<PAGE>
===============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report: July 26, 1999
Date of earliest event reported: May 18, 1999
eBAY INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware
----------------------------------------------
(State or other jurisdiction of incorporation)
000-24821 77-0430924
- ---------------- -----------------
(Commission (IRS Employer
File Number) Identification No.)
2125 Hamilton Ave., San Jose, California 95125
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
408-558-7400
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
2005 Hamilton Ave., Suite 350, San Jose, CA 95125
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
===============================================================================
<PAGE>
Item 2: Acquisition or Disposition of Assets.
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of the following Current Reports on Form
8-K, as set forth below and in the pages attached hereto:
. Form 8-K filed on May 28, 1999, related to the Registrant's acquisition of
Kruse, Inc. (d.b.a. Kruse International), Auburn Cordage, Inc., ACD Auto
Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising &
Promotions, Inc., (collectively, "Kruse" or the "Kruse International Group of
Companies") on May 18, 1999, by means of a merger among eBay Inc. ("eBay"),
each of the Kruse companies, five merger subsidiaries wholly-owned by eBay,
Dean V. Kruse and Mitchell Kruse.
. Form 8-K filed on June 7, 1999, related to the Registrant's acquisition of
Billpoint, Inc. ("Billpoint") on May 25, 1999, by means of a merger among
eBay, Billpoint and Brazil Acquisition Corp., a wholly-owned subsidiary of
eBay.
. Form 8-K filed on June 7, 1999, related to the Registrant's acquisition of
Butterfield & Butterfield Auctioneers on May 28, 1999 by means of a merger
among eBay, Butterfield & Butterfield Auctioneers, a merger subsidiary
wholly-owned by eBay, the stockholders of Butterfield & Butterfield
Auctioneers, 111 Potrero Partners, LLC, HBJ Partners, LLC and the members of
the 111 Potrero Partners, LLC and HBJ Partners, LLC (collectively, "B&B" or
the "Butterfield & Butterfield Group of Companies").
Item 5: Other Events.
Risk Factors that may Affect Results of Operations and Financial Condition of
the Acquired Companies.
The acquisition itself may adversely affect the Acquired Companies.
The process of integrating any acquisition may create unforeseen operating
difficulties and expenditures and is itself risky. The areas where we may face
difficulties include:
. diversion of management time (both ours and at the acquired companies) during
the period of negotiation through closing and further diversion of such time
after closing from focus on operating the businesses to issues of integration
and future products;
. decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects, or the direction of
the business;
. the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management and the lack of control if such integration is delayed or not
implemented;
. the need to implement controls, procedures and policies appropriate for a
larger public company at companies that prior to acquisition had been
smaller, private companies; and
. we have almost no experience in managing this integration process.
Our new land-based auction businesses need to continue to acquire properties.
The businesses of B&B and Kruse are both dependent on the continued acquisition
of high quality auction properties from sellers. Their future success will
depend in part on their ability to maintain an adequate supply of high
quality auction property, particularly fine and decorative arts and collectibles
and collectible automobiles, respectively. There is intense competition for
these pieces with other auction companies and dealers. In addition, a small
number of key senior management and specialists maintain the relationships with
the primary sources of auction property and the loss of any of these individuals
could adversely affect the business of B&B and Kruse. See "The acquired
businesses are dependent on a small number of key employees."
Our new land-based auction businesses could suffer losses from price guarantees,
advances or rescissions of sales.
-2-
<PAGE>
In order to secure high quality auction properties from sellers, B&B and Kruse
may give a guaranteed minimum price or a cash advance to a seller, based on the
estimated value of the property. If the auction proceeds are less than the
amount guaranteed, or less than the amount advanced and the seller does not
repay the difference, the company involved will suffer a loss. In addition,
under certain circumstances a buyer who believes that an item purchased at
auction does not have good title, provenance or authenticity may rescind the
purchase. Under such circumstances, the company involved will lose its
commissions and fees on the sale even if the seller, in accordance with the
terms and conditions of sale, in turn accepts back the item and returns the
funds he or she received from the sale.
Our new land-based auction businesses are dependent on discretionary consumer
spending.
A decline in consumer spending would harm our new land-based auction businesses.
Sales of fine and decorative art, collectable cars and other collectibles would
be adversely affected by a decline in discretionary consumer spending,
especially for luxury items. Changes in buyer's tastes, economic conditions or
consumer trends could cause declines in the number or dollar volume of items
auctioned and thereby harm the business of these companies.
Our new businesses are dependent on a small number of key employees.
Our new businesses are all dependent on attracting and retaining key employees.
The land-based auction businesses are particularly dependent on specialists and
senior management because of the relationships these individuals have
established with sellers who consign property for sale at auction. Dean Kruse
is particularly important to Kruse. The loss of any of these individuals could
result in the loss of significant future business and would harm us. Such
personnel are in great demand by other auction companies. In addition, employee
turnover frequently increases during the period following an acquisition as
employees evaluate possible changes in compensation, culture, reporting
relationships, and the direction of the business. Such increased turnover could
increase our costs and reduce our future revenues.
Our new land-based businesses are subject to regulation.
Both B&B and Kruse are subject to regulation in some jurisdictions governing the
manner in which auctions are conducted. Both are required to obtain licensure
in certain jurisdictions with respect to their business or to permit the sale of
certain properties (e.g. wine, automobiles, real estate). Such licenses must
generally be regularly renewed and are subject to revocation for violation of
law, violation of the regulations governing auctions in general or the sale of
the particular item and other events. If either company was unable to renew a
license or had a license revoked it would be harmed. In addition, changes to
the regulations or the licensure requirements could increase the complexity and
the cost of doing auctions, thereby harming us.
Our new payments business may be subject to regulation.
Businesses that handle consumers' funds are potentially subject to numerous
regulations, including those related to banking, credit cards, escrow, fair
credit reporting and others. Billpoint is a new business with a relatively
novel approach to facilitating payments. It is not yet known how regulatory
agencies will treat Billpoint. The cost and complexity of Billpoint's business
may increase if certain regulations are deemed to apply to its business.
We acquired real property with some of our new businesses.
In connection with the acquisition of Kruse and B&B we acquired real property
including land, buildings and interests in partnerships holding land and
buildings. We have no experience in managing real property. Ownership of this
property subjects us to new risks, including:
. the possibility of environmental contamination and the costs associated
with fixing any environmental problems;
. the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements;
. possible disputes with tenants, partners or others.
Our new land-based auction businesses are seasonal and are subject to
significant quarterly fluctuations.
-3-
<PAGE>
Both B&B and Kruse have significant quarter to quarter variations in their
results depending on the timing of auctions and the availability of high quality
items from large collections and estates. B&B typically has its best operating
results in the traditional fall and spring auction seasons and has historically
incurred operating losses in the first and third quarters. This seasonal effect
may be partially offset by Kruse, which typically sees a seasonal peak in
operations with its Auburn, Indiana auction around Labor Day.
Our new businesses could be harmed by Year 2000 compliance problems.
Our new businesses are heavily dependent upon the functioning of their computer
systems. Any failure or malfunction of their information, business, finance,
accounting, or other systems could harm these businesses in a manner that is
impossible to currently quantify or anticipate. We are currently reviewing the
Y2K status of these businesses. If necessary upgrades or changes are not
properly identified, or if they cannot be successfully and timely implemented
even if properly identified, these businesses could be harmed.
Our new businesses are subject to intense competition.
The land-based auction business is intensely competitive. B&B competes with two
larger and better known auction companies, Sotheby's Holdings, Inc. and
Christie's International plc, as well as numerous regional auction companies. To
the extent that these companies increase their focus on the middle market
properties that form the core of B&B's business, its business may suffer. Kruse
is subject to competition from numerous regional competitors. In addition,
competition with Internet based auctions may harm the land-based auction
business. Although Billpoint's business is new, several companies are beginning
to enter this market and large competitors, including banks and credit card
companies, may become competitors.
Item 7: Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired
See Exhibit 99.1 for the audited combined financial statements of the Kruse
Group of Companies, Exhibit 99.2 for the audited financial statements of
Billpoint and Exhibit 99.3 for the audited combined financial statements of the
Butterfield & Butterfield Group of Companies.
(b) Pro Forma Financial Information
Pro Forma Condensed Financial Information (Unaudited)
The following unaudited pro forma combined financial statements give effect
to the mergers of eBay with Kruse, Billpoint and B&B (the "Acquired Entities"),
which were accounted for as poolings of interests. The unaudited pro forma
condensed balance sheet presents the combined financial position of eBay and the
Acquired Entities as of March 31, 1999, assuming that each of the mergers had
occurred as of March 31, 1999. Such pro forma information is based upon the
historical balance sheet data of eBay and the Acquired Entities as of that date.
The unaudited pro forma condensed statement of income gives effect to the
mergers of eBay and the Acquired Entities by combining the results of operations
of eBay and the Acquired Entities for the three years ended December 31, 1998
and the three months ended March 31, 1998 and 1999, on a pooling of interests
basis, with the exception of Billpoint, which is included from its date of
inception of September 1, 1998. These unaudited pro forma financial statements
should be read in conjunction with the historical financial statements and notes
thereto of eBay included in its Annual Report on Form 10-K for the year ended
December 31, 1998 and the historical financial statements and notes thereto of
the Acquired Entities included as exhibits herein.
The unaudited pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or financial
position that would have occurred if the mergers had been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position. In addition, the unaudited pro forma
condensed combined financial statements do not incorporate increases in property
taxes that the combined company will be subject to as a result of increases in
the tax basis of certain real estate holdings of B&B
-4-
<PAGE>
which, because the acquisitions have been accounted for as poolings of
interests, remain at historical cost for book purposes.
eBay and the Acquired Entities incurred direct transaction costs of
approximately $4.3 million associated with the mergers which were charged to
operations during the three months ended June 30, 1999. There can be no
assurance that eBay will not incur additional charges in subsequent periods to
reflect costs associated with the mergers or that management will be successful
in its efforts to integrate the operations of the companies. This charge is
reflected in the unaudited pro forma condensed combined balance sheet, but is
not reflected in the unaudited pro forma condensed combined statements of
operations. This charge is based upon an estimate and is subject to change.
-5-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------------------------------------
- ---
Acquired Pro Forma
eBay Entities Adjustments Combined
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents......... $ 24,850 $ 4,300 $ -- $ 29,150
Short-term investments............ 32,121 -- -- 32,121
Accounts receivable, net.......... 12,104 6,028 -- 18,132
Deferred tax assets............... -- 38 -- 38
Other current assets.............. 23,588 1,439 (202) (A) 24,825
------------- ------------- ------------- -------------
Total current assets............. 92,663 11,805 (202) 104,266
Property and equipment, net........ 16,235 36,979 -- 53,214
Intangible assets, net............. 733 2,515 -- 3,248
Note receivable.................... -- 1,919 -- 1,919
Deferred tax assets................ -- -- 11,231 (B)(C) 11,231
Other assets....................... 81 2,080 -- 2,161
------------- ------------- ------------- -------------
$ 109,712 $ 55,298 $ 11,029 $ 176,039
============= ============= ============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable..................... $ -- $ 3,644 $ -- $ 3,644
Accounts payable.................. 3,748 7,360 -- 11,108
Accrued expenses.................. 8,947 2,039 4,024 (A) 15,010
Customer advances and deferred
revenue.......................... 1,022 199 -- 1,221
Income taxes payable.............. 2,713 1,370 2,478 (C) 6,561
Deferred tax liabilities.......... 1,682 -- -- 1,682
------------- ------------- ------------- -------------
Total current liabilities........ 18,112 14,612 6,502 39,226
Notes payable...................... -- 18,060 -- 18,060
Environmental and seismic accruals. -- 5,900 -- 5,900
Deferred tax liability............. -- 261 -- 261
Minority interest.................. -- (102) -- (102)
------------- ------------- ------------- -------------
18,112 38,731 6,502 63,345
------------- ------------- ------------- -------------
Stockholders' equity:
Common stock...................... 121 3 -- 124
Additional paid-in capital........ 86,089 6,724 8,753 (B) 101,566
Notes receivable from stockholders (510) -- -- (510)
Unearned compensation............. (3,324) (1,396) -- (4,720)
Retained earnings................. 9,224 11,236 (4,226) (A) 16,234
------------- ------------- ------------- -------------
Total stockholders' equity....... 91,600 16,567 4,527 112,694
------------- ------------- ------------- -------------
$ 109,712 $ 55,298 $ 11,029 $ 176,039
============= ============= ============= =============
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-6-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
-----------------------------------------------------------------
Acquired Pro Forma
eBay Entities Combined
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues:
Fees and services........................................ $ 34,010 $ 7,734 $ 41,744
Real estate rentals...................................... -- 1,057 1,057
-------- ------- --------
Total net revenues...................................... 34,010 8,791 42,801
-------- ------- --------
Cost of net revenues:
Fees and services........................................ 5,121 2,345 7,466
Real estate rentals...................................... -- 478 478
-------- ------- --------
Total cost of revenues.................................. 5,121 2,823 7,944
-------- ------- --------
Gross profit........................................... 28,889 5,968 34,857
-------- ------- --------
Operating expenses:
Sales and marketing...................................... 12,067 4,819 16,886
Product development...................................... 1,924 239 2,163
General and administrative............................... 5,043 2,562 7,605
Amortization of acquired intangibles..................... 328 -- 328
-------- ------- --------
Total operating expenses................................ 19,362 7,620 26,982
-------- ------- --------
Income (loss) from operations............................. 9,527 (1,652) 7,875
Interest and other income, net............................ 639 173 812
Interest expense.......................................... -- (519) (519)
-------- ------- --------
Income (loss) before income taxes, minority interest and
equity in partnership income............................. 10,166 (1,998) 8,168
Provision for income taxes................................ (4,270) (1) (4,271)
Minority interest in combined company..................... -- (78) (78)
Equity interest in partnership income..................... -- 59 59
-------- ------- --------
Net income (loss)......................................... $ 5,896 $(2,018) $ 3,878
======== ======= ========
Net income (loss) per share:
Basic.................................................... $ 0.06 $ (0.81) $ 0.04
======== ======= ========
Diluted.................................................. $ 0.05 $ (0.81) $ 0.03
======== ======= ========
Weighted average shares:
Basic.................................................... 95,047 2,494 97,541
======== ======= ========
Diluted.................................................. 127,979 2,494 130,473
======== ======= ========
Supplemental Pro Forma Information:
Income before income taxes, minority interest and equity
in partnership income as reported........................ $ 8,168
Provision for income taxes as reported.................... (4,271)
Pro forma adjustment to provision for income taxes
(Note 3)............................................... 136
Minority interest in combined company as reported......... (78)
Equity interest in partnership income as reported......... 59
--------
Pro forma net income...................................... $ 4,014
========
Pro forma net income per share:
Basic.................................................... $ 0.04
========
Diluted.................................................. $ 0.03
========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-7-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
-----------------------------------------------------------
Acquired Pro Forma
eBay Entities Combined
---------- ------------ ------------
<S> <C> <C> <C>
Net revenues:
Fees and services........................................ $ 5,981 $ 6,852 $ 12,833
Real estate rentals...................................... -- 1,155 1,155
-------- -------- --------
Total net revenues...................................... 5,981 8,007 13,988
-------- -------- --------
Cost of net revenues:
Fees and services........................................ 630 1,180 1,810
Real estate rentals...................................... -- 681 681
-------- -------- --------
Total cost of revenues.................................. 630 1,861 2,491
-------- -------- --------
Gross profit........................................... 5,351 6,146 11,497
-------- -------- --------
Operating expenses:
Sales and marketing...................................... 2,106 3,473 5,579
Product development...................................... 518 -- 518
General and administrative............................... 1,028 1,280 2,308
Amortization of acquired intangibles..................... -- -- --
-------- -------- --------
Total operating expenses................................ 3,652 4,753 8,405
-------- -------- --------
Income from operations.................................... 1,699 1,393 3,092
Interest and other income, net............................ 36 366 402
Interest expense.......................................... (14) (466) (480)
-------- -------- --------
Income before income taxes, minority interest and equity
in partnership income.................................... 1,721 1,293 3,014
Provision for income taxes................................ (1,573) (75) (1,648)
Minority interest in combined company..................... -- (95) (95)
Equity interest in partnership income..................... -- 173 173
-------- -------- --------
Net income................................................ $ 148 $ 1,296 $ 1,444
======== ======== ========
Net income per share:
Basic.................................................... $ 0.00 $ 0.61 $ 0.05
======== ======== ========
Diluted.................................................. $ 0.00 $ 0.61 $ 0.01
======== ======== ========
Weighted average shares:
Basic.................................................... 26,936 2,115 29,051
======== ======== ========
Diluted.................................................. 97,614 2,115 99,729
======== ======== ========
Supplemental Pro Forma Information:
Income before income taxes, minority interest and equity $ 3,014
in partnership income as reported........................
Provision for income taxes as reported.................... (1,648)
Pro forma adjustment to provision for income taxes
(Note 3)............................................... (470)
Minority interest in combined company as reported......... (95)
Equity interest in partnership income as reported......... 173
--------
Pro forma net income...................................... $ 974
Pro forma net income per share: ========
Basic.................................................... $ 0.03
========
Diluted.................................................. $ 0.01
========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-8-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------------------
Acquired Pro Forma
eBay Entities Combined
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues:
Fees and services........................................ $ 47,352 $ 34,291 $ 81,643
Real estate rentals...................................... -- 4,486 4,486
--------- --------- ---------
Total net revenues...................................... 47,352 38,777 86,129
--------- --------- ---------
Cost of net revenues:
Fees and services........................................ 6,859 7,089 13,948
Real estate rentals...................................... -- 2,146 2,146
--------- --------- ---------
Total cost of revenues.................................. 6,859 9,235 16,094
--------- --------- ---------
Gross profit........................................... 40,493 29,542 70,035
--------- --------- ---------
Operating expenses:
Sales and marketing...................................... 19,841 16,135 35,976
Product development...................................... 4,606 34 4,640
General and administrative............................... 9,080 6,769 15,849
Amortization of acquired intangibles..................... 805 -- 805
--------- --------- ---------
Total operating expenses................................ 34,332 22,938 57,270
--------- --------- ---------
Income from operations.................................... 6,161 6,604 12,765
Interest and other income, net............................ 908 891 1,799
Interest expense.......................................... (39) (2,152) (2,191)
--------- --------- ---------
Income before income taxes, minority interest and equity
in partnership income.................................... 7,030 5,343 12,373
Provision for income taxes................................ (4,632) (157) (4,789)
Minority interest in combined company..................... -- (381) (381)
Equity interest in partnership income..................... -- 70 70
--------- --------- ---------
Net income................................................ $ 2,398 $ 4,875 $ 7,273
========= ========= =========
Net income per share:
Basic.................................................... $ 0.05 $ 2.25 $ 0.14
========= ========= =========
Diluted.................................................. $ 0.02 $ 2.25 $ 0.06
========= ========= =========
Weighted average shares:
Basic.................................................... 49,896 2,169 52,065
========= ========= =========
Diluted.................................................. 114,588 2,169 116,757
========= ========= =========
Supplemental Pro Forma Information:
Income before income taxes, minority interest and equity
in partnership income as reported........................ $ 12,373
Provision for income taxes as reported.................... (4,789)
Pro forma adjustment to provision for income taxes income
(Note 3)................................................. (2,071)
Minority interest in combined company as reported......... (381)
Equity interest in partnership income as reported......... 70
---------
Pro forma net income...................................... $ 5,202
=========
Pro forma net income per share:
Basic................................................... $ 0.10
=========
Diluted................................................. $ 0.04
=========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-9-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------------
Acquired Pro Forma
eBay Entities Combined
--------- ------------ -------------
<S> <C> <C> <C>
Net revenues:
Fees and services........................................ $ 5,744 $ 31,326 $ 37,070
Real estate rentals...................................... -- 4,300 4,300
-------- -------- --------
Total net revenues...................................... 5,744 35,626 41,370
-------- -------- --------
Cost of net revenues:
Fees and services........................................ 746 5,885 6,631
Real estate rentals...................................... -- 1,773 1,773
-------- -------- --------
Total cost of revenues.................................. 746 7,658 8,404
-------- -------- --------
Gross profit........................................... 4,998 27,968 32,966
-------- -------- --------
Operating expenses:
Sales and marketing...................................... 1,730 13,888 15,618
Product development...................................... 831 -- 831
General and administrative............................... 950 5,584 6,534
-------- -------- --------
Total operating expenses................................ 3,511 19,472 22,983
-------- -------- --------
Income from operations.................................... 1,487 8,496 9,983
Interest and other income, net............................ 59 995 1,054
Interest expense.......................................... (3) (2,368) (2,371)
-------- -------- --------
Income before income taxes, minority interest and equity 1,543 7,123 8,666
in partnership income....................................
Provision for income taxes................................ (669) (302) (971)
Minority interest in combined company..................... -- (320) (320)
Equity interest in partnership loss....................... -- (314) (314)
-------- -------- --------
Net income................................................ $ 874 $ 6,187 $ 7,061
======== ======== ========
Net income per share:
Basic.................................................... $ 0.04 $ 2.93 $ 0.29
======== ======== ========
Diluted.................................................. $ 0.01 $ 2.93 $ 0.08
======== ======== ========
Weighted average shares:
Basic.................................................... 22,313 2,115 24,428
======== ======== ========
Diluted.................................................. 82,660 2,115 84,775
======== ======== ========
Supplemental Pro Forma Information:
Income before income taxes, minority interest and equity
in partnership income as reported........................ $ 8,666
Provision for income taxes as reported.................... (971)
Pro forma adjustment to provision for income taxes
(Note 3)................................................. (2,576)
Minority interest in combined company as reported......... (320)
Equity interest in partnership loss as reported........... (314)
--------
Pro forma net income...................................... $ 4,485
========
Pro forma net income per share:
Basic.................................................... $ 0.18
========
Diluted.................................................. $ 0.05
========
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-10-
<PAGE>
eBay Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------
Acquired Pro Forma
eBay Entities Combined
-------- ------------ --------------
<S> <C> <C> <C>
Net revenues:
Fees and services........................................ $ 372 $27,787 $28,159
Real estate rentals...................................... -- 3,892 3,892
------- ------- -------
Total net revenues...................................... 372 31,679 32,051
------- ------- -------
Cost of net revenues:
Fees and services........................................ 14 5,167 5,181
Real estate rentals...................................... -- 1,622 1,622
------- ------- -------
Total cost of revenues.................................. 14 6,789 6,803
------- ------- -------
Gross profit........................................... 358 24,890 25,248
------- ------- -------
Operating expenses:
Sales and marketing...................................... 32 13,107 13,139
Product development...................................... 28 -- 28
General and administrative............................... 45 5,616 5,661
------- ------- -------
Total operating expenses................................ 105 18,723 18,828
------- ------- -------
Income from operations.................................... 253 6,167 6,420
Interest and other income, net............................ 1 376 377
Interest expense.......................................... -- (2,322) (2,322)
------- ------- -------
Income before income taxes, minority interest and
equity in partnership income.............................. 254 4,221 4,475
Provision for income taxes................................ (106) (369) (475)
Minority interest in combined company..................... -- (86) (86)
Equity interest in partnership loss....................... -- (576) (576)
------- ------- -------
Net income................................................ $ 148 $ 3,190 $ 3,338
======= ======= =======
Net income per share:
Basic.................................................... $ 0.02 $ 1.51 $ 0.39
======= ======= =======
Diluted.................................................. $ 0.00 $ 1.51 $ 0.07
======= ======= =======
Weighted average shares:
Basic.................................................... 6,375 2,115 8,490
======= ======= =======
Diluted.................................................. 42,945 2,115 45,060
======= ======= =======
Supplemental Pro Forma Information:
Income before income taxes, minority interest and
equity in partnership loss as reported................... $ 4,475
Provision for income taxes as reported.................... (475)
Pro forma adjustment to provision for income taxes
(Note 3)................................................. (1,362)
Minority interest in combined company as reported......... (86)
Equity interest in partnership loss as reported........... (576)
-------
Pro forma net income...................................... $ 1,976
=======
Pro forma net income per share:
Basic................................................... $ 0.23
=======
Diluted................................................. $ 0.04
=======
</TABLE>
See accompanying notes to pro forma condensed combined financial information.
-11-
<PAGE>
eBay Inc.
Notes to Pro Forma Condensed Combined Financial Statements
(unaudited)
1. Basis of Presentation
Pro Forma Basis of Presentation
The unaudited pro forma condensed combined financial statements of eBay,
Kruse, Billpoint and B&B give retroactive effect to the mergers, which are
being accounted for as poolings of interests and, as a result, the unaudited
pro forma condensed combined balance sheets and statements of operations are
presented as if eBay and the Acquired Entities had been combined for all
periods presented.
The pro forma condensed combined financial statements reflect the issuance of
a total of approximately 2,638,800 shares of eBay common stock for all of the
outstanding shares of Kruse, Billpoint and B&B outstanding as of the dates of
the respective mergers. This total consists of approximately 787,300 shares of
eBay common stock issued for all of the outstanding shares of Kruse, 524,100
shares of eBay common stock issued for all of the outstanding shares of
Billpoint, and 1,327,400 shares of eBay common stock issued for all of the
outstanding shares of B&B in connection with the mergers, which resulted in
exchange ratios of approximately 339.35862, 0.05912 and 0.27931 shares of eBay
common stock for each share of Kruse, Billpoint and B&B, respectively. In
addition, options and warrants representing 2,233,181 shares of Billpoint
common stock were assumed by eBay and converted into options and warrants
representing approximately 132,000 shares of eBay common stock.
Acquired Entities
The components of pro forma net revenues, operating expenses and net income
(loss) during the three months ended March 31, 1999 and 1998 and the years
ended December 31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Operating Net Income
Net Revenues Expenses (Loss)
-------------- ------------- -------------
Three Months Ended March 31, 1999
<S> <C> <C> <C>
Kruse............................................. $ 2,551 $ 2,398 $ (423)
Billpoint......................................... - 758 (746)
B&B............................................... 6,240 4,464 (849)
------- ------- -------
$ 8,791 $ 7,620 $(2,018)
======= ======= =======
Three Months Ended March 31, 1998
Kruse............................................. $ 2,455 $ 1,887 $ 112
B&B............................................... 5,552 2,866 1,184
------- ------- -------
$ 8,007 $ 4,753 $ 1,296
======= ======= =======
Year Ended December 31, 1998
Kruse............................................. $10,265 $ 8,119 $ (58)
Billpoint......................................... - 74 (74)
B&B............................................... 28,512 14,745 5,007
------- ------- -------
$38,777 $22,938 $ 4,875
======= ======= =======
Year Ended December 31, 1997
Kruse............................................. $ 7,520 $ 5,895 $ (237)
B&B............................................... 28,106 13,577 6,424
------- ------- -------
$35,626 $19,472 $ 6,187
======= ======= =======
Year Ended December 31, 1996
Kruse............................................. $ 7,760 $ 6,024 $ (69)
B&B............................................... 23,919 12,699 3,259
------- ------- -------
$31,679 $18,723 $ 3,190
======= ======= =======
</TABLE>
-12-
<PAGE>
2. Merger Transaction Costs
eBay and the Acquired Entities incurred direct transaction costs of
approximately $4.3 million associated with the mergers, including $1.5
million for legal and other professional consulting fees and $2.8 million for
various fees including those associated with the termination of B&B's initial
public offering, which will be charged to operations during the quarter ended
June 30, 1999, the period in which the transactions were consummated. There
can be no assurance that eBay will not incur additional charges in subsequent
quarters to reflect costs associated with the mergers or that management will
be successful in their efforts to integrate the operations of the respective
companies. This charge is an estimate and is subject to change.
3. Income Taxes
The provision for income taxes does not reflect the benefit of Billpoint's
net operating losses due to certain limitations and uncertainty surrounding
the realization of the tax benefits associated with such losses. Because the
acquisition of the B&B entities has been accounted for as a pooling of
interests, there has been no adjustment to the historical carrying values of
real estate holdings. However, these properties are subject to increases in
tax basis, which will result in a higher depreciable basis for income and
property tax purposes.
In connection with the acquisition of B&B by eBay, B&B's status as an S
Corporation was terminated, and B&B became subject to federal and state
income taxes. The supplemental pro forma information includes an increase to
the provisions for income taxes based upon a combined federal and state tax
rate of 42%, which approximates the statutory tax rates that would have
applied if B&B had been taxed as a C corporation during the periods prior to
its acquisition by eBay.
4. Pro Forma Adjustments
The following pro forma adjustments have been made to the historical
financial statements of eBay and the Acquired Entities based upon preliminary
estimates and assumptions made by management for the purpose of preparing the
unaudited pro forma combined condensed financial statements. There have been
no significant intercompany transactions.
(A) To record the accrual of estimated costs resulting from the mergers. See
Note 2 above.
(B) A portion of the B&B acquisition was a taxable transaction, accordingly,
a deferred tax asset and a corresponding increase in stockholders equity
of approximately $8,753,000 was recorded for the difference between the
financial statement carrying amounts and tax basis of the related net
assets upon the closing of the transaction.
(C) To record the deferred tax asset relating to temporary differences
within the B&B Group Companies upon the change in status from an
S Corporation to a C Corporation for federal income tax purposes.
5. Pro Forma Net Income (Loss) Per Share
The pro forma combined basic and diluted net income (loss) per share is based
on the combined weighted average number of common shares of eBay Common Stock
and the Acquired Entities' Common Stock outstanding for each period using the
relevant exchange ratios based on the issuance of approximately 2,638,800
shares of eBay Common Stock for all of the outstanding shares of the Acquired
Entities as of their respective acquisition dates. All convertible preferred
stock, warrants and employee stock options have been included in the
computation of pro forma combined diluted net income per share using the
treasury stock method to the extent such instruments are dilutive for the
periods presented.
-13-
<PAGE>
(c) Exhibits.
The following exhibits are filed herewith:
2.1* Agreement and Plan of Merger and Reorganization, dated as of May 17, 1999,
among eBay Inc., Sesame Corporation No. 1, Sesame Corporation No. 2,
Sesame Corporation No. 3, Sesame Corporation No. 4, Sesame Corporation No.
5, Kruse, Inc. (d/b/a Kruse International), Auburn Cordage, Inc., ACD Auto
Sales, Inc., Reppert School of Auctioneering, Inc., Classic Advertising &
Promotions, Inc., Dean V. Kruse and Mitchell Kruse.
2.2* Agreement and Plan of Merger and Reorganization, dated as of April 23,
1999, among eBay Inc., Margarine Acquisition Sub Corp., Butterfield &
Butterfield Auctioneers Corporation, the stockholders of Butterfield &
Butterfield Auctioneers Corporation, 111 Potrero Partners, LLC, HBJ
Partners, LLC and the members of 111 Potrero Partners, LLC and HBJ
Partners, LLC.
2.3* Agreement and Plan of Merger and Reorganization, dated as of May 18, 1999,
among eBay Inc., Brazil Acquisition Corp. and Billpoint, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants.
99.1 Kruse International Group of Companies Audited Combined Financial
Statements.
99.2 Billpoint, Inc. Audited Financial Statements.
99.3 Butterfield & Butterfield Group of Companies Audited Combined Financial
Statements.
____________
* - Previously filed.
-14-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
eBAY INC.
Date: July 26, 1999 By: /s/ Gary F. Bengier
-------------------
Gary F. Bengier
Chief Financial Officer and
Vice President of Operations
-15-
<PAGE>
Exhibit 23.1
CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8, File No. 333-64179, of eBay Inc. of our report dated
July 7, 1999 with respect to the combined financial statements of the Kruse
International Group of Companies which appears in exhibit 99.1 in this Form 8-
K/A, of our report dated July 20, 1999 with respect to the financial statements
of Billpoint, Inc. which appears in exhibit 99.2 in this Form 8-K/A, and of our
report dated July 23, 1999 with respect to the combined financial statements of
the Butterfield & Butterfield Group of Companies which appears in exhibit 99.3
in this Form 8-K/A.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 23, 1999
<PAGE>
EXHIBIT 99.1
Report of Independent Accountants
To the Board of Directors and Shareholders
of the Kruse International Group of Companies
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations and shareholder's equity and of cash flows present
fairly, in all material respects, the combined financial position of the Kruse
International Group of Companies at December 31, 1997 and 1998, and the combined
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
Group'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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 7, 1999
<PAGE>
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 638 $ 493 $ 304
Accounts receivable........................................... 8 20 17
Other current assets.......................................... 390 363 177
Deferred tax asset............................................ 38 38 38
------ ------ ------
Total current assets...................................... 1,074 914 536
Property and equipment, net...................................... 3,975 4,253 4,055
Other assets, net................................................ 249 198 185
------ ------ ------
$5,298 $5,365 $4,776
====== ====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current........................................ $ 148 $ 257 $ 248
Accounts payable.............................................. 793 822 763
Accrued liabilities........................................... 1,017 981 1,018
Customer advances and unearned revenue........................ 233 246 199
Taxes payable................................................. 1,242 1,380 1,370
------ ------ ------
Total current liabilities................................. 3,433 3,686 3,598
Deferred tax liability........................................... 295 261 261
Notes payable.................................................... 344 250 172
------ ------ ------
4,072 4,197 4,031
------ ------ ------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common Stock, no par value, 23,000 shares authorized;
23,000 shares issued and outstanding.......................... 32 32 32
Retained earnings............................................. 1,194 1,136 713
------ ------ ------
Total shareholders' equity................................ 1,226 1,168 745
------ ------ ------
$5,298 $5,365 $4,776
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined
financial statements.
<PAGE>
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
(unaudited)
Net revenues:
Auction fees and services............................... $7,398 $7,276 $ 9,750 $2,198 $2,372
Other................................................... 362 244 515 257 179
------ ------ ------- ------ ------
Net revenues........................................... 7,760 7,520 10,265 2,455 2,551
------ ------ ------- ------ ------
Cost of net revenues:
Auction fees and services............................... 1,335 1,560 2,087 381 576
Other................................................... -- -- -- -- --
------ ------ ------- ------ ------
Cost of net revenues................................... 1,335 1,560 2,087 381 576
------ ------ ------- ------ ------
Gross profit........................................... 6,425 5,960 8,178 2,074 1,975
------ ------ ------- ------ ------
Operating expenses:
Sales and marketing..................................... 3,091 3,071 3,609 1,070 1,244
General and administrative.............................. 2,933 2,824 4,510 817 1,154
------ ------ ------- ------ ------
Total operating expenses............................... 6,024 5,895 8,119 1,887 2,398
------ ------ ------- ------ ------
Income (loss) from operations............................ 401 65 59 187 (423)
------ ------ ------- ------ ------
Other income (expense):
Interest and other income, net.......................... 18 20 30 4 7
Interest expense........................................ (161) (60) (38) (4) (7)
------ ------ ------- ------ ------
Income from combined companies before taxes.............. 258 25 51 187 (423)
Provision for income taxes............................... (327) (262) (109) (75) --
------ ------ ------- ------ ------
Net income (loss)........................................ $ (69) $ (237) $ (58) $ 112 $ (423)
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Retained Total Shareholders'
Shares Amount Earnings Equity
<S> <C> <C> <C> <C>
Balance at December 31, 1995.................. 23 $ 32 $1,362 $1,394
Net income.................................... -- -- 69 69
----- ----- ------ ------
Balance at December 31, 1996.................. 23 32 1,431 1,463
Net loss...................................... -- -- (237) (237)
----- ----- ------ ------
Balance at December 31, 1997.................. 23 32 1,194 1,226
Net loss...................................... -- -- (58) (58)
----- ----- ------ ------
Balance at December 31, 1998.................. 23 32 1,136 1,168
Net loss (unaudited).......................... -- -- (423) (423)
----- ----- ------ ------
Balance at March 31, 1999 (unaudited)......... 23 $ 32 $ 713 $ 745
===== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $ (69) $(237) $ (58) $ 112 $(423)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 167 176 322 33 100
Gain on sale of property and equipment.............. -- -- -- -- (83)
Changes in assets and liabilities:
Accounts receivable............................... 81 66 (12) 5 3
Other current assets.............................. 29 (112) 28 266 186
Other assets...................................... (7) -- -- -- --
Accounts payable.................................. (235) 169 29 (540) (59)
Accrued liabilities............................... 173 230 (36) 200 37
Customer advances and unearned revenue............ 38 56 13 (99) (47)
Taxes payable..................................... 304 244 138 75 (10)
Deferred tax liabilities.......................... -- -- (34) -- --
----- ----- ----- ----- -----
Net cash provided by (used in) operating activities.... 481 592 390 52 (296)
----- ----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment..................... (345) (142) (550) -- (6)
Proceeds from sales of property and equipment........... -- -- -- -- 200
----- ----- ----- ----- -----
Net cash provided by (used in) investing activities.... (345) (142) (550) -- 194
----- ----- ----- ----- -----
Cash flows from financing activities:
Proceeds from (repayment of) note payable............... (202) (63) 15 (123) (87)
----- ----- ----- ----- -----
Net cash provided by (used in) financing activities.... (202) (63) 15 (123) (87)
----- ----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents..... (66) 387 (145) (71) (189)
Cash and cash equivalents, beginning of period........... 317 251 638 638 493
----- ----- ----- ----- -----
Cash and cash equivalents, end of period................. $ 251 $ 638 $ 493 $ 567 $ 304
===== ===== ===== ===== =====
Supplemental disclosures:
Cash paid for interest.................................. $ 161 $ 60 $ 38 $ 4 $ 7
Cash paid for income taxes.............................. $ 23 $ 18 $ 5 $ 13 $ 10
Supplemental non-cash investing and financing activity:
Issuance of note payable for non-compete agreement...... $ -- $ 240 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
<PAGE>
KRUSE INTERNATIONAL
GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. The Group Companies and Summary of Significant Accounting Policies
The Group Companies and Basis of Presentation
The accompanying combined financial statements include the accounts of Kruse
International, Auburn Cordage Inc., ACD Auto Sales Inc., Classic Advertising
& Promotion Inc. and Reppert Auction School Inc. (collectively the "Group" or
"Group Companies"). The financial statements for the aforementioned companies
have been prepared on a combined basis for all periods presented as the
companies were subject to common control. All intercompany accounts and
transactions have been eliminated in the preparation of these combined
financial statements.
Kruse International - was founded in 1971 and operated as a sole
proprietorship until it was incorporated in the state of Indiana in August
1986. Kruse International conducts auctions and performs appraisal
services for classic car auctions in various locations in the United
States, England, Germany and the Netherlands.
Auburn Cordage Inc. - was incorporated in September 1962 and operates as a
real estate holding company for properties leased by Kruse International
conducting its classic car auctions.
ACD Auto Sales Inc. - was incorporated in March 1992 and operates as a
special purpose entity for the ownership of auto dealer licenses on behalf of
Kruse International.
Classic Advertising & Promotion Inc. - was incorporated in Indiana and
operates as a special purpose entity and provides advertising services on
behalf of Kruse International.
Reppert Auction School Inc. - was incorporated in June 1997 and operates a
training center for auctioneers including those employed by Kruse
International.
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.
Revenue recognition
Revenues are derived primarily from entry fees on auction items, bidder
registration fees and commission fees calculated as a percentage of the final
auction sales transaction value. Revenues related to these fees are
recognized upon the completion of an auction. Revenues are also derived from
sponsorship fees paid by various corporations. Sponsor fee revenues are
recognized over the term of the sponsorship agreement. Advertising revenues
and auctioneer tuition fees do not represent a significant source of revenues
and are recognized as advertising and auctioneer training services are
provided.
Cash equivalents
The Group Companies consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of deposit and money market accounts that are
stated at cost, which approximates fair value. The Group Companies deposit
cash and cash equivalents with financial institutions which management
believes are of high credit quality.
<PAGE>
Concentration of credit risk
Financial instruments that potentially subject the Group Companies to a
concentration of credit risk consist of cash, cash equivalents, and accounts
receivable. The Group Companies' accounts receivable are derived from
revenues earned from customers located in the United States, England,
Germany, The Netherlands and Japan and are denominated in U.S. dollars.
Accounts receivable balances are typically settled upon completion of an
auction and as a result, the Companies have minimal outstanding accounts
receivable. During the years ended December 31, 1996, 1997 and 1998 and the
three month periods ended March 31, 1998 and 1999 (unaudited) no customers
accounted for more than 10% of net revenues.
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 which range from five years for office equipment and vehicles to
31.5 years for buildings and building improvements.
Other assets
Other assets consist primarily of a non-compete agreement with a former
shareholder, which is being amortized on a straight-line basis over the 60
month term of the agreement.
Long-lived assets
The Companies evaluate 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 121"). SFAS 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.
Fair value of financial instruments
The Companies' financial instruments, including cash, cash equivalents,
accounts receivable and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Advertising expenses
Advertising costs are expensed as incurred and totaled $1,691, $1,413,
$1,787, $358 (unaudited) and $788 (unaudited) during the years ended December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999
respectively.
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 Companies' 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.
<PAGE>
Comprehensive income
Effective January 1, 1998, the Companies 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 Group Companies have not
had any transactions that are required to be reported in comprehensive
income.
Segment information
Effective January 1, 1998, the Group Companies adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Companies' management identify their operating segments
based on business activities, management responsibility and geographic
location. During all periods presented, the Group operated in a single
business segment providing classic car auction services, primarily in the
United States. Through March 31, 1999, foreign operations have not been
significant.
Foreign currency translation
The Group Companies use the U.S. dollar as their functional currency.
Revenues and expenses are translated at average exchange rates in effect
during each period, and balance sheet amounts are translated at historical
exchange rates. Gains or losses from foreign currency transactions are
included in the determination of net income or loss.
Recent accounting pronouncements
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5 "Reporting
on the Costs of Start-Up Activities." Start-up activities are defined broadly
as those one-time activities related to opening a new facility, introducing a
new product or service, commencing some new operation or organizing a new
entity. Under SOP 98-5, the cost of start-up activities should be expensed as
incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do
not expect its adoption to have a material effect on their results of
operations, financial position or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivatives and Hedging Activities". SFAS 133 is
effective for all fiscal quarters beginning with the quarter ending June 30,
2000. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Group Companies will adopt SFAS
No. 133 in the quarter ending June 30, 2000 and do not expect such adoption
to have an impact on their results of operations, financial position or cash
flows.
Unaudited interim financial information
The accompanying interim financial statements as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999, 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 at March 31, 1999 and their
results of operations and cash flows for the three months ended March 31,
1998 and 1999. The financial data and other information disclosed in these
notes to the financial statements related to these periods are unaudited. The
results for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31,
1999.
<PAGE>
2. Balance Sheet Components
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998 1999
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Accounts receivable:
Accounts receivable...................................... $ 8 $ 20 $ 17
------- ------- -------
Less: Allowance for doubtful accounts................... -- -- --
------- ------- -------
$ 8 $ 20 $ 17
======= ======= =======
Property and equipment, net:
Land and buildings....................................... $ 1,453 $ 1,453 $ 1,453
Building improvements.................................... 2,949 3,433 3,317
Office equipment......................................... 473 569 574
Vehicles................................................. 355 325 325
------- ------- -------
5,230 5,780 5,669
Less: Accumulated depreciation and amortization........... (1,255) (1,527) (1,614)
------- ------- -------
$ 3,975 $ 4,253 $ 4,055
======= ======= =======
Accrued liabilities:
Payroll and related expenses............................ $ 39 $ 46 $ 60
Property taxes.......................................... 43 44 55
Unclaimed checks........................................ 242 242 242
Accrued interest and other expenses..................... 621 621 621
Other................................................... 72 28 40
------- ------- -------
$ 1,017 $ 981 $ 1,018
======= ======= =======
</TABLE>
3. Income Taxes
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................................... $ 246 $ 217 $ 110
State and local............................................................. 66 59 33
----- ----- -----
Total current............................................................ 312 276 143
----- ----- -----
Deferred:
Federal..................................................................... 12 (11) (25)
State and local............................................................. 3 (3) (9)
----- ----- -----
Total deferred........................................................... 15 (14) (34)
----- ----- -----
$ 327 $ 262 $ 109
===== ===== =====
</TABLE>
<PAGE>
The effective tax rate differs from the statutory rate as a result of the
following:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Provision at statutory rate............................................. $ 88 $ 8 $ 17
Permanent differences:
Meals and entertainment.............................................. 10 11 15
Life insurance....................................................... 22 30 42
Non-deductible expenses.............................................. 153 169 --
Other................................................................ 11 6 13
State taxes, net of federal benefit..................................... 43 38 22
----- ----- -----
$ 327 $ 262 $ 109
===== ===== =====
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
----------- -----------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves..................................................... $ 38 $ 38
----- -----
Deferred tax liabilities:
Depreciation and amortization............................................. (295) (261)
----- -----
Net deferred tax liability.................................................... $(257) $(223)
===== =====
</TABLE>
<PAGE>
4. Borrowings
Notes payable
Notes payable consists of amounts payable to various financial institutions
and a former shareholder and are secured by specified property as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998 1999
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
6% note; interest and principal payable at
maturity in May 1999....................................... $ 240 $ 140 $ 140
10% note; $1,200.00 in interest and principal payable
monthly, matures April 2004................................ 77 70 --
8% note; $12,500.00 in interest and principal payable
semiannually; matures September 2003....................... 64 43 43
10.5% note; $2,487.00 in interest and principal payable
monthly; matures December 2002............................. 111 92 87
7.5% note; $47,500.00 in interest and principal payable
annually; matures October 2000............................. -- 97 97
7.75% - 8.5% automobile notes; payable in monthly principal
and interest payments ranging from $300.00 to $1,425.00;
maturing December 1999 through January 2003................ -- 65 53
----- ----- -----
492 507 420
Less: Current portion...................................... (148) (257) (248)
----- ----- -----
$ 344 $ 250 $ 172
===== ===== =====
</TABLE>
Principal payments under notes payable are as follows:
<TABLE>
Year Ending
December 31,
<S> <C>
1999.............................................................................. $257
2000.............................................................................. 112
2001.............................................................................. 45
2002.............................................................................. 46
2003.............................................................................. 13
Thereafter........................................................................ 34
----
Total principal obligations....................................................... $507
====
</TABLE>
<PAGE>
5. Commitments and Contingencies
Leases
The Group Companies lease office space and equipment under noncancelable
operating leases with various expiration dates through June 2001. Rent
expense for the years ended December 31, 1996, 1997 and 1998 and for the
three months ended March 31, 1998 and 1999 was $0, $57, $73, $4 (unaudited)
and $11 (unaudited), respectively. The terms of the facility lease provide
for rental payments on a graduated scale. The Group Companies recognize
rent expense on a straight-line basis over the lease period, and have
accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending Operating
December 31, Leases
<S> <C>
1999............................................................ $33
2000............................................................ 19
2001............................................................ 14
---
Total minimum lease payments.................................... $66
===
</TABLE>
Contingencies
On July 1, 1992, the Group Companies were notified by the Internal Revenue
Service that they had failed to make certain required filings of Form 5300,
Report of Cash Payments Over $10,000 Received in a Trade or Business, for the
years 1990, 1991 and 1992. In December 1996, civil penalties were assessed
against the Companies relating to this claim. These allegations are being
vigorously defended by the Group Companies' management. The outcome of these
allegations is unknown, however, management does not expect that resolution
of this matter will have a material adverse impact on the Group Companies'
financial position or results of operations.
From time to time, the Group Companies are involved in other various disputes
which have arisen in the ordinary course of business. Management believes
that the ultimate resolution of these disputes will not have a material
adverse impact on the Companies' financial position or results of operations.
6. Employee Benefit Plans
The Group Companies sponsor a 401(k) defined contribution plan covering all
employees. Contributions made by the Group Companies are determined annually
by the Boards of Directors. Employer contributions under this plan totaled
$0, $15, $0, $0 (unaudited) and $1 (unaudited) for the years ended December
31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999,
respectively.
<PAGE>
7. Subsequent Events
On May 20, 1999, eBay Inc. acquired all of the outstanding Common Stock of
each of the combined companies, at which time the Companies became wholly-
owned subsidiaries of eBay Inc.
<PAGE>
Exhibit 99.2
Report of Independent Accountants
To the Board of Directors and Shareholders
of Billpoint, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Billpoint, Inc. (a company in the
development stage) at December 31, 1998 and the results of its operations and
its cash flows for the period from September 1, 1998 (date of inception) through
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 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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 20, 1999
<PAGE>
BILLPOINT, INC.
(A Development Stage Company)
BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
-------------- --------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................................... $ 50 $ 3,134
Other current assets......................................................... -- 52
----- -------
Total current assets..................................................... 50 3,186
Property and equipment, net..................................................... 12 627
Other assets ................................................................... -- 50
----- -------
$ 62 $ 3,863
===== =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................. $ 20 $ 752
----- -------
Total current liabilities................................................ 20 752
----- -------
Shareholders' equity:
Convertible Preferred Stock, no par value; 3,723,793 shares authorized;
220,000 shares issued and outstanding at December 31, 1998 and
3,165,975 (unaudited) shares issued and outstanding at March 31, 1999........ 110 3,772
Common Stock, no par value; 20,000,000 shares authorized; 5,700,000
shares issued and outstanding at December 31, 1998 and March 31, 1999
(unaudited)................................................................. 6 6
Additional paid-in capital.................................................... -- 1,549
Unearned compensation......................................................... -- (1,396)
Deficit accumulated during the development stage.............................. (74) (820)
----- -------
Total shareholders' equity............................................... 42 3,111
----- -------
$ 62 $ 3,863
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
September 1, September 1,
1998 (inception) Three months 1998 (inception)
to December 31, ended March 31, to March 31,
1998 1999 1999
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Operating expenses:
Sales and marketing.............................................. $ 3 $ 414 $ 417
Product development.............................................. 34 239 273
General and administrative....................................... 37 105 142
----- ----- -----
Total operating expenses..................................... 74 758 832
----- ----- -----
Loss from operations................................................ (74) (758) (832)
Interest income..................................................... -- 12 12
----- ----- -----
Net loss............................................................ $ (74) $(746) $(820)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Convertible Additional in the Share-
Preferred Stock Common Stock Paid-in Unearned Development Holders'
Shares Amount Shares Amount Capital Compensation Stage Equity
------ ------ ------ ------ ------- ------------ ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series A Convertible
Preferred Stock for cash at $0.50 per
share in October 1998, net ......... 220 $ 110 -- - $ -- $ -- $ -- $ 110
Issuance of Common Stock for cash at
$0.001 per share in October 1998 .... -- -- 5,700 6 -- -- -- 6
Net loss ............................... -- -- -- -- -- -- (74) (74)
------ ------ ------ ------ ------ ------- ------- ------
Balance at December 31, 1998 ........... 220 110 5,700 6 -- -- (74) 42
Issuance of Series A Convertible
Preferred Stock for cash at $0.50 per
share in January 1999, net
(unaudited) ......................... 100 46 -- -- -- -- -- 46
Issuance of Series B Convertible
Preferred Stock for cash at $1.28 per
share in March 1999, net
(unaudited) ......................... 2,846 3,616 -- -- -- -- -- 3,616
Issuance of Preferred Stock Warrant
(unaudited) ......................... -- -- -- -- 468 (468) -- --
Amortization of Preferred Stock
Warrant (unaudited) ................. -- -- -- -- -- 117 -- 117
Unearned stock compensation
(unaudited) ......................... -- -- -- -- 1,081 (1,081) -- --
Amortization of unearned stock
compensation (unaudited) ............ -- -- -- -- -- 36 -- 36
Net loss (unaudited) ................... -- -- -- -- -- -- (746) (746)
------ ------ ------ ------ ------ ------- ------- ------
Balance at March 31, 1999 (unaudited) .. 3,166 $3,772 5,700 $ 6 $1,549 $(1,396) $(820) $3,111
====== ====== ====== ====== ====== ======= ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
BILLPOINT, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from Period from
September 1, September 1,
1998 (inception) Three months 1998 (inception)
to December 31, ended March 31, to March 31,
1998 1999 1999
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (74) $ (746) $ (820)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ............................... -- 26 26
Amortization of unearned compensation ....................... -- 36 36
Amortization of Preferred Stock Warrant ..................... -- 117 117
Changes in assets and liabilities:
Other current assets ...................................... -- (52) (52)
Other assets .............................................. -- (50) (50)
Accounts payable .......................................... 20 732 752
----- ------ ------
Net cash provided by (used in) operating activities ............ (54) 63 9
----- ------ ------
Cash flows from investing activities:
Purchases of property and equipment ......................... (12) (641) (653)
----- ------ ------
Net cash used in investing activities .......................... (12) (641) (653)
----- ------ ------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock, net .... 110 3,662 3,772
Proceeds from issuance of Common Stock ........................ 6 -- 6
----- ------ ------
Net cash provided by financing activities ...................... 116 3,662 3,778
----- ------ ------
Net increase in cash and cash equivalents ...................... 50 3,084 3,134
Cash and cash equivalents at beginning of period ............... -- 50 --
----- ------ ------
Cash and cash equivalents at end of period ..................... $ 50 $3,134 $3,134
===== ====== ======
Supplemental non-cash financing activity:
Issuance of Preferred Stock Warrant ......................... $ -- $ 468 $ 468
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
BILLPOINT, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. The Company and Summary of Significant Accounting Policies
The Company
Billpoint, Inc. (the "Company"), began operations on September 1, 1998, and
was incorporated in California on September 24, 1998. The Company has
developed a centralized, turnkey authorization, billing and payment
fulfillment solution that permits individuals and small merchants to accept
credit cards as payment for Internet-based sales transactions. The Company's
service, which was launched in December 1998, is expected to derive revenues
based upon a variety of fee arrangements, including percentage-of-
transaction, fixed-fee per transaction and flat monthly rates.
Since its inception, the Company has been in the development stage, engaged
primarily in research and development, recruiting personnel and raising
capital. To date, no revenues have been generated from its planned
operations. Accordingly, the accompanying financial statements are not
indicative of a normal operating period.
The Company has incurred losses during all periods since inception and
expects to incur further losses related to the development of its product
and service offerings; however, management believes that existing capital
resources, including the equity financing secured subsequent to December
31, 1998, will be sufficient to fund the Company's cash requirements
through at least December 31, 1999.
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.
Cash equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At
December 31, 1998 and March 31, 1999, $50 and $3,134 (unaudited),
respectively, of money market funds, the fair value of which approximates
cost, are included in cash and cash equivalents.
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration
of credit risk consist of cash and cash equivalents. The Company deposits
cash and cash equivalents with financial institutions that management
believes are of high credit quality.
Software development costs
Software development costs are included in research and development and are
expensed as incurred. After technological feasibility is established using
the working model approach, material software development costs are
capitalized. The capitalized cost is then amortized on a straight-line basis
over the estimated product life, or on the ratio of current revenues to total
projected product revenues, whichever is greater. To date, the period
between achieving technological feasibility and the general availability of
such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.
<PAGE>
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally one to three years, or the lease term of the respective assets if
shorter.
Long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." 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.
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 Companies' 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.
Research and development
Research and development costs are charged to expense as incurred.
Stock compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the 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 Opinion No. 25, unearned compensation is based on
the difference, if any, on the date of the grant, between the fair value of
the Company's Common Stock and the exercise price of the option. The Company
accounts for stock issued to non-employees in accordance with the provisions
of SFAS No. 123 and EITF 96-18.
Comprehensive income
There were no items required to be reported in comprehensive loss for the
periods presented.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP No.
98-1 requires that entities capitalize certain costs related to internal-use
software once certain criteria have been met. The Company does not expect
the adoption of SOP No. 98-1 to have a material impact on its financial
position, results of operations or cash flows. The Company will be required
to implement SOP No. 98-1 for the year ending December 31, 1999.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-Up Activities." SOP No. 98-5 requires that all start-up costs related
to new operations be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. The Company does not expect the adoption of SOP No. 98-5 to have a
material impact on its financial position, results of operations or cash
flows. The Company will be required to implement SOP No. 98-5 for the year
ending December 31, 1999.
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative financial
instruments and hedging activities. Because the Company currently holds no
derivative instruments and does not engage in hedging activities, the Company
does not expect the adoption of SFAS No. 133 to have a material impact on its
financial position, results of operations or cash flows. The Company will be
required to implement SFAS No. 133 for the year ending December 31, 2000.
Unaudited interim financial information
The accompanying interim financial statements as of March 31, 1999 and for
the three months then ended 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 at March 31, 1999 and its results of operations
and cash flows for the three months then ended. The financial data and other
information disclosed in these notes to the financial statements related to
this period is unaudited. The results for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the
year ending December 31, 1999.
2. Balance Sheet Components
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
--------------- --------------
(unaudited)
Property and equipment, net:
<S> <C> <C>
Computer equipment........................................................... $ 12 $ 428
Software..................................................................... -- 174
Furniture and fixtures....................................................... -- 29
Leasehold improvements....................................................... -- 22
----- -----
Less: Accumulated depreciation and amortization............................... -- (26)
----- -----
$ 12 $ 627
===== =====
</TABLE>
3. Income Taxes
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses from inception (September 1, 1998)
to December 31, 1998. As of December 31, 1998, the Company had net operating
loss carryforwards of approximately $50 for federal income tax purposes which
can be used to reduce future taxable income. These net operating loss
carryforwards begin to expire in 2014.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over
a three year period. As a result of this limitation, the net operating loss
carryforwards may expire prior to their utilization.
<PAGE>
4. Commitments
Leases
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through February 2003. Rent expense for
the year ended December 31, 1998 and the period ended March 31, 1999 totaled
$2,000 and $10,000 (unaudited), respectively. The terms of the facility
lease provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease period, and
has accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases, including
lease commitments entered into subsequent to December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1999 .......................................................... $ 96
2000 .......................................................... 133
2001 .......................................................... 25
2002 .......................................................... 3
2003 .......................................................... 1
----
Total minimum lease payments................................... $258
====
</TABLE>
5. Shareholders' Equity
Convertible Preferred Stock
The Company's Articles of Incorporation, as amended, authorize the issuance
of 3,723,793 shares of Convertible Preferred Stock, of which 320,000 shares,
2,853,793 shares, and 550,000 shares are designated as Series A, Series B and
Series C, respectively. The holders of Convertible Preferred Stock have
various rights and preferences as follows:
Voting
Each share of Series A and B Convertible Preferred Stock has voting rights
equal to an equivalent number of shares of Common Stock into which it is
convertible and votes together as one class with the Common Stock.
As long as at least fifty percent of the Convertible Preferred Stock remain
outstanding, the Company must obtain approval from a majority of the holders
of Convertible Preferred Stock in order to amend the Articles of
Incorporation as related to Convertible Preferred Stock, change the
authorized number of shares of Convertible Preferred Stock, repurchase any
shares of Common Stock other than shares subject to the right of repurchase
by the Company, change the authorized number of Directors, authorize a
dividend for any class or series other than Convertible Preferred Stock,
create a new class of stock or effect a merger, consolidation or sale of
assets where the existing shareholders retain less than 50% of the voting
stock of the surviving entity.
<PAGE>
Dividends
Holders of Series A and B Convertible Preferred Stock are entitled to receive
noncumulative dividends at the per annum rate of $0.04 and $0.10 per share,
respectively, when and if declared by the Board of Directors. The holders of
Series A and B Convertible Preferred Stock will also be entitled to
participate in dividends on Common Stock, when and if declared by the Board
of Directors, based on the number of shares of Common Stock held on an as-if
converted basis. No dividends on Convertible Preferred Stock or Common Stock
have been declared by the Board of Directors from inception to December 31,
1998 and March 31, 1999 (unaudited), respectively.
Liquidation
In the event of any liquidation, dissolution or winding up of the Company,
including a merger, acquisition, or sale of assets where the beneficial
owners of the Company's Common Stock and Convertible Preferred Stock own less
than 50% of the resulting voting power of the surviving entity, the holders
of Series A and B Convertible Preferred Stock are entitled to receive an
amount of $0.50 and $1.28 per share, respectively, plus any declared but
unpaid dividends prior to and in preference to any distribution to the
holders of Common Stock. The remaining assets, if any, shall be distributed
ratably among the holders of Common Stock according to the number of shares
of Common Stock such holders then hold. Should the Company's legally
available assets be insufficient to satisfy the liquidation preferences, the
funds will be distributed ratably among the holders of Series A and B
Convertible Preferred Stock in proportion to the full preferential amount
each such holder is entitled to receive. At December 31, 1998 the aggregate
liquidation preference of Series A Convertible Preferred Stock totaled $110.
At March 31, 1999 the aggregate liquidation preference of Series A and Series
B Convertible Preferred Stock totaled $156 and $3,616 (unaudited),
respectively.
Conversion
Each share of Series A and Series B Convertible Preferred Stock is
convertible, at the option of the holder, according to a conversion ratio
subject to adjustment for dilution. Each share of Series A and B Convertible
Preferred Stock automatically converts into the number of shares of Common
Stock into which such shares are convertible at the then effective conversion
ratio upon: (1) the closing of a public offering of Common Stock at a price
of at least $3.00 per share with gross proceeds of at least $15,000 (2) a
merger sale of substantially all of the assets of the Company, or other
transactions which result in a change in control or (3) the consent of the
holders of the majority of Convertible Preferred Stock.
At December 31, 1998, the Company reserved 3,173,793 shares of Common Stock
for the conversion of Series A and B Convertible Preferred Stock.
Preferred Stock Warrant (unaudited)
On March 18, 1999, as consideration for entering into an agreement to develop
a co-branded transaction processing service for individual users on the
Internet, the Company granted Excite, Inc. a warrant to purchase 550,000
shares of the Company's Preferred Stock. The warrant has an exercise price of
$2.60 per share, was fully vested on the grant date and has a term of one
year from the date of the agreement. Using the Black-Scholes option pricing
model, the estimated fair value of the warrant totaled $468 which was
recorded as unearned stock compensation and is being recognized ratably over
the one year term of the agreement as a charge to sales and marketing
expense. Amortization of the fair value of the Preferred Stock warrant
totaled $117 (unaudited) for the three months ended March 31, 1999.
<PAGE>
Common Stock
The Company's Articles of Incorporation, as amended, authorize the Company to
issue 20,000,000 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 issue date or employee hire date, as applicable. At December
31, 1998 and March 31, 1999 there were 5,344,750 and 4,987,500 (unaudited)
shares, respectively, were subject to repurchase rights.
6. Stock Option Plans (unaudited)
During 1999, the Company adopted the Employee Stock Option Plan (the "Plan").
The Plan provides for the granting of stock options to employees and
consultants of the Company. Options granted under the Plan 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. The Company has reserved 2,189,091 shares of Common Stock for
issuance under the Plan.
Options under the Plan 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 and NSO shall not be less than 100%
and 85% of the estimated fair value of the shares on the date of grant,
respectively, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of
the shares on the date of grant. Options are exercisable based on a vesting
schedule which provides a 25% vest one year after the date of grant and the
remaining options thereafter in monthly installments over the remaining 36
months. To date, options granted generally vest over four years. Activity
under the Plan is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------
Weighted
Average
Shares Exercise
available for price per
grant Shares share
----------------- --------------- ---------------
<S> <C> <C> <C>
Shares reserved at Plan inception................................... 2,189,091 -- $ --
Options granted .................................................. (537,096) 537,096 0.13
Options exercised ................................................ -- -- --
Options canceled ................................................. -- -- --
--------- ------------
Balance at March 31, 1999........................................... 1,651,995 537,096 0.13
========= ============
Options exercisable at March 31, 1999............................... --
============
</TABLE>
Options outstanding and exercisable at March 31, 1999 (unaudited) are as
follows:
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable at
March 31, 1999 March 31, 1999
------------------------------------------------------------------- ----------------------------
Weighted Weighted
Average Average Weighted
Range of Number of Remaining Exercise Number of Average
Exercise Price Shares Contractual Life Price Shares Exercise Price
-------------- ----------- ---------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.13 537,096 9.71 years $0.13 -- $0.13
</TABLE>
<PAGE>
Fair value disclosures (unaudited)
Had compensation cost for the Company's stock-based compensation plan been
determined based on the fair value at the grant dates for the awards under a
method prescribed by SFAS No. 123, the Company's net loss would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1999
---------------------
(unaudited)
<S> <C>
Net Loss:
As reported....................................................................... $746
====
Pro forma......................................................................... $750
====
</TABLE>
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes pricing method with the following assumptions:
volatility 0%; dividend yield at 0%; weighted average expected option term of
four years; risk free interest rate of 6% for the three months ended March
31, 1999. The weighted average fair value of options granted during March
1999 was $0.06.
Unearned stock compensation (unaudited)
In connection with certain stock option grants during the three months ended
March 31, 1999, the Company recorded unearned stock compensation totaling
$1,081,000, which is being amortized over the four year vesting period of the
related option. Amortization of unearned stock compensation totaled $36,000
for the three months ended March 31, 1999.
7. Employee Benefit Plans
The Company sponsors a 401(k) defined contribution plan covering all
employees. Contributions made by the Company are determined annually by the
Board of Directors. No employer contributions were made during the period
from inception to December 31, 1998 or during the three months ended March
31, 1999 (unaudited), respectively.
8. Subsequent Events (unaudited)
Stock compensation
In April 1999, in connection with certain stock option grants, the Company
recorded unearned stock compensation totaling $4,740, which will be
amortized over the four year vesting period of the related options.
Acquisition
On May 25, 1999, eBay Inc. acquired all of the Company's outstanding capital
stock at which time the Company became a wholly-owned subsidiary of eBay Inc.
<PAGE>
EXHIBIT 99.3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors, Stockholders and Members of the
Butterfield & Butterfield Group of Companies
In our opinion, the accompanying combined balance sheet and the related
combined statements of income, of group equity and of cash flows present fairly,
in all material respects, the combined financial position of the Butterfield &
Butterfield Group of Companies at December 31, 1997 and 1998, and the results of
their combined 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
Group'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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 23, 1999
-1-
<PAGE>
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
--------------------- March 31,
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 7,748 $ 4,952 $ 862
Accounts receivable and advances, net............................................... 6,401 6,036 6,011
Inventories......................................................................... 1,851 1,139 327
Other current assets................................................................ 1,064 1,114 883
------- ------- -------
Total current assets............................................................... 17,064 13,241 8,083
Property and equipment, net.......................................................... 29,436 31,966 32,297
Asset held for sale.................................................................. 1,360 1,160 1,060
Intangible assets, net............................................................... 630 2,345 2,330
Note receivable...................................................................... 2,806 1,946 1,919
Investment in partnerships........................................................... -- 926 928
Other assets......................................................................... 137 42 42
------- ------- -------
$51,433 $51,626 $46,659
======= ======= =======
LIABILITIES AND GROUP EQUITY
Current liabilities:
Accounts payable.................................................................... $ 493 $ 1,380 $ 1,532
Accrued expenses.................................................................... 586 131 144
Accrued compensation and benefits................................................... 1,497 1,221 875
Notes payable, current.............................................................. 6,282 3,790 3,396
Payable to consignors............................................................... 11,571 6,390 4,315
------- ------- -------
Total current liabilities.......................................................... 20,429 12,912 10,262
Accrued investment loss.............................................................. 3,099 -- --
Minority interests in deficit of combined companies.................................. (944) (180) (102)
Accrued environmental and seismic costs.............................................. 5,700 5,900 5,900
Notes payable, long-term............................................................. 15,668 18,111 17,888
------- ------- -------
43,952 36,743 33,948
------- ------- -------
Commitments and contingencies (Notes 7)
Group equity:
Common stock -- par value $.001, 15,000,000 shares authorized,
4,752,364 shares issued and outstanding............................................ 4 4 4
Members' equity..................................................................... 10,297 15,620 15,620
Additional paid-in capital.......................................................... 1,064 1,364 1,364
Accumulated deficit................................................................. (3,884) (2,105) (4,277)
------- ------- -------
Total group equity................................................................. 7,481 14,883 12,711
------- ------- -------
$51,433 $51,626 $46,659
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-2-
<PAGE>
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
--------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues:
Auction fees and services............................... $20,027 $23,806 $24,026 $4,397 $5,183
Real estate rentals..................................... 3,892 4,300 4,486 1,155 1,057
------- ------- ------- ------ ------
Net revenues........................................... 23,919 28,106 28,512 5,552 6,240
------- ------- ------- ------ ------
Cost of net revenues:
Auction fees and services............................... 3,832 4,325 5,002 799 1,769
Real estate rentals..................................... 1,622 1,773 2,146 681 478
------- ------- ------- ------ ------
Cost of net revenues................................... 5,454 6,098 7,148 1,480 2,247
------- ------- ------- ------ ------
Gross profit........................................... 18,465 22,008 21,364 4,072 3,993
------- ------- ------- ------ ------
Operating expenses:
Sales and marketing..................................... 10,016 10,817 12,523 2,403 3,161
General and administrative.............................. 2,683 2,760 2,222 463 1,303
------- ------- ------- ------ ------
Total operating expenses............................... 12,699 13,577 14,745 2,866 4,464
------- ------- ------- ------ ------
Income (loss) from operations............................ 5,766 8,431 6,619 1,206 (471)
------- ------- ------- ------ ------
Other income (expense):
Interest and other income, net.......................... 358 975 861 362 154
Interest expense........................................ (2,161) (2,308) (2,114) (462) (512)
------- ------- ------- ------ ------
Income (loss) from combined companies
before taxes and minority interests..................... 3,963 7,098 5,366 1,106 (829)
------- ------- ------- ------ ------
Provision for income taxes............................... (42) (40) (48) -- (1)
Minority interest in combined company.................... (576) (314) 70 173 59
------- ------- ------- ------ ------
Income (loss) from combined companies.................... 3,345 6,744 5,388 1,279 (771)
Equity interest in partnership loss...................... (86) (320) (381) (95) (78)
------- ------- ------- ------ ------
Net income (loss)........................................ $ 3,259 $ 6,424 $ 5,007 $1,184 $ (849)
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-3-
<PAGE>
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF GROUP EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional Total
Members' Paid-in Accumulated Group
Shares Amount Equity Capital Deficit Equity
--------- ------ -------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........................... 4,752 $4 $ 9,809 $ 914 $(5,752) $ 4,975
Capital contributions from stockholders/members..... - - 488 150 - 638
Distributions to stockholders/members............... - - - - (4,556) (4,556)
Net income.......................................... - - - - 6,424 6,424
--------- -- ------- ------ ------- -------
Balance, December 31, 1997........................... 4,752 4 10,297 1,064 (3,884) 7,481
Capital contributions from stockholders/members..... - - 5,323 300 - 5,623
Distributions to stockholders/members............... - - - - (3,228) (3,228)
Net income.......................................... - - - - 5,007 5,007
--------- -- ------- ------ ------- -------
Balance, December 31, 1998........................... 4,752 4 15,620 1,364 (2,105) 14,883
Distributions to stockholders/members (unaudited)... - - - - (1,323) (1,323)
Net loss (unaudited)................................ - - - - (849) (849)
--------- -- ------- ------ ------- -------
Balance, March 31, 1999 (unaudited).................. 4,752 $4 $15,620 $1,364 $(4,277) $12,711
========= == ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-4-
<PAGE>
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------- ----------------------
1996 1997 1998 1998 1999
------- ------- -------- ---------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $3,259 $6,424 $ 5,007 $1,184 $ (849)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 1,188 1,269 1,486 416 372
Allowance for doubtful accounts........................ -- 30 54 -- 91
(Gain)/Loss sale of property and equipment............. 190 -- (333) (200) --
Loss on impairment of asset held for sale.............. -- -- 200 -- 100
Minority interest in deficit of combined companies..... 86 24 764 708 78
Net change in equity interest in partnerships ......... 576 (146) (4,025) 36 (2)
Changes in assets and liabilities:
Accounts receivable and advances...................... 3,904 (167) 311 (367) (66)
Inventories........................................... 46 (1,414) 712 (254) 812
Other assets.......................................... 111 981 45 758 231
Accounts payable...................................... (375) 151 887 (89) 152
Accrued expenses...................................... (304) (168) (455) (870) 13
Accrued compensation and benefits..................... 113 707 (276) (4) (346)
Payable to consignors................................. 1,038 2,555 (5,181) (8,015) (2,075)
Accrued environmental and seismic costs............... 750 -- 200 -- --
------ ------ ------- ------ -------
Net cash provided by (used in) operating activities.... 10,582 10,246 (604) (6,697) (1,489)
------ ------ ------- ------ -------
Cash flows from investing activities:
Purchase of property and equipment...................... (1,228) (2,168) (3,338) (197) (688)
Purchase of intangible assets........................... (36) (141) (1,248) (34) --
Proceeds from sale of property and equipment............ 1,051 -- 1,274 390 --
Related party advances/repayments....................... (1,369) -- -- -- --
Payments on notes receivable............................ 32 145 109 27 27
------ ------ ------- ------ -------
Net cash provided by (used in) investing activities.... (1,550) (2,164) (3,203) 186 (661)
------ ------ ------- ------ -------
Cash flows from financing activities:
Net borrowings (repayments) on line of credit........... (2,375) 1,990 1,001 (400) (394)
Net borrowings (repayments) on notes payable............ (3,876) (960) (2,385) (2,048) (223)
Contributions from stockholders......................... 467 638 5,623 1,292 --
Distributions to stockholders........................... (2,107) (4,556) (3,228) (1,160) (1,323)
------ ------ ------- ------ -------
Net cash used in financing activities.................. (7,891) (2,888) (1,011) (2,316) (1,940)
------ ------ ------- ------ -------
Net increase (decrease) in cash and cash equivalents..... 1,141 5,194 (2,796) (8,827) (4,090)
Cash and cash equivalents, beginning of period........... 1,413 2,554 7,748 7,748 4,952
------ ------ ------- ------ -------
Cash and cash equivalents, end of period................. $2,554 $7,748 $ 4,952 (1,079) $ 862
====== ====== ======= ====== =======
Supplemental disclosures:
Cash paid for interest.................................. $2,077 $1,830 $ 1,633 462 $ 513
Cash paid for income taxes.............................. $ 2 $ 70 $ 45 -- 1
Non-cash investing and financing activities:
Building and inventory obtained in connection with
foreclosure............................................ $ -- $1,510 $ 751 $ -- $ --
Notes and accounts payable assumed in connection with
foreclosure............................................ $ -- $ 695 $ -- $ -- $ --
Receivables canceled in connection with foreclosure..... -- 815 500 -- --
Land and building transferred in exchange for
assumption of debt...................................... -- -- 835 -- --
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
-5-
<PAGE>
BUTTERFIELD & BUTTERFIELD
GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands except share amounts)
Note 1--The Group and Summary of Significant Accounting Policies:
Butterfield & Butterfield
The Group Companies and Basis of Presentation
The accompanying combined financial statements include the accounts of
Butterfield & Butterfield Auctioneers Corp. and all affiliated entities under
common control including; Butterfield Credit Corporation Inc., 111 Potrero, LLC
and HBJ Partners, LLC. (collectively the "Group" or "Group Companies"). All
intercompany accounts and transactions have been eliminated in the preparation
of these combined statements.
Butterfield & Butterfield Auctioneers Corp. ("B&B") - B&B was established
in 1865, incorporated in California in July 1970 and reincorporated in the
state of Delaware in March 1999. B&B conducts auctions and performs appraisal
services of fine art, jewelry, antiques and wine primarily in San Francisco,
Los Angeles and Chicago.
Butterfield Credit Corporation Inc. ("BCCI") - BCCI is a wholly-owned
subsidiary of B&B and is incorporated in California. BCCI operates as a
financing corporation whose sole purpose is serving B&B's clients.
111 Potrero Partners, LLC - ("111 Potrero") - 111 Potrero is a limited
liability corporation organized in May 1996. 111 Potrero owns several
commercial properties located in San Francisco and Los Angeles, which are
currently occupied by B&B and third parties.
HBJ Partners, LLC - ("HBJ") - HBJ is a limited liability corporation
organized in California in September 1996. HBJ owns several commercial
properties located in San Francisco, which are currently occupied by B&B and
third parties. HBJ also has general partnership interests in 111 Santa Fe
Avenue Partners, 2959 Victoria Street Partners and 6700 Cherry Avenue
Partners. Ownership interests in the above partnerships were 58%, 60% and 38%,
respectively.
Investment in general partnerships
Interests in general partnerships in which the Group owns more than 50
percent ownership and exerts control are reported under the consolidation
method of accounting; the combined accounts include 100 percent of the assets
and liabilities of these general partnerships and the ownership interests of
minority investors are recorded as "Minority interest in combined companies".
Investments in general partnerships in which the Group owns more than 20
percent are accounted for by the equity method of accounting and are recorded
as "Investment in partnerships".
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
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. Cash equivalents consist primarily of deposits in money market
funds.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents and accounts
receivable. Cash and cash equivalents are deposited with financial institutions
that management believes are of high credit quality. The Company's accounts
receivable are derived from revenue earned from customers located in the U.S.
and are denominated in U.S. dollars. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts
receivable. During the years ended December 31, 1996, 1997 and 1998, and the
periods ended March 31, 1998 (unaudited) and 1999 (unaudited) respectively, one
customer accounted for 13.3%, 11.4%, 11.5%, 14.8% (unaudited) and 13.2%
(unaudited), respectively of net revenues. No other customer 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,
accounts receivable, accounts payable and debt are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Inventory
Inventory generally consists of objects obtained as a result of the auction
process or of goods purchased specifically for resale. Inventory is valued at
the lower of cost, specifically identified, or estimated net realizable value.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method and accelerated methods
over the estimated useful lives of the related assets, ranging from three years
for computer equipment to 31.5 years for buildings.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of
Dunnings Auction Services, Inc. in June 1998 were estimated by management to be
primarily associated with a covenant not to compete and goodwill and are being
amortized over their estimated useful lives of five and 15 years, respectively.
-6-
<PAGE>
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 No. 121"). SFAS No. 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the fair value as
estimated by management based on appraisals, current market value, comparable
sales values and the estimated undiscounted future cash flows attributable to
such assets.
Environmental expenditures
Environmental expenditures that relate to current operations are charged to
expense or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and that do not contribute to current or
future revenue generation, are charged to expense. Liabilities are recorded when
environmental assessments are made and remediation obligations are probable and
the costs can be reasonably estimated. The timing of these accruals is generally
no later than the completion of feasibility studies.
HBJ and 111 Potrero own or control numerous real estate properties that are
either used in the auction business or leased to unrelated parties for various
commercial applications. Certain environmental and structural deficiencies have
been identified in the past for which the Company has remediation
responsibility. The amount accrued to correct these matters are based upon
estimates developed in preliminary studies by external consultants. Due to
uncertainties inherent in the estimation process, it is at least reasonably
possible that as additional information is obtained, the amounts accrued for
these matters may be revised in future periods.
Revenue recognition
Auction revenues are derived primarily from auction commissions and fees
from sale of property through the auction process. Revenue from these sources
are recognized at the date the related auction is concluded. Services revenues
are derived from financial, appraisal and other related services which are
recognized as such services are rendered.
Advertising expense
The Group Companies incur advertising expenses primarily related to the
distribution of catalogues and advertising for specific auction events.
Advertising expenses are recognized in accordance with Statement of Position
("SOP") 93-7 "Reporting on Advertising Costs." As such, the Group 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. Advertising expenses totaled $926, $868, $1,337, $197
(unaudited) and $289 (unaudited) during the years ended December 31, 1996, 1997
and 1998, and the three months ended March 31, 1998 and 1999, respectively.
Income taxes
For all periods presented in these combined financial statements, B&B and
BCCI have elected to be taxed as "S" Corporations and therefore, their
respective taxable income or loss have been reported on the shareholders'
individual tax returns. As limited liability corporations, 111 Potrero's and
HBJ's taxable income or loss have also been reported on the members, individual
income tax returns. Accordingly the provison for income taxes is comprised
solely of the California state franchise tax applicable to S Corporations.
Unaudited interim financial information
The accompanying interim combined financial statements as of March 31, 1999
and for the three months ended March 31, 1998 and 1999, are unaudited. The
unaudited interim combined financial statements have been prepared on the same
basis as the annual combined financial statements, and in the opinion of
management, reflect all adjustments, which include only normal recurring
adjustments, necessary to present fairly the Group Companies' financial
position, results of operations and cash flows as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999. The financial data and other
information disclosed in these notes to the combined financial statements
related to
-7-
<PAGE>
these period are unaudited. The results for the three months ended March 31,
1999 are not necessarily indicative of the results to be expected for the year
ending December 31, 1999.
Comprehensive income
Effective January 1, 1998, the Group Companies adopted the provisions of
Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting
Comprehensive Income." SFAS No. 130 establishes the standard 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 Group Companies have not had any
transactions that are required to be reported in comprehensive income.
Recent accounting pronouncements
In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those
one-time activities related to opening a new facility, introducing a new
product or service, commencing some new operation or organizing a new entity.
Under SOP 98-5, the cost of start-up activities should be expensed as
incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do not
expect its adoption to have a material effect on their combined results of
operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivatives and Hedging Activities." SFAS No. 133 is effective
for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS
133 establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Group Companies will adopt SFAS No. 133 in July 2000 and
have not assessed the impact of adoption on their combined results of
operations, financial position or cash flows.
2. Balance Sheet Components
<TABLE>
<CAPTION>
December 31,
--------------- March 31,
1997 1998 1999
---------- ---------- --------------
(unaudited)
<S> <C> <C> <C>
Accounts receivable and advances, net:
Auction receivables........................................... $5,498 $5,203 $4,307
Consignor advances............................................ 1,358 1,342 2,304
Less: Allowance for doubtful accounts -- auction receivables.. (268) (314) (474)
Less: Allowance for doubtful accounts -- consignor advances... (187) (195) (126)
------ ------ ------
$6,401 $6,036 $6,011
====== ====== ======
Property and equipment, net:
Land and buildings............................................ $34,043 $ 37,359 $ 37,945
Computer equipment............................................ 1,658 1,821 1,885
Furniture, fixtures and equipment............................. 421 543 590
Leasehold improvements........................................ 2,154 2,199 2,234
Automobiles................................................... 244 367 383
Construction in progress...................................... -- 189 --
------- -------- --------
38,520 42,478 43,037
Less: accumulated depreciation................................ (9,084) (10,512) (10,740)
------- -------- --------
$29,436 $ 31,966 $ 32,297
======= ======== ========
</TABLE>
-8-
<PAGE>
3. Borrowings
<TABLE>
<CAPTION>
Decmeber 31, March 31,
1997 1998 1999
----------- ---------- --------------
(unaudited)
<S> <C> <C> <C>
Revolving line of credit, prime rate ................ $ 1,990 $ 2,991 $ 2,597
Mortgage notes, prime plus 1%,
due September 31, 2002 ............................ 2,013 1,905 1,878
Mortgage notes, LIBOR plus 1.75%,
due July 15 2001 .................................. 3,067 3,638 3,600
Mortgage notes, 8.255%,
due May 15, 2000 .................................. 12,407 12,249 12,111
10.5% loan on foreclosed property
due October 2010 .................................. 663 618 606
8.5% loan in connection with Dunnings acquisition
due June 30, 2000 ................................. - 500 500
Related party 10% demand note ....................... 1,710 - -
Demand note payable, prime rate ..................... 100 - -
----------------------------------
Subtotal .......................................... 21,950 21,901 21,284
Less current portion ................................ (6,282) (3,790) (3,396)
----------------------------------
$15,668 $18,111 $17,888
==================================
</TABLE>
At December 31, 1997, HBJ maintained a revolving line of credit with a bank
that provided for borrowings of up to $2,000 and is personally guaranteed by the
members. Effective August 1, 1998, the agreement was amended to increase the
amount available to $4,500. The line of credit accrues interest on outstanding
borrowings at a rate equal to the bank's prime rate (8.5% and 7.75% at December
31, 1997 and 1998, respectively).
B&B and BCCI each maintain a $3,000 bank line of credit which expire on
July 31, 1999 and are each guaranteed by the other party. There were no
outstanding balances at December 31, 1997, 1998 and at March 31, 1999
(unaudited). The lines of credit require compliance with certain financial
covenants and annual profitability. The Companies were in compliance with these
covenants at December 31, 1998 and March 31, 1999 (unaudited). Interest is
generally charged at the Bank's prime rate (8.0% at December 31, 1998) less
.25%. However, the Company has the option to select from variations of the
London Interbank Offered Rate (LIBOR) 5.59% at December 31, 1998) plus 2% for
all or a portion of the outstanding balance for a predetermined loan term of 30
days to one year.
The mortgage notes outstanding are on property owned by the real estate
general partnerships and are personally guaranteed by the general partners. The
notes have variable interest rates ranging from 7.34% to 8.75% at December 31,
1998 and are secured by certain land, buildings and improvements. The notes are
repayable in equal monthly installments over six to ten year terms, with final
installments consisting of all remaining unpaid principal and accrued interest
at the end of the term.
During 1997, B&B foreclosed on secured receivables totaling $815 and
assumed a related note payable for $668, plus unpaid property taxes of $27. The
property received in the foreclosure consisted of inventory with estimated value
of $150 and real property recorded at the remaining value of consideration given
of $1,360, which approximates its fair value. The real property has been
classified as asset held for sale on the accompanying combined balance sheet,
because B&B has not used the property in its business operations and has
actively listed the property for sale since the foreclosure date. The related
loan bears interest at a fixed rate of 10.5% and is due in monthly principal and
interest installments of $9.
In connection with the purchase of Dunnings Auction Services, Inc.,
("Dunnings") (see Note 9), the Company assumed a note payable to the prior
owners in the original amount of $500. The note carries interest at 8.5%, and is
due in two approximately equal installments on June 30, 1999 and 2000.
In July 1993, an affiliate of HBJ entered into a note payable from a
general partner for $1,800. The note was payable on demand and accrued interest
at an annual rate of 10%. During the first quarter of 1998, the Company paid off
the note in full.
Notes payable consist of one demand note payable to an individual
totaling $100 at December 31, 1997 with an interest rate of prime and was
repaid during 1998.
Minimum annual repayments on these notes at December 31, 1998 are as
follows:
Year ending
December 31,
1999............................... $ 4,319
2000............................... 12,210
2001............................... 3,479
2002............................... 1,618
2003............................... 48
Thereafter......................... 227
-------
$21,901
=======
Interest expense for all obligations for the years ended December 31, 1996,
1997 and 1998 and for the three months ended March 31, 1998 and 1999 totaled
$2,161, $2,308, $2,114, $462 (unaudited) and $512 (unaudited), respectively.
-9-
<PAGE>
4. Leasing Arrangements
HBJ and underlying general partnerships and 111 Potrero's leasing
operations consist principally of the leasing of certain land and buildings.
These leases are classified as operating leases that expire at various intervals
between 1999 and 2010. Certain of these leases contain renewal options and have
escalation clauses tied to changes in CPI. Under the terms of the leases, the
tenants are generally responsible for the payment of property taxes, insurance
and maintenance costs related to the leased property.
B&B leases space from HBJ and 111 Potrero at market rates. These lease
arrangements have been eliminated in consolidation.
Property on Operating Leases and Property Held for Lease
The following schedule provides an analysis of the Company's investment in
property use under operating leases and property held for lease by major
classes:
<TABLE>
<CAPTION>
December 31,
1997 1998
------- --------
<S> <C> <C>
Land................................. $ 6,956 $ 7,265
Building............................. 7,133 8,581
Improvements......................... 8,535 9,672
Other................................ 37 37
------- -------
22,661 25,555
Less: Accumulated depreciation....... (3,751) (4,249)
------- -------
$18,910 $21,306
======= =======
</TABLE>
The following is a schedule by year of minimum future rental income on
noncancellable operating leases as of December 31, 1998:
<TABLE>
<CAPTION>
Year ending
December 31
<S> <C>
1999......................................... $ 3,960
2000......................................... 3,964
2001......................................... 3,967
2001......................................... 3,837
2002......................................... 3,841
Thereafter................................... 21,110
-------
Total minimum future rentals................. $40,679
=======
</TABLE>
5. Sale of Real Estate Properties
During 1998, the partners of 131 North Gilbert Avenue Partners, including
HBJ a 63.3% holder, sold the property to an unrelated party for $2,450 in cash
and recognized a gain on the transaction of $200. In August, HBJ also sold the
Parthenia property for $865 in cash and recognized a gain of $133.
6. Employee Benefit Plans
The Company has a defined savings contribution plan that covers employees
after one year of service. Under the Plan, participants may elect to contribute
up to 15% of their compensation, up to a maximum amount allowable under IRS
regulations on a pre-tax basis. In addition, the Company may contribute to the
plan up to 25% of the first 2% of each participant's compensation in an amount
determined annually by the Board of Directors. The Company's contributions
amounted to $14, $11, $20 and $5 (unaudited) for the years ended December 31,
1996, 1997, 1998 and for the three month ended March 31, 1999, respectively.
7. Commitments and Contingencies
Operating leases
The Group leases office and warehouse space and equipment under
noncancelable operating leases with varying expiration dates through the year
2005. Rent expense for the years ended December 31, 1996, 1997 and 1998 and for
the three months ended March 31, 1998 and 1999, totaled $5, $5, $58, $1
(unaudited) and $27 (unaudited), respectively.
Future minimum annual lease payments for noncancelable operating leases are
not material.
-10-
<PAGE>
Employment Agreement
In connection with the Dunnings purchase (see Note 9), the Group Companies
entered into employment agreement with a former owner of Dunnings. Under the
agreement, the Group Companies shall continue base salary payments of $175
annually through the November 2001 expiration date in the event of the
employee's death or termination with or without cause. Payments shall cease upon
resignation or termination with cause.
8. Acquisition
Effective June 30, 1998, the Group Companies acquired all net assets of
Dunning Auction Services, Inc., an auction house located in Elgin, Illinois. The
acquistion 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 date of acquisition.
The total purchase price of $750 consisted of $250 in cash and the
assumption of $500 in debt. Of the total purchase price, $100 was allocated to
an agreement not to compete and the excess was allocated to goodwill.
The results of operations are included in the combined financial
statements commencing on July 1, 1998. The pro forma results of operations to
present what the results would have been had the acquisitions actually taken
place at the beginning of the respective periods presented did not result in a
material difference from the reported results of operations.
9. Operating Segment Reporting
Effective January 1, 1998, the Group Companies adopted the provisions of
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS No. 131 establishes the standards for reporting information
about operating segments in annual financial statements and requires that
certain selected information about operating segments be reported in interim
financial reports. It also establishes standards for related disclosures about
products and services, and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
evaluated regularly by the chief decision-maker in order to allocate resources
and in assessing performance.
The Group Companies have identified two primary operating segments: auction
services and real estate. The auction services segment consists of the
operations of B&B and BCCI. The real estate segment consists of the HBJ, 111
Potrero and the various general partnership interests. All segments conducted
their operations solely in the United States.
Segment selection was based upon the internal organization structure, the
manner in which these operations are managed and their performance evaluated by
management, the availability of separate financial information, and overall
materiality considerations. The operating information for the two segments
identified are as follows:
<TABLE>
<CAPTION>
Auction
Services Real Estate Total
--------------- ---------------- ----------
<S> <C> <C> <C>
March 31, 1999 (unaudited)
Net revenues:
Net revenues from external customers.......... $ 5,183 $ 1,057 $ 6,240
Intersegment net revenues..................... 168 447 615
--------------- ---------------- ----------
Total segment net revenues.................. 5,351 1,504 6,855
Income:
Income before taxes........................... (1,506) 736 (770)
Provision for income taxes.................... (1) - (1)
Minority interest............................. - (78) (78)
--------------- ---------------- ----------
Net income.................................... (1,507) 658 (849)
Other disclosuress:
Depreciation and amortization................. (167) (205) (372)
Interest income............................... 111 43 154
Interest expense.............................. (98) (414) (512)
Capital expenditures.......................... (517) (2) (519)
Unconsolidated affiliates:
Equity in income/loss....................... - 59 59
Investment in............................... - 928 928
Total assets at year-end...................... 14,845 31,814 46,659
<CAPTION>
Auction
Services Real Estate Total
--------------- ---------------- ----------
<S> <C> <C> <C>
Year ended December 31, 1998
Net revenues:
Net revenues from external customers.......... $ 24,026 $ 4,486 $ 28,512
Intersegment net revenues..................... 1,237 1,422 2,659
--------------- ---------------- ----------
Total segment net revenues.................. 25,263 5,908 31,171
Income:
Income before taxes........................... 2,578 2,858 5,436
Minority interest............................. - (381) (381)
Provision for income taxes.................... (48) - (48)
--------------- ---------------- ----------
Net income.................................... 2,530 2,477 5,007
Other disclosures:
Depreciation and amortization................. 619 867 1,486
Interest income............................... 374 410 784
Interest expense.............................. 481 1,633 2,114
Capital expenditures.......................... 638 4,166 4,804
Unconsolidated affiliates:
Equity in income/loss....................... - (70) (70)
Investment in............................... - 928 928
Total assets at year-end...................... 17,483 34,143 51,626
<CAPTION>
Auction
Services Real Estate Total
--------------- ---------------- ----------
<S> <C> <C> <C>
Year ended December 31, 1997
Net revenues:
Net revenues from external customers.......... $ 23,806 $ 4,300 $ 28,106
Intersegment net revenues..................... 628 1,684 2,312
--------------- ---------------- ----------
Total segment net revenues.................. 24,434 5,984 30,418
Income:
Income before taxes........................... 4,223 2,561 6,784
Minority interest............................. - (320) (320)
Provision for income taxes.................... (40) - (40)
--------------- ---------------- ----------
Net income.................................... 4,183 2,241 6,424
Other disclosures:
Depreciation and amortization................. 491 778 1,269
Interest income............................... 792 183 975
Interest expense.............................. 606 1,702 2,308
Capital expenditures.......................... 478 2,516 2,994
Unconsolidated affiliates:
Equity in income/loss....................... - (314) (314)
Investment in............................... - (3,099) (3,099)
Total assets at year-end...................... 20,223 31,210 51,433
<CAPTION>
Auction
Services Real Estate Total
--------------- ---------------- ----------
<S> <C> <C> <C>
Year ended December 31, 1996
Net revenues:
Net revenues from external customers.......... $ 20,027 $ 3,892 $ 23,919
Intersegment net revenues..................... 664 1,596 2,260
--------------- ---------------- ----------
Total segment net revenues.................. 20,691 5,488 26,179
Income:
Income before taxes........................... 2,632 755 3,387
Minority interest............................. - (86) (86)
Provision for income taxes.................... (42) - (42)
--------------- ---------------- ----------
Net income.................................... 2,590 669 3,259
Other disclosures:
Depreciation and amortization................. 536 652 1,188
Loss on sale of asset......................... - 340 340
Interest income............................... 698 - 698
Interest expense.............................. 485 1,676 2,161
Capital expenditures.......................... 520 708 1,228
Unconsolidated affiliates:
Equity in income/loss....................... - (576) (576)
Investment in............................... - (3,245) (3,245)
Total assets at year-end...................... 14,965 29,114 44,079
</TABLE>
10. Subsequent Events
Initial Public Offering Withdrawn
In April 1999, B&B withdrew its registration statement for its initial
public offering. Accordingly, in the second quarter of 1999, the Company will
record a charge of approximately $2.6 million related to the costs of the
withdrawn offering. Of these costs, approximately $202 (unaudited) was included
in prepaid assets at March 31, 1999.
Acquisition by eBay Inc.
On May 28, 1999, eBay Inc. acquired all of the outstanding equity interests
of the Group Companies at which time they each became wholly-owned subsidiaries
of eBay Inc.
-11-
