<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-24821
eBay Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 77-0430924
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2145 HAMILTON AVENUE
SAN JOSE, CALIFORNIA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(408) 558-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------
Check whether the registrant: (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 23, 2000, there were 267,897,498 shares of the
Registrant's Common Stock outstanding.
================================================================================
<PAGE> 2
PART I: FINANCIAL INFORMATION
--------------------------------------------------------------------------------
ITEM 1. FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------- -----------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 221,801 $ 130,558
Short-term investments ............................................ 181,086 302,542
Accounts receivable, net .......................................... 36,538 49,226
Other current assets .............................................. 25,882 40,419
----------- -----------
Total current assets ................................. 465,307 522,745
Long-term investments ................................................... 373,988 317,489
Property and equipment, net ............................................. 112,202 122,054
Restricted cash and investments ......................................... -- 126,390
Deferred tax assets ..................................................... 5,639 10,887
Intangible and other assets, net ........................................ 12,689 14,581
----------- -----------
$ 969,825 $ 1,114,146
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 32,133 $ 18,796
Accrued expenses .................................................. 32,675 56,995
Deferred revenue and customer advances ............................ 5,997 5,170
Debt and leases, short-term ....................................... 15,781 8,965
Income taxes payable .............................................. 6,455 7,966
Other current liabilities ......................................... -- 3,867
----------- -----------
Total current liabilities ............................ 93,041 101,759
Debt and leases, long-term .............................................. 15,023 22,887
Other liabilities ....................................................... 5,900 5,881
Minority interests ...................................................... 1,732 14,740
----------- -----------
115,696 145,267
----------- -----------
Stockholders' equity:
Common Stock, $0.001 par value; 900,000 shares
authorized; 262,087 and 267,387 shares
issued and outstanding........................................... 263 267
Additional paid-in capital ........................................ 831,120 920,655
Notes receivable from stockholders ................................ (11) (11)
Unearned compensation ............................................. (8,704) (1,843)
Retained earnings ................................................. 26,367 50,727
Accumulated other comprehensive income (loss) ..................... 5,094 (916)
----------- -----------
Total stockholders' equity ........................... 854,129 968,879
----------- -----------
$ 969,825 $ 1,114,146
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 3
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues ................................................... $ 58,525 $ 113,377 $150,805 $297,416
Cost of net revenues ........................................... 17,081 23,912 36,003 71,499
--------- --------- --------- ---------
Gross profit .............................................. 41,444 89,465 114,802 225,917
--------- --------- --------- ---------
Operating expenses:
Sales and marketing ....................................... 27,278 41,137 67,152 117,728
Product development ....................................... 6,958 15,783 14,597 41,721
General and administrative ................................ 11,914 17,341 29,616 54,143
Payroll expense on employee stock options ................. -- 17 -- 1,752
Amortization of acquired intangibles ...................... 328 264 983 879
Merger related costs ...................................... -- 607 4,359 1,431
--------- --------- --------- ---------
Total operating expenses ............................. 46,478 75,149 116,707 217,654
--------- --------- --------- ---------
Income (loss) from operations .................................. (5,034) 14,316 (1,905) 8,263
Interest and other income, net ................................. 7,598 11,674 14,927 34,223
Interest expense ............................................... (449) (958) (1,491) (2,836)
--------- --------- --------- ---------
Income before income taxes, minority interest and equity
interest in partnership income.................................. 2,115 25,032 11,531 39,650
Provision for income taxes ..................................... (858) (10,141) (5,720) (16,815)
Minority interest in consolidated companies .................... (85) 320 (175) 1,594
Equity interest in partnership income .......................... 14 -- 131 --
--------- --------- --------- ---------
Net income ................................................ $ 1,186 $ 15,211 $ 5,767 $ 24,429
========= ========= ========= =========
Net income per share:
Basic ..................................................... $ 0.01 $ 0.06 $ 0.03 $ 0.10
========= ========= ========= =========
Diluted ................................................... $ 0.00 $ 0.05 $ 0.02 $ 0.09
========= ========= ========= =========
Weighted average shares (Note 1):
Basic ..................................................... 227,975 255,741 212,488 249,070
Diluted ................................................... 276,179 280,297 271,476 280,567
Supplemental pro forma information:
Income before income taxes, minority interest and equity
interest in partnership income ................... 2,115 25,032 11,531 39,650
Provision for income taxes ................................ (858) (10,141) (5,720) (16,815)
Pro forma adjustment to provision for income taxes
(Note 4).................................................. -- -- (677) --
Minority interest in consolidated companies ............... (85) 320 (175) 1,594
Equity interest in partnership income ..................... 14 -- 131 --
--------- --------- --------- ---------
Pro forma net income ........................................... $ 1,186 $ 15,211 $ 5,090 $ 24,429
========= ========= ========= =========
Pro forma net income per share:
Basic ..................................................... $ 0.01 $ 0.06 $ 0.02 $ 0.10
========= ========= ========= =========
Diluted ................................................... $ 0.00 $ 0.05 $ 0.02 $ 0.09
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 4
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income ......................................... $ 1,186 $ 15,211 $ 5,767 $ 24,429
Other comprehensive income:
Foreign currency translation adjustments ....... (20) 1,428 13 988
Unrealized gains (losses) on securities, net ... (32,295) (3,147) 6,893 (11,663)
Estimated tax benefit (provision) on change in
other comprehensive income......................... 13,564 1,259 (2,895) 4,665
-------- -------- -------- --------
Net change in other comprehensive income (loss) .... (18,751) (460) 4,011 (6,010)
-------- -------- -------- --------
Comprehensive income (loss) ........................ $(17,565) $ 14,751 $ 9,778 $ 18,419
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 5
eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS; UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 2000
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 5,767 $ 24,429
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for doubtful accounts and authorized credits ........... 5,458 2,690
Depreciation and amortization .................................... 10,849 27,207
Amortization of unearned compensation ............................ 3,655 6,784
Tax benefit on employee stock options ............................ 5,841 20,943
Minority interest in consolidated companies ...................... 133 (912)
Loss on impairment of asset held for sale ........................ 100 126
Equity interest in partnership net loss .......................... -- (19)
Changes in assets and liabilities:
Accounts receivable ............................................ (20,622) (15,042)
Other assets ................................................... (24,556) (21,042)
Accounts payable ............................................... 12,892 (13,338)
Accrued expenses ............................................... 16,467 26,244
Income taxes payable ........................................... 3,079 1,511
Other liabilities .............................................. 736 6,102
--------- ---------
Net cash provided by operating activities ................................ 19,799 65,683
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ................................. (47,568) (36,224)
Net sales and purchases of short-term investments ................... (99,005) (121,456)
Net sales and purchases of long-term investments ................... (363,700) 49,711
Purchase of restricted investments .................................. -- (126,390)
Purchases of intangible assets and other non-current assets ......... (2,625) --
--------- ---------
Net cash used in investing activities .................................... (512,898) (234,359)
Cash flows from financing activities:
Proceeds from issuance of stock, net ................................ 708,642 39,215
Proceeds from issuance of stock by subsidiaries ..................... -- 37,736
Stockholder loan repayments ......................................... 712 --
Discount on convertible note ........................................ -- 6
Proceeds from long-term debt ........................................ 7 --
Principal payments on long-term debt and leases ..................... (4,105) (512)
Stockholder distributions ........................................... (3,892) --
Stockholder contributions ........................................... 3,275 --
--------- ---------
Net cash provided by financing activities ................................ 704,639 76,445
--------- ---------
Effect of exchange rates on cash ......................................... -- 988
--------- ---------
Net change in cash and cash equivalents .................................. 211,540 (91,243)
Cash and cash equivalents at beginning of period ......................... 37,285 221,801
--------- ---------
Cash and cash equivalents at end of period ............................... $ 248,825 $ 130,558
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 6
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
eBay Inc. ("eBay") was incorporated in California in May 1996,
reincorporated in Delaware in April 1998 and as of September 30, 2000 had
operations in the United States, Switzerland, United Kingdom, Germany,
Australia, Canada, and Japan. eBay pioneered online personal trading by
developing a web-based community in which buyers and sellers are brought
together to buy and sell almost anything. The eBay online service permits
sellers to list items for sale, buyers to bid on items of interest and all eBay
users to browse through listed items in a fully-automated, topically-arranged
service that is available online seven-days-a-week. Through eBay's recent
acquisition of Half.com, Inc. ("Half.com"), eBay also offers an online
marketplace to buy and sell using a fixed-price trading platform. eBay engages
in the traditional auction business through its subsidiaries, Butterfield and
Butterfield Auctioneer Corporation ("Butterfields") and Kruse International
("Kruse"), and in online payment processing through eBay's Billpoint, Inc.
("Billpoint") subsidiary.
Stock split
On April 19, 2000, eBay's Board of Directors approved a two-for-one
Common Stock split. Stockholders of record on May 9, 2000 received one
additional share for each share owned on May 24, 2000. All share and per share
amounts in these condensed consolidated financial statements and notes thereto
reflect the stock split for all periods presented.
Wells Fargo Bank
On February 24, 2000, Billpoint and Wells Fargo Bank ("Wells Fargo")
entered into an agreement whereby Wells Fargo became the exclusive provider of
Internet payment services of domestic transactions for Billpoint's customers.
The service agreement expires February 28, 2007.
Billpoint was reincorporated in Delaware and sold 350 shares of common
stock and 1,399,965 shares of Series A Preferred stock to Wells Fargo which
represented approximately 35% ownership in Billpoint. Simultaneously, eBay
exchanged 25,999,350 of Billpoint's common shares for 2,599,935 shares of Series
A Preferred stock. eBay continues to consolidate Billpoint due to a majority
ownership interest and reflects a minority interest for the equity interest of
Wells Fargo.
Use of estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of consolidation and basis of presentation
The accompanying condensed consolidated financial statements as of
December 31, 1999 are derived from audited financial statements, and the
condensed consolidated financial statements as of September 30, 2000, and for
the three and nine months ended September 30, 1999 and 2000, are unaudited. The
unaudited interim condensed consolidated financial statements have been prepared
on the same basis as the annual consolidated financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly our financial position, as of
September 30, 2000, the results of operations for the three and nine months
ended September 30, 1999 and 2000 and cash flows for the nine months ended
September 30, 1999 and 2000. These condensed consolidated financial statements
and notes thereto should be read in conjunction with our audited consolidated
financial
<PAGE> 7
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
statements and related notes included in eBay's Report on Form 10-K for the year
ended December 31, 1999. The results for the three and nine months ended
September 30, 2000 are not necessarily indicative of the expected results for
the year ending December 31, 2000.
Fair value of financial instruments
eBay's 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. Capital lease obligations are carried
at cost, which approximates fair value due to the proximity of the implicit
rates of these financial instruments and the prevailing market rates for similar
instruments.
Short and long-term investments, which include marketable equity
securities, municipal, government and corporate bonds, are classified as
available-for-sale and reported at fair value. Realized gains and losses are
included in earnings. Unrealized gains and losses are excluded from earnings and
reported as a component of stockholders' equity, net of estimated tax provisions
and benefits.
Related party transactions
A subsidiary of eBay entered into a service contract with a related
party whereby the subsidiary agreed to provide services with respect to the
design of the related party's system. The related party remitted payment
totaling $1.5 million to the subsidiary of which $35,000 was treated as a cost
reimbursement for product development expenses, and the remainder was accounted
for as income. Both amounts are included in the accompanying consolidated
statement of income.
eBay purchased shares representing beneficial interest of less than five
percent of a company affiliated with a director of eBay. In connection with the
transaction, eBay received a warrant that would, if exercised, increase eBay's
beneficial interest to less than ten percent of the company. eBay recorded the
investment at cost. Separately, eBay entered into a commercial agreement whereby
eBay provided approximately $510,000 of advertising services to the related
party. The amount is included in the accompanying consolidated statement of
income.
eBay had also entered into an agreement whereby eBay purchased shares
representing beneficial interest of less than five percent of a company
affiliated with a director of eBay. Additionally, eBay received a warrant that,
if exercised, eBay's beneficial interest would remain at less than five percent.
eBay recorded the investment at cost. Separately, eBay entered into a commercial
agreement whereby eBay provided approximately $600,000 of advertising services
to the related party. The amount is included in the accompanying consolidated
statement of income.
In a commercial agreement entered into with a company that is affiliated
with a director of eBay, eBay recorded approximately $2.6 million in income
relating to advertising services. eBay also entered into an agreement whereby
eBay purchased shares representing less than one percent of the related party's
total shares outstanding. Additionally, eBay received a warrant that, if
exercised, its beneficial interest would remain at less than one percent.
Investments in subsidiaries and general partnerships
Interests in subsidiaries and general partnerships in which eBay holds
more than 50 percent ownership is consolidated. The consolidated accounts
include 100 percent of the assets and liabilities of these subsidiaries and
general partnerships and the ownership interests of minority investors are
recorded as minority interests. Investments in entities and general partnerships
where eBay holds more than 20 percent ownership but less than 50 percent
ownership and exert significant influence are accounted for using the equity
method of accounting, are recorded as investment in partnerships or equity
investees and are included within other assets.
Third party investments in a subsidiary of eBay are considered for their
impact on the dilution of eBay's interest at the date these investments are
made. To the extent the proceeds of these investments differ from the third
party's percent ownership in the net equity of the subsidiary, eBay will record
these differences as a capital transaction and accordingly will reflect eBay's
share of the difference within additional paid-in-capital.
Impairment of long-lived assets
eBay evaluates the recoverability of 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.
<PAGE> 8
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue recognition
Online transaction revenues are derived primarily from placement fees
charged for the listing of items on the eBay website, success fees calculated as
a percentage of the final sales transaction value for both eBay and Half.com,
and to a lesser extent, online advertising.
Listing and featured item fee revenue is recognized ratably over the
estimated period of the auction while revenues related to success fees are
recognized at the time that the transaction is successfully concluded. A
transaction is considered successfully concluded when at least one buyer has bid
above the seller's specified minimum price or reserve price, whichever is
higher, at the end of the transaction term. Advertising revenues, which are
principally derived from the sale of banners or sponsorship on the eBay site,
are recognized as the impressions are delivered, or ratably over the term of the
agreement where such agreements provide for minimum monthly or quarterly
advertising commitments or such commitments are fixed throughout the term.
Provisions for doubtful accounts and authorized credits to sellers are made at
the time of revenue recognition based upon our historical experience.
Kruse auction 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. Sponsorship 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.
Butterfields auction revenues are derived primarily from auction
commissions and fees from the sale of property through the auction process.
Revenues from these sources are recognized at the date the related auction is
concluded. Service revenues are derived from financial, appraisal and other
related services and are recognized as such services are rendered. Rental
revenues are derived from property rentals to third parties.
To date, barter advertising has accounted for less than 1% of eBay's
revenue. eBay records barter revenue in accordance with Emerging Issues Task
Force ("EITF") Issue No. 99-17, "Accounting for Advertising Barter Transactions"
that required that barter transactions be recognized at the fair value of the
advertising surrendered only when an entity has a historical practice of
receiving cash for similar advertising transactions. Consequently, most barter
transactions have not resulted in recognizing any revenue.
Website development costs
eBay recognizes website development costs in accordance with EITF Issue
No. 00-02, "Accounting for Website Development Costs." As such, eBay expenses
all costs incurred that relate to the planning and post implementation phases of
development of its website. Direct costs incurred in the development phase are
capitalized and recognized over the product's estimated useful life. In general,
costs associated with repair or maintenance for the website are included in cost
of sales in the accompanying consolidated statement of income.
Comprehensive income
eBay accounts for comprehensive income in accordance with 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. The change in comprehensive income
resulted from foreign currency translation gains and losses and unrealized gains
and losses on securities.
Recent accounting pronouncements
<PAGE> 9
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date until the first
fiscal year ending on or after June 30, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. eBay will adopt SFAS No. 133, as amended, in its quarter ending
March 31, 2001, and eBay is currently assessing the impact, if any, on its
consolidated financial statements.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB 25." This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000; however,
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation will be recognized on a prospective
basis from July 1, 2000. eBay adopted FIN 44, and such adoption did not have a
material impact on its consolidated financial statements.
In July 2000, the EITF reached a consensus with respect to EITF Issue
No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." EITF
99-19 addressed whether a company should report revenue based on the gross
amount billed to a customer because it has earned revenue from the sale of the
goods or services or the net amount retained (that is, the amount billed to the
customer less the amount paid to a supplier) because it has earned a commission
or fee. eBay adopted EITF 99-19, and such adoption did not have a material
impact on its consolidated financial statements.
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. eBay evaluated the provisions of the EITF and
concluded that it will not impact eBay's consolidated financial statements.
In July 2000, the EITF issued EITF Issue No. 00-15 "Classification in
the Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option." EITF. 00-15 addresses the
cash flow statement presentation of the tax benefit associated with nonqualified
stock options. eBay receives an income tax deduction for the difference between
the exercise price and the market price of a nonqualified stock option upon
exercise by the employee. EITF 00-15 concludes that the income tax benefit
realized by us upon employee exercise should be classified in the operating
section of the cash flow statement. The EITF is effective for all quarters
ending after July 20, 2000. eBay adopted EITF 00-15, and such adoption did not
have a material impact on its consolidated financial statements.
In July 2000, the EITF issued EITF Issue No. 00-16 "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation."
This Issue addresses how an entity should
<PAGE> 10
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
account for employer payroll taxes on stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
SFAS No. 123, "Accounting for Stock-Based Compensation." This Issue addresses
eBay's timing for recognizing our payroll tax liability and requires that this
liability be recognized when the tax obligation is triggered. eBay adopted EITF
00-16 effective July 31, 2000, however, such adoption did not have a material
impact on its consolidated financial statements.
NOTE 2--NET INCOME PER SHARE:
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Net income .................................................... $ 1,186 $ 15,211 $ 5,767 $ 24,429
======== ======== ======== ========
Denominator (Note 1):
Weighted average shares ....................................... 259,377 267,213 253,871 266,272
Weighted average common shares subject to repurchase agreements (31,402) (11,472) (41,383) (17,202)
-------- -------- -------- --------
Denominator for basic calculation ............................... 227,975 255,741 212,488 249,070
Weighted average effect of dilutive securities:
Warrants ...................................................... -- 94 -- 94
Weighted average common shares subject to repurchase agreements 31,402 11,472 41,383 17,202
Employee stock options ........................................ 16,802 12,990 17,605 14,201
-------- -------- -------- --------
Denominator for diluted calculation ............................. 276,179 280,297 271,476 280,567
======== ======== ======== ========
Net income per share:
Basic ......................................................... $ 0.01 $ 0.06 $ 0.03 $ 0.10
======== ======== ======== ========
Diluted ....................................................... $ 0.00 $ 0.05 $ 0.02 $ 0.09
======== ======== ======== ========
</TABLE>
NOTE 3--ACQUISITION
Half.com
On July 11, 2000, eBay acquired Half.com. Half.com was incorporated in
Pennsylvania in June 1999 and provides a fixed-price, person-to-person
e-commerce site that allows people to buy and sell previously owned goods at
discounted prices.
In connection with the merger, eBay issued, or reserved for issuance, a
total of approximately 5,484,000 shares of eBay common stock to Half.com's
existing shareholders, option holders and warrant holders as consideration for
all shares of capital stock, options and warrants of Half.com held immediately
prior to consummation of the merger. The merger was accounted for as a
pooling-of-interests.
The results of operations previously reported by eBay and Half.com and
the combined amounts presented in the accompanying condensed consolidated
financial statements are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- -------------
1999 2000 1999
----------------------- -------------
<S> <C> <C> <C>
Net revenues:
eBay ..................... $ 92,280 $183,152 $224,724
Half.com ................. -- 887 --
-------- -------- --------
$ 92,280 $184,039 $224,724
======== ======== ========
Net income (loss):
</TABLE>
<PAGE> 11
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C> <C> <C>
eBay ......................... $ 4,581 $ 17,878 $ 10,828
Half.com ..................... -- (8,661) (1,261)
-------- -------- --------
$ 4,581 $ 9,217 $ 9,567
======== ======== ========
</TABLE>
There were no adjustments required to conform the accounting policies of
Half.com to those of eBay.
NOTE 4--INCOME TAXES:
Prior to the acquisition by eBay in 1999, Butterfields was taxed as an S
Corporation. In connection with the acquisition, Butterfields' status as an S
Corporation was terminated, and Butterfields became subject to Federal and state
income taxes designated as a C Corporation. The supplemental pro forma financial
information presented in the financial statements includes an increase to the
provisions for income taxes based upon a combined Federal and state tax rate.
This rate approximates the statutory tax rate that would have been applied if
Butterfields was taxed as a C Corporation prior to the date of the acquisition.
NOTE 5--SEGMENT INFORMATION:
eBay reports segment-related information in accordance with 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.
eBay has identified two primary operating segments: online services and
offline, traditional auction services. The online services segment consists of
the operations of eBay, including all international subsidiaries, Billpoint, and
Half.com. The offline, traditional auction segment consists of the current
operations of Butterfields and Kruse.
Segment selection is 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. Segment performance measurement is based on
operating income before income taxes, amortization of intangibles, stock
compensation and merger related costs. The operating information for the two
segments identified are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
----------------------------------- ----------------------------------
ONLINE OFFLINE CONSOLIDATED CONSOLIDATED ONLINE OFFLINE
--------- --------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers ................... $ 49,496 $ 9,029 $ 58,525 $ 102,839 $ 10,538 $ 113,377
========= ========= ========= ========= ========= =========
Operating income (loss) before amortization
of acquired intangibles, stock
compensation, and merger related costs ............... $ (3,028) $ (199) $ (3,227) $ 18,868 $ (321) $ 18,547
Interest and other income, net ......................... 7,404 208 7,612 11,451 223 11,674
Interest expense ....................................... (30) (419) (449) (284) (674) (958)
Amortization of acquired intangibles, stock
compensation, and merger related costs ............... (1,705) (102) (1,807) (4,137) (94) (4,231)
--------- --------- --------- --------- --------- ---------
</TABLE>
<PAGE> 12
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes, excluding
minority interest, as reported .............. $ 2,641 $ (512) $ 2,129 $ 25,898 $ (866) $ 25,032
========== ========== ========== ========== ========== ==========
Total assets ..................................... $ 839,524 $ 72,563 $ 912,087 $1,023,054 $ 91,092 $1,114,146
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 2000
------------------------------------------ ----------------------------------------
ONLINE OFFLINE CONSOLIDATED CONSOLIDATED ONLINE OFFLINE
----------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from external customers ...... $ 121,698 $ 29,107 $ 150,805 $ 268,850 $ 28,566 $ 297,416
=========== =========== =========== =========== =========== ===========
Operating income (loss) before amortization
of acquired intangibles, stock
compensation, and merger related costs .. $ 5,313 $ 2,003 $ 7,316 $ 20,311 $ (3,018) $ 17,293
Interest and other income, net ............ 14,621 437 15,058 33,659 564 34,223
Interest expense .......................... (32) (1,459) (1,491) (1,026) (1,810) (2,836)
Amortization of acquired intangibles,stock
compensation, and merger related costs .. (4,830) (4,391) (9,221) (8,130) (900) (9,030)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes,
excluding minority interest, as
reported ................................ $ 15,072 $ (3,410) $ 11,662 $ 44,814 $ (5,164) $ 39,650
=========== =========== =========== =========== =========== ===========
Total assets .............................. $ 839,524 $ 72,563 $ 912,087 $ 1,023,054 $ 91,092 $ 1,114,146
=========== =========== =========== =========== =========== ===========
</TABLE>
NOTE 6--INVESTMENTS:
At December 31, 1999 and September 30, 2000, short and long-term
investments were classified as available-for-sale securities and are reported at
fair value as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments:
Municipal bonds and notes ..... $ 75,442 $ -- $ (55) $ 75,387
Corporate bonds ............... 44,356 -- (5) 44,351
Government securities ......... 59,820 -- (492) 59,328
Other ......................... 2,034 -- (14) 2,020
-------- ------- -------- --------
Total ..................... $181,652 $ -- $ (566) $181,086
======== ======= ======== ========
Long-term investments:
Municipal bonds and notes ..... $322,144 $ -- $ (3,425) $318,719
Corporate bonds ............... 2,353 -- (26) 2,327
Government securities ......... 28,112 -- (392) 27,720
Other ......................... 11,913 13,309 -- 25,222
-------- ------- -------- --------
Total ..................... $364,522 $13,309 $ (3,843) $373,988
======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
---------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Short-term investments:
Municipal bonds and notes ..... $106,403 $-- $ (212) $106,191
Corporate bonds ............... 21,482 17 (9) 21,490
Government securities ......... 168,226 306 -- 168,532
Other ......................... 6,335 -- (6) 6,329
-------- ------- -------- --------
</TABLE>
<PAGE> 13
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
Total ..................... $302,446 $ 323 $ (227) $302,542
======== ======== ======== ========
Long-term investments:
Municipal bonds and notes ..... $199,315 $-- $ (1,506) $197,809
Government securities ......... 223,649 437 (634) 223,452
Other ......................... 24,088 33 (1,503) 22,618
-------- -------- -------- --------
Total ..................... $447,052 $ 470 $ (3,643) $443,879
======== ======== ======== ========
</TABLE>
Restricted cash of $126,390 is included within the $197,809 of municipal
bonds and notes classified as long-term investments.
The estimated fair value of short and long-term investments classified
by date of contractual maturity are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1999 2000
---- ----
<S> <C> <C>
Due within one year or less ........................... $247,513 $302,542
Due after one year through two years .................. 128,455 421,261
Due after two years through three years ............... 153,884 --
Equity investments .................................... 25,222 22,618
-------- --------
$555,074 $746,421
======== ========
</TABLE>
NOTE 7--DEBT:
Notes payable consists of amounts payable to various financial
institutions and a former shareholder, which are collateralized by specific
properties and are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1999 2000
---- ----
<S> <C> <C>
Mortgage notes, prime plus 1%, due September 30, 2002 ........... $ 1,797 $ 1,716
Mortgage notes, LIBOR plus 1.75%, due July 15, 2001 ............. 3,501 3,389
Mortgage notes, 8.25%, due October 15, 2002 ..................... 11,980 11,804
Mortgage notes, 5.2% variable, due August 1, 2003 ............... 9,300 9,300
Convertible note, prime plus 1%, due April 3, 2000 .............. 3,496 --
10.5% loan on foreclosed property due October 2010 .............. 549 558
6%-10.5% notes, due October 2000 through January 2003 ........... 176 --
-------- --------
Subtotal ................................................ 30,799 26,767
Less: Current portion of debt ................................... (15,781) (4,657)
-------- --------
$ 15,018 $ 22,110
======== ========
</TABLE>
Mortgage notes outstanding are on property owned by Butterfields. The
notes have variable interest rates and are collateralized 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.
The mortgage notes bearing an interest rate of 8.25% were originally due
on May 15, 2000. The maturity was extended to October 15, 2002.
The convertible note was related to Half.com and was used as a bridge
loan until funding was received from their preferred stock issuance. The
convertible note was converted to preferred stock in January 2000.
Lease arrangement
<PAGE> 14
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On March 1, 2000, eBay entered into a five-year lease for general office
facilities located in San Jose, California. Payments under this lease, which
commenced during 2000, are based on a spread over the London Interbank Offering
Rate ("LIBOR") applied to the $126.4 million cost of the facility funded by the
lessor. eBay has an option to renew the lease for up to two five-year extensions
subject to specific conditions. Under the terms of the lease agreement, eBay was
required to place $126.4 million of cash and investment securities as collateral
for the term of the lease. The cash and investment securities are restricted as
to their withdrawal from the third party trustee and are classified as long-term
restricted cash in the accompanying balance sheet.
eBay entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow eBay to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments which effectively amends the interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease. The interest rate swaps
have been accounted for under the accrual method of accounting.
NOTE 8--CONTINGENCIES:
Lawsuits
On September 1, 1999, eBay was served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleges that eBay violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit seeks declaratory and injunctive relief,
restitution and legal fees. eBay filed a general demurrer, which was sustained
by the court with leave to amend. The plaintiff filed an amended complaint.
Discovery has commenced. eBay filed a motion for summary judgement. On November
7, 2000, eBay's motion for summary judgement was granted.
On December 10, 1999, eBay sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
eBay alleging that eBay violated the antitrust laws by monopolizing or
attempting to monopolize a market, was competing unfairly and interfered with
their contract with eBay magazine. Bidder's Edge is seeking treble damages, an
injunction and its fees and costs. Discovery in this case has commenced. A
motion to dismiss on the antitrust counterclaim has been denied. On May 24,
2000, the court granted eBay a preliminary injunction against the use by
Bidder's Edge of robotic means to copy the eBay site. Bidder's Edge has appealed
this ruling. eBay intends to prosecute its claims and defend itself against
Bidder's Edge's counterclaims vigorously. However, this lawsuit has been and is
expected to continue to be costly, and eBay's business would be harmed if it
were to lose.
On April 25, 2000, eBay was served with a lawsuit, Gentry et.al. v.
eBay, Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit
is filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims eBay was
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims eBay violated Section 17200 and a section of the California Civil
Code which prohibits "dealers" from selling sports memorabilia without a
"Certificate of Authenticity." The lawsuit seeks class action certification,
compensatory damages, a civil penalty of ten times actual damages, interest,
costs and fees and injunctive relief. Discovery in this case has commenced. eBay
filed a demurrer to three of the counts, which the court sustained with leave to
amend. The plaintiffs
<PAGE> 15
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
have filed an amended complaint. eBay believes it has meritorious defenses to
this lawsuit and intend to defend itself vigorously. However, even if
successful, this defense has been and is expected to be costly. If eBay loses
this lawsuit, it would harm its business.
From time to time, eBay is involved in 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 eBay's financial
position or results of operations.
Minimum Auction Guarantees
From time to time eBay, through its Butterfields subsidiary, guarantees
the minimum net proceeds with respect to the sale of properties at future
auctions. Such guaranteed proceeds are often advanced to the consignor prior to
the completion of the auction. eBay is responsible for the shortfall, if any,
between the guaranteed minimum proceeds and the actual net proceeds upon the
completion of the auction. Losses, if any, are recognized at the conclusion of
the auction. In 2000, Butterfields had entered into two such agreements with
guaranteed net proceeds of $1.25 million and $2.0 million. The $2.0 million
agreement is shared with another auction service, half of which is guaranteed by
each party. In June 2000, the auction associated with the $2.0 million agreement
took place, and at the conclusion of the auction, the minimum net proceed amount
was not obtained. Butterfields recognized an insignificant loss for the
shortfall between the minimum proceeds it guaranteed and the actual net proceeds
received.
GO.com
On February 6, 2000, eBay entered into a four-year marketing agreement
with GO.com. In accordance with the agreement, GO.com provided eBay with online
and offline promotion, eBay and GO.com developed a co-branded version of the
eBay service and both companies developed a site featuring merchandise from
GO.com affiliates. These affiliates include but are not limited to The Walt
Disney Company, ESPN and ABC. In consideration for this agreement, eBay will pay
a minimum of $30 million to GO.com over the four-year term.
NEC
On February 17, 2000, eBay Japan Inc., a wholly owned subsidiary of
eBay, entered into a shareholder and marketing services agreement with NEC
Corporation. In accordance with the shareholder agreement, NEC acquired 30% of
eBay Japan and eBay retained the remaining 70% interest of eBay Japan. eBay will
continue to consolidate eBay Japan due to a majority ownership interest and will
reflect a minority interest for the equity interest of NEC.
In accordance with the marketing agreement, NEC provided marketing and
services to eBay Japan in an effort to deliver a minimum level of confirmed
registered users. As compensation for the marketing and other services performed
by NEC, eBay Japan paid NEC an annual up-front fee of approximately $1.5
million. The first payment was made in April, 2000, and additional payments will
be payable on the anniversary of such date in each of the subsequent three years
as long as the contract is in effect. If NEC is unable to deliver the minimum
level of confirmed registered users, then eBay will have the right to repurchase
shares of eBay Japan from NEC.
AutoTrader.com
On March 6, 2000, eBay and Autotrader.com LLC ("Autotrader") entered
into a marketing and services agreement whereby eBay and Autotrader developed a
co-branded site, and Autotrader will refer customers desiring an auction pricing
format to eBay for a referral fee. Under the terms of the agreement, we have
committed to provide certain marketing expenditures for the promotion of the
eBay service and
<PAGE> 16
eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
additional automobile related services offered by Autotrader. In consideration
for these expenditures, eBay is committed to pay $29 million over the 3.5-year
term.
Under the agreement, eBay acquired approximately a 3% equity investment
in Autotrader representing 1,173,876 Autotrader.com Class A units in exchange
for cash proceeds of $10.3 million or $8.77 per unit.
AOL
In March 1999, eBay expanded the scope of its strategic relationship
with AOL. Under the amended agreement, eBay was granted a prominent presence
featuring it as the preferred provider of person-to-person trading services on
AOL's proprietary services (both domestic and international), AOL.com, Digital
Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
addition, eBay has developed or will develop a co-branded version of its service
for each AOL property which will prominently feature each party's brand. AOL
will be entitled to all advertising revenue from the co-branded site. eBay will
pay $75 million over the four-year term of the contract. We are recognizing
these fees as sales and marketing expense over the greater of: i) the ratio of
the number of impressions delivered over the total number of contracted
impressions, or ii) a straight-line basis beginning with the initial delivery of
impressions and extending over the term of the contract. At September 30, 2000,
we had advanced $37.5 million under the amended agreement, and had recognized
$21.5 million as advertising expense commencing with the launch of the
co-branded program and delivery of advertising impressions.
In conjunction with the expanded strategic relationship, AOL terminated
its original contract with eBay in August of 1999. As a result, the remaining
$8.0 million commitment associated with the original agreement has been waived.
AOL continued to deliver impressions under the original agreement through August
1999.
<PAGE> 17
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that involve
risks and uncertainties, such as statements of eBay's plans, objectives,
expectations and intentions. When used in this document, the words "expects",
"anticipates", "intends" and "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related
forward-looking statements wherever they appear in this document. Our actual
results could differ materially from those discussed in this document. Factors
that could cause or contribute to such differences include those discussed
below.
OVERVIEW
eBay pioneered online person-to-person trading by developing a web-based
community in which buyers and sellers are brought together in an efficient and
entertaining format to buy and sell almost anything. The eBay service permits
sellers to list items for sale, buyers to bid on items of interest and all eBay
users to browse through listed items in a fully-automated, topically-arranged,
intuitive and easy-to-use online service that is available seven-days-a-week. We
have extended our online offerings to include regional and international
trading, autos, "premium" priced items, and through our recent acquisition of
Half.com, we now offer a fixed-price trading platform. Additionally, Billpoint
provides online billing and payment solutions. eBay also expanded into the
traditional auction business, also called offline trading, with our acquisitions
of Butterfields and Kruse.
Substantially all of our revenues comes from fees and commissions
associated with online and offline trading services. Online revenue is primarily
derived from placement, success fees, and commissions paid by sellers, as eBay
does not charge fees to buyers. Sellers pay a nominal placement fee, and by
paying additional fees, sellers can have items featured in various ways. Sellers
also pay a success fee based on the final purchase price. In addition, eBay
receives revenues from end-to-end service providers whose services increase the
velocity of transactions to the site, strategic commercial partnership revenues
that are derived from commercial partners that are of strategic value to eBay to
build out a category or other function and direct advertising which include
promotional payments from unrelated third parties. We expect these end-to-end,
commercial partnership and direct advertising revenues to increase in the
future. To date, online payment solutions provided by Billpoint and fixed price
trading provided by Half.com have not made significant contributions to net
revenues, although we expect Billpoint and Half.com's revenues to increase in
the future. Offline revenue is derived from a variety of sources including
sellers' commissions, buyers' premiums, bidder registration fees, and auction
related services including appraisal and authentication. eBay expects that the
online business will continue to represent the majority of revenue growth in the
foreseeable future.
ACQUISITION
On July 11, 2000, we acquired Half.com. Half.com was incorporated in
Pennsylvania in June 1999 and provides a fixed-price, person-to-person
e-commerce site allowing people to buy and sell previously owned goods at
discounted prices.
In connection with the merger, we issued, or reserved for issuance, a
total of approximately 5,484,000 shares of our common stock to Half.com's
existing shareholders, option holders and warrant holders as consideration for
all shares of capital stock, options and warrants of Half.com held immediately
prior to consummation of the merger. The merger was accounted for as a
pooling-of-interests.
RESULTS OF OPERATIONS
<PAGE> 18
The following table sets forth, for the periods presented, certain data
from eBay's consolidated statements of income as a percentage of net revenues.
The information contained in the table below should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included
elsewhere in this report.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues ............................................... 100.0% 100.0% 100.0% 100.0%
Cost of net revenues ....................................... 29.2 21.1 23.9 24.0
----- ----- ----- -----
Gross profit ........................................... 70.8 78.9 76.1 76.0
----- ----- ----- -----
Operating expenses:
Sales and marketing .................................... 46.6 36.3 44.5 39.6
Product development .................................... 11.9 13.9 9.7 14.0
General and administrative ............................. 20.4 15.3 19.6 18.3
Payroll expense on employee stock options .............. -- -- -- 0.6
Amortization of acquired intangibles ................... 0.5 0.2 0.7 0.3
Merger related costs ................................... -- 0.5 2.9 0.5
----- ----- ----- -----
Total operating expenses ........................... 79.4 66.2 77.4 73.3
----- ----- ----- -----
Income (loss) from operations .............................. (8.6) 12.7 (1.3) 2.7
Interest and other income, net ............................. 13.0 10.3 10.0 11.7
Interest expense ........................................... (0.8) (0.9) (1.0) (1.0)
----- ----- ----- -----
Income before income taxes and minority interest ........... 3.6 22.1 7.7 13.4
Provision for income taxes ................................. (1.5) (9.0) (3.8) (5.7)
Minority interest in consolidated companies ................ -- 0.3 (0.1) 0.5
----- ----- ----- -----
Net income ................................................. 2.1% 13.4% 3.8% 8.2%
===== ===== ===== =====
</TABLE>
It is difficult for us to forecast revenues or earnings accurately, and
the operating results in one or more future quarters may fall below the
expectations of securities analysts or investors. Although accurate revenue
forecasts are difficult, we have begun to recognize the seasonal nature of our
business. In particular, the online portion of our business has historically
noted stronger sequential quarterly revenue growth between the fourth quarter
and the first quarter and a lower, relatively level growth rate throughout the
remainder of the year. Within offline auction operations, Butterfields typically
experiences its strongest revenue in the second and fourth quarters, while Kruse
International typically experiences its strongest revenue in the third quarter.
Due to the inherent difficulty in forecasting net revenues, it is also
difficult to forecast income statement expense categories as a percentage of net
revenues. We expect to invest any revenue upside back into the business across
all expense categories. Quarterly and annual income statement expense categories
as a percentage of net revenues may be significantly different from historical
or projected rates. As a general note, we expect costs to increase in absolute
dollars across all income statement categories. As more users come to the site
for practical and one-time items like computers and automobiles, we expect that
the number of transactions per registered user will continue to decline. Because
the product mix is varied, the metrics for transactions per registered user is
decreasingly relevant. We expect our gross margin to remain relatively flat
throughout the remainder of the year.
Although the operations and results of both Butterfields and Kruse show
seasonal trends in net revenues and expenses, annual results of operations are
relatively stable when compared to the online business. To a large extent, the
changes in the consolidated results of operations for the periods presented are
due to the growth of the online business, which will be the primary focus of our
year-over-year quarterly comparisons.
Net Revenues
<PAGE> 19
We derive revenue from a variety of sources including: listing, success
and featured item fees, end-to-end services, commercial partnerships,
sponsorships and other advertising, commissions and rental income in traditional
auction operations. Our net revenues increased from $58.5 million and $150.8
million in the three and nine months ended September 30, 1999 to $113.4 million
and $297.4 million in the comparable periods of 2000. The increases from 1999 to
2000 were predominantly the result of increased use of our website, reflected in
the growth in the number of registered users, listings and gross merchandise
sales. Throughout the remainder of the year, we expect that future revenue
growth will be largely driven by the growth of online services including
end-to-end services, commercial partnership revenues and direct advertising.
We have reviewed the Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," and its
effect on the recognition of listing and featured item fee revenue. While the
effect of SAB No. 101 on historical listing and featured item fee revenue is
insignificant, eBay adopted the prescribed method for listing and featured item
fee revenue in the first quarter of 2000. As such, listing and featured item fee
revenue is recognized ratably over the estimated period of the auction.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs
associated with customer support and site operations. The costs included are
compensation, employee and facilities costs for customer support and site
operations personnel, ISP connectivity charges and depreciation on site
equipment. Cost of net revenues in traditional auction operations primarily
includes compensation for auction, appraisal, and customer support personnel and
direct auction costs, such as event site rental. Cost of net revenues increased
in absolute dollars from $17.1 million and $36.0 million or 29.2% and 23.9% of
net revenues for the three and nine months ended September 30, 1999 to $23.9
million and $71.5 million or 21.1% and 24.0% of net revenues for the comparable
periods in 2000. The increases from 1999 to 2000 were due almost entirely to our
online business, including our international operations, as well as Billpoint
and Half.com. The increase in absolute dollars in expenditures for the online
service from 1999 to 2000 resulted from the continued development and expansion
of our customer support and site operations departments, depreciation of the
equipment required for site operations, software licensing fees and ISP
connectivity charges. The decrease in cost of net revenues as a percentage of
net revenue from 1999 to 2000 resulted from cost management in customer support
and site operations and increases in higher gross margin businesses such as
autos and end-to-end trading solutions.
Sales and Marketing
Our sales and marketing expenses for both the online and traditional
auction businesses are comprised primarily of compensation for our sales and
marketing personnel, advertising, tradeshow and other promotional costs,
employee and facilities costs. Sales and marketing expenses increased in
absolute dollars from $27.3 million and $67.2 million or 46.6% and 44.5% of net
revenues for the three and nine months ended September 30, 1999 to $41.1 million
and $117.7 million or 36.3% and 39.6% of net revenues for the same periods in
2000. Increases from 1999 to 2000 in absolute dollars were primarily the result
of growth in online advertising, including expenses for various marketing
agreements, personnel related costs, costs associated with the use of outside
services and consultants and miscellaneous user and promotional costs.
Online sales and marketing expenses are expected to increase in absolute
dollars for the remainder of 2000 as we plan to build the eBay brand more
broadly. We expect to further build our brand with continued advertising
impressions delivered under the strategic alliance with America Online ("AOL"),
new alliances including agreements with Go.com and Autotrader.com and the
expansion of international advertising. Sales and marketing expenses in the
traditional auction businesses are expected to remain comparable with historical
levels.
<PAGE> 20
Product Development
Product development expenses consist primarily of compensation for our
product development staff, payments to outside contractors, depreciation on
equipment used for development, employee and facilities costs. Our product
development expenses increased from $7.0 million and $14.6 million or 11.9% and
9.7% of net revenues for the three and nine months ended September 30, 1999 to
$15.8 million and $41.7 million or 13.9% and 14.0% of net revenues for the same
periods in 2000. The online business was the driver of the year-over-year
changes. Neither Butterfields nor Kruse had any product development costs for
the nine months ended September 30, 2000. The increase from 1999 to 2000
resulted primarily from an increase in personnel-related costs as we
significantly increased the size of our product development staff, expenses
related to contractors and consultants employed within product development
departments, and maintenance and depreciation for equipment used in research and
development. The year-over-year increase also resulted from the addition of
product development operations at Billpoint and Half.com including a one-time,
stock-based compensation expense at Half.com resulting from the acquisition.
Product development expenses are expected to increase in absolute dollars during
future periods primarily from personnel additions, the continued impact of
Billpoint and Half.com product development and additional depreciation costs as
we continue to purchase equipment to improve and expand operations both
domestically and internationally.
General and Administrative
General and administrative expenses consist primarily of compensation
for personnel and, to a lesser extent, fees for external professional advisors,
provisions for doubtful accounts, employee and facilities costs. Our general and
administrative expenses increased in absolute dollars from $11.9 million and
$29.6 million or 20.4% and 19.6% of net revenues in the three and nine months
ended September 30, 1999 to $17.3 million and $54.1 million or 15.3% and 18.3%
of net revenues for the same period in 2000. During the respective periods in
1999 and 2000, increases in absolute dollars in general and administrative
expenses were primarily related to the online auction business. The
year-over-year increases resulted from growth in personnel-related expenses in
order to meet the demands of our expanding business, including operations in new
countries and the integration of new businesses, fees for professional services,
employee and facilities costs. We expect that general and administrative
expenses will increase in absolute dollars in future periods as we continue to
invest in the infrastructure that is necessary for our business. Such expenses
in the online business are typically lower as a percentage of net revenues than
those in the traditional auction business.
Payroll Expense on Employee Stock Options
We are subject to employer payroll taxes on employee exercises of
non-qualified stock options. These employer payroll taxes are recorded as a
charge to operations in the period such options are exercised based on actual
gains realized by employees. Our quarterly results of operations and cash flows
could vary significantly depending on the actual period that the stock options
are exercised by employees and, consequently, the amount of employer payroll
taxes assessed. Such payroll taxes were insignificant in the three months ended
September 30, 2000 due in part to restrictions on the sales of stock associated
with the Half.com acquisition.
Amortization of Acquired Intangibles
From time to time we have purchased, and expect to continue purchasing,
assets or businesses in order to maintain our leadership role in personal
trading. These purchases may result in the creation of intangible assets and
lead to a corresponding increase in the amortization of acquired intangibles.
Our amortization of acquired intangibles decreased in absolute dollars from
$328,000 and $983,000 or 0.5% and 0.7% of net revenues in the three and nine
months ended September 30, 1999 to $264,000 and
<PAGE> 21
$879,000 or 0.2% and 0.3% of net revenues in the same periods in 2000.
Acquisition related intangibles will be amortized at varying rates through 2009.
Interest and Other Income, Net
Interest and other income, net, consists of interest earned on cash,
cash equivalents, and investments offset by foreign exchange gains or losses.
Our interest and other income, net increased in absolute dollars from $7.6
million and $14.9 million or 13.0% and 10.0% of net revenues in the three and
nine months ended September 30, 1999 to $11.7 million and $34.2 million or 10.3%
and 11.7% of net revenues for the comparable periods in 2000. The increase from
1999 to 2000 was primarily the result of interest earned on cash, cash
equivalents and investments. We expect interest and other income to exceed
interest expense for the remainder of 2000 due to the interest earned on the
proceeds from our April 1999 follow-on offering as well as positive cash flow
from operations.
Provision for Income Taxes
Our effective federal and state income tax rates were 42% and 50% for
three and nine months ended September 30, 1999 compared to 40% and 41% for the
same periods in 2000. Additionally, we receive tax deductions for gains realized
by employees on the exercise of non-qualified stock options for which the
benefit is recorded to paid-in capital.
Prior to the acquisition by eBay in 1999, Butterfields was taxed as an S
Corporation. In connection with the acquisition, Butterfields' status as an S
Corporation was terminated, and Butterfields became subject to federal and state
income taxes. The supplemental pro forma financial information presented in the
financial statements includes an increase to the provisions for income taxes
based upon a combined federal and state tax rate. This rate approximates the
statutory tax rate that would have been applied if Butterfields were taxed as a
C Corporation prior to the acquisition.
Stock-Based Compensation
In connection with granting certain stock options from May 1997 through
May 1999, we recorded aggregate unearned compensation totaling $13.1 million,
which is being amortized over the four-year vesting period of the options. In
connection with granting certain stock options between July 1999 and March 2000,
we recorded unearned compensation totaling $4.9 million. Of the total unearned
stock compensation, approximately $1.4 million and $3.7 million was amortized in
the three and nine months ended September 30, 1999 compared to $3.4 million and
$6.7 million for the same periods in 2000. Of the amortization in 2000,
approximately $2.9 million and $4.8 million for the three and nine months ended
September 30, 2000 was related to the acquisition of Half.com. For the remainder
of 2000, we expect approximately $419,000 in amortization of unearned stock
compensation. We expect approximately $1.1 million of amortization in 2001, and
approximately $278,000 of amortization in 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, eBay has financed operations primarily from net cash
generated from operating activities. We obtained additional financing from the
sale of preferred stock and warrants, proceeds from the exercise of those
warrants, proceeds from the exercise of stock options, and proceeds from our
initial and follow-on public offerings.
Net cash provided by operating activities was $19.8 million for the nine
months ended September 30, 1999 compared to net cash provided by operations of
$65.7 million for the same period in 2000. Net cash provided by operating
activities resulted primarily from our net income before non-cash charges for
the tax benefit on employees' stock option, depreciation and amortization,
accrued expenses, offset by changes in accounts receivable, accounts payable,
and other assets.
<PAGE> 22
Net cash used in investing activities totaled $512.9 million for the
nine months ended September 30, 1999 compared to $234.4 million for the same
period in 2000. The primary use for invested cash in the periods presented was
purchases of investments, property, and equipment.
Net cash provided by financing activities was $704.6 million for the
nine months ended September 30, 1999 compared to $76.4 million for the same
period in 2000. The decrease from 1999 to 2000 was primarily driven by decreased
sales of common stock, partially offset by NEC's investment in eBay Japan and
Wells Fargo's investment in Billpoint.
We had no material commitments for capital expenditures at September 30,
2000, but expects such expenditures to approximate $13 million through December
31, 2000. Such expenditures will primarily be for computer equipment, furniture
and fixtures and leasehold improvements. We also have total minimum lease
obligations of $43.7 million under certain noncancellable operating leases and
notes payable obligations of $26.8 million through December 2004. In March 1999,
we expanded the scope of our strategic relationship with AOL. Under the
agreement we will pay AOL $75 million over the four-year term of the contract.
To date, we paid $37.5 million on the contract. In February, 2000, we signed an
agreement with Go.com. In consideration for this agreement, we will pay a
minimum of $30 million to GO.com over the four-year term.
We believe that existing cash, cash equivalents and investments, and any
cash generated from operations will be sufficient to fund our operating
activities, capital expenditures and other obligations for the foreseeable
future. However, if during that period or thereafter we are not successful in
generating sufficient cash flow from operations or in raising additional capital
when required in sufficient amounts and on terms acceptable to us, our business
could suffer.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The risks and uncertainties described below are not the only ones facing
eBay. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following risks or such other risks actually occur, our business could be
harmed.
We have a limited operating history
Our company was formed as a sole proprietorship in September 1995 and
was incorporated in May 1996. We have only a limited operating history on which
you can base an evaluation of our business and prospects. As an online commerce
company still relatively early in our development, we face substantial risks,
uncertainties, expenses and difficulties. To address these risks and
uncertainties, we and our subsidiaries must do the following:
- maintain and increase our number of registered users, items
listed on our service and completed sales;
- expand into new markets;
- maintain and grow our website and customer support operations at
a reasonable cost;
- continue to make trading through our service safer for users;
- maintain and enhance our brand;
- continue to develop and upgrade our technology and information
processing systems;
- continue to enhance our service to meet the changing
requirements of our users;
<PAGE> 23
- provide superior customer service;
- remain attractive to our commercial partners;
- respond to competitive developments; and
- attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these goals, which could
cause our business to suffer. In addition, accomplishing one or more of these
goals might be very expensive, which could harm our financial results.
Our operating results may fluctuate
Our operating results have varied on a quarterly basis during our
operating history. Our operating results may fluctuate significantly as a result
of a variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
- our ability to retain an active user base, to attract new users
who list items for sale and who purchase items through our
service and to maintain customer satisfaction;
- our ability to keep our website operational and to manage the
number of items listed on our service;
- the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
business, operations and infrastructure;
- foreign, federal, state or local government regulation,
including investigations prompted by items improperly listed or
sold by our users;
- the introduction of new sites, services and products by us or
our competitors;
- volume, size, timing and completion rate of trades on our
websites;
- consumer confidence in the security of transactions on our
websites;
- our ability to upgrade and develop our systems and
infrastructure to accommodate growth;
- technical difficulties or service interruptions;
- our ability to attract new personnel in a timely and effective
manner;
- our ability to retain key employees in both our online
businesses and our acquisitions;
- our ability to successfully integrate Half.com, our newest
acquisition;
- the ability of our land-based auction businesses to acquire high
quality properties for auction;
- the timing, cost and availability of advertising in traditional
media and on other websites and online services;
- the timing of payments to us and of marketing and other expenses
under existing and future contracts;
<PAGE> 24
- consumer trends and popularity of some categories of collectible
items;
- the success of our brand building and marketing campaigns;
- the level of use of the Internet and online services;
- increasing consumer acceptance of the Internet and other online
services for commerce and, in particular, the trading of
products such as those listed on our website; and
- general economic conditions and economic conditions specific to
the Internet and e-commerce industries.
Our limited operating history and the emerging nature of the markets in
which we compete make it difficult for us to forecast the level or source of our
revenues or earnings accurately. We believe that period-to-period comparisons of
our operating results may not be meaningful, and you should not rely upon them
as an indication of future performance. We do not have backlog, and almost all
of our net revenues each quarter come from transactions for items that are
listed and sold during that quarter. Our operating results in one or more future
quarters may fall below the expectations of securities analysts and investors.
In that event, the trading price of our common stock would almost certainly
decline.
Our failure to manage growth could harm us
We currently are experiencing a period of expansion in our headcount,
facilities and infrastructure, and we anticipate that further expansion will be
required to address potential growth in our customer base and number of listings
as well as our expansion into new geographic areas, types of goods and
alternative methods of sale. This expansion has placed, and we expect it will
continue to place, a significant strain on our management, operational and
financial resources. The areas that are put under strain by our growth include
the following:
- The Websites. We must constantly add new hardware, update
software and add new engineering personnel to accommodate the
increased use of our and our subsidiaries' websites and the new
products and features we are regularly introducing. This has
reduced our margins. If we are unable to increase the capacity
of our systems at least as fast as the growth in demand for this
capacity, our websites may become unstable and may cease to
operate for periods of time. We have experienced periodic
unscheduled downtime. Continued unscheduled downtime would harm
our business and also could anger users of our website and
reduce future revenues.
- Customer Support. We are expanding our customer support
operations to accommodate the increased number of users and
transactions on our websites. If we are unable to hire and
successfully train sufficient employees or contractors in this
area, users of our websites may have negative experiences, and
current and future revenues could suffer.
- Customer Accounts. Our revenues are dependent on prompt and
accurate billing processes. If we are unable to grow our
transaction processing abilities to accommodate the increasing
number of transactions that must be billed, our ability to
collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid
rate. The majority of our employees today have been with us less than one year
and we expect that our rate of hiring will continue at a very high pace. If our
new hires are not good hires, or if we are unsuccessful in training and
integrating these new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the expected growth of
our operations and personnel, we will need to improve our transaction
processing, operational and financial systems, procedures and controls. Our
current and planned personnel, systems, procedures and controls may not be
adequate to support our future operations. We may
<PAGE> 25
be unable to hire, train, retain and manage required personnel or to identify
and take advantage of existing and potential strategic relationships and market
opportunities.
We may not maintain profitability
We believe that our continued profitability will depend in large part on
our ability to do the following:
- maintain sufficient transaction volume to attract buyers and
sellers;
- manage the costs of our business, including the costs associated
with maintaining and developing our website, customer support
and international and product expansion;
- increase our brand name awareness; and
- provide our customers with superior community and trading
experiences.
We are investing heavily in marketing and promotion, customer support,
further development of our website, technology and operating infrastructure
development. The costs of these investments have reduced our margins and are
expected to remain significant into the future. In addition, we have significant
ongoing commitments in some of these areas. As a result, we may be unable to
adjust our spending rapidly enough to compensate for any unexpected revenue
shortfall, which may harm our profitability. The existence of several larger and
more established companies that are rapidly enabling online sales as well as new
companies, many of whom do not charge for transactions on their sites and others
who are facilitating trading through other pricing formats (fixed price, reverse
auction, group buying, etc.) may limit our ability to raise user fees in
response to declines in profitability. In addition, we are spending in advance
of anticipated growth, which may also harm our profitability. In view of the
rapidly evolving nature of our business and our limited operating history, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful. You should not rely upon our historical results as
indications of our future performance.
Acquisitions could result in dilution, operating difficulties and other harmful
consequences
We have acquired a number of businesses, including our recent
acquisition of Half.com, and may in the future acquire businesses, technologies,
services or products that we believe are strategic. 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 (at both 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; and
- 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.
Prior to the four large acquisitions we made in 1999, we had almost no
experience in managing this integration process. Most of our acquisitions to
date have involved either family-run companies or very early stage companies,
which may worsen these integration issues. Moreover, the anticipated benefits of
<PAGE> 26
any or all of these acquisitions may not be realized. Future acquisitions or
mergers could result in potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could harm our business.
Future acquisitions or mergers may require us to obtain additional equity or
debt financing, which may not be available on favorable terms or at all. Even if
available, this financing may be dilutive.
The inability to expand our systems may limit our growth
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
websites, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
revenues depend primarily on the number of items listed by users, the volume of
user transactions that are successfully completed and the final prices paid for
the items listed. We need to expand and upgrade our technology, transaction
processing systems and network infrastructure both to meet increased traffic on
our site and to implement new features and functions, including those required
under our contracts with third parties. We may be unable to accurately project
the rate or timing of increases, if any, in the use of our service or to expand
and upgrade our systems and infrastructure to accommodate any increases in a
timely fashion.
We use internally developed systems to operate our service for
transaction processing, including billing and collections processing. We must
continually improve these systems in order to accommodate the level of use of
our website. In addition, we may add new features and functionality to our
services that would result in the need to develop or license additional
technologies. We capitalize hardware and software costs associated with this
development in accordance with generally accepted accounting principles and
include such amounts in property and equipment. Our inability to add additional
software and hardware or to upgrade our technology, transaction processing
systems or network infrastructure to accommodate increased traffic or
transaction volume could have adverse consequences. These consequences include
unanticipated system disruptions, slower response times, degradation in levels
of customer support, impaired quality of the users' experience of our service
and delays in reporting accurate financial information. Our failure to provide
new features or functionality also could result in these consequences. We may be
unable to effectively upgrade and expand our systems in a timely manner or to
integrate smoothly any newly developed or purchased technologies with our
existing systems. These difficulties could harm or limit our ability to expand
our business.
Unauthorized break-ins or other assaults on our service could harm our business
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data or the inability to complete customer transactions. In addition,
unauthorized persons may improperly access our data. We have experienced an
unauthorized break-in by a "hacker" who has stated that he can in the future
damage or change our system or take confidential information. We have also
experienced "denial of service" type attacks on our system that have made all or
portions of our website unavailable for periods of time. These and other types
of attacks could harm us. Actions of this sort may be very expensive to remedy
and could damage our reputation and discourage new and existing users from using
our service.
There are many risks associated with our international operations
We are expanding internationally. In 1999, we acquired alando.de, a
leading online German personal trading platform, and began operations in the
United Kingdom and, through a joint venture, in Australia. In the first quarter
of 2000, we further expanded into Japan and formally launched our localized
Canadian operations. In October 2000, we launched our French site. Expansion
into international markets will require management attention and resources. We
have limited experience in localizing our service to conform to local cultures,
standards and policies. In most countries, we will have to compete with local
companies who understand the local market better than we do. We may not be
successful in expanding into international markets or in generating revenues
from foreign operations. Even if we are successful, the costs of operating are
expected to exceed our net revenues for at least 12 months in most countries. As
we
<PAGE> 27
continue to expand internationally, we are subject to risks of doing business
internationally, including the following:
- regulatory requirements, including regulation of "auctions,"
that may limit or prevent the offering of our services in local
jurisdictions, may prevent enforceable agreements between
sellers and buyers, or may prohibit certain categories of goods;
- legal uncertainty regarding liability for the listings of our
users, including less Internet-friendly legal systems, unique
local laws and lack of clear precedent or applicable law;
- government-imposed limitations on the public's access to the
Internet;
- difficulties in staffing and managing foreign operations;
- longer payment cycles, different accounting practices and
problems in collecting accounts receivable;
- higher telecommunications and Internet service provider costs;
- more stringent consumer protection laws;
- cultural non-acceptance of online trading;
- stronger local competitors;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Some of these factors may cause our international costs to exceed our
domestic costs of doing business. To the extent we expand our international
operations and have additional portions of our international revenues
denominated in foreign currencies, we also could become subject to increased
difficulties in collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations.
Our revenue from end-to-end service providers, commercial partners and
advertising is subject to factors beyond our control
We are beginning to receive revenues from end-to-end service providers,
commercial partnerships and direct advertising promotions. These revenues may be
affected by events affecting the parties with whom we have these relationships
and by the market for online promotions generally. Our direct advertising
revenue is dependent in significant part on the performance of AOL's sales
force, which we do not control. Reduction in these revenues, whether due to the
softening of the market for online advertising in general or particular problems
facing parties with whom we have commercial relationships, could adversely
affect our results.
Our business may be harmed by the listing or sale by our users of illegal items
The law relating to the liability of providers of online services for
the activities of their users on their service is currently unsettled. We are
aware that certain goods, such as firearms, other weapons, adult material,
tobacco products, alcohol and other goods that may be subject to regulation by
local, state or federal authorities, have been listed and traded on our service.
We may be unable to prevent the sale of unlawful goods, or the sale of goods in
an unlawful manner, by users of our service, and we may be subject to
allegations of civil or criminal liability for unlawful activities carried out
by users through our service.
<PAGE> 28
Several lawsuits based upon such allegations are currently pending. See "We are
subject to intellectual property and other litigation" and "Legal Proceedings."
In order to reduce our exposure to this liability, we have prohibited the
listing of certain items and increased the number of personnel reviewing
questionable items. We may in the future implement other protective measures
that could require us to spend substantial resources and/or to reduce revenues
by discontinuing certain service offerings. Any costs incurred as a result of
liability or asserted liability relating to the sale of unlawful goods or the
unlawful sale of goods, could harm our business. In addition, we have received
significant and continuing media attention relating to the listing or sale of
unlawful goods on our website. This negative publicity could damage our
reputation and diminish the value of our brand name. It also could make users
reluctant to continue to use our services.
Our business may be harmed by the listing or sale by our users of pirated items
We have received in the past, and we anticipate we will receive in the
future, communications alleging that certain items listed or sold through our
service by our users infringe third-party copyrights, trademarks and tradenames
or other intellectual property rights. Although we have actively sought to work
with the content community to eliminate infringing listings on our website, some
content owners have expressed the view that our efforts are insufficient.
Content owners have been active in defending their rights against online
companies. An allegation of infringement of third-party intellectual property
rights may result in litigation against us. Any such litigation could be costly
for us, could result in increased costs of doing business through adverse
judgment or settlement, could require us to change our business practices in
expensive ways, or could otherwise harm our business. Litigation against other
online companies could result in interpretations of the law that could also
require us to change our business practices or otherwise increase our costs. See
"We are subject to intellectual property and other litigation" and "Legal
Proceedings."
Our business may be harmed by fraudulent activities on our website
Our future success will depend largely upon sellers reliably delivering
and accurately representing their listed goods and buyers paying the agreed
purchase price. We have received in the past, and anticipate that we will
receive in the future, communications from users who did not receive the
purchase price or the goods that were to have been exchanged. In some cases
individuals have been arrested and convicted for fraudulent activities using our
website. While we can suspend the accounts of users who fail to fulfill their
delivery obligations to other users, we do not have the ability to require users
to make payments or deliver goods or otherwise make users whole other than
through our limited insurance program. Other than through this program, we do
not compensate users who believe they have been defrauded by other users. We
also periodically receive complaints from buyers as to the quality of the goods
purchased. Negative publicity generated as a result of fraudulent or deceptive
conduct by users of our service could damage our reputation and diminish the
value of our brand name. We expect to continue to receive requests from users
requesting reimbursement or threatening or commencing legal action against us if
no reimbursement is made. This sort of litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
Government inquiries may lead to charges or penalties
On January 29, 1999, we received initial requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with our website. We were
informed that the inquiry includes an examination of our practices with respect
to these transactions. We have provided further information in connection with
this ongoing inquiry. In order to protect the investigation, the court has
ordered that no further public disclosures be made with respect to the matter.
On March 24, 2000, Butterfields received a grand jury subpoena from the
Antitrust Division of the Department of Justice requesting documents relating
to, among other things, changes in Butterfields' seller commissions and buyer
premiums and discussions, agreements or understandings with other auction
houses, in each case since 1992. We believe this request may be related to a
publicly reported criminal
<PAGE> 29
investigation of auction houses for price fixing. We have provided the
information requested in the subpoena.
Should these or any other investigations lead to civil or criminal
charges against us, we would likely be harmed by negative publicity, the costs
of litigation, the diversion of management time and other negative effects, even
if we ultimately prevail. Our business would certainly suffer if we were not to
prevail in any actions like these. Even the process of providing records and
information can be expensive, time consuming and result in the diversion of
management attention.
A large number of transactions occur on our website. We believe that
government regulators have received a substantial number of consumer complaints
about us which, while small as a percentage of our total transactions, are large
in aggregate numbers. As a result, we have from time to time been contacted by
various federal, state and local regulatory agencies and been told that they
have questions with respect to the adequacy of the steps we take to protect our
users from fraud. We are likely to receive additional inquiries from regulatory
agencies in the future, which may lead to action against us. We have responded
to all inquiries from regulatory agencies by describing our current and planned
antifraud efforts. If one or more of these agencies is not satisfied with our
response to current or future inquiries, the resultant investigations and
potential fines or other penalties could harm our business.
We have provided information to the antitrust division of the Department
of Justice in connection with an inquiry into our conduct with respect to
"auction aggregators" including our licensing program and our lawsuit against
Bidder's Edge. Should the division decide to take action against us, we would
likely be harmed by negative publicity, the costs of the action, possible
private antitrust lawsuits, the diversion of management time and effort and
penalties we might suffer if we ultimately were not to prevail.
Some of our businesses are subject to regulation and others may be in the future
Both Butterfields and Kruse are subject to regulation in some
jurisdictions governing the manner in which live auctions are conducted. Both
are required to obtain licenses in these jurisdictions with respect to their
business or to permit the sale of categories of items (e.g. wine, automobiles
and real estate). These licenses generally must be renewed regularly 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, its business 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.
As our activities and the types of goods listed on our site expand,
state regulatory agencies may claim that we are subject to licensure in their
jurisdiction. These claims could result in costly litigation or could require us
to change our manner of doing business in ways that increase our costs or reduce
our revenues or force us to prohibit listings of certain items. We could also be
subject to fines or other penalties. Any of these outcomes could harm our
business.
As we have expanded internationally, we have become subject to new
regulations, including regulations on the transmission of personal information.
These laws may require costly changes to our business practices. If we are found
to have violated any of these laws, we could be subject to fines or penalties,
and our business could be harmed.
Companies that handle payments, including our subsidiaries Billpoint and
Half.com, may be subject to additional regulation
The Half.com business model involves the handling of payments by buyers
for the items listed by Half.com's sellers. Billpoint handles its customer funds
as a provider of Internet payment solutions. Businesses that handle consumers'
funds are 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
<PAGE> 30
its business. In addition to the need to comply with these regulations,
Billpoint's business is also subject to risks of fraud, the need to grow systems
and processes rapidly if its products are well received, a high level of
competition, including competitors who are currently not charging for their
product offerings and are offering significant promotional incentives, and the
need to coordinate systems and policies among itself, us and Wells Fargo Bank,
which is the provider of payment services. Similarly, Half.com may be subject to
certain regulations regarding payments and the cost and complexity of its
business may increase if these regulations are deemed to apply to its business.
We are subject to risks associated with information disseminated through our
service
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both
United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their services. Several
private lawsuits seeking to impose liability upon us currently are pending. In
addition, federal, state and foreign legislation has been proposed that imposes
liability for or prohibits the transmission over the Internet of certain types
of information. Our service features a Feedback Forum, which includes
information from users regarding other users. Although all such feedback is
generated by users and not by us, it is possible that a claim of defamation or
other injury could be made against us for content posted in the Feedback Forum.
Claims like these become more likely and have a higher probability of success in
jurisdictions outside the U.S. If we become liable for information provided by
our users and carried on our service, we could be directly harmed and we may be
forced to implement new measures to reduce our exposure to this liability. This
may require us to expend substantial resources and/or to discontinue certain
service offerings, which would negatively affect our financial results. In
addition, the increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals could harm our reputation or otherwise
impact the growth of our business. Any costs incurred as a result of this
liability or asserted liability could harm our business.
We are subject to intellectual property and other litigation
On September 1, 1999, we were served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleges that we violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit seeks declaratory and injunctive relief,
restitution and legal fees. We filed a general demurrer which was sustained by
the court with leave to amend. The plaintiff filed an amended complaint.
Discovery has commenced. We filed a motion for summary judgement. On November 7,
2000, our motion for summary judgement was granted.
On December 10, 1999, we sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
us alleging that we violated the antitrust laws by monopolizing or attempting to
monopolize a market, we are competing unfairly, and that we interfered with
their contract with eBay magazine. Bidder's Edge is seeking treble damages, an
injunction and its fees and costs. Discovery in this case has commenced. A
motion to dismiss on the antitrust counterclaim has been denied. On May 24,
2000, the court granted us a preliminary injunction against the use by Bidder's
Edge of robotic means to copy our site. Bidder's Edge has appealed this ruling.
We intend to prosecute our claims and defend ourselves against Bidder's Edge's
counterclaims vigorously. However, this lawsuit has been and is expected to
continue to be costly, and our business would be harmed if we were to lose.
On April 25, 2000, we were served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit is
filed on behalf of a purported class of eBay users who
<PAGE> 31
purchased allegedly forged autographed sports memorabilia on eBay. The lawsuit
claims eBay was negligent in permitting certain named (and other unnamed)
defendants to sell allegedly forged autographed sports memorabilia on eBay. In
addition, the lawsuit claims eBay violated Section 17200 and a section of the
California Civil Code which prohibits "dealers" from selling sports memorabilia
without a "Certificate of Authenticity." The lawsuit seeks class action
certification, compensatory damages, a civil penalty of ten times actual
damages, interest, costs and fees and injunctive relief. Discovery in this case
has commenced. We filed a demurrer to three of the counts, which the court
sustained with leave to amend. The plaintiffs have filed an amended complaint.
We believe we have meritorious defenses to this lawsuit and intend to defend
ourselves vigorously. However, even if successful, this defense has been and is
expected to be costly. If we lose this lawsuit, our business would be harmed.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future technologies. We
expect that participants in our markets increasingly will be subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any claim like this, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on acceptable terms or at all. As a
result, any claim like this could harm our business.
From time to time, we are involved in disputes that 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 our financial position
or results of operations.
System failures could harm our business
We have experienced system failures from time to time. Our website has
been interrupted for periods of up to 22 hours. In addition to placing increased
burdens on our engineering staff, these outages create a flood of user questions
and complaints that need to be responded to by our customer support personnel.
Any unscheduled interruption in our service results in an immediate loss of
revenues that can be substantial and may cause some users to switch to our
competitors. If we experience frequent or persistent system failures, our
reputation and brand could be permanently harmed. We have been taking steps to
increase the reliability and redundancy of our system. These steps are
expensive, reduce our margins and may not be successful in reducing the
frequency or duration of unscheduled downtime.
Substantially all of our computer hardware for operating our services
(other than Half.com) currently is located at the facilities of Exodus
Communications, Inc. in Santa Clara, California and AboveNet Communications in
San Jose, California. The computer hardware for the Half.com service is located
in the facilities of Level 3 Communications in Philadelphia, Pennsylvania. These
systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. We do not maintain fully redundant systems or
alternative providers of hosting services, and we do not carry business
interruption insurance sufficient to compensate us for losses that may occur.
Despite any precautions we may take, the occurrence of a natural disaster or
other unanticipated problems at any of the Exodus, AboveNet or Level 3
facilities could result in interruptions in our services. In addition, the
failure by Exodus, AboveNet or Level 3 to provide our required data
communications capacity could result in interruptions in our service. Any damage
to or failure of our systems could result in interruptions in our service.
Interruptions in our service will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable.
Our stock price has been and may continue to be extremely volatile
The trading price of our common stock has been and is likely to be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
- actual or anticipated variations in our quarterly operating
results;
<PAGE> 32
- unscheduled system downtime;
- additions or departures of key personnel;
- announcements of technological innovations or new services by us
or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce
industries;
- changes in the market valuations of other Internet or online
service companies;
- developments in Internet regulation;
- announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- sales of our common stock or other securities in the open
market; and
- other events or factors that may be beyond our control.
In addition, the trading price of Internet stocks in general, and ours
in particular, have experienced extreme price and volume fluctuations in recent
months. These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extraordinarily high based on conventional valuation
standards such as price-to-earnings and price-to-sales ratios. The trading price
of our common stock has increased enormously from the initial public offering
price. These trading prices and valuations may not be sustained. Any negative
change in the public's perception of the prospects of Internet or e-commerce
companies could depress our stock price regardless of our results. Other broad
market and industry factors may decrease the market price of our common stock,
regardless of our operating performance. Market fluctuations, as well as general
political and economic conditions, such as recession or interest rate or
currency rate fluctuations, also may decrease the market price of our common
stock. In the past, following declines in the market price of a company's
securities, securities class-action litigation often has been instituted.
Litigation of this type, if instituted, could result in substantial costs and a
diversion of management's attention and resources.
New and existing regulations could harm our business
We are subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels (both
in the U.S. and abroad) and it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and
regulations could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services, taxation,
advertising, intellectual property rights and information security.
Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of these laws
were adopted prior to the advent of the Internet and related technologies and,
as a result, do not contemplate or address the unique issues of the Internet and
related technologies. Those laws that do reference the Internet, such as the
Digital Millennium Copyright Act, have not yet been interpreted to a significant
degree by the courts and their applicability and reach are therefore uncertain.
In addition, numerous states, including the State of California, where our
headquarters are located, have regulations regarding how "auctions" may be
conducted and the liability of "auctioneers" in conducting such auctions. No
final legal determination has been made with respect to the applicability of the
California regulations to
<PAGE> 33
our business to date and little precedent exists in this area. Several states
are considering imposing these regulations upon us or our users, which could
harm our business. In addition, as the nature of the products listed by our
users change, we may become subject to new regulatory restrictions.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has recently
settled several proceedings regarding the manner in which personal information
is collected from users and provided to third parties. Changes to existing laws
or the passage of new laws intended to address these issues could directly
affect the way we do business or could create uncertainty in the marketplace.
This could reduce demand for our services, increase the cost of doing business
as a result of litigation costs or increased service delivery costs, or
otherwise harm our business. In addition, because our services are accessible
worldwide, and we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with their laws. For
example, a French court has recently ruled that a U.S. website must comply with
French laws regarding content. As we have expanded our international activities,
we have become obligated to comply with the laws of the countries in which we
operate. Laws regulating Internet companies outside of the United States may be
less favorable then those in the United States, giving greater rights to
consumers, content owners and users. Compliance may be more costly or may
require us to change our business practices or restrict our service offerings
relative to those in the United States. Our failure to comply with foreign laws
could subject us to penalties ranging from fines to bans on our ability to offer
our services.
Our business has been seasonal
Our results of operations historically have been somewhat seasonal in
nature because many of our users reduce their activities on our website during
the Thanksgiving and Christmas holidays and with the onset of good weather. We
have historically experienced our strongest quarter of online growth our first
fiscal quarter. Both Butterfields and Kruse have significant quarter-to-quarter
variations in their results of operations depending on the timing of auctions
and the availability of high quality items from large collections and estates.
Butterfields 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. Kruse typically sees a seasonal peak in operations in
the third quarter. Seasonal or cyclical variations in our business may become
more pronounced over time and may harm our results of operations in the future.
We are dependent on the continued growth of online commerce
The business of selling goods over the Internet, particularly through
personal trading, is new and dynamic. Our future net revenues and profits will
be substantially dependent upon the widespread acceptance of the Internet and
online services as a medium for commerce by consumers. Rapid growth in the use
of and interest in the Internet and online services is a recent phenomenon. This
acceptance and use may not continue. Even if the Internet is accepted, concerns
about fraud, privacy and other problems may mean that a sufficiently broad base
of consumers will not adopt the Internet as a medium of commerce. In particular,
our website requires users to make publicly available their e-mail addresses and
other personal information that some potential users may be unwilling to
provide. These concerns may increase as additional publicity over privacy issues
on eBay or generally over the Internet increase. Market acceptance for recently
introduced services and products over the Internet is highly uncertain, and
there are few proven services and products. In order to expand our user base, we
must appeal to and acquire consumers who historically have used traditional
means of commerce to purchase goods. If these consumers prove to be less active
than our earlier users, and we are unable to gain efficiencies in our operating
costs, including our cost of acquiring new customers, our business could be
adversely impacted.
Our business may be subject to sales and other taxes
We do not collect sales or other similar taxes on goods sold by users
through our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose
<PAGE> 34
additional taxes on the sale of goods and services through the Internet. These
proposals, if adopted, could substantially impair the growth of e-commerce, and
could diminish our opportunity to derive financial benefit from our activities.
In 1998, the U.S. federal government enacted legislation prohibiting states or
other local authorities from imposing new taxes on Internet commerce for a
period of three years. This tax moratorium will last only for a limited period
and does not prohibit states or the Internal Revenue Service from collecting
taxes on our income, if any, or from collecting taxes that are due under
existing tax rules. A successful assertion by one or more states or any foreign
country that we should collect sales or other taxes on the exchange of
merchandise on our system would harm our business.
We are dependent on key personnel
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to retain and motivate our other
officers and key employees. The loss of the services of any of our executive
officers or other key employees could harm our business. We do not have
long-term employment agreements with any of our key personnel, and we do not
maintain any "key person" life insurance policies. Our 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. For example, Dean Kruse is particularly
important to Kruse. We have had some turnover of these types of personnel, and
continued losses could result in the loss of significant future business and
would harm us. Such personnel are in great demand by other online 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 future
success also will depend on our ability to attract, train, retain and motivate
highly skilled technical, managerial, marketing and customer support personnel.
Competition for these personnel is intense, especially for engineers and other
professionals, especially in the San Francisco Bay Area, and we may be unable to
successfully attract, integrate or retain sufficiently qualified personnel. In
making employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock options they
are to receive in connection with their employment. Fluctuations in our stock
price may make it more difficult to retain and motivate employees whose stock
option strike prices are substantially above current market prices.
Our off-line auction businesses need to continue to acquire properties
The businesses of Butterfields 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 harm the business of Butterfields and Kruse.
Our off-line auction businesses could suffer losses from price guarantees,
advances or rescissions of sales
In order to secure high quality auction properties from sellers,
Butterfields 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 these 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.
We are subject to the risks of owning real property
<PAGE> 35
In connection with the acquisitions of Kruse and Butterfields 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;
- adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors;
- the possible need for structural improvements in order to comply
with zoning, seismic, disability act or other requirements; and
- possible disputes with tenants, partners or others.
Our market is intensely competitive
Depending on the category of product, we currently or potentially
compete with a number of companies serving particular categories of goods as
well as those serving broader ranges of goods. The online personal trading
market is a new, rapidly evolving and intensely competitive area. We expect
competition to intensify in the future as the barriers to entry are relatively
low, and current and new competitors can launch new sites at a nominal cost
using commercially available software. Our broad-based competitors include the
vast majority of traditional department and general merchandise stores as well
as emerging online retailers. These include most prominently: Wal-Mart, Kmart,
Target, Sears, Macy's, JC Penney, Montgomery Ward, Costco, Sam's Club as well as
Amazon.com, Buy.com, AOL.com, Yahoo! shopping and MSN.
In addition, we face competition from specialty retailers and exchanges
in each of its categories of products. For example:
Antiques: Christie's, eHammer, Sotheby's / Sothebys.com,
Sothebys.amazon.com
Coins & Stamps: Collectors Universe, Heritage, Numismatists Online, US
Mint
Collectibles: Franklin Mint
Musical Instruments: Guitar Center, Harmony-Central.com, MARRS,
MusicHotBid.com
Sports Memorabilia: Beckett's, Collectors Universe Toys, Bean Bag Plush:
Amazon.com, eToys.com, KB Toys
Premium Collectibles: Christies, DuPont Registry, Greg Manning Auctions,
iCollector, Lycos / Skinner Auctions, Millionaire.com, Phillips (LVMH),
Sotheby's, Sothebys.amazon.com
Automotive (used cars): Autobytel.com, AutoVantage.com, AutoWeb.com,
Barrett-Jackson, CarOrder.com, CarPoint, CarScene.com, eClassics.com,
Edmunds, GreenLight.com, Hemmings, imotors.com, vehix.com, newspaper
classifieds, used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, DVD Express,
Spinner.com, Wherehouse, Alibris.com
Clothing: Bluefly.com, Dockers.com, FashionMall.com, The Gap, J. Crew,
LandsEnd.com, The Limited, lucy.com, Macys, The Men's Wearhouse, Ross,
3Dshopping.com
<PAGE> 36
Computers & Consumer Electronics: Best Buy, Buy.com, Circuit City,
Compaq, CompUSA, Dell, Egghead, Fry's Electronics, Gateway, The Good
Guys, IBM, MicroWarehouse, The Sharper Image, Shopping.com
Home & Garden: IKEA, Crate & Barrel, Homepoint.com, Home Depot,
Garden.com, Pottery Barn, Ethan Allen, Frontgate
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, MVP.com, PlanetOutdoors.com, Play It Again Sports,
REI, Sports Authority
Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware,
OSH
Business-to-Business: Ariba, BidFreight.com, BizBuyer.com, bLiquid.com,
CloseOutNow.com, Commerce One, Concur Technologies, DoveBid,
FreeMarkets, Oracle, PurchasePro.com, RicardoBiz.com, Sabre,
SurplusBin.com, UnionStreet.com, Ventro, VerticalNet
Additionally, we face competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (an auction network
including Microsoft's MSN, Excite@Home, Dell Computer, ZD Net, Lycos and more
than 100 others), First Auction, Surplus Auction, uBid, Yahoo! Auctions and a
large number of other companies using an auction format for consumer-to-consumer
or business-to-consumer sales.
The principal competitive factors in our market include the following:
- ability to attract buyers;
- volume of transactions and selection of goods;
- customer service; and
- brand recognition.
With respect to our online competition, additional competitive factors
are:
- community cohesion and interaction;
- system reliability;
- reliability of delivery and payment;
- website convenience and accessibility;
- level of service fees; and
- quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online trading services may be acquired by, receive investments from or enter
into other commercial relationships with larger, well-established and
well-financed companies. As a result, some of our competitors with other revenue
sources may be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to website and systems
<PAGE> 37
development than we are able to. Increased competition may result in reduced
operating margins, loss of market share and diminished value of our brand. Some
of our competitors have offered services for free, and others may do this as
well. We may be unable to compete successfully against current and future
competitors.
In order to respond to changes in the competitive environment, we may,
from time to time, make pricing, service or marketing decisions or acquisitions
that could harm our business. For example, we implemented an insurance program
that generally insures items up to a value of $200, with a $25 deductible, for
users with a non-negative feedback rating at no cost to the user. New
technologies may increase the competitive pressures by enabling our competitors
to offer a lower cost service. Some Internet-based applications that direct
Internet traffic to certain websites may channel users to trading services that
compete with us.
Although we have established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Internet
browsers could promote our competitors or charge us substantial fees for
inclusion.
The off-line auction business is intensely competitive. Butterfields
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 Butterfields' 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 new companies
have entered this market, including competitors who are offering free services
and significant promotional incentives, and large companies, including banks and
credit card companies, are also beginning to enter this market. Half.com
competes directly with online retailers in its product categories, as well as
with traditional sellers of used books, videos and CDs.
Our business is dependent on the development and maintenance of the Internet
infrastructure
The success of our service will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security,
as well as timely development of complementary products such as high-speed
modems, for providing reliable Internet access and services. Because global
commerce and the online exchange of information is new and evolving, we cannot
predict whether the Internet will prove to be a viable commercial marketplace in
the long term. The Internet has experienced, and is likely to continue to
experience, significant growth in the numbers of users and amount of traffic. If
the Internet continues to experience increased numbers of users, increased
frequency of use or increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
the performance of the Internet may be harmed by increased number of users or
bandwidth requirements.
The Internet has experienced a variety of outages and other delays as a
result of damage to portions of its infrastructure, and it could face outages
and delays in the future. These outages and delays could reduce the level of
Internet usage as well as the level of traffic and the processing transactions
on our service. In addition, the Internet could lose its viability due to delays
in the development or adoption of new standards and protocols to handle
increased levels of activity or due to increased governmental regulation. The
infrastructure and complementary products or services necessary to make the
Internet a viable commercial marketplace for the long term may not be developed
successfully or in a timely manner. Even if these products or services are
developed, the Internet may not become a viable commercial marketplace for
services such as those that we offer.
Our business is subject to online commerce security risks
<PAGE> 38
A significant barrier to online commerce and communications is the
secure transmission of confidential information over public networks. Our
security measures may not prevent security breaches. Our failure to prevent
security breaches could harm our business. Currently, a significant number of
our users authorize us to bill their credit card accounts directly for all
transaction fees charged by us. We rely on encryption and authentication
technology licensed from third parties to provide the security and
authentication technology to effect secure transmission of confidential
information, including customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other
developments may result in a compromise or breach of the technology used by us
to protect customer transaction data. A number of websites have reported
breaches of their security. Any compromise of our security could harm our
reputation and, therefore, our business. In addition, a party who is able to
circumvent our security measures could misappropriate proprietary information or
cause interruptions in our operations. An individual has claimed to have
misappropriated some of our confidential information by breaking into our
computer system. We may need to expend significant resources to protect against
security breaches or to address problems caused by breaches. Security breaches
could damage our reputation and expose us to a risk of loss or litigation and
possible liability. Our insurance policies carry low coverage limits, which may
not be adequate to reimburse us for losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging and changing nature of the
Internet. Our future success therefore will depend on our ability to adapt to
rapidly changing technologies, to adapt our services to evolving industry
standards and to continually improve the performance, features and reliability
of our service. Our failure to adapt to such changes would harm our business. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
We need to develop new services, features and functions in order to expand
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth of
services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our overall
market acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation and diminish the value of
our brand. We anticipate that future services will include pre- and post-trade
services.
We are pursuing strategic relationships with third parties to provide
many of these services. By using third parties to deliver these services, we may
be unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand
We believe that our historical growth has been largely attributable to
word of mouth. We have benefited from frequent and high visibility media
exposure both nationally and locally. We do not expect the frequency or quality
of this media exposure to continue. However, we believe that continuing to
strengthen our brand will be critical to achieving widespread acceptance of our
service. Promoting and positioning our brand will depend largely on the success
of our marketing efforts and our ability to provide high quality services. In
order to promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. Brand promotion activities may not yield increased
revenues, and even if they do, any increased revenues may not
<PAGE> 39
offset the expenses we incurred in building our brand. If we do attract new
users to our service, they may not conduct transactions over our service on a
regular basis. If we fail to promote and maintain our brand or incur substantial
expenses in an unsuccessful attempt to promote and maintain our brand, our
business would be harmed.
We may be unable to protect or enforce our own intellectual property rights
adequately
We regard the protection of our URLs, copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our success. We rely on
a combination of patent, copyright, trademark, service mark and trade secret
laws and contractual restrictions to protect our proprietary rights in products
and services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
parties with whom we conduct business in order to limit access to and disclosure
of our proprietary information. These contractual arrangements and the other
steps taken by us to protect our intellectual property may not prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. We pursue the registration of our URLs, trademarks and
service marks in the U.S. and internationally. Effective copyright, service
mark, trademark, trade dress and trade secret protection is very expensive to
maintain, and protection may not be available in every country in which our
services are made available online. Furthermore, we must also protect our URLs
in an increasing number of jurisdictions, a process that is expensive and may
not be successful in every location. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation. We
also rely on certain technologies that we license from third parties, such as
Oracle Corporation, Microsoft Corporation and Sun Microsystems Inc., the
suppliers of key database technologies, the operating system and specific
hardware components for our service. These third-party technology licenses may
not continue to be available to us on commercially reasonable terms. The loss of
this technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost.
Our business is subject to consumer trends and discretionary consumer spending
We derive most of our revenues from fees received from sellers for
listing products for sale on our service and fees received from successfully
completed transactions. Our future revenues will depend upon continued demand
for the types of goods that are listed by users of our service. The popularity
of certain categories of items, such as toys, dolls and memorabilia, among
consumers may vary over time due to perceived scarcity, subjective value, and
societal and consumer trends in general. A decline in the popularity of, or
demand for, certain collectibles or other items sold through our service could
reduce the overall volume of transactions on our service, resulting in reduced
revenues. In addition, consumer "fads" may temporarily inflate the volume of
certain types of items listed on our service, placing a significant strain upon
our infrastructure and transaction capacity. These trends also may cause
fluctuations in our operating results from one reporting period to the next. Any
decline in demand for the goods offered through our service as a result of
changes in consumer trends could harm our business. A decline in consumer
spending would harm our 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 buyers' tastes, economic conditions or consumer trends could
cause declines in the number or dollar volume of items sold and thereby harm the
business of these companies.
Some anti-takeover provisions may affect the price of our common stock
The Board of Directors has the authority to issue up to 10,000,000
shares of preferred stock and to determine the preferences, rights and
privileges of those shares without any further vote or action by the
stockholders. The rights of the holders of common stock may be harmed by the
rights of the holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws could have the
effect of making it more difficult for a third party to acquire a majority of
our outstanding voting stock. These include provisions that provide for a
classified Board of Directors, prohibit
<PAGE> 40
stockholders from taking action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to provisions of
Delaware law that prohibit us from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder, unless certain conditions are met. This could
have the effect of delaying or preventing a change of control.
We are controlled by certain stockholders, executive officers and directors
Our executive officers and directors (and their affiliates) own
approximately one-half of our outstanding common stock. As a result, they have
the ability to control our company and direct our affairs and business,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of our company and may make some
transactions more difficult or impossible without the support of these
stockholders. Any of these events could decrease the market price of our common
stock.
--------------------------------------------------------------------------------
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------
INTEREST RATE RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents, short-term and long-term investments in a variety of securities,
including both government and corporate obligations and money market funds.
These securities are generally classified as available for sale and consequently
are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income, net
of tax.
Investments in both fixed rate and floating rate interest earning
instruments carry varying degrees of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates. In general, longer dated securities are subject to greater interest rate
risk than shorter dated securities. While floating rate securities generally are
subject to less interest rate risk than fixed rate securities, floating rate
securities may produce less income than expected if interest rates decrease. Due
in part to these factors, our investment income may fall short of expectations
or we may suffer losses in principal if securities are sold that have declined
in market value due to changes in interest rates. As of September 30, 2000, our
fixed income investments earned a pretax yield of approximately 6.4% and had a
weighted average maturity of 0.9 years. If interest rates were to
instantaneously increase (decrease) by 100 basis points, the fair market value
of the total investment portfolio could decrease (increase) by approximately
$6.7 million.
We entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow for us to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments which effectively changes our interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease.
EQUITY PRICE RISK
We are exposed to equity price risk on the marketable portion of equity
investments as such investments are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or eliminate its market
exposure in these equity investments. As of September 30, 2000, the position in
equity investments included a net unrealized loss of $1.5 million.
<PAGE> 41
FOREIGN CURRENCY RISK
International sales are made mostly from our foreign sales in the
respective countries by our foreign subsidiaries and are typically denominated
in the local currency of each country. These subsidiaries also incur most of
their expenses in the local currency. Accordingly, all foreign subsidiaries use
the local currency as their functional currency. Our international business is
subject to risks typical of an international business, including, but not
limited to differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions, and foreign
exchange rate volatility. Accordingly, our future results could be materially
adversely impacted by changes in these or other factors. These intercompany
accounts are typically denominated in the functional currency of the foreign
subsidiary in order to centralize foreign exchange risk with the parent company
in the United States. We are also exposed to foreign exchange rate fluctuations
as the financial results of foreign subsidiaries are translated into U.S.
dollars in consolidation. As exchange rates vary, these results, when
translated, may vary from expectations and adversely impact overall expected
profitability. The effect of foreign exchange rate fluctuations on eBay as of
September 30, 2000 was a gain of approximately $930,000.
PART II: OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
--------------------------------------------------------------------------------
On September 1, 1999, we were served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleges that we violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit seeks declaratory and injunctive relief,
restitution and legal fees. We filed a general demurrer which was sustained by
the court with leave to amend. The plaintiff filed an amended complaint.
Discovery has commenced. We filed a motion for summary judgement. On November 7,
2000, our motion for summary judgement was granted.
On December 10, 1999, we sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
us alleging that we violated the antitrust laws by monopolizing or attempting to
monopolize a market, we are competing unfairly, and that we interfered with
their contract with eBay magazine. Bidder's Edge is seeking treble damages, an
injunction and its fees and costs. Discovery in this case has commenced. A
motion to dismiss on the antitrust counterclaim has been denied. On May 24,
2000, the court granted us a preliminary injunction against the use by Bidder's
Edge of robotic means to copy our site. Bidder's Edge has appealed this ruling.
We intend to prosecute our claims and defend ourselves against Bidder's Edge's
counterclaims vigorously. However, this lawsuit has been and is expected to
continue to be costly, and our business would be harmed if we were to lose.
On April 25, 2000, we were served with a lawsuit, Gentry et. al. v.
eBay, Inc. et. al., filed in Superior Court in San Diego, California. The
lawsuit is filed on behalf of a purported class of our users who purchased
allegedly forged autographed sports memorabilia on our website. The lawsuit
claims we were negligent in permitting certain named (and other unnamed)
defendants to sell allegedly forged autographed sports memorabilia on our
website. In addition, the lawsuit claims we violated Section 17200 and a section
of the California Civil Code which prohibits "dealers" from selling sports
memorabilia without a "Certificate of Authenticity." The lawsuit seeks class
action certification, compensatory damages, a civil penalty of ten times actual
damages, interest, costs and fees and injunctive relief. Discovery in this case
has commenced. We filed a demurrer to three of the counts, which the court
sustained with leave to amend. The plaintiffs have filed an amended complaint.
We believe we have meritorious defenses to this
<PAGE> 42
lawsuit and intend to defend ourselves vigorously. However, even if successful,
this defense has been and is expected to be costly. If we lose this lawsuit, our
business would be harmed.
From time to time, we are involved in 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 our financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 11, 2000, we completed our acquisition of Half.com, a company
providing a fixed-price, person-to-person e-commerce site that allows people to
buy and sell, previously owned goods at discounted prices. In connection with
the acquisition and in exchange for all of the outstanding equity securities of
Half.com, we issued, or reserved for issuance, a total of approximately
5,484,000 shares of our common stock. This transaction was exempt from the
registration requirements of the Securities Act pursuant to Section 4(2) thereof
or Rule 506 of the rules and regulations thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
27.01 Financial Data Schedule (EDGAR version only)
<PAGE> 43
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
eBay Inc.
Date: November 9, 2000
By: /s/ MARGARET C. WHITMAN
--------------------------------------
Margaret C. Whitman
President and Chief Executive Officer
By: /s/ GARY F. BENGIER
--------------------------------------
Gary F. Bengier
Vice President and
Chief Financial Officer
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
27.01 Financial Data Schedule (EDGAR version only)
</TABLE>
