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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended Annual December 31, 1999.
OR
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from ___________ to _________.
Commission File Number 000-24821
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eBay Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0430924
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
</TABLE>
2145 Hamilton Avenue, San Jose, CA 95125
(Address of Principal Executive Offices, Including Zip Code)
(408) 558-7400
(Registrant's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
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Indicate by check mark whether the registrant: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 1, 2000 there were 130,182,905 shares of the Registrant's Common
Stock, $0.001 par value, outstanding, which is the only class of common or
voting stock of the registrant issued as of that date. The aggregate market
value of the voting stock held by non-affiliates computed by reference to the
closing price for the Common Stock as quoted by the Nasdaq Stock Market as of
March 1, 2000 was approximately $7,711,442,000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 through 13 are incorporated by reference to the Company's Proxy
Statement for the 2000 annual meeting of shareholders to be filed by May 1st,
2000.
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PART I
Item 1: Business
This Annual Report on Form 10-K contains forward-looking statements based on
our current expectations about our company and our industry. You can identify
these forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Risk Factors" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report. We undertake no obligation to publicly update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
The Company
eBay Inc. ("eBay" or the "Company") is the world's largest and most popular
personal trading community on the Internet, based on the value of goods traded
on the eBay service.
eBay, was formed as a sole proprietorship in September 1995, incorporated in
California in May 1996 and reincorporated in Delaware in April 1998. eBay
pioneered online personal 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 items such as automobiles, collectibles, high-end or
premium art items, jewelry, consumer electronics and a host of practical and
miscellaneous items. The eBay service permits sellers to list items for sale,
buyers to bid on items of interest and all eBay users to browse through listed
items. The Company's service is fully automated, topically arranged, intuitive
and easy to use. From December 31, 1998 to December 31 1999, the number of
registered eBay users grew from approximately 2.1 million to over 10 million.
eBay users listed over 41 million items for sale during the fourth quarter of
1999, up from 13.64 million items in the fourth quarter of 1998. As of
December 31, 1999, the Company had over 3.0 million items listed in over 3,000
categories. Browsers and buyers can search listings for specific items or
search by category, key word, seller name, recently commenced auctions or
auctions about to end. The eBay pricing format based on auctions creates a
sense of urgency among buyers to bid for goods and creates an entertaining and
compelling trading environment. eBay also provides buyers and sellers a place
to socialize and to discuss topics of common interest. This compelling trading
environment fosters a large and growing commerce-oriented online community.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct business
electronically. International Data Corporation ("IDC") estimated that the
number of Web users would grow from approximately 150 million worldwide in
1998 to approximately 500 million worldwide by the end of 2003.
The growing adoption of the Web represents an enormous opportunity for
businesses to conduct commerce over the Internet. IDC estimated that commerce
over the Internet would increase from approximately $40 billion worldwide in
1998 to approximately $900 billion worldwide in 2003.
The Personal Trading Market Opportunity
eBay's trading platform has historically offered the exchange of goods among
individuals and small businesses, competing with classified advertisements,
collectibles shows, garage sales, flea markets and other venues such as
auction houses. As eBay's service has evolved, its applicability has expanded
to broader categories of items, and to a broader and more global user base. As
a result, the Company's product mix has begun to shift from primarily
collectibles to practical everyday items, such as household goods, office
equipment,
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services, and other items. With the shift to a broader product offering, the
Company's competition has also broadened, and now includes distributors,
liquidators, retailers, import/export companies, catalog/mail order companies,
and virtually all online and offline commerce participants (consumer-to-
consumer, business-to-consumer, and business-to-business).
Many of these traditional forums are inefficient because:
. their fragmented, regional nature makes it difficult and expensive for
buyers and sellers to meet, exchange information and complete
transactions;
. they may offer a limited variety or breadth of goods;
. they often have high transaction costs; and
. they are information inefficient, as buyers and sellers lack a reliable
and convenient means of setting prices for sales or purchases.
The Internet offers the first opportunity to create a compelling global
marketplace that overcomes the inefficiencies associated with traditional
trading among individuals and small businesses. An Internet-based, centralized
trading place offers the following benefits:
. facilitates buyers and sellers meeting, listing items for sale,
exchanging information, interacting with each other and, ultimately,
consummating transactions;
. allows buyers and sellers to trade directly, bypassing traditional
intermediaries and lowering costs for both parties;
. is global in reach, offering buyers a significantly broader selection of
goods to purchase and providing sellers the opportunity to sell their
goods efficiently to a broader base of buyers;
. offers significant convenience, allowing trading at all hours and
providing continuously updated information; and
. fosters a sense of community through direct buyer and seller
communication, thereby enabling interaction between individuals with
mutual interests.
In addition, the community orientation, facilitation of direct buyer to
seller communication and efficient access to information on a buyer's or
seller's trading history can help alleviate the risks of trading. As a result,
a significant market opportunity exists for an Internet-based, centralized
trading environment that applies the unique attributes of the Internet to
facilitate personal trading.
The eBay Solution
eBay pioneered personal trading of a wide range of goods over the Internet
using an efficient and entertaining auction pricing format and has grown into
the largest and most popular personal trading platform on the Internet. The
core eBay service permits sellers to list items for sale, buyers to bid for
and purchase items of interest and all eBay users to browse through listed
items from any place in the world at any time. eBay offers buyers a large
selection of new and used items that can be difficult and costly to find
through traditional means. eBay also enables sellers to reach a larger number
of buyers more cost-effectively than traditional trading forums.
The eBay service was originally introduced in September 1995 to create an
efficient forum for individuals to trade with one another. Since its beginning
as a grassroots online trading community, eBay has primarily attracted buyers
and sellers through word of mouth and by providing buyers and sellers a place
to socialize, discuss topics of common interest and ultimately to trade goods
with one another. The number of categories under which eBay users list goods
for sale has grown from 10, when eBay was first introduced, to more than 3,000
as of December 31, 1999. The main categories on eBay currently include
automobiles, antiques & art, books, movies, music, coins & stamps,
collectibles, computers, dolls, dollhouses, jewelry, photo & electronics,
pottery & glass, sports, toys, miscellaneous items ("everything else"), and
premium arts and collectibles.
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The principal reasons for eBay's success are as follows:
Largest Online Trading Forum. Unlike other commerce trading forums, eBay has
aggregated a critical mass of buyers, sellers and items listed for sale. As a
result, eBay has become the largest online personal trading forum. As of
December 31, 1999, eBay had over 10 million registered users, offered more
than 3,000 product categories and listed more than 3.0 million items for sale,
many of which were unique or otherwise hard to find.
Compelling Trading Environment. eBay has created a distinctive trading
environment by utilizing an entertaining pricing format, establishing
procedural rules and promoting community values that are designed to
facilitate trade and communications between buyers and sellers. The trading
environment's efficiency is illustrated by the limited need for eBay to
intervene or play a significant role in the trading process. The auction
pricing format creates a sense of urgency among buyers to bid for goods
because of the uncertain future availability of unique items on the website.
Similarly, by accepting multiple bids at increasing prices, the auction
pricing format provides sellers a more efficient means of obtaining a maximum
price for their products.
Trust and Safety Programs. The Company has developed a number of programs
designed to make users more comfortable with dealing with an unknown trading
partner over the Web. The Company's Feedback Forum encourages every eBay user
to provide comments and feedback on other eBay users with whom they interact
and offers user profiles that provide feedback ratings and incorporate these
comments. In addition, eBay's expanded SafeHarbor(TM) program provides
guidelines for trading, helps provide information to resolve user disputes,
responds to reports of misuse of the eBay service and, if necessary, warns or
suspends users who violate the terms of the Company's user agreement. The
Company's ongoing trust and safety initiatives, including user verification,
credit card requirements for sellers, insurance, integrated escrow,
authentication and new means to help keep previously suspended users from re-
registering on eBay, are all intended to bolster eBay's reputation as a safe
place to trade. The Company has also developed an extensive set of rules and
guidelines designed to educate users and help implement eBay's policy of
prohibiting the sale of illegal or pirated items.
Cost-Effective, Convenient Trading. eBay allows its buyers and sellers to
bypass traditionally expensive, regionally fragmented intermediaries and
transact business on a seven-day-a-week basis. Because sellers bypass costly
intermediaries, they have lower selling costs and an increased likelihood of
finding buyers willing to pay the target price. Listing an item on eBay
requires sellers to generally pay a nominal placement fee ranging from $0.25
to $2.00 and an additional success fee from 5% to 1.25% of the transaction
value if the sale is concluded successfully. eBay charges different fees for
certain categories of items, including autos and real estate. As a result,
sellers can sell relatively inexpensive items which had previously been
prohibitively expensive to list through most traditional trading forums. By
allowing sellers to conveniently reach a broad range of buyers, eBay also
addresses the time-consuming, logistical inconvenience of individual selling.
Buyers have access to a broad selection of items and avoid the need to pay
expensive markups or commissions to intermediaries. Buyers are not charged for
trading on eBay. The critical mass of items listed on eBay provides a mutual
benefit for buyers and sellers allowing both to effectively determine an
appropriate price for an item.
Strong Community Affinity. The Company believes that fostering direct
interaction between buyers and sellers with similar interests has enabled it
to create a loyal, active community of users. eBay has introduced a variety of
features and services designed to strengthen this sense of community among
eBay users. The Company facilitates communications between buyers and sellers
by offering chat rooms, bulletin boards, threaded discussion boards, customer
support assistance from eBay personnel or other eBay users and by providing
"About Me" user pages. These community features encourage consumer loyalty and
repeat usage.
Intuitive User Experience. The eBay service is a fully automated, topically
arranged, intuitive and easy-to-use online service that is available on a
seven-day-a-week basis. Within minutes of completing a simple online form, a
seller can list items for sale on the service, and buyers can submit bids for
items quickly and easily. Buyers can easily search the millions of items
listed by category or specific item. During the course of the transaction,
bidders are notified by email of the status of their bids on a daily basis and
are notified immediately if they are outbid. Sellers and successful bidders
are automatically notified when an transaction is completed. To assist users
further, the Company offers email customer support staffed on a seven-day-a-
week basis.
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eBay Strategy
The Company's objective is to build upon its position as the world's leading
online personal trading platform. The key elements of eBay's strategy are to:
Expand the eBay Community and Strengthen the eBay Brand. The Company
believes that building greater awareness of the eBay brand within and beyond
the eBay community is critical to expanding its user base and to maintaining
the vitality of the eBay community. Although the Company's early growth and
much of its current growth is attributable to word of mouth, the Company has
introduced aggressive marketing efforts to build its user base and its brand
name. These include:
. advertising in targeted publications;
. strategic advertising and sponsorship placements on high traffic
websites;
. radio advertising campaigns; and
. active participation in other forums such as selected trade shows.
These traditional and online media placements and word of mouth advertising
give eBay frequent and high visibility media exposure both nationally and
locally.
Broaden the eBay Trading Platform. The Company has pursued a multi-pronged
strategy for growing the eBay platform within existing product categories,
across new product categories and through geographic expansion--both local and
international. The Company targeted key product categories in its user
programs and marketing activities. The Company has expanded and developed
existing product categories by introducing category-specific bulletin boards
and chat rooms, integrating category-specific content, advertising its service
in targeted publications and participating in targeted trade shows. In
addition, the Company broadened the range of products offered on its trading
platform by seeking to attract new users from the general audience of Internet
users and adding product categories, content, features and other services to
meet this new user demand. The increasing number and importance of practical
(as opposed to collectible) items on the site is illustrative of this
broadened range. The Company has also broadened the range of products that it
offers to facilitate trading on the site, including payment services, shipping
services, authentication and escrow services. In addition, the Company intends
to offer its community additional pricing formats such as fixed price sales.
Key improvements implemented during 1999 include:
. the acquisition of Kruse International, one of the largest land-based
auctioneers of collectible cars in the world. This acquisition provided
expertise in the automobile market and led to the launch of eBay's
collectible and used car categories online;
. the acquisition of Butterfield & Butterfield ("B&B"), the fourth largest
auctioneer of fine arts and collectibles in the world. This acquisition
permitted the launch of "eBay Great Collections," designed to showcase
high quality items from auction houses and dealers around the world;
. the launch of eBay Regional sites. In 1999, eBay launched 53 regional
sites that address the 50 largest statistical metropolitan areas in the
United States to encourage the sale of items that are too bulky or
expensive to ship, items of a local interest and items that people
prefer to view before purchasing; and
. the launch of over 2,000 new categories that make it easier to find
items in diverse categories.
Foster eBay Community Affinity. The Company continues to enhance what is
already the largest and one of the most loyal online trading communities on
the Web. By instilling a vibrant eBay community experience, the Company seeks
to maintain a critical mass of frequent buyers and sellers with a vested
interest in the eBay community. The Company believes that new community tools,
such as AboutMe personal pages and the recently introduced threaded message
boards will continue to contribute to the community dynamic. The Company's
recent trust and safety initiatives, including user verification, requirements
for new sellers to have a credit card
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on file, insurance, integrated escrow, authentication and appraisal, are
intended to bolster eBay's reputation as a safe place to trade. Consistent
with its desire to foster community, the Company has organized a charitable
fund, known as the eBay Foundation, and involves the members of the eBay
community in determining to which charitable purposes the eBay Foundation's
funds will be applied. See "-The eBay Service-Community Services."
Enhance Features and Functionality. The Company intends to continually
update and enhance the features and functionality of the eBay website in order
to continue to improve the trading experience on eBay. In 1999, the Company
added several new features and services to help buyers and sellers trade with
greater ease. In January 1999, the Company introduced the "Gallery" and in
September 1999, the ability to search while in the Gallery mode. The Gallery
showcases items in a catalog of pictures rather than text. For sellers, the
Company introduced "Mr. Lister 2.0", a software tool that permits automated
listing of multiple items for sale on eBay. For buyers, the Company introduced
"Personal Shopper", an automated tool that permits buyers to indicate items of
interest that they are alerted to by email when those items are available for
sale on eBay. In June 1999, the Company launched an improved user interface to
make it easier to find information on the eBay site. The Company also launched
its "eBay Anywhere" strategy to permit eBay users to access trading
information through wireless devices such as Skytel 2-way pagers and the Palm
VII personal data assistant. The Company intends to continue refining its
features and services to permit easier, safer and more efficient trade on
eBay. The Company will also continue to provide rapid system response and
transaction processing time by investing in its infrastructure in order to
accommodate additional users, content and items for sale.
Generally, added features and functionality are deemed to be elements of the
ongoing revision and maintenance of the eBay site. Hardware and software
purchases and customization associated with revisions have been capitalized in
accordance with company policy and are included in computer equipment and
software. Due to the speed of change and continuous nature of site revision,
internal expenses often are judged to have useful lives of less than one year,
or have been more appropriately classified as maintenance related costs. As
such, these costs are expensed as incurred.
Expand Value-Added Services. In order to offer an end-to-end personal
trading service, the Company intends to provide a variety of "pre-trade" and
"post-trade" services to enhance the user experience and make trading easier.
"Pre-trade" services make listing items for sale easier and include photo
hosting, authentication and seller productivity software. "Post-trade"
services make transactions easier and more comfortable to consummate, such as
payment facilitation, insurance, escrow, shipping and postage. The company
currently provides, or will provide, these services directly or through
strategic partnerships with third parties.
Key improvements implemented during 1999 include:
. the acquisition and partial implementation of Billpoint, which enables
person-to-person payment on the Internet. In February 2000, eBay
announced a strategic relationship with Wells Fargo & Co.
("Wells Fargo") to jointly address the growing need for person to person
payments on the Internet. As part of the relationship, Wells Fargo
purchased a 35% equity interest in Billpoint from Billpoint. Wells Fargo
also entered into a long-term payment processing and customer care
contract with Billpoint;
. a strategic relationship with E-Stamp to offering electronic postage to
users of eBay; and
. the acquisition of Blackthorne Software which offers the leading seller
productivity software under the "Auction Assistant" brand.
The company anticipates that future service offerings may include services
to facilitate the uploading and hosting of photos of listed items, the
shipment of products and expanding the Billpoint payment solution to more of
the eBay community and the Internet community at large.
Develop International Markets. The Company believes that the Internet
provides a significant opportunity for the creation of a global trading
market. The Company intends to take advantage of this opportunity by
leveraging the eBay service and brand name internationally by developing eBay
for selected international
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markets and actively marketing and promoting these services. The Company has
introduced country-specific services for Canada, the United Kingdom, Australia,
Germany and as of February 2000, Japan. The Company believes that its user base
already includes users located in over 200 countries.
The Company can choose from several strategies to enter new international
markets including building a user community from scratch, acquiring a company
already in the local trading market or partnering with strong local companies.
The company has adopted each of these strategies where appropriate, including
the following:
. eBay's presence in the United Kingdom has been built with local
management, grass roots and online marketing and local events;
. the market in Germany was built primarily through the June 1999
acquisition of alando.de.ag, an existing German trading service;
. the Company entered into a joint venture with a subsidiary of one of the
largest media companies in Australia and New Zealand to penetrate that
market; and
. the Company announced in February 2000 that it had entered into a
relationship with NEC to jointly address the market in Japan. As part of
that agreement, NEC agreed to purchase a 30% equity interest in eBay
Japan.
The eBay Service
The eBay trading platform is a robust, Internet-based, centralized trading
environment that facilitates buying and selling of a wide variety of items.
Registration. While any visitor to eBay can browse through the eBay service
and view the items listed for sale, in order to bid for an item or to list an
item for sale, buyers and sellers must first register with eBay. Users register
by completing a short online form and thereafter can immediately bid for an
item or list an item for sale. Users in Canada, Germany, Japan (as of February
2000), Australia and the United Kingdom may instead register through a country-
specific home page.
Buying on eBay. Buyers typically enter eBay through its home page, which
contains a listing of product categories that allows for easy exploration of
current items for sale. Bidders can search for specific items by browsing
through a list of items within a category or subcategory and then "clicking
through" to a detailed description for a particular item. Bidders also can
search specific categories, interest pages or the entire database of item
listings using keywords to describe the types of products in which they are
interested, and eBay's search engine will generate a list of relevant items
with links to the detailed descriptions. Each item is assigned a unique
identifier so that users can easily search for and track specific items. Users
also can search for a particular bidder or seller by name in order to review
his or her item for sale and feedback history as well as search for products by
specific region or search in "Gallery" mode. Once a bidder has found an item of
interest and registered with eBay, the bidder enters the maximum amount he or
she is willing to pay at that time. In the event of competitive bids, the eBay
service automatically increases bidding in increments based upon the then
current highest bid for the item, up to the bidder's maximum price. As eBay
encourages direct interaction between buyers and sellers, bidders wishing
additional information about a listed item can access the seller's email
address and contact the seller. The Company believes that this interaction
between bidders and sellers leverages the personal, one-on-one nature of
trading on the Web and is an important element of the eBay experience. Once
each bid is made, eBay sends a confirmation to the bidder via email, an outbid
notice to the next highest bidder and automatically updates the item's auction
status. During the course of the sale, eBay notifies bidders immediately via
email if they are outbid. Bidders are not charged for making bids or purchases
through eBay. In addition, buyers can also specify items of interest on a
service called "Personal Shopper" and receive automated email messages when
particular items are available for sale on eBay.
Selling on eBay. Sellers registered with eBay can list a product for sale by
completing a short online form or using "Mr. Lister," "Auction Assistant" or
third party tools that facilitates the listing of multiple items. The
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seller selects a minimum price for opening bids for the item and chooses
whether the sale will last three, five, seven or ten days. Additionally, a
seller may select a reserve price for an item, which is the minimum price at
which the seller is willing to sell the item and is typically higher than the
minimum price set for the opening bid. The reserve price is not disclosed to
bidders. A seller can elect to sell items in individual item listings or, if he
or she has multiple identical items, can elect to hold a "Dutch Auction." For
example, an individual wishing to sell 10 identical watches could hold 10
individual auctions or hold a Dutch Auction in which the 10 highest bidders
would each receive a watch at the same price and all lower bids would be
rejected. To be eligible to hold a Dutch auction, a seller must have a
sufficiently high feedback rating and must have been a registered seller for at
least 60 days. A seller may also specify that an auction will be a private
auction. With this format, bidders' e-mail addresses are not disclosed on the
item screen or bidding history screen.
Sellers generally pay a nominal placement fee to list items for sale--$0.25
for an item listing with a minimum starting price of less than $10.00, $0.50
for a minimum starting price of $10.00 to $24.99, $1.00 for a minimum starting
price of $25.00 to $49.99 and $2.00 for a minimum starting price of $50.00 or
more. By paying an additional $1.00, sellers can choose to have a reserve
selling price below which they are not obligated to sell the item. By paying
incremental placement fees, sellers can have items featured in various ways. A
seller can highlight his or her item for sale by utilizing a bold font for the
item heading for an additional fee of $2.00. A seller with a favorable feedback
rating can have his or her auction featured as a "Featured Auction" for $99.95,
which allows the seller's item to be rotated on the eBay home page, or as a
"Category Featured Auction" for $14.95, which allows his or her item to be
featured within a particular eBay category. A seller can choose to place a
seasonal icon (such as a shamrock in connection with St. Patrick's Day) next to
his or her listing for $1.00. A seller can also include a description of the
product with links to the seller's website. In addition, a seller can include a
photograph in the item's description if the seller posts the photograph on a
website and provides eBay with the appropriate Web address. Items may be
showcased in the Gallery section with a catalog of pictures rather than text. A
seller who uses a photograph in his or her listing can have this photograph
included in the Gallery section for $0.25 or featured in the Gallery section
for $19.95. The Gallery feature is available in all categories of eBay. Certain
categories of items, including real estate, automobiles and "Great Collections"
have different pricing. All pricing is subject to change.
How Transactions are Completed. When an auction ends, the eBay system
validates if a bid exceeded the minimum price, and the reserve price if one has
been set. If the sale was successful, eBay automatically notifies the buyer and
seller via email and the buyer and seller can then consummate the transaction
independent of eBay. At the time of the email notification, eBay generally
charges the seller a success fee equal to 5% of the first $25 of the purchase
price, 2.5% of that portion of the purchase price from $25.01 to $1,000, and
1.25% of that portion of the purchase price over $1,000. At no point during the
process does the Company take possession of either the item being sold or the
buyer's payment for the item. Rather, the buyer and seller must independently
arrange for the shipment of and payment for the item, with the buyer typically
paying for shipping. A seller can view a buyer's feedback rating and then
determine the manner of payment, such as personal check, cashier's check or
credit card, and also whether to ship the item before or after the payment is
received. Under the terms of the Company's user agreement, if a seller receives
one or more bids above the stated minimum or reserve price, whichever is
higher, the seller is obligated to complete a transaction, although the Company
has no power to force the seller or buyer to complete the transaction other
than to suspend them from using the eBay service. In the event the buyer and
seller are unable to complete the transaction and the seller notifies eBay,
eBay credits the seller the amount of the success fee. When items that have a
reserve price sell, sellers are credited the $1.00 reserve fee. Invoices for
placement fees, additional listing fees and success fees are sent via email to
sellers on a monthly basis. All new sellers are required to have a credit card
account on file with eBay. Sellers who pay by credit card are charged shortly
after the invoice is sent.
Feedback Forum. eBay pioneered a feature to facilitate the establishment of
reputations within its community by encouraging individuals to record comments
about their trading partners on each transaction. Every registered eBay user
has a feedback profile containing compliments, criticisms and other comments by
users who have conducted business or interacted with the person. A recent
enhancement to the Feedback Forum requires feedback to be related to specific
transactions and provides an easy tool for them to match up transaction
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numbers with the user names of their trading partners. This information is
recorded in a feedback profile that includes a feedback rating for the person
and indicates comments from other eBay users who have interacted with that
person over the past seven days, the past month, the past six months and
beyond. A user who has developed positive reputations over time will have a
color coded star symbol displayed next to his or her user name to indicate the
amount of positive feedback received by the user. eBay users may review a
person's feedback profile to check on the person's reputation within the eBay
community before deciding to bid on an item listed by that person or in
determining how to complete the payment for and delivery of the item.
The terms of the Company's user agreement prohibit actions that would
undermine the integrity of the Feedback Forum, such as a person's leaving
positive feedback about himself or herself through other accounts or leaving
multiple negative feedback for others through other accounts. The Feedback
Forum system has several automated features designed to detect and prevent some
forms of abuse. For example, feedback posting from the same account, positive
or negative, cannot affect a user's net feedback rating (i.e., the number of
positive postings, less the number of negative postings) by more than one
point, no matter how many comments an individual makes. Furthermore, a user can
only give feedback to his or her trading partners in completed transactions.
Users who receive a sufficiently negative net feedback rating have their
registrations suspended and are unable to bid on or list items for sale. The
Company believes its Feedback Forum is extremely useful in overcoming initial
user hesitancy when trading over the Internet, as it reduces the anonymity and
uncertainty of dealing with an unknown trading partner. See "Risk Factors--We
are subject to risks associated with information disseminated through our
service."
Trust and Safety Initiatives. The Company developed a number of programs
designed to make users more comfortable with dealing with an unknown trading
partner over the Web. In addition to the Feedback Forum, the Company offers the
SafeHarbor(TM) program, which provides guidelines for trading, helps provide
information to resolve user disputes and responds to reports of misuses of the
eBay service. The Company's SafeHarbor(TM) staff of 182 persons, including
regular employees and contractors, investigates users' complaints of possible
misuse of eBay and take appropriate action, including issuing warnings to users
or suspending users from bidding on or listing items for sale. Some of the
complaints the SafeHarbor(TM) staff investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting illegal items
for sale. The SafeHarbor(TM) group is organized into three areas;
investigations, community watch and fraud prevention. The investigations group
investigates reported trading infractions and misuse of eBay. The fraud
prevention department provides information to assist users with disputes over
the quality of the goods sold or potentially fraudulent transactions and, upon
receipt of an officially filed, written claim of fraud from a user, will
generally suspend the offending user from eBay. The community watch department
investigates the listing of illegal, infringing or inappropriate items on the
eBay site and violations of certain eBay policies. Upon receipt of a written
claim of intellectual property infringement by the owner of the intellectual
property, the Company will remove the offending item from eBay. Users who
repeatedly infringe intellectual property rights are suspended. In addition,
the Company has increased the number of personnel reviewing potentially illegal
items. The Company's trust and safety initiatives, including user identity
verification, insurance, integrated escrow and authentication, are intended to
bolster eBay's reputation as a safe place to trade. See "Risk Factors--Our
business may be harmed by fraudulent activities on our website." eBay has also
recently partnered with Infoglide, a leading provider of similarity search
technology, to help keep previously suspended users from re-registering on
eBay. The Company has introduced a requirement that new sellers must provide a
credit card or pass an identity verification check before being allowed to
sell. The identify verification process is performed by Equifax.
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What Can Be Purchased or Sold on eBay. The eBay service has grown from
offering 10 product categories when it was first introduced in September 1995
to offering more than 3,000 categories as of December 31, 1999. As the number
of product categories has grown, the Company periodically organizes the
categories under different headings to reflect the major types of items
currently listed. As of February 2000, these product categories were organized
under the following headings:
<TABLE>
<S> <C>
Automobiles Great Collections (Premium items)
Antiques & Art Jewelry, Gemstones
Books, Movies, Music Photo & Electronics
Coins & Stamps Pottery & Glass
Collectibles Sports
Computers Toys & Beanie Babies
Dolls, Dollhouses Everything Else
</TABLE>
Each category has numerous subcategories. As of December 31, 1999, eBay
offered a selection of over 3 million items, with the most popular items sold
on eBay being those that are relatively standardized, well-represented with a
photo (and therefore can be evaluated to some degree without a physical
inspection), small and easily shippable, and relatively inexpensive. As the
eBay community grows and additional items are listed, the Company will
continue to organize items for sale under additional categories to respond to
the needs of the eBay community.
Community Services. Beyond providing a convenient means of trading, eBay has
devoted substantial resources to building an online trading community, which
the Company believes is one of the strongest on the Web. Key components of the
Company's community philosophy are maintaining an honest and open marketplace
and treating individual users with respect. The Company offers a variety of
community and support features that are designed to solidify the growth of the
eBay community and to build eBay user affinity and loyalty. eBay facilitates
communication between buyers and sellers by offering:
. category-specific chat rooms;
. the eBay Cafe, a chat room for the entire eBay community;
. a bulletin board devoted to user feedback on new features;
. an announcements section that covers new features on eBay or other eBay
news;
. customer support boards; and
. ""items wanted" listings where users can post notices seeking specific
items.
eBay also offers My eBay, which permits users to receive a report of their
recent activity on eBay, including bidding activity, selling activity, account
balances, favorite categories and recent feedback. Users with their own Web
pages also can post link buttons from the user's page to eBay and to a list of
items the user is selling on eBay. The Company recently introduced About Me,
which offers users the opportunity to create their own personal home page free
of charge on eBay using step-by-step instructions provided by the Company. The
About Me home page can include personal information, items listed for sale,
eBay feedback ratings, images and links to other favorite sites.
In addition, in June 1998, the Company donated 321,750 shares of Common
Stock to the Community Foundation Silicon Valley, a tax-exempt donor-advised
public charity, and established a fund known as the "eBay Foundation." Through
the Community Foundation Silicon Valley, the eBay Foundation sponsors programs
including a recent program in which teachers travel abroad and share their
experiences with their students. The Company solicits user suggestions for
worthwhile charities through the eBay website.
Customer Support. The Company devotes significant resources to providing
personalized, timely customer service and support. eBay offers customer
support on a seven-day-a-week basis. Most customer support inquiries are
handled via email, with customer email inquiries typically being answered
within 24 hours after submission.
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In 1999, the Company partnered with Customer Cast, an online customer
satisfaction survey company, to enable eBay to understand and improve on how
well it was serving its customers. Overall customer satisfaction for the
Company's core support email services has improved significantly since
launching the survey in July 1999. The Company offers an online tutorial for
new eBay users. In June 1999, the Company opened a new customer support center
in Salt Lake City, Utah. The center has grown rapidly and, by the end of 1999,
was handling the majority of customer support email. In addition, the Company
offers the SafeHarbor(TM) program and has recently introduced or is developing
a number of trust and safety initiatives. See "--Trust and Safety Initiatives"
above.
Marketing
eBay's marketing strategy is to promote its brand and attract buyers and
sellers to the eBay service. To attract users to its website, eBay
historically has relied primarily on word of mouth and, to a lesser extent, on
distribution or sponsorship relationships with high traffic websites. Today,
the Company employs a variety of methods to promote its brand and attract
potential buyers and sellers. Currently, eBay uses strategic purchases of
online advertising to place advertisements in areas in which the Company
believes it can reach its target audience. The Company also engages in a
number of marketing activities in traditional media such as advertising; print
media and at trade shows and other events. eBay also advertises in a number of
targeted publications. The Company continues to benefit from frequent and high
visibility media exposure both nationally and locally. While the Company does
not expect the frequency or quality of this type of publicity to continue, the
Company does promote public relations through initiatives such as online
eBay/special event tie-ins and executive speaking engagements. In March 1999,
the Company expanded the scope of its preexisting strategic relationship with
AOL. Under the amended agreement, eBay was given a prominent presence
featuring it as the preferred provider of personal trading services on AOL's
proprietary services (both domestic and international), AOL.com, Digital
Cities, ICQ, CompuServe (both domestic and international) and Netscape. eBay
will pay $75 million over the four-year term of the contract. eBay has
developed a co-branded version of its service for each AOL property which
prominently features each party's brand. AOL is entitled to all advertising
revenue from the co-branded sites. Subsequent to year-end, eBay entered into
marketing agreements with Autotrader.com and GO.com
Operations and Technology
eBay has a scalable user interface and transaction processing system that is
based on internally-developed proprietary software. The eBay system
facilitates the sale process, including notifying users via email when they
initially register for the service, when they place a successful bid, are
outbid, place an item for sale, and when an auction ends. Furthermore, the
system sends daily status updates to any active sellers and bidders regarding
the state of their current auctions. The system maintains user registration
information, billing accounts, current auctions and historical listings. All
information is regularly archived. Complete listings of all items for sale are
generated regularly. The system regularly updates a text-based search engine
with the titles and descriptions of new items, as well as pricing and bidding
updates for active items. Every time an item is listed on the service, a
listing enhancement option is selected by a seller, or an auction closes with
a bid in excess of the seller-specified minimum bid, the system makes an entry
into the seller's billing account. The system sends electronic invoices to all
sellers via email on a monthly basis. For convenience, sellers may place a
credit card account number on file with eBay, and their account balance is
billed directly. Sellers that are new to the eBay service are now required to
place a credit card account number on file. In addition to these features, the
eBay service also supports a number of community bulletin board and chat areas
where users and eBay customer support personnel can interact.
The Company's system has been designed around industry standard
architectures and has been designed to reduce downtime in the event of outages
or catastrophic occurrences. The eBay service provides seven-day-a-week
availability, subject to a maintenance period for a few hours during one night
per week. eBay's system hardware is hosted at the Exodus and Abovenet
facilities in Santa Clara, California, which provide redundant communications
lines and emergency power backup. The Company's system consists of Sun
database servers running Oracle relational database management systems and a
suite of Pentium-based Internet servers running
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the Windows NT operating system. The Company uses Resonate Inc.'s load
balancing systems and its own redundant servers to provide for fault
tolerance. The Company has experienced periodic system interruptions, which it
believes will continue to occur from time to time. These outages have stemmed
from a variety of causes, including third-party hardware and software problems
and human error. The volume of traffic on the Company's website and the number
of items being listed by users has been increasing continually and
exponentially, requiring the Company to expand and upgrade its technology,
transaction processing systems and network infrastructure and add new
engineering personnel. The process of upgrading and expansion is part of the
routine maintenance and revision of the site. Hardware and software changes
associated with the continuous revision have been capitalized in accordance
with company policy and are included in computer equipment and software. Due
to the speed of change and continuous nature of site revision, internal
expenses often are judged to have useful lives of less than one year, or have
been more appropriately classified as maintenance related costs. As such,
these costs are expensed as incurred. The Company may be unable to accurately
project the rate or timing of increases, if any, in the use of the eBay
service or expand and upgrade its systems and infrastructure to accommodate
these increases in a timely manner. Any failure to expand or upgrade its
systems at least as fast as the growth in demand for capacity could cause the
website to become unstable and possibly cease to operate for periods of time.
Unscheduled downtime could harm the Company's business.
The Company uses internally developed systems to operate its service and for
transaction processing, including billing and collections processing. The
Company must continually improve these systems to accommodate the level of use
of its website. In addition, the Company may add new features and
functionality to its services that would result in the need to develop or
license additional technologies. The Company's inability to add additional
software and hardware or to upgrade its technology, transaction processing
systems or network infrastructure to accommodate increased traffic or
transaction volume could have adverse consequences. These consequences include
unanticipated system disruptions, slower response times, degradation in levels
of customer support, impaired quality of the users' experience on its service
and delays in reporting accurate financial information. The Company's failure
to provide new features or functionality also could result in these
consequences. The Company may be unable to effectively upgrade and expand its
systems in a timely manner or integrate smoothly any newly developed or
purchased technologies with its existing systems. These difficulties could
harm or limit its ability to expand its business. See "Risk Factors--The
inability to expand our systems may limit our growth" and "--System failures
could harm our business."
The Company incurred $831,000, $4.6 million and $23.8 million in product
development expenses in 1997, 1998 and 1999, respectively. The Company
anticipates that it will continue to devote significant resources to product
development in the future as it adds new features and functionality to the
eBay service. The Company capitalizes hardware and software associated with
added features or functionality in accordance with company policy and includes
such amounts in computer equipment and software. Internal expenses are often
judged to have useful lives of less than one year, or have been more
appropriately classified as maintenance related costs. As such, these costs
are expensed as incurred. The market in which the Company competes is
characterized by rapidly changing technology, evolving industry standards,
frequent new service and product announcements, introductions and enhancements
and changing customer demands. Accordingly, the Company's future success will
depend on its ability to adapt to rapidly changing technologies, adapt its
services evolving industry standards and to continually improve the
performance, features and reliability of its service in response to
competitive service and product offerings and evolving demands of the
marketplace. The failure of the Company to adapt to these changes would harm
the Company's business. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes
could require substantial expenditures by the Company to modify or adapt the
Company's services or infrastructure. See "Risk Factors--Our failure to manage
growth could harm us;" "--We must keep pace with rapid technological change to
remain competitive" and "--We need to develop new services, features and
functions in order to expand."
Competition
Online personal trading is a new, rapidly evolving and intensely competitive
area. The Company expects 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.
Depending on the category of
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product, eBay currently or potentially competes with a number of companies
serving particular categories of goods as well as those serving broader ranges
of goods. 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, eBay faces competition from specialty retailers and exchanges in
each of its categories of products. For example:
Antiques: Christies, 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, Toys.com, Toys R Us
Premium Collectibles: Christies, DuPont Registry, Gavelnet, Greg Manning
Auctions, iCollector, Lycos / Skinner Auctions, Millionaire.com, Phillips
(LVMH), Sotheby's, Sothebys.amazon.com
Automotive (used cars): Auction Auto.com, Autobytel.com, AutoMallUSA,
AutoVantage.com, AutoWeb.com, Barrett-Jackson, CarOrder.com, CarPoint,
CarScene.com, eClassics.com, Edmunds, GreenLight.com, Hemmings, Newspaper
classifieds, Used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, Cductive.com, DVD Express,
Half.com, Reel.com, Spinner.com, Wherehouse, Alibris.com, Bookfinders.com
Clothing: Bluefly.com, Boo.com, Dockers.com, FashionMall.com, The Gap, J.
Crew, LandsEnd.com, The Limited, Lucy.com, Macys, The Men's Wearhouse,
Ross, 3Dshopping.com
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, ValueAmerica.com
Home & Garden: IKEA, Crate & Barrel, Furniture.com, Homepoint.com, Home
Depot, Living.com, Garden.com, Pottery Barn, Ethan Allen, Frontgate
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, golftrader.com, MVP.com, PlanetOutdoors.com, Play It
Again Sports, REI, Sports Authority
Tools / Equipment / Hardware: Home Depot, HomeBase, Amazon.com, Ace
Hardware, OSH
Business-to-Business: Ariba, BidFreight.com, BizBuyer.com, bLiquid.com,
CloseOutNow.com, CommerceBid.com, Commerce One, Concur Technologies,
DoveBid, FreeMarkets, iMark, Oracle, PurchasePro.com, RicardoBiz.com,
Sabre, SurplusBin.com, TradeOut.com, UnionStreet.com, Ventro, VerticalNet
Additionally, the Company faces competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (a 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 the Company's market include the
following:
. ability to attract buyers
. volume of transactions and selection of goods;
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. community cohesion and interaction;
. system reliability;
. customer service;
. reliability of delivery and payment by users;
. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other
business and Internet markets than eBay does. 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 the
Company's competitors with other revenue sources may be able to devote more
resources to marketing and promotional campaigns, adopt more aggressive
pricing policies and devote substantially more resources to website and
systems development than the Company is able to do. Increased competition may
result in reduced operating margins, loss of market share and diminished value
of the eBay brand. Some of the Company's competitors have offered services for
free and others may do this as well. The Company may be unable to compete
successfully against current and future competitors.
In order to respond to changes in the competitive environment, the Company
may, from time to time, make pricing, service or marketing decisions or
acquisitions that could harm the business. For example, the Company
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 the Company's competitors to offer a lower cost service. Some Web-
based applications that direct Internet traffic to certain websites may
channel users to trading services that compete with the Company.
Although the Company has established Internet traffic arrangements with
several large online services and search engine companies, these arrangements
may not be renewed on commercially reasonable terms. Even if these
arrangements are renewed, they may not result in increased usage of the eBay
service. In addition, companies that control access to transactions through
network access or Web browsers could promote the Company's competitors or
charge eBay substantial fees for inclusion.
The land-based auction business is intensely competitive. B&B competes with
two larger and better known auction companies, Sotheby's Holdings, Inc. and
Christie's International plc, as well as numerous regional auction companies.
To the extent that these companies increase their focus on the middle market
properties that form the core of B&B's business, its business may suffer.
Kruse is subject to competition from numerous regional competitors. In
addition, competition with Internet based auctions may harm the land-based
auction business. Although Billpoint's business is new, several new companies
are beginning to enter this market and large companies, including banks and
credit card companies, may become competitors.
Issues Related to the Listing or Sale by Users of Unlawful Items
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. The Company
is aware that certain goods, such as firearms, other weapons, adult material,
tobacco products, alcohol and other goods that may be subject to regulation by
local, state or federal authorities, have been listed and traded on its
service. The Company may be unable to prevent the sale of unlawful goods, or
the sale of goods in an unlawful manner, by users of its service, and the
Company may be subject to allegations of civil or criminal liability for
unlawful activities carried out by users through its service. In order to
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<PAGE>
reduce exposure to this liability, the Company has prohibited the listing of
certain items and increased the number of personnel reviewing questionable
items. The Company may in the future implement other protective measures that
could require spending substantial resources or may reduce revenues by
discontinuing certain service offerings. Any costs incurred as a result of
liability or asserted liability relating to the sale of unlawful goods or the
unlawful sale of goods, could harm the Company's business. In addition, the
Company has received significant and continuing media attention relating to
the listing or sale of unlawful goods on the Company's website. This negative
publicity could damage the Company's reputation and diminish the value of its
brand name. It also could make users reluctant to continue to use the
Company's services.
Fraudulent Activities on the eBay Website
The Company's future success will depend largely upon sellers reliably
delivering and accurately representing their listed goods and buyers paying
the agreed purchase price. The Company has received in the past, and
anticipates that it will receive in the future, communications from users who
did not receive the purchase price or the goods that were to have been
exchanged. While the Company can suspend the accounts of users who fail to
fulfill their delivery obligations to other users, it does 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, the Company does not compensate users who believe they
have been defrauded by other users. The Company also periodically receives
complaints from buyers as to the quality of the goods purchased. Negative
publicity generated as a result of fraudulent or deceptive conduct by users of
our service could damage the Company's reputation and diminish the value of
the Company's brand name. The Company expects to continue to receive requests
from users requesting reimbursement or threatening or commencing legal action
against the Company if reimbursement is not made. This sort of litigation
could be costly for the Company, divert management attention, result in
increased costs of doing business, lead to adverse judgments or could
otherwise harm the Company's business. See "Risk Factors--Our business may be
harmed by fraudulent activities on our website."
Government Inquiries
On January 29, 1999, the Company received requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with its website. The Company
has been informed that the inquiry includes an examination of the Company's
practices with respect to these transactions. The Company has 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, B&B received a grand jury subpoena from the antitrust
division of the Department of Justice requesting documents relating to, among
other things, changes in B&B's seller's commissions and buyer's premiums and
discussions, agreements or understandings with other auction houses, in each
case since 1992. The Company believes this request may be related to a
publicly reported criminal investigation of auction houses for price fixing.
Should these or any other investigations lead to civil or criminal charges
against the Company, eBay would likely be harmed by negative publicity, the
costs of litigation and the diversion of management time and other negative
effects even if the Company ultimately prevails. The Company's business would
certainly suffer if the Company were not to prevail in any action like this.
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 the eBay website. As a result, the
Company believes that government regulators have received a substantial number
of consumer complaints about the eBay website which, while small as a
percentage of its total transactions, are large in aggregate numbers. As a
result, the Company has from time to time been contacted by various federal,
state and local regulatory agencies and been told that they have questions
with respect to the adequacy of the steps the Company takes to protect its
users
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from fraud. For example, the City of New York--Department of Consumer Affairs
received complaints from users about transactions on the eBay website. In
investigating these complaints, the Department of Consumer Affairs requested
information about the Company and these transactions. The Company has provided
the requested information. The Company is likely to receive additional
inquiries from regulatory agencies in the future, which may lead to action
against the Company. The Company has responded to all inquiries from regulatory
agencies by describing its current and planned antifraud efforts. If one or
more of these agencies is not satisfied with the Company's response to current
or future inquiries, the resultant investigations and potential fines or other
penalties could harm the Company's business.
The Company has recently provided information to the antitrust division of
the Department of Justice in connection with an inquiry into the Company's
conduct with respect to "auction aggregators" including the Company's licensing
program and its lawsuit against Bidder's Edge. Should the antitrust division
decide to take action against the Company, the Company 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 the Company
might suffer if the Company ultimately were not to prevail. See "Risk Factors--
Government inquiries may lead to charges or penalties."
Privacy Policy
The Company believes that issues relating to privacy and the use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. The Company has adopted a detailed
privacy policy that outlines how eBay uses information concerning its users and
the extent to which other registered eBay users may have access to this
information. Users must acknowledge and agree to this policy when registering
for the eBay service. The Company does not sell or rent any personally
identifiable information about its users to any third party; however, the
Company does disclose information to sellers and winning bidders that contains
the seller's and winning bidder's name, email address and telephone number. The
Company also discloses certain personally identifiable information to its
subsidiaries and business partners in connection with the provision of services
by these entities. The Company also will disclose customer information in its
possession (other than credit card information) to a law enforcement agency or
member of the Legal Buddy Program that requests this information in connection
with a civil, criminal or regulatory investigation. The Company also uses
information about its users for internal purposes in order to improve marketing
and promotional efforts, to analyze website usage statistically, and to improve
content, product offerings and website layout. eBay is a member of the TRUSTe
program, a non-profit independent organization that audits websites' privacy
statements and audits their adherence thereto.
New and Existing Regulation of the Internet
The Company is subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels 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 online contracts, user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of these laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as the recently
passed Digital Millennium Copyright Act, have not yet been interpreted by the
courts and their applicability and reach are therefore uncertain. In addition,
numerous states, including the State of California, where the Company's
headquarters are located, have regulations regarding how "auctions" may be
conducted and the liability of "auctioneers" in conducting such auctions. No
definitive legal determination has been made with respect to the
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applicability of the California regulations to the Company's business to date
and little precedent exists in this area. Several states are considering
imposing these regulations upon the Company or its users, which could harm the
business. In addition, as the nature of the products listed by the Company's
users change, eBay 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 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 the Company does business or could create uncertainty in the
marketplace. This could reduce demand for the Company's services, increase the
cost of doing business as a result of litigation costs or increased service
delivery costs, or otherwise harm the business. In addition, because the
Company's services are accessible worldwide, and facilitate sales of goods to
users worldwide, foreign jurisdictions may claim that the Company is required
to comply with their laws. As the Company expands its international activities,
it will become obligated to comply with the laws of the countries in which the
Company operates. Compliance may be more costly or may require the Company to
change its business practices or restrict service offerings relative to those
in the United States. The Company's failure to comply with foreign laws could
subject the Company to penalties ranging from fines to bans on its services.
Item 2: Properties
On March 1, 2000, the Company entered into a five-year lease for general
office facilities located in San Jose, California. Payment under this lease,
which commenced during 2000, are based on the London Interbank Offering Rate
("LIBOR") plus 0.394% applied to the $126.4 million cost of the facility funded
by the lessor. The Company 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, the Company 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.
The Online segment leases 72,000 square feet in Utah that is primarily used
as a customer call center. Office space for the Online segment's international
subsidiaries is leased in Australia, England, Germany, Japan and Switzerland.
The Offline segment owns facilities in California and Indiana with an
aggregate of approximately 750,000 square feet. Of the 750,000 square feet, the
Company is a majority interest holder in 343,000 total square feet of office
space and the sole owner of the remaining balance.
The Company believes that its existing facilities are adequate to meet its
needs for the immediate future and future growth can be accommodated by leasing
additional or alternative space.
Item 3: Legal Proceedings
On March 23, 1999, the Company was sued by Network Engineering Software, Inc.
("NES") in the U.S. District Court for the Northern District of California for
its alleged willful and deliberate violation of a patent. The suit sought
unspecified monetary damages as well as an injunction against the Company's
operations. It also sought treble damages and attorneys' fees and costs. The
Company has entered into a settlement agreement and license with NES, and this
suit has been dismissed with prejudice.
On September 1, 1999, the Company 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 the Company 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 the
Company's users, allegedly in violation of California penal statutes relating
to the sale of unauthorized audio recordings. The lawsuit seeks declaratory and
injunctive
16
<PAGE>
relief, restitution and legal fees. Discovery has commenced. The Company
believes it has meritorious defenses to this lawsuit and intends to defend
itself vigorously. However, even if successful, this defense could be costly
and, if the Company were to lose this lawsuit, its business could be harmed.
On December 10, 1999, the Company 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 the Company alleging that the Company has violated the
antitrust laws by monopolizing or attempting to monopolize a market, the
Company is competing unfairly, and that the Company interfered with their
contract with eBay magazine. Bidder's Edge is seeking treble damages, an
injunction and its fees and costs. Expedited discovery in this case has
commenced. The Company intends to prosecute its claims and defend itself
against Bidder's Edge counterclaims vigorously. However, this lawsuit could be
costly and the business could be harmed if the Company were to lose.
From time to time, the Company is involved in disputes which arise in the
ordinary course of business. The Company believes that the ultimate resolution
of these disputes will not have a material adverse impact on its financial
position or results of operations.
Item 4: Submission of Matters to a Vote of Security Holders
There were no submissions of matters to a vote of security holders during the
fourth quarter ended December 31, 1999.
17
<PAGE>
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Price Range of Common Stock
eBay's Common Stock has been traded on The Nasdaq Stock Market(SM) under the
symbol "EBAY" since September 24, 1998. The following table sets forth the high
and low sales prices of the Company's Common Stock for the periods indicated
and are as reported on The Nasdaq Stock Market(SM):
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Year Ended December 31, 1998
Third Quarter (from September 24, 1998)................. $ 18.08 $ 13.71
Fourth Quarter.......................................... 103.75 8.42
Year Ended December 31, 1999
First Quarter........................................... 177.38 55.33
Second Quarter.......................................... 234.00 126.69
Third Quarter........................................... 161.00 70.28
Fourth Quarter.......................................... 186.00 124.50
</TABLE>
As of March 1, 2000 there were approximately 1,150 stockholders of record of
the Company's Common Stock, although the Company believes that there is a
significantly larger number of beneficial owners of its Common Stock.
Dividend Policy
The Company has never paid cash dividends on its stock, and anticipates that
it will continue to retain any future earnings to finance the growth of its
business.
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<PAGE>
Item 6: Selected Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated
Financial Statements and Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this report. The consolidated statement of income data for the years ended
December 31, 1996, 1997, 1998 and 1999 and the consolidated balance sheet data
at December 31, 1998 and 1999, are derived from, and are qualified by
reference to, the audited consolidated financial statements of the Company.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996(1) 1997 1998 1999
------- ------- ------- --------
(in thousands, except per share
data)
<S> <C> <C> <C> <C>
Consolidated Statement of Income Data:
Net revenues............................. $32,051 $41,370 $86,129 $224,724
Cost of net revenues..................... 6,803 8,404 16,094 57,588
------- ------- ------- --------
Gross profit......................... 25,248 32,966 70,035 167,136
------- ------- ------- --------
Operating expenses:
Sales and marketing.................... 13,139 15,618 35,976 95,956
Product development.................... 28 831 4,640 23,785
General and administrative............. 5,661 6,534 15,849 43,055
Amortization of acquired intangibles... -- -- 805 1,145
Merger related costs................... -- -- -- 4,359
------- ------- ------- --------
Total operating expenses............. 18,828 22,983 57,270 168,300
------- ------- ------- --------
Income/(loss) from operations............ 6,420 9,983 12,765 (1,164)
Interest and other income/(expense),
net..................................... (2,607) (1,951) (703) 21,377
------- ------- ------- --------
Income before income taxes............... 3,813 8,032 12,062 20,213
Provision for income taxes............... (475) (971) (4,789) (9,385)
------- ------- ------- --------
Net income............................... $ 3,338 $ 7,061 $ 7,273 $ 10,828
======= ======= ======= ========
Net income per share(2):
Basic.................................. $ 0.39 $ 0.29 $ 0.14 $ 0.10
======= ======= ======= ========
Diluted................................ $ 0.07 $ 0.08 $ 0.06 $ 0.08
======= ======= ======= ========
Weighted average shares:
Basic.................................. 8,490 24,428 52,064 108,235
======= ======= ======= ========
Diluted................................ 45,060 84,775 116,759 135,910
======= ======= ======= ========
Supplemental Operating Data:
Number of registered users at end of
period.................................. 41 341 2,181 10,006
Gross merchandise sales, in millions(3).. $ 7 $ 95 $ 745 $ 2,805
Number of items listed................... 289 4,394 33,668 129,560
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................................... $ 37,285 $219,679
Short-term investments....................................... 40,401 181,086
Working capital.............................................. 72,934 371,009
Total assets................................................. 149,536 963,942
Debt and leases, long-term portion........................... 18,361 15,018
Total stockholders' equity................................... 100,538 852,467
</TABLE>
19
<PAGE>
- --------
(1) Includes the results of operations for the Company's predecessor sole
proprietorship from September 1995 to December 1995. The sole
proprietorship had no revenues and insignificant expenses prior to January
1, 1996.
(2) See Note 2 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share,
respectively.
(3) Represents the aggregate sales prices of all goods for which an auction
was successfully concluded (i.e., there was at least one bid above the
seller's specified minimum price or reserve price, whichever is higher).
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
eBay pioneered online personal 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. The Company has extended its online offerings to include regional
and international trading, autos, "premium" priced items and has acquired
Billpoint, a provider of online billing and payment solutions. During 1999
eBay also expanded into the traditional auction business with its acquisitions
of Butterfield & Butterfield and Kruse International.
Substantially all of the Company's revenues come from fees and commissions
associated with online and offline trading services. Online revenue is derived
from placement and success fees 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. To date, online advertising on the eBay
website and online payment solutions provided by Billpoint have not made
significant contributions to net revenues although the Company expects both of
these sources of revenue 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, including the Billpoint
service, will continue to drive the majority of revenue growth in the
foreseeable future.
Acquisitions
Butterfield & Butterfield
On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
Corporation, a Delaware corporation and all affiliated entities under common
control including: Butterfield Credit Corporation Inc., 111 Potrero Partners,
LLC and HBJ Partners, LLC (collectively "B&B" or the "B&B Companies"). The
aggregate consideration exchanged for the merger was 1,327,370 shares of eBay
common stock. The merger has been accounted for as a pooling of interests. In
April 1999, B&B withdrew its registration statement for its initial public
offering. Accordingly, in the second quarter of 1999, the Company recorded a
charge of approximately $2.6 million related to the costs of the withdrawn
offering. Such amounts are included in merger related costs on the
consolidated statement of income.
Kruse International
On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and
all affiliated entities under common control including; Auburn Cordage, Inc.,
ACD Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic
Advertising & Promotions, Inc., each an Indiana corporation (collectively,
"Kruse" or the "Kruse Companies"). Kruse International was founded in 1971 and
operated as a sole proprietorship until it was
20
<PAGE>
incorporated in the state of Indiana in August 1986. The Kruse Companies
conduct auctions, perform appraisal services and auctioneering training for
classic car auctions in various locations in the United States and
internationally. The aggregate consideration exchanged for the merger was
787,312 shares of eBay common stock for all shares of capital stock of the
Kruse Companies. The merger has been accounted for as a pooling of interests.
Billpoint
On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
developed a centralized, turnkey authorization, billing and payment
fulfillment solution that permits individuals and small merchants to accept
credit cards as payment for Internet-based sales transactions. Billpoint's
service is now being made available to the Company's users, providing the
ability to accept credit cards for payment. In connection with the merger,
eBay issued a total of 524,132 shares of eBay common stock to the existing
shareholders of Billpoint as consideration for all shares of capital stock of
Billpoint, all options, and warrants to purchase shares of common stock of
Billpoint outstanding immediately prior to the consummation of the merger were
converted into options and warrants to purchase shares of eBay common stock.
The merger has been accounted for as a pooling of interests.
alando
On June 15, 1999, eBay acquired alando.de.ag. ("alando"). alando was
Germany's leading online personal trading platform. The aggregate
consideration exchanged for the merger was 316,000 shares of eBay common
stock. The merger has been accounted for as a pooling of interests.
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income as a percentage of net revenues. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this report.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues................ 100.0 % 100.0 % 100.0 %
Cost of net revenues........ 20.3 18.7 25.6
----- ----- -----
Gross profit............ 79.7 81.3 74.4
----- ----- -----
Operating expenses:
Sales and marketing....... 37.8 41.8 42.7
Product development....... 2.0 5.4 10.6
General and
administrative........... 15.8 18.4 19.2
Amortization of acquired
intangibles.............. -- 0.9 0.5
Merger related costs...... -- -- 1.9
----- ----- -----
Total operating
expenses............... 55.6 66.5 74.9
----- ----- -----
Income/(loss) from
operations................. 24.1 14.8 (0.5)
Interest and other
income/(expense), net...... (4.8) (0.8) 9.5
----- ----- -----
Income before income taxes.. 19.3 14.0 9.0
Provision for income taxes.. (2.2) (5.6) (4.2)
----- ----- -----
Net income.................. 17.1 % 8.4 % 4.8 %
===== ===== =====
</TABLE>
It is difficult for the Company to forecast its 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, the Company has begun to recognize the
seasonal nature of its business. In particular, the Company has noted stronger
sequential quarterly online 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
21
<PAGE>
auction operations, B&B typically experiences its strongest revenue growth in
the second and fourth quarters, while Kruse International experiences its
strongest revenue growth 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. Quarterly and annual income statement expense categories as a
percentage of net revenues may be significantly different from historical or
projected rates. In general, the Company expects 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, the Company
expects that the number of transactions per registered user will continue to
decline. Further, the Company expects its gross margin to remain at levels
lower than those experienced historically due primarily to the effects of
depreciation from recently purchased and expected future purchases of site
equipment and software, increases in site operations personnel and consulting
costs, and growth within the customer support organization.
Although the operations and results of both B&B and Kruse show seasonal
trends in net revenues and expenses, annual results of operations are
relatively stable when compared to the online business. These trends may not
be indicative of future results as the Company leverages the acquired
companies' expertise and expands into premium online sales and online
automobile sales. 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, thus discussions about year over year changes will primarily focus
on the online operation.
Net Revenues
The Company derives revenue from a variety of sources including: listing,
success, and featured item fees for transactions occurring online, and
transaction related fees, commissions and rental income in traditional auction
operations. Neither Billpoint nor alando had significant operations prior to
1999, and no significant revenue was generated from either company in 1999.
The Company's net revenues increased from $41.4 million to $86.1 million in
the years ended December 31, 1997 and 1998, and further increased to $224.7
million in the year ended December 31, 1999. The increases from 1997 to 1998
and from 1998 to 1999 were almost solely the result of increased use of the
eBay site. Net revenues in the acquired Companies remaining comparable with
prior periods. Increases in online net revenues were a result of the growth of
the eBay site, which is reflected in the growth in the number of registered
users, listings, and gross merchandise sales. The Company expects that future
revenue growth will be largely driven by the online services, including
revenue derived from the Billpoint services.
The Company has reviewed 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.
Although the Company believes the effect of SAB 101 on historical listing and
featured item fee revenue is insignificant, eBay has adopted the provision for
placement fee revenue in the first quarter of 2000. As such, listing and
featured item fee revenue will be recognized ratably over the estimated period
of the listing for sale.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs
associated with customer support and site operations. These costs include:
compensation and allocated overhead for customer support and site operations
personnel, ISP connectivity charges and depreciation. 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
$8.4 million or 20.3% of net revenues in 1997 to $16.1 million or 18.7% of net
revenues in 1998, and further increased to $57.6 million or 25.6% of net
revenues in 1999. The increases from 1997 to 1998 and from 1998 to 1999 were
due almost entirely to the eBay online business, including the operations of
alando and Billpoint in 1999. Changes in offline cost of net revenues roughly
paralleled the changes in net revenues during the periods reported. Increases
in absolute dollar expenditures for the eBay online service during the periods
from 1997 to
22
<PAGE>
1998, and from 1998 to 1999 resulted from the continued development and
expansion of the Company's customer support and site operations departments,
depreciation of the equipment required for the Company's site operations,
software licensing fees and ISP connectivity charges. Cost of net revenues as
a percentage of net revenues is expected to remain at levels higher than those
seen historically as the Company continues to invest in its site
infrastructure in advance of demand, depreciates recently purchased equipment,
and continues to grow its customer support function.
Sales and Marketing
The Company's sales and marketing expenses for both the online sales and
traditional auction businesses are comprised primarily of compensation for the
Company's sales and marketing personnel, advertising, tradeshow and other
promotional costs, expenses for creative design of the Company's website and
shared employee and facilities costs. Sales and marketing expenses increased
in absolute dollars from $15.6 million or 37.8% of net revenues in 1997 to
$36.0 million or 41.8% of net revenues in 1998, and further increased to
$96.0 million or 42.7% of net revenues in 1999. During the periods from 1997
to 1998, and from 1998 to 1999, increases in marketing expenditures were
primarily driven by the online business. The increase from 1997 to 1998
primarily resulted from substantial increases in advertising and promotional
expenses, including costs associated with national print, broadcast and online
advertising campaigns and expenses associated with a marketing agreement with
AOL, each of which commenced in the second half of 1998, in addition to the
continued growth in the number of sales and marketing personnel. Increases
from 1998 to 1999 were primarily the result of increases in online advertising
and distribution, including expenses associated with the marketing agreement
with AOL, labor 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 2000, due to
a full year of advertising impressions delivered under the strategic alliance
with AOL, new alliances including agreement with Go.com and Autotrader.com,
the expansion of international advertising and expenses associated with
personnel additions made during 1999. Sales and marketing expenses in the
traditional auction businesses are expected to remain comparable with
historical levels.
Product Development
The Company's product development expenses consist primarily of compensation
for the Company's product development staff, payments to outside contractors,
depreciation on equipment used for development and shared employee and
facilities costs. The Company's product development expenses increased in
absolute dollars from $831,000 or 2.0% of net revenues in 1997 to $4.6 million
or 5.4% of net revenues in 1998, and further increased to $23.8 million or
10.6% of net revenues in 1999. The year over year changes, and all
expenditures discussed, were incurred by the online business. Neither B&B nor
Kruse had any product development costs through December 31, 1999. The
increase in absolute dollars during the periods from 1997 to 1998, and from
1998 to 1999 resulted primarily from increases in salaries, benefits and other
personnel related costs as the Company significantly increased the size of its
research and development staff, as well as expenses related to contractors and
consultants employed within product development departments. The 1999 increase
also includes Billpoint, which had no significant expenses in 1998. Product
development expenses are expected to increase in future periods primarily from
personnel additions, the continued impact of Billpoint product development,
and additional depreciation costs as the Company continues to purchase
equipment to improve and expand its operations both domestically and
internationally. These future expenditures will be capitalized or expensed as
appropriate. Hardware and software expenditures associated with the continuous
revision of the site will be capitalized and included in computer equipment
and software. Expenditures that are incurred for maintenance related costs or
have been judged to have a useful life of less than one year will be expensed
as incurred.
General and Administrative
The Company's general and administrative expenses consist primarily of
compensation for personnel and, to a lesser extent, fees for external
professional advisors, provisions for doubtful accounts and shared employee
23
<PAGE>
and facilities costs. The Company's general and administrative expenses
increased in absolute dollars from $6.5 million or 15.8% of net revenues in
1997 to $15.8 million or 18.4% of net revenues in 1998, and further increased
to $43.1 million or 19.2% of net revenues in 1999. During the periods from
1997 to 1998, and from 1998 to 1999, increases in general and administrative
expenses were primarily driven by the online business. The increase in
expenses from 1997 to 1998 primarily resulted from several stock related
transactions occurring in 1998. These include the Company's contribution in
June 1998 of 321,750 shares of common stock with an estimated fair value of
$1.2 million to a charitable foundation, compensation expense of $429,000
associated with the purchase of restricted shares of common stock by the
Company's outside directors and compensation expense of approximately $1.7
million associated with stock options granted to employees. Additional year
over year increases resulted from increases in personnel related expenses, the
allowance for doubtful accounts, fees for professional services and overhead
costs. Increases from 1998 to 1999 resulted primarily from additional
personnel-related expenses, including those associated with the SafeHarbora
program, fees for professional services, public company expenses including
various SEC filing fees and allocations of overhead. The Company expects that
general and administrative expenses will increase in absolute dollars and
decrease as a percentage of net revenues in future periods as eBay's online
business becomes a progressively larger piece of the consolidated business.
Such expenses in the online business are typically lower as a percentage of
net revenues than those in the traditional auction business.
Amortization of Acquired Intangibles
During 1998, eBay recognized expenses totaling $805,000 related to the
acquisition of Jump Inc. ("Jump"). The majority of the Jump acquired
intangibles were fully amortized during 1999, with the remaining amortization
continuing through the third quarter of 2000. Other acquisition related
intangibles will be amortized at varying rates through 2009. From time to time
the Company has purchased, and expects to continue purchasing, assets or
businesses in order to maintain its leadership role in online personal
trading. These purchases may result in the creation of intangible assets and
lead to a corresponding increase in the amortization of acquired intangibles.
Merger Related Costs
During the year ended December 31, 1999, the Company incurred direct merger
related transaction costs of $4.4 million which were charged to operations.
There were no comparable expenses in the same periods of 1997 or 1998. As
opportunities present themselves, the Company may continue to acquire new
companies; such acquisitions could lead to additional direct and indirect
expenses which would negatively affect the Company's results of operations.
Interest and Other Income (Expense), Net
The Company's interest and other income (expense), net, consists of interest
earned on cash, cash equivalents, and short term investments offset by
interest expense, minority interests in consolidated companies, and income or
loss in partnership equity. Interest expense is primarily derived from
interest payments on building mortgages held by B&B. The Company's interest
and other income (expense), net declined from $(2.0) million or (4.8)% of net
revenues in 1997 to $(703,000) or (0.8)% of net revenues in 1998 and became a
gain of $21.4 million or 9.5% in 1999. From 1997 to 1998, eBay's online
business was the primary contributor to interest income from interest earned
on the net proceeds from the Company's initial public offering in September
1998 and, to a lesser extent, interest earned on proceeds from the exercise of
warrants in May 1998. Those gains were offset primarily by interest expense
incurred on mortgages held by B&B. The gain in 1999 was primarily the result
of interest earned on cash, cash equivalents and investments, particularly the
interest earned on the net proceeds of the Company's follow-on offering
completed in April 1999. Interest expense was approximately comparable between
1997, 1998, and 1999. The Company expects interest and other income (expense),
net to remain positive in 2000 due to the continued interest earned on the
proceeds from the follow-on offering.
24
<PAGE>
Provision for Income Taxes
The Company's effective federal and state income tax rate was 11.2%, 38.7%
and 46.2% in the years ended December 31, 1997, 1998 and 1999, respectively.
Prior to its acquisition in 1999, B&B had been taxed as an S Corporation. In
connection with its acquisition, B&B's status as an S Corporation was
terminated, and B&B became subject to federal and state income taxes. The
supplemental pro forma 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 which would have been applied if B&B had been taxed as a C
Corporation prior to its acquisition by eBay. The rate changes from 1997 to
1998 and from 1998 to 1999 both resulted from two primary factors, a larger
portion of the revenue in each year was generated by eBay, a C Corporation,
and certain non-cash, non-deductible expenses as a percentage of pre-tax
income. The Company expects the consolidated effective tax rate to be at or
near 42% during 2000.
Stock-Based Compensation
In connection with the grant of certain stock options and warrants from May
1997 through May 1999, the Company recorded aggregate unearned compensation
totaling $13.1 million, which is being amortized over the four-year vesting
period of the options and the one-year term of the warrant, respectively. Of
the total unearned compensation, approximately $25,000, $3.1 million and $4.7
million was amortized in 1997, 1998 and 1999 respectively. The Company expects
stock based compensation expense of approximately $2.1 million in the year
ended December 31, 2000.
Liquidity and Capital Resources
Since inception, the Company has financed its operations primarily from net
cash generated from operating activities. The Company has 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 its initial and follow-on public offerings.
Net cash provided by operating activities was $11.6 million in 1997, $6.0
million in 1998 and $66.6 million in 1999. Net cash provided by operating
activities resulted primarily from the Company's net income before non-cash
charges for amortization of unearned compensation, the provision for doubtful
accounts, depreciation and amortization, as well as increases in various
liabilities, offset by partnership losses and changes in accounts receivable.
Net cash used in investing activities totaled $3.0 million in 1997, $53.0
million in 1998, and $602.9 million in 1999. Purchases of investments,
property, equipment and intangibles was the primary use for invested cash in
all years presented, partially offset in 1998 by the sale of property and
equipment. During 1998 and 1999, proceeds from public offerings were used to
purchase $40.4 million and $509.6 million of investments, respectively.
Net cash provided by financing activities was $560,000 in 1997, $72.2
million in 1998 and $718.7 million in 1999. During 1997, 1998 and 1999, the
Company made distributions to B&B stockholders, but those amounts were offset
by debt and equity proceeds. The Company remained cash flow positive from
financing activities primarily due to the completion of its initial public
offering in September 1998 and its follow-on offering in April 1999. To a
lesser extent, financing activities included the exercise of preferred stock
warrants in 1998 and B&B stockholders' contributions during 1997, 1998 and
1999.
eBay had no material commitments for capital expenditures at December 31,
1999, but expects such expenditures to be at least $60.0 million through
December 31, 2000. Such expenditures will primarily be for computer equipment,
furniture and fixtures and leasehold improvements. eBay also has total minimum
lease obligations of $59.0 million under certain noncancellable operating
leases and notes payable obligations of $27.3 million through December 2004.
In March 1999, eBay and AOL expanded the scope of their strategic
25
<PAGE>
relationship. Under this new agreement, eBay will pay AOL $75 million over the
four-year term of the contract. See Notes 7 and 10 of Notes to Consolidated
Financial Statements.
The Company believes that its existing cash, cash equivalents and
investments, and any cash generated from operations will be sufficient to fund
its operating activities, capital expenditures and other obligations for the
foreseeable future. However, if during that period or thereafter the Company
is not successful in generating sufficient cash flow from operations or in
raising additional capital when required in sufficient amounts and on terms
acceptable to the Company, the Company's business could suffer.
Year 2000
The Company reviewed and tested its internal programs and those of its
newly-acquired businesses and determined that there were no significant Year
2000 issues within its or their mission critical systems or services. During
the Company's review of third-party software, the Company and its subsidiaries
identified certain software "patches" for third-party software that needed to
be implemented for Year 2000 compliance. All of these patches were implemented
prior to January 1, 2000. Total out-of-pocket costs associated with Y2K
remediation efforts were less than $1.5 million. Although the Company has not
experienced any significant Year 2000 problems in its own software or third-
party systems, it is possible that such problems still exist. If so, the
Company could face unexpected expenses to fix such problems or suffer
unexpected outages, either of which would harm its business.
Risk Factors
The risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that
we currently deem immaterial also may impair our business operations. If any
of the following risks actually occur, our business could be harmed.
We have a limited operating history
Our company was formed as a sole proprietorship in September 1995 and we
incorporated in May 1996. We have only a limited operating history on which
you can base an evaluation of our business and prospects. As an online
commerce company in the early stage of development, we face substantial risks,
uncertainties, expenses and difficulties. You should consider an investment in
our company in light of these risks, uncertainties, expenses and difficulties.
To address these risks and uncertainties, we must do the following:
. maintain and increase our number of registered users, items listed on
our service and completed 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;
. successfully execute our business and marketing strategy;
. continue to develop and upgrade our technology and information
processing systems;
. continue to enhance our service to meet the needs of a changing market;
. provide superior customer service;
. respond to competitive developments; and
. attract, integrate, retain and motivate qualified personnel.
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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 short
operating history. Our operating results may fluctuate significantly as a
result of a variety of factors, many of which are outside our control. Factors
that may affect our quarterly operating results include the following:
. our ability to retain an active user base, to attract new users who list
items for sale and who 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;
. 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 website;
. consumer confidence in the security of transactions on our website;
. 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 new acquisitions;
. 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 marketing expenses under existing contracts;
. 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 electronic commerce industries.
Our limited operating history and the emerging nature of the markets in
which we compete make it difficult for us to forecast our revenues or earnings
accurately. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely upon them as an
indication of future performance. We do not have backlog, and almost all of
our net revenues each quarter come from items that are listed and completed
during that quarter. Our operating results in one or more future quarters may
fall below the expectations of securities analysts and investors. In that
event, the trading price of our common stock would almost certainly decline.
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Our failure to manage growth could harm us
We currently are experiencing a period of significant expansion in our
headcount, facilities and infrastructure and we anticipate that further
expansion will be required to address potential growth in our customer base
and market opportunities. This expansion has placed, and we expect it will
continue to place, a significant strain on our management, operational and
financial resources. The areas that are put under severe strain by our rate of
growth include the following:
. The Website. We must constantly add new hardware, update software and
add new engineering personnel to accommodate the increased use of our
website. 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 website may become unstable and may cease to operate
for periods of time. We have experienced periodic unscheduled downtime.
Continued unscheduled downtime could harm our business and also could
anger users of our website and reduce future revenues.
. Customer Support. We must expand our customer support operations to
accommodate the increased number of users and transactions on our
website. If we are unable to hire and successfully train sufficient
employees or contractors in this area, users of our website may have
negative experiences and current and future revenues could suffer.
. Customer Accounts. Our revenues are dependent on prompt and accurate
billing processes. If we are unable to grow our transaction processing
abilities to accommodate the increasing number of transactions that must
be billed, our ability to collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid rate.
The majority of our employees today have been with us less than one year and
we expect that our rate of hiring will continue at a very high pace. If our
new hires are not good hires, or if we are unsuccessful in training and
integrating these new 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 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 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.) limits 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. Our historic growth rates are not sustainable and we expect in
the near term that our costs, particularly those related to site operations,
customer support, payments, other infrastructure and our international,
regional and premium initiatives, will continue to increase. In view of the
rapidly evolving nature
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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
If appropriate opportunities present themselves, we intend to acquire
businesses, technologies, services or products that we believe are strategic.
In 1999 we completed the four acquisitions described earlier in this document
as well as several smaller acquisitions. 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 1999 acquisitions 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 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.
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" attacks on our system which made 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.
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. In order to reduce our exposure to this
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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. 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. See "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. 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 requests to produce certain records and
information to the federal government relating to an investigation of possible
illegal transactions in connection with our website. We have been informed
that the inquiry includes an examination of our practices with respect to
these transactions. We 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, B&B received a grand jury subpoena from the antitrust
division of the Department of Justice requesting documents relating to, among
other things, changes in B&B's seller's commissions and buyer's 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 investigation of auction houses for price fixing. 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 action
like this. Even the process of providing records and information can be
expensive, time consuming and result in the diversion of management attention.
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A large number of transactions occur on our website. As a result, we believe
that government regulators have received a substantial number of consumer
complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. As a result, we have from time
to time been contacted by various federal, state and local regulatory agencies
and been told that they have questions with respect to the adequacy of the
steps we take to protect our users from fraud. For example, the City of New
York-- Department of Consumer Affairs received complaints from users about
transactions on our website. In investigating these complaints, the Department
of Consumer Affairs requested information about us and these transactions. We
have provided the requested information. We are likely to receive additional
inquiries from regulatory agencies in the future, which may lead to action
against us. We have responded to all inquiries from regulatory agencies by
describing our current and planned antifraud efforts. If one or more of these
agencies is not satisfied with our response to current or future inquiries,
the resultant investigations and potential fines or other penalties could harm
our business.
We have recently provided information to the antitrust division of the
Department of Justice in connection with an inquiry 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 B&B and Kruse are subject to regulation in some jurisdictions governing
the manner in which live auctions are conducted. Both are required to obtain
licensure in these jurisdictions with respect to their business or to permit
the sale of categories of items (e.g. wine, automobiles, 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 us.
Billpoint, our Internet payment company, is subject to unique risks
Billpoint is subject to unique risks 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 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 product is well received, a high level of competition, including
competitors who are currently not charging for their product offerings, and
the need to coordinate systems and policies among itself, us and Wells Fargo
Bank, which will be the provider of payment services.
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
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services. Several private lawsuits seeking to impose liability upon online
services companies currently are pending. In addition, federal, state and
foreign legislation has been proposed that imposes liability for or prohibits
the transmission over the Internet of certain types of information. Our service
features a Feedback Forum, which includes information from users regarding
other users. Although all such feedback is generated by users and not by us, it
is possible that a claim of defamation or other injury could be made against us
for content posted in the Feedback Forum. 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.
In addition, the increased attention focused upon liability issues as a result
of these lawsuits and legislative proposals could harm our reputation or
otherwise impact the growth of our business. We carry liability insurance, but
it may not be adequate to fully compensate us if we become liable for
information carried on or through our service. Any costs incurred as a result
of this liability or asserted liability could harm our business.
We are subject to intellectual property and other litigation
On March 23, 1999, we were sued by Network Engineering Software, Inc. ("NES")
in the U.S. District Court for the Northern District of California for our
alleged willful and deliberate violation of a patent. The suit sought
unspecified monetary damages as well as an injunction against our operations.
It also sought treble damages and attorneys' fees and costs. We have entered
into a settlement agreement and license with NES, and this suit has been
dismissed with prejudice.
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 our 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. Discovery has commenced. We believe we have
meritorious defenses to this lawsuit and intend to defend ourselves vigorously.
However, even if successful, this defense could be costly and, if we were to
lose this lawsuit, our business could be harmed.
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 have 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. Expedited
discovery in this case has commenced. We intend to prosecute our claims and
defend ourselves against Bidder's Edge counterclaims vigorously. However, this
lawsuit could be costly and our business could be harmed if we were to lose.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future technologies. We
expect that participants in our markets increasingly will be subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any claim like this, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements. These royalty or licensing
agreements might not be available on acceptable terms or at all. As a result,
any claim like this could harm our business.
The inability to expand our systems may limit our growth
We seek to generate a high volume of traffic and transactions on our service.
The satisfactory performance, reliability and availability of our website,
processing systems and network infrastructure are critical to our reputation
and our ability to attract and retain large numbers of users. Our revenues
depend on the number of
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items listed by users, the volume of user transactions that are successfully
completed and the final prices paid for the items listed. If the volume of
traffic on our website or the number of items being listed for sale continues
to increase, we will need to expand and upgrade our technology, transaction
processing systems and network infrastructure. We may be unable to accurately
project the rate or timing of increases, if any, in the use of our service or
to timely expand and upgrade our systems and infrastructure to accommodate any
increases.
We use internally developed systems to operate our service and for
transaction processing, including billing and collections processing. We must
continually improve these systems in order to accommodate the level of use of
our website. In addition, we may add new features and functionality to our
services that would result in the need to develop or license additional
technologies. We capitalize hardware and software costs associated with this
development in accordance with company policy and include such amounts in
computer equipment and software. Internal expenses are often judged to have
useful lives of less than one year, or have been more appropriately classified
as maintenance related costs. As such, these costs are expensed as incurred.
Our inability to add additional software and hardware or to upgrade our
technology, transaction processing systems or network infrastructure to
accommodate increased traffic or transaction volume could have adverse
consequences. These consequences include unanticipated system disruptions,
slower response times, degradation in levels of customer support, impaired
quality of the users' experience on our service and delays in reporting
accurate financial information. Our failure to provide new features or
functionality also could result in these consequences. We may be unable to
effectively upgrade and expand our systems in a timely manner or to integrate
smoothly any newly developed or purchased technologies with our existing
systems. These difficulties could harm or limit our ability to expand our
business.
System failures could harm our business
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 must 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 are currently 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. Our eBay Germany website is
maintained by a third party. Any failure by this party to successfully operate
this site could damage our business.
Substantially all of our computer hardware for operating our service
currently is located at the facilities of Exodus Communications, Inc. in Santa
Clara, California and AboveNet in San Jose, California. These systems and
operations are vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunication failures and similar events. They are also
subject to break-ins, sabotage, intentional acts of vandalism and similar
misconduct. We do not 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 either the Exodus or AboveNet facility could result in
interruptions in our services. In addition, the failure by Exodus or AboveNet
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;
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. 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 against the company. Litigation of this type, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
New and existing 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 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
online contracts, user privacy, freedom of expression, pricing, fraud, content
and quality of products and services, taxation, advertising, intellectual
property rights and information security. Applicability to the Internet of
existing laws governing issues such as property ownership, copyrights and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of these laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies. Those
laws that do reference the Internet, such as the recently passed Digital
Millennium Copyright Act, have not yet been interpreted by the courts and their
applicability and reach are therefore uncertain. In addition, numerous states,
including the State of California, where our headquarters are located, have
regulations regarding how "auctions" may be conducted and the liability of
"auctioneers" in conducting such auctions. No legal determination has been made
with respect to the applicability of the California regulations to our business
to date and little precedent exists in this area. 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
changes, we may become subject to new regulatory restrictions.
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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 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. As we expand our
international activities, we will become obligated to comply with the laws of
the countries in which we operate. 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.
In the United States, companies are required to qualify as foreign
corporations in states where they are conducting business. As an Internet
company, it is unclear in which states we are actually conducting business. Our
failure to qualify as a foreign corporation in a jurisdiction where we are
required to do so could subject us to taxes and penalties for the failure to
qualify and could result in our inability to enforce contracts in those
jurisdictions. Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could harm our business.
Our business has been seasonal
Our results of operations historically have been somewhat seasonal in nature
because many of our users reduce their activities on our website during the
Thanksgiving and Christmas holidays and with the onset of good weather. Both
B&B 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. B&B typically has its best
operating results in the traditional fall and spring auction seasons and has
historically incurred operating losses in the first and third quarters. 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.
There are many risks associated with our international operations
We are expanding internationally. We recently acquired alando, a leading
online German personal trading platform, and began operations in the United
Kingdom and, through a joint venture, in Australia. In February 2000, we
further expanded into Japan. Expansion into international markets will require
management attention and resources. We have limited experience in localizing
our service to conform to local cultures, standards and policies. We may have
to compete with local companies who understand the local market better than we
do. We
35
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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 internationally are expected to exceed our international net revenues
for at least 12 months in most countries. As we 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;
. legal uncertainty regarding liability for the listings of our users,
including less Internet friendly basic law and unique local laws;
. government-imposed limitations on the public's access to the Internet;
. difficulties in staffing and managing foreign operations;
. longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
. cultural nonacceptance of online trading;
. higher telecommunications and internet service provider costs;
. more stringent consumer protection laws;
. 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 business may be subject to sales and other taxes
We do not collect sales or other similar taxes on goods sold by users through
our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce, and could diminish our opportunity to derive financial
benefit from our activities. 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. 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
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<PAGE>
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 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 new land-based auction businesses need to continue to acquire properties
The businesses of B&B and Kruse are both dependent on the continued
acquisition of high quality auction properties from sellers. Their future
success will depend in part on their ability to maintain an adequate supply of
high quality auction property, particularly fine and decorative arts and
collectibles and collectible automobiles, respectively. There is intense
competition for these pieces with other auction companies and dealers. In
addition, a small number of key senior management and specialists maintain the
relationships with the primary sources of auction property and the loss of any
of these individuals could harm the business of B&B and Kruse.
Our new land-based auction businesses could suffer losses from price
guarantees, advances or rescissions of sales
In order to secure high quality auction properties from sellers, B&B and
Kruse may give a guaranteed minimum price or a cash advance to a seller, based
on the estimated value of the property. If the auction proceeds are less than
the amount guaranteed, or less than the amount advanced and the seller does not
repay the difference, the company involved will suffer a loss. In addition,
under certain circumstances a buyer who believes that an item purchased at
auction does not have good title, provenance or authenticity may rescind the
purchase. Under 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 acquired real property with some of our new businesses
In connection with the acquisition of Kruse and B&B we acquired real property
including land, buildings and interests in partnerships holding land and
buildings. We have no experience in managing real property. Ownership of this
property subjects us to new risks, including:
. the possibility of environmental contamination and the costs associated
with fixing any environmental problems;
. the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements; and
. possible disputes with tenants, partners or others.
Our market is intensely competitive
Online personal trading market is a new, rapidly evolving and intensely
competitive area. The Company expects 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.
Depending on the category of product, eBay currently or potentially competes
with a number of companies serving particular categories of goods as well as
those serving broader ranges of goods. Broad-based competitors include the vast
majority of traditional department and general merchandise stores as well as
emerging online retailers. These
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<PAGE>
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, eBay faces competition from specialty retailers and exchanges in
each of its categories of products. For example:
Antiques: Christies, 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, Toys.com, Toys R Us
Premium Collectibles: Christies, DuPont Registry, Gavelnet, Greg Manning
Auctions, iCollector, Lycos / Skinner Auctions, Millionaire.com, Phillips
(LVMH), Sotheby's, Sothebys.amazon.com
Automotive (used cars): Auction Auto.com, Autobytel.com, AutoMallUSA,
AutoVantage.com, AutoWeb.com, Barrett-Jackson, CarOrder.com, CarPoint,
CarScene.com, eClassics.com, Edmunds, GreenLight.com, Hemmings, Newspaper
classifieds, Used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, Cductive.com, DVD Express,
Half.com, Reel.com, Spinner.com, Wherehouse, Alibris.com, Bookfinders.com
Clothing: Bluefly.com, Boo.com, Dockers.com, FashionMall.com, The Gap, J.
Crew, LandsEnd.com, The Limited, Lucy.com, Macys, The Men's Wearhouse,
Ross, 3Dshopping.com
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, ValueAmerica.com
Home & Garden: IKEA, Crate & Barrel, Furniture.com, Homepoint.com, Home
Depot, Living.com, Garden.com, Pottery Barn, Ethan Allen, Frontgate
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, golftrader.com, 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, CommerceBid.com, Commerce One, Concur Technologies,
DoveBid, FreeMarkets, iMark, Oracle, PurchasePro.com, RicardoBiz.com,
Sabre, SurplusBin.com, TradeOut.com, UnionStreet.com, Ventro, VerticalNet
Additionally, the Company faces competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (a 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 the Company's market include the
following:
. ability to attract buyers
. volume of transactions and selection of goods;
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<PAGE>
. community cohesion and interaction;
. system reliability;
. customer service;
. reliability of delivery and payment by users;
. brand recognition;
. website convenience and accessibility;
. level of service fees; and
. quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other
business and Internet markets than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources.
Other online trading services may be acquired by, receive investments from or
enter into other commercial relationships with larger, well established and
well financed companies. As a result, some of our competitors with other
revenue sources may be able to devote more resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we are
able to. Increased competition may result in reduced operating margins, loss of
market share and diminished value of our brand. Some of our competitors have
offered services for free and others may do this as well. We may be unable to
compete successfully against current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business. For example, we 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 Web-based applications that direct Internet traffic to
certain websites may channel users to trading services that compete with us.
Although we have established Internet traffic arrangements with several large
online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Web
browsers could promote our competitors or charge us substantial fees for
inclusion.
The land-based auction business is intensely competitive. B&B competes with
two larger and better known auction companies, Sotheby's Holdings, Inc. and
Christie's International plc, as well as numerous regional auction companies.
To the extent that these companies increase their focus on the middle market
properties that form the core of B&B's business, its business may suffer. Kruse
is subject to competition from numerous regional competitors. In addition,
competition with Internet based auctions may harm the land-based auction
business. Although Billpoint's business is new, several new companies are
beginning to enter this market and large companies, including banks and credit
card companies, may become competitors.
Our business is dependent on the development and maintenance of the Web
infrastructure
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant
growth in the numbers of users and
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<PAGE>
amount of traffic. If the Web continues to experience increased numbers of
users, increased frequency of use or increased bandwidth requirements, the Web
infrastructure may be unable to support the demands placed on it. In addition,
the performance of the Web may be harmed by increased users or bandwidth
requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. These outages and delays could reduce the level of Web usage as
well as the level of traffic and the processing transactions on our service. In
addition, the Web could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to increased governmental regulation. The infrastructure and
complementary products or services necessary to make the Web a viable
commercial marketplace for the long term may not be developed successfully or
in a timely manner. Even if these products or services are developed, the Web
may not become a viable commercial marketplace for services such as those that
we offer.
Our business is subject to online commerce security risks
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new
discoveries in the field of cryptography, or other developments may result in a
compromise or breach of the technology used by us to protect customer
transaction data. Any such compromise of our security could harm our reputation
and, therefore, our business. In addition, a party who is able to circumvent
our security measures could misappropriate proprietary information or cause
interruptions in our operations. An individual 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 nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes would harm our
business. In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
We need to develop new services, features and functions in order to expand
We plan to expand our operations by developing new or complementary services,
products or transaction formats or expanding the breadth and depth of services.
We may be unable to expand our operations in a cost-effective or timely manner.
Even if we do expand, we may not maintain or increase our overall market
acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation and diminish the value of
our brand. We anticipate that future services may include pre-and post-trade
services, including the following:
. the scanning and uploading of photographs of listed items;
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<PAGE>
. authentication and appraisal; and
. arrangements to facilitate shipment of products.
We may pursue strategic relationships with third parties to provide many of
these services. By using third parties to deliver these services, we may be
unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand
We believe that our historical growth has been largely attributable to word
of mouth. We have benefited from frequent and high visibility media exposure
both nationally and locally. We do not expect the frequency or quality of this
media exposure to continue. However, we believe that continuing to strengthen
our brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order to
promote our brand, we will need to increase our marketing budget and otherwise
increase our financial commitment to creating and maintaining brand loyalty
among users. Brand promotion activities may not yield increased revenues, and
even if they do, any increased revenues may not offset the expenses we incurred
in building our brand. If we do attract new users to our service, they may not
conduct transactions over our service on a regular basis. If we fail to promote
and maintain our brand or incur substantial expenses in an unsuccessful attempt
to promote and maintain our brand, our business would be harmed.
We may be unable to protect or enforce our intellectual property rights
adequately
We regard the protection of our copyrights, service marks, trademarks, trade
dress and trade secrets as critical to our success. We rely on a combination of
patent, copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights in products and
services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements
with parties with which we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual arrangements and
the other steps taken by us to protect our intellectual property may not
prevent misappropriation of our technology or deter independent third-party
development of similar technologies. We pursue the registration of our
trademarks and service marks in the U.S. and internationally. Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online. We
have licensed in the past, and expect to license in the future, certain of our
proprietary rights, such as trademarks or copyrighted material, to third
parties. These licensees may take actions that might diminish the value of our
proprietary rights or harm our reputation. We also rely on certain technologies
that we license from third parties, such as Oracle Corporation, Microsoft and
Sun Microsystems Inc., the suppliers of key database technology, the operating
system and specific hardware components for our service. These third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of this technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost.
Our business is subject to consumer trends 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
41
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our service, resulting in reduced revenues. In addition, consumer "fads" may
temporarily inflate the volume of certain types of items listed on our service,
placing a significant strain upon our infrastructure and transaction capacity.
These trends also may cause significant fluctuations in our operating results
from one quarter to the next. Any decline in demand for the goods offered
through our service as a result of changes in consumer trends could harm our
business. 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 buyer's 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 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 a majority 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 7A: Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The primary objective of eBay's investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its 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.
The following table presents the fair value balances of the Company's cash
equivalents and short-term and long-term investments that are subject to
interest rate risk by year of expected maturity and average interest rates as
of December 31, 1999, (dollars in thousands):
<TABLE>
<CAPTION>
2000 2001 2002 Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash equivalents.................... $219,679 $219,679
Average interest rates.............. 3.9%
Investments excluding equity
investments........................ $247,513 $128,455 $153,884 $529,852
Average interest rates.............. 5.6% 6.0% 5.6%
Equity investments.................. $ 25,222
</TABLE>
The Company is 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. The Company typically does not
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<PAGE>
attempt to reduce or eliminate its market exposure in these equity investments.
As of December 31, 1999, the position in equity investments included unrealized
gains of $13.3 million.
eBay did not hold derivative financial instruments as of December 31, 1999,
and has never held such instruments in the past. In addition, eBay had
outstanding debt as of December 31, 1999 of $27.3 million.
Foreign Currency Risk
Currently the majority of eBay's sales and expenses are denominated in U.S.
dollars and as a result the foreign exchange gains and losses to date have not
been significant. While the Company is effecting some transactions in foreign
currencies during 1999, it does not expect that foreign exchange gains or
losses will be significant. As the Company expands internationally, foreign
currency risks will become more important.
Item 8: Financial Statements and Supplementary Data
Annual Financial Statements: See Part IV, Item 14 of this Form 10-K.
Selected Quarterly Data: See Part II, Item 7 of this Form 10-K.
Item 9: Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10: Directors and Executive Officers of the Registrant
Incorporated by reference to the Company's Proxy Statement to be filed on or
before May 1, 2000.
Item 11: Executive Compensation
Incorporated by reference to the Company's Proxy Statement to be filed on or
before May 1, 2000.
Item 12: Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Proxy Statement to be filed on or
before May 1, 2000.
Item 13: Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement to be filed on or
before May 1, 2000.
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PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
Upon written request, the Company will provide, without charge, a copy of
this Report on Form 10-K, including the consolidated financial statements,
financial statement schedules and any exhibits for the Company's most recent
fiscal year. All requests should be sent to:
eBay Inc.
Investor Relations
2145 Hamilton Ave.
San Jose, CA 95125
(408) 558-7400
In addition, the Securities and Exchange Commission maintains a website that
provides access to all filings made electronically by the Company at
www.sec.gov. The Company's website is located at www.ebay.com. Information
contained on the Company's website is not a part of this Annual Report on Form
10-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Report of Independent Accountants .................................. 46
Consolidated Balance Sheet ......................................... 47
Consolidated Statement of Income ................................... 48
Consolidated Statement of Stockholders' Equity ..................... 50
Consolidated Statement of Cash Flows ............................... 51
Notes to Consolidated Financial Statements ......................... 52
</TABLE>
2. Financial Statement Schedules.
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or
notes thereto.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by reference
into, this Form 10-K:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
2.01 Agreement and Plan of Merger by and between eBay Inc., a California
corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump
Acquisition Sub, Inc., Jump Incorporated and certain shareholders of
Jump Incorporated dated as of June 30, 1998.*
2.03 Agreement and Plan of Merger and Reorganization among Registrant,
Margarine Acquisition Sub Corp., Butterfield & Butterfield
Auctioneers Corp, HBJ Partners, LLC and 111 Potrero LLC.****
2.04 Agreement and Plan of Merger and Reorganization among Registrant and
Kruse, Inc.****
2.05 Agreement and Plan of Merger and Reorganization among Registrant and
Billpoint, Inc.****
3.01 Registrant's Amended and Restated Certificate of Incorporation.**
3.02 Registrant's Amended and Restated Bylaws.**
4.01 Form of Specimen Certificate for Registrant's Common Stock.*
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant
and certain stockholders named therein.*
10.01 Form of Indemnity Agreement entered into by Registrant with each of
its directors and executive officers.*
10.02 Registrant's 1996 Stock Option Plan and related documents.*
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
10.03 Registrant's 1997 Stock Option Plan and related documents.*
10.04 Registrant's 1998 Equity Incentive Plan and related documents.*
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant's 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated September 30, 1996,
as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California
corporation, and Registrant dated August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a
Connecticut corporation, and the Registrant dated April 10, 1998, as
amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20,
1997 between Imperial Bank and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between
Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement
and Co-Location Addendum effective as of May 1, 1997.*
10.13 License Agreement between Thunderstone Software and Registrant.*
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey
Skoll and Registrant.*
10.15 Employment Letter Agreement dated December 9, 1996 between Michael
Wilson and Registrant.*
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly
and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary
Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C.
Whitman and Registrant.*
10.19 Employment Letter Agreement dated August 14, 1998 between Brian T.
Swette and Registrant.*
10.20 Employment Letter Agreement dated August 20, 1998 between Michael R.
Jacobson and Registrant.*
10.21 Office Lease between Greylands Business Park, Phase 2, a California
General Partnership, and the Registrant, dated January 29, 1999.***
10.22 Amendment No. 1 to Registrant's 1998 Directors Stock Option Plan.***
10.23 Offer Letter to Maynard Webb.*****
10.24 Offer Letter to Jeffrey D. Jordan.*****
10.25 Lease between eBay Realty Trust and Registrant.
10.26 Cash Collateral Agreement between Registrant and Chase Manhattan Bank
as Agent.
21.01 List of Subsidiaries.
27.01 Financial Data Schedule.
</TABLE>
- --------
* Previously filed as an Exhibit to the Form S-1 (No. 33-59097) filed in
connection with the Company's initial public offering and incorporated by
reference herein.
** Previously filed as an Exhibit to the Form 10-Q filed on November 13, 1998
and incorporated by reference herein.
*** Previously filed as an Exhibit to the Form S-1 filed on March 25, 1999 and
incorporated by reference herein.
**** Previously filed as an Exhibit to the Form 10-Q filed on November 15,
1999 and incorporated by reference herein.
***** Previously filed as an Exhibit to the Form S-3 filed on September 30,
1999 and incorporated by reference herein.
45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of eBay Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, comprehensive income, stockholders' equity
and of cash flows present fairly, in all material respects, the financial
position of eBay Inc. and its subsidiaries at December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
January 25, 2000, except for Note 16,
which is as of March 6, 2000
46
<PAGE>
eBAY INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 37,285 $219,679
Short-term investments................................... 40,401 181,086
Accounts receivable, net................................. 12,425 36,538
Other current assets..................................... 7,479 22,531
-------- --------
Total current assets................................... 97,590 459,834
Long-term investments...................................... -- 373,988
Property and equipment, net................................ 44,062 111,806
Intangible assets, net..................................... 3,728 8,812
Deferred tax assets........................................ -- 5,639
Other assets............................................... 4,156 3,863
-------- --------
$149,536 $963,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 9,997 $ 31,538
Accrued expenses and other liabilities................... 6,577 32,550
Debt and leases, current................................. 4,047 12,285
Customer advances and deferred revenue................... 973 5,997
Income tax payable....................................... 1,380 6,455
Deferred tax liabilities, current........................ 1,682 --
-------- --------
Total current liabilities.............................. 24,656 88,825
Debt and leases, long-term................................. 18,361 15,018
Environmental accruals..................................... 5,900 5,900
Other liabilities.......................................... 81 1,732
-------- --------
48,998 111,475
-------- --------
Commitments and Contingencies (Notes 7 and 10)
Stockholders' equity:
Preferred Stock, $0.001 par value; 5,000 and 10,000
shares authorized, no shares issued or outstanding...... -- --
Common Stock, $0.001 par value; 195,000 and 900,000
shares authorized, 123,225 and 129,782 shares issued and
outstanding............................................. 123 130
Additional paid-in capital............................... 87,779 823,750
Notes receivable from stockholders....................... (1,130) (11)
Unearned compensation.................................... (4,139) (4,124)
Retained earnings........................................ 17,905 27,628
Accumulated other comprehensive income................... -- 5,094
-------- --------
Total stockholders' equity............................. 100,538 852,467
-------- --------
$149,536 $963,942
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
47
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues:
Fees and services................................ $37,070 $81,643 $220,493
Real estate rentals.............................. 4,300 4,486 4,231
------- ------- --------
Total net revenues............................. 41,370 86,129 224,724
------- ------- --------
Cost of net revenues:
Fees and services................................ 6,631 13,948 55,639
Real estate rentals.............................. 1,773 2,146 1,949
------- ------- --------
Total cost of net revenues..................... 8,404 16,094 57,588
------- ------- --------
Gross profit................................... 32,966 70,035 167,136
------- ------- --------
Operating expenses:
Sales and marketing.............................. 15,618 35,976 95,956
Product development.............................. 831 4,640 23,785
General and administrative....................... 6,534 15,849 43,055
Amortization of acquired intangibles............. -- 805 1,145
Merger related costs............................. -- -- 4,359
------- ------- --------
Total operating expenses....................... 22,983 57,270 168,300
------- ------- --------
Income from operations............................. 9,983 12,765 (1,164)
Interest and other income, net..................... 1,054 1,799 23,422
Interest expense................................... (2,371) (2,191) (1,943)
------- ------- --------
Income before income taxes, minority interest and
equity interest in partnership income............. 8,666 12,373 20,315
Provision for income taxes......................... (971) (4,789) (9,385)
Minority interest in consolidated company.......... (320) (381) (256)
Equity interest in partnership income (loss)....... (314) 70 154
------- ------- --------
Net income......................................... $ 7,061 $ 7,273 $ 10,828
======= ======= ========
Net income per share:
Basic............................................ $ 0.29 $ 0.14 $ 0.10
======= ======= ========
Diluted.......................................... $ 0.08 $ 0.06 $ 0.08
======= ======= ========
Weighted average shares:
Basic............................................ 24,428 52,064 108,235
======= ======= ========
Diluted.......................................... 84,775 116,759 135,910
======= ======= ========
Supplemental pro forma information:
Income before income taxes, minority interest and
equity interest in partnership income........... $ 8,666 $12,373 $ 20,315
Provision for income taxes as reported........... (971) (4,789) (9,385)
Pro forma adjustment to provision for income
taxes (Note 15)................................. (2,576) (2,071) 1,118
Minority interest in consolidated company as
reported........................................ (320) (381) (256)
Equity interest in partnership loss as reported.. (314) 70 154
------- ------- --------
Pro forma net income............................... $ 4,485 $ 5,202 $ 11,946
======= ======= ========
Pro forma net income per share:
Basic............................................ $ 0.18 $ 0.10 $ 0.11
======= ======= ========
Diluted.......................................... $ 0.05 $ 0.04 $ 0.09
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
48
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Net income.................. $7,061 $ 7,273 $10,828
Other comprehensive income:
Foreign currency
translation adjustments.. -- -- (58)
Unrealized gains on
securities............... -- -- 13,318
Unrealized losses on
securities............... -- -- (4,435)
------ ------- -------
Total other
comprehensive income... -- -- 19,653
------ ------- -------
Estimated tax provision on
other comprehensive
income..................... -- -- (3,731)
------ ------- -------
Comprehensive income........ $7,061 $ 7,273 $15,922
====== ======= =======
Net comprehensive income per
share:
Basic..................... $ 0.29 $ 0.14 $ 0.15
====== ======= =======
Diluted................... $ 0.08 $ 0.06 $ 0.12
====== ======= =======
Weighted average shares:
Basic..................... 24,428 52,064 108,235
====== ======= =======
Diluted................... 84,775 116,759 135,910
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
49
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Notes Other
Stock Common Stock Additional Receivable Unearned Compre- Total
------------ ------------- Paid-in from Com- hensive Retained Stockholders'
Shares Par Shares Par Capital Shareholders pensation Income Earnings Equity
------ ---- ------- ---- ---------- ------------ --------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 1,676 $ 4 63,315 $ 63 $ 965 $ (68) $ -- $ -- $ 5,636 $ 6,600
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 1,424 -- (1,424) -- -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 25 -- -- 25
Contributions from
partners............... -- -- -- -- 150 -- -- -- 488 638
Distributions to
partners............... -- -- -- -- -- -- -- -- (4,556) (4,556)
Net income.............. -- -- -- -- -- -- -- -- 7,061 7,061
------ ---- ------- ---- -------- ------- ------- ------ ------- --------
Balance at December 31,
1997................... 1,676 4 63,315 63 2,539 (68) (1,399) -- 8,583 9,722
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- -- -- -- -- -- -- (46) (46)
Unearned compensation... -- -- -- -- 5,831 -- (5,831) -- -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 3,091 -- -- 3,091
Issuance of Common Stock
for cash and notes..... -- -- 19,290 20 4,685 (1,378) -- -- -- 3,327
Issuance of Common Stock
for acquisition........ -- -- 428 -- 2,000 -- -- -- -- 2,000
Contribution of Common
Stock to charitable
foundation............. -- -- 322 -- 1,215 -- -- -- -- 1,215
Issuance of Common Stock
for cash, net of
offering expenses of
$6,168................. -- -- 12,043 12 66,076 -- -- -- -- 66,088
Conversion of Preferred
Stock to Common Stock.. (1,676) (4) 27,827 28 5,133 -- -- -- -- 5,157
Note repayments......... -- -- -- -- -- 316 -- -- -- 316
Contributions from
partners............... -- -- -- -- 300 -- -- -- 5,323 5,623
Distributions to
partners............... -- -- -- -- -- -- -- -- (3,228) (3,228)
Net income.............. -- -- -- -- -- -- -- -- 7,273 7,273
------ ---- ------- ---- -------- ------- ------- ------ ------- --------
Balance at December 31,
1998................... -- -- 123,225 123 87,779 (1,130) (4,139) -- 17,905 100,538
Unearned compensation... -- -- -- -- 5,318 -- (5,318) -- -- --
Amortization of unearned
compensation........... -- -- -- -- -- -- 4,681 -- -- 4,681
Issuance of Common Stock
for cash............... -- -- 1,954 2 8,354 -- -- -- -- 8,356
Issuance of Common Stock
for acquisitions....... -- -- 500 1 6,943 -- -- -- -- 6,944
Issuance of Common Stock
for cash in follow-on
offering, net of
offering expenses of
$1,000................. -- -- 4,250 4 696,208 -- -- -- -- 696,212
Distributions to
partners............... -- -- -- -- -- -- -- -- (1,105) (1,105)
Note repayments......... -- -- -- -- -- 1,066 -- -- -- 1,066
Cancellation or
repurchase of shares
and options............ -- -- (147) -- (1,397) 53 1,340 -- -- (4)
Unrealized gain on
investments, net of tax
provision.............. -- -- -- -- -- -- -- 5,152 -- 5,152
Tax benefit related to
acquisitions........... -- -- -- -- 8,753 -- -- -- -- 8,753
Foreign currency
translation adjustment,
net of tax provision... -- -- -- -- -- -- -- (58) -- (58)
Benefit from operating
loss on tax basis...... -- -- -- -- 11,104 -- -- -- -- 11,104
Issuance of warrants for
services............... -- -- -- -- 688 -- (688) -- -- --
Net income.............. -- -- -- -- -- -- -- -- 10,828 10,828
------ ---- ------- ---- -------- ------- ------- ------ ------- --------
Balance at December 31,
1999................... -- $ -- 129,782 $130 $823,750 $ (11) $(4,124) $5,094 $27,628 $852,467
====== ==== ======= ==== ======== ======= ======= ====== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
50
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 7,061 $ 7,273 $ 10,828
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and authorized
credits...................................... 373 3,377 4,771
Depreciation and amortization................. 1,519 4,526 20,650
Amortization of unearned compensation......... 25 2,661 4,681
Compensation expense associated with purchases
of Common Stock by outside directors......... -- 429 --
Charitable contribution of Common Stock....... -- 1,215 --
Series B Preferred stock issued for services.. -- 93 --
Minority interest in deficit of consolidated
companies.................................... 24 764 1,651
Loss on impairment of asset held for sale..... -- 200 100
Acquired research and development............. -- 150 --
Equity in partnership net loss................ (146) (4,025) --
Loss on sale of property...................... -- (333) --
Changes in assets and liabilities:
Accounts receivable......................... (1,302) (8,369) (28,884)
Other current and non-current assets........ (742) (3,702) (15,336)
Accounts payable............................ 3,104 (3,112) 21,541
Accrued expenses............................ 769 3,164 25,973
Income tax payable.......................... 363 (35) 17,247
Other liabilities........................... 579 1,765 3,342
------- -------- ---------
Net cash provided by operating activities........ 11,627 6,041 66,564
------- -------- ---------
Cash flows from investing activities:
Purchases of property and equipment............. (2,990) (12,758) (86,432)
Purchases of short-term investments, net........ -- (40,401) (140,685)
Purchases of long-term investments, net......... -- -- (368,894)
Proceeds from sale of property and equipment.... -- 1,274 173
Purchases of intangible assets.................. (141) (1,248) (7,159)
Payments (advances) on notes receivable......... 145 109 109
------- -------- ---------
Net cash used in investing activities............ (2,986) (53,024) (602,888)
------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock,
net............................................ 2,972 2,110 --
Proceeds from issuance of Common Stock, net..... -- 69,305 710,449
Repayments of Stockholder loans................. -- 316 1,062
Proceeds (principal payments) on long-term debt
and leases..................................... 1,506 (1,967) 4,895
Contributions from Stockholders................. 638 5,623 6,204
Distributions to Stockholders................... (4,556) (3,228) (3,892)
------- -------- ---------
Net cash provided by financing activities........ 560 72,159 718,718
------- -------- ---------
Net increase in cash and cash equivalents........ 9,201 25,176 182,394
Cash and cash equivalents at beginning of year... 2,908 12,109 37,285
------- -------- ---------
Cash and cash equivalents at end of year......... $12,109 $ 37,285 $ 219,679
======= ======== =========
Supplemental cash flow disclosures:
Cash paid for interest.......................... $ 1,893 $ 1,710 $ 1,465
Cash paid for income taxes...................... $ 540 $ 4,932 $ (1,927)
Non-cash investing and financing activities:
Common Stock issued for notes receivable........ $ -- $ 1,378 $ --
Common Stock issued for acquisition.............. $ -- $ 2,000 $ 6,943
Issuance of note payable for non-compete
agreement....................................... $ 240 $ -- $ --
Property and equipment leases.................... $ 23 $ -- $ --
Building and inventory obtained in connection
with foreclosure................................ $ 1,510 $ 751 $ --
Notes and accounts payable assumed in connection
with foreclosure................................ $ 695 $ -- $ --
Receivables cancelled in connection with
foreclosure..................................... $ 815 $ 500 $ --
Land and Building transferred for assumption of
debt............................................ $ -- $ 835 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
51
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. ("eBay" or the "Company") was incorporated in California in May
1996, and reincorporated in Delaware in April 1998 and by December 31, 1999
had operations in the 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. eBay also engages in the traditional auction business through its
subsidiaries, Butterfield & Butterfield ("B&B") and Kruse International
("Kruse"), and in online payment processing through its Billpoint, Inc.
("Billpoint") subsidiary.
Reincorporation
As a result of the reincorporation in April 1998, the Company was authorized
to issue 180,000,000 shares of $0.001 par value Common Stock and 6,000,000
shares of $0.001 par value Preferred Stock. The Board of Directors and the
stockholders subsequently amended the number of authorized shares such that
the Company was authorized to issue 900,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock. The Board of Directors has the authority
to issue the undesignated Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof.
Public offerings
On September 24, 1998, the Company completed its initial public offering of
4,025,000 shares of its Common Stock, the net proceeds of which aggregated
approximately $66.1 million. At the closing of the offering, all issued and
outstanding shares of the Company's Convertible Preferred Stock and
Mandatorily Redeemable Convertible Preferred Stock were converted into an
aggregate of 27,827,019 shares of Common Stock.
On April 16, 1999, the Company completed its follow-on public offering of
Common Stock. A total of 4,250,000 shares were sold by the Company at a price
of $170.00 per share. The offering resulted in net proceeds to the Company of
approximately $696.2 million, net of an underwriting discount of $25.3 million
and offering expenses of $1.0 million.
Stock split
During January 1999, the Company's Board of Directors approved a three-for-
one Common Stock split. Shareholders of record on February 9, 1999 received
two additional shares on March 1, 1999. All share and per share amounts in
these consolidated financial statements and notes thereto for all periods
presented reflect the stock split.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
52
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Principles of consolidation and basis of presentation
The financial statements as of December 31, 1998 and 1999, and for the three
years ended December 31, 1999 are consolidated and include the Company and its
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
In May and June of 1999, the Company acquired four businesses, each of which
were accounted for as pooling of interests (see Note 3--"Acquisitions").
Accordingly, all financial information included herein reflects the
consolidated operations of eBay and the acquired companies. Certain prior
period balances have been reclassified to conform to the current period
presentation.
Fair value of financial instruments
The Company's financial instruments, including cash, cash equivalents,
accounts receivable, and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments. 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. Unrealized gains and losses are excluded from
earnings and reported as a component of stockholders' equity.
Concentration of credit risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents, investments
and accounts receivable. Cash, cash equivalents and investments are deposited
with high credit, quality financial institutions. The Company's accounts
receivable are derived from revenue earned from customers located in the U.S.
and throughout the world and are denominated in U.S. dollars. Accounts
receivable balances are typically settled through customer credit cards and,
as a result, the majority of accounts receivable are collected upon processing
of credit card transactions. The Company maintains an allowance for doubtful
accounts receivable based upon the expected collectibility of accounts
receivable. During the years ended December 31, 1997, 1998 and 1999, no
customers accounted for more than 10% of net revenues or net accounts
receivable.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally five years or less for equipment and
furniture, and up to 40 years for buildings and building improvements. Leased
capital assets are depreciated using the straight-line method over the shorter
of the lease term or the estimated useful lives of the assets.
Intangible assets
Intangible assets resulting from the acquisitions of entities accounted for
using the purchase method of accounting are estimated by management based on
the fair value of assets received. These include acquired customer lists,
workforce, technological know how, covenants not to compete and goodwill.
Intangible assets are amortized from eight months to 10 years on a straight-
line basis which represents on the estimated periods of benefit.
53
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Environmental expenditures
The Company owns or controls real estate properties that are either used in
the auction business or leased to unrelated parties for various commercial
applications. Certain environmental and structural deficiencies have been
identified in the past for which the Company has remediation responsibility.
The amounts accrued to correct these matters are based upon estimates
developed in preliminary studies by external consultants. Due to uncertainties
inherent in the estimation process, the amounts accrued for these matters may
be revised in future periods as additional information is obtained.
Environmental expenditures that relate to current operations are charged to
expense or capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and that do not contribute to current or
future revenue generation, are charged to expense. Liabilities are recorded
when environmental assessments are made, remediation obligations are probable
and the costs can be reasonably estimated. The timing of these accruals is
generally upon the completion of feasibility studies. For the periods
presented, estimated liabilities of $5.9 million are included within other
liabilities.
Investment in general partnerships
Interests in general partnerships in which the Company holds more than 50
percent ownership and exerts control are consolidated. The consolidated
accounts include 100 percent of the assets and liabilities of these general
partnerships and the ownership interests of minority investors are recorded as
minority interests and are included within other liabilities. Investments in
general partnerships in which the Company holds more than 20 percent ownership
and exerts significant influence are accounted for using the equity method of
accounting and are recorded as investment in partnerships and are included
within other liabilities.
Impairment of long-lived assets
The Company 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.
Revenue recognition
Online transaction revenues are derived primarily from placement fees
charged for the listing of items on the eBay service and success fees
calculated as a percentage of the final sales transaction value. Revenues
related to placement fees are recognized at the time the item is listed, while
those related to success fees are recognized at the time that the 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.
Provisions for doubtful accounts and authorized credits to sellers are
provided at the time of revenue recognition based upon the Company's
historical experience.
The Company has reviewed Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," and
its effect on the recognition of placement fee revenue. Although the Company
believes the effect of SAB 101 on historical placement fee revenue is
insignificant, eBay has adopted the provision for placement fee revenue in the
first quarter of 2000. As such, placement fee revenue will be recognized
ratably over the estimated period of the transaction.
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
54
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
B&B 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, advertising revenue, which includes barter advertising, has
accounted for less than 1% of the Company's revenue. Historically, the Company
has recorded barter revenue only to the extent that specific objective
evidence existed demonstrating the fair value of benefits given and received.
As a result, most barter transactions were judged to have no value or
associated revenue.
Product development costs
Product development costs include expenses incurred by the Company to
maintain, monitor and manage the Company's website. The Company recognizes
website development costs in accordance with Statement of Position ("SOP") 98-
1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." As such, the Company expenses all costs incurred that relate to
the planning and post implementation phases of development. Costs incurred in
the development phase are capitalized and recognized over the product's
estimated useful life if the product is expected to have a useful life beyond
one year. Costs associated with repair or maintenance of the existing site or
the development of website content are included in product development expense
in the accompanying consolidated statement of income.
Advertising expense
The Company recognizes advertising expenses in accordance with SOP 93-7
"Reporting on Advertising Costs." As such, the Company expenses the costs of
producing advertisements at the time production occurs, and expenses the cost
of communicating advertising in the period in which the advertising space or
airtime is used. Internet advertising expenses are recognized based on the
terms of the individual agreements, but generally over the greater of the
ratio of the number of impressions delivered over the total number of
contracted impressions, or a straight-line basis over the term of the
contract. Advertising expenses totaled $2.8 million, $15.4 million, and $45.3
million during the years ended December 31, 1997, 1998 and 1999, respectively.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is based on the
difference, if any, on the date of the grant, between the fair value of the
Company's stock and the exercise price. The Company accounts for stock issued
to non-employees in accordance with the provisions of SFAS No. 123 and the
Emerging Issues Task Force ("EITF") Consensus on Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences
55
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of events that have been recognized in the Company's financial statements or
tax returns. The measurement of current and deferred tax liabilities and
assets are based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of deferred
tax assets is reduced, if necessary, by the amount of any tax benefits that,
based on available evidence, are not expected to be realized.
Comprehensive income
Effective January 1, 1998 the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. At December 31, 1997 and 1998, the
Company did not have transactions that were required to be reported in
comprehensive income.
Recent accounting pronouncements
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 quarter ending on or after June 30, 2000. The Company will adopt
SFAS No. 133 in its quarter ending June 30, 2000. The Company has not engaged
in significant hedging activities or invested in derivative instruments.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance for revenue recognition under
certain circumstances. The Company believes the effect of SAB 101 on
historical placement fee revenue is insignificant but has adopted the
provision for placement fee revenue in the first quarter of 2000. As such,
placement fee revenue will be recognized ratably over the estimated period of
the transaction.
In November 1999, the EITF commenced discussions on EITF No. 99-17,
"Accounting for Advertising Barter Transactions." The EITF provides guidance
on the recognition of Internet barter advertising revenues and expenses under
various circumstances. The EITF reached a conclusion that revenues and
expenses from advertising barter transactions should be recognized at the fair
value of the advertising surrendered or received only when an entity has a
historical practice of receiving or paying cash for similar advertising
transactions. The Company does not expect that the adoption of EITF No. 99-17
will have a material impact on its consolidated financial statements.
Note 2--Net Income per Share:
The Company computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net income
per share is computed by dividing the net income available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income per share is computed by
dividing the net income for the period by the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares, composed of unvested, restricted Common Stock and
incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of Series A and Series B Convertible Preferred
Stock, are included in diluted net income per share to the extent such shares
are dilutive.
56
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income..................................... $ 7,061 $ 7,273 $ 10,828
Accretion of Series B Mandatorily Redeemable
Convertible Preferred Stock to redemption
value......................................... (46) (46) --
-------- -------- --------
Net income available to common stockholders.... $ 7,015 $ 7,227 $ 10,828
======== ======== ========
Denominator:
Weighted average shares........................ 63,315 91,642 127,301
Weighted average unvested common shares subject
to repurchase agreements...................... (38,887) (39,578) (19,066)
-------- -------- --------
Denominator for basic calculation.............. 24,428 52,064 108,235
Weighted average effect of dilutive securities:
Series A Preferred Stock..................... 15,088 11,037 --
Series B Preferred Stock..................... 6,372 8,054 --
Series B Preferred Stock warrants............ -- 1,098 --
Unvested common shares subject to repurchase
agreements.................................. 38,887 39,578 19,066
Employee stock options....................... -- 4,928 8,609
-------- -------- --------
Denominator for diluted calculation............ 84,775 116,759 135,910
======== ======== ========
Net income per share:
Basic.......................................... $ 0.29 $ 0.14 $ 0.10
======== ======== ========
Diluted........................................ $ 0.08 $ 0.06 $ 0.08
======== ======== ========
</TABLE>
Note 3--Acquisitions:
Jump Incorporated
Effective June 30, 1998, the Company acquired all the outstanding shares of
Jump, an online personal trading community. The acquisition has been accounted
for using the purchase method of accounting and accordingly, the purchase
price has been allocated to the tangible and intangible assets acquired and
liabilities assumed on the basis of their respective fair values on the
acquisition date. The fair value of intangible assets was determined using a
combination of methods, including replacement cost estimates for acquired
research and development and completed technology, a risk-adjusted income
approach for the acquired customer list and the amounts paid for covenants not
to compete.
The total purchase price of approximately $2.3 million consisted of 428,544
shares of the Company's Common Stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to in-
process technology and was immediately charged to operations because such in-
process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000).
The intangible assets are being amortized over their estimated useful lives of
eight to 24 months.
57
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Butterfield & Butterfield
On May 28, 1999, eBay acquired Butterfield & Butterfield Auctioneers
Corporation, a Delaware corporation and all affiliated entities under common
control including Butterfield Credit Corporation Inc., 111 Potrero Partners,
LLC and HBJ Partners, LLC. (collectively "B&B" or the "B&B Companies").
Butterfield & Butterfield Auctioneers Corp. ("Butterfield & Butterfield")
was established in 1865, incorporated in California in July 1970 and
reincorporated in the state of Delaware in March 1999. Butterfield &
Butterfield conduct auctions and perform appraisal services of fine art,
jewelry, antiques and other collectibles primarily in San Francisco, Los
Angeles and Chicago.
Butterfield Credit Corporation Inc. ("BCCI") is a wholly-owned subsidiary of
Butterfield & Butterfield and is incorporated in California. BCCI operates as
a financing corporation whose sole purpose is serving Butterfield &
Butterfield's clients.
111 Potrero Partners, LLC ("111 Potrero") is a limited liability corporation
organized in May 1996. 111 Potrero owns several commercial properties located
in San Francisco and Los Angeles, which are currently occupied by B&B and
third parties.
HBJ Partners, LLC ("HBJ") is a limited liability corporation organized in
California in September 1996. HBJ owns several commercial properties located
in San Francisco, which are currently occupied by B&B and third parties. HBJ
also has general partnership interests in 17600 Santa Fe Avenue Partners, 2959
Victoria Street Partners and 6700 Cherry Avenue Partners. Ownership interests
in the above partnerships at the date of acquisition were 58%, 60% and 38%,
respectively.
The aggregate consideration exchanged for the acquisition was 1,327,370
shares of eBay common stock. The acquisition has been accounted for as a
pooling of interests. In April 1999, B&B withdrew its registration statement
for its initial public offering. Accordingly, in the second quarter of 1999,
the Company recorded a charge of approximately $2.6 million related to the
costs of the withdrawn offering.
Kruse International
On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and
all affiliated entities under common control including: Auburn Cordage, Inc.,
ACD Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic
Advertising & Promotions, Inc., each an Indiana corporation (collectively,
"Kruse" or the "Kruse Companies").
Kruse International was founded in 1971 and operated as a sole
proprietorship until it was incorporated in the state of Indiana in August
1986. The Kruse Companies conduct auctions, perform appraisal services and
auctioneer training for classic car auctions in various locations in the
United States, England, Germany and the Netherlands.
The aggregate consideration exchanged for the acquisition was 787,312 shares
of eBay common stock for all shares of capital stock of the Kruse Companies.
The acquisition has been accounted for as a pooling of interests.
Billpoint
On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
developed a centralized, turnkey authorization, billing and payment
fulfillment solution that permits individuals and small merchants to
58
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
accept credit cards as payment for Internet-based sales transactions.
Billpoint's service is now being made available to the Company's users,
providing the ability to accept credit cards for payment.
In connection with the acquisition, eBay issued 524,132 shares of eBay
common stock to the existing Billpoint shareholders as consideration for all
shares of capital stock, and all options and warrants to purchase shares of
common stock of Billpoint outstanding immediately prior to the consummation of
the merger were converted into options and warrants to purchase shares of eBay
common stock. The acquisition has been accounted for as a pooling of
interests.
The components of net revenues, operating expenses and net income (loss)
during the years ended December 31, 1996, 1997 and 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Net Operating Net Income
Revenues Expenses (Loss)
-------- --------- ----------
<S> <C> <C> <C>
Year Ended December 31, 1996
Kruse........................................ $ 7,760 $ 6,024 $ (69)
B&B.......................................... 23,919 12,699 3,259
------- ------- ------
$31,679 $18,723 $3,190
======= ======= ======
Year Ended December 31, 1997
Kruse........................................ $ 7,520 $ 5,895 $ (237)
B&B.......................................... 28,106 13,577 6,424
------- ------- ------
$35,626 $19,472 $6,187
======= ======= ======
Year Ended December 31, 1998
Kruse........................................ $10,265 $ 8,119 $ (58)
Billpoint.................................... -- 74 (74)
B&B.......................................... 28,512 14,745 5,007
------- ------- ------
$38,777 $22,938 $4,875
======= ======= ======
</TABLE>
alando.de.ag
On June 15, 1999, eBay acquired all of the outstanding stock of alando.de.ag
("alando"). alando began operations on February 19, 1999 and is Germany's
leading online personal trading community. The aggregate consideration
exchanged for the acquisition was 316,000 shares of eBay common stock. The
acquisition has been accounted for as a pooling of interests.
Note 4--Segment Information:
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes the standards for reporting information about
operating segments in annual financial statements and requires that certain
selected information about operating segments be reported in interim financial
reports. It also establishes standards for related disclosures about products
and services and geographic areas. Operating segments are defined as
components of an enterprise about which separate financial information is
evaluated regularly by the chief decision-maker in order to allocate resources
and in assessing performance.
eBay has identified two primary operating segments: online trading services
and offline, traditional auction services. The online trading services segment
consists of the operations of eBay, Billpoint and alando. The offline,
traditional auction segment consists of the current operations of B&B and
Kruse.
59
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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>
Year Ended December 31, 1997
------------------------------
Online Offline Consolidated
------ ------- ------------
<S> <C> <C> <C>
Net revenues from external customers.......... $5,744 $35,626 $41,370
====== ======= =======
Operating income before amortization of
intangibles, stock compensation, and merger
related costs................................ $1,487 $ 8,496 $ 9,983
Interest and other income, net................ 59 995 1,054
Interest expense.............................. (3) (2,368) (2,371)
Amortization of intangibles, stock
compensation, and merger related costs....... -- -- --
------ ------- -------
Income before income taxes, as reported....... $1,543 $ 7,123 $ 8,666
====== ======= =======
Total assets.................................. $5,619 $56,731 $62,350
====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------
Online Offline Consolidated
------- ------- ------------
<S> <C> <C> <C>
Net revenues from external customers......... $47,352 $38,777 $ 86,129
======= ======= ========
Operating income before amortization of
intangibles, stock compensation, and merger
related costs............................... $11,573 $ 6,678 $ 18,251
Interest and other income, net............... 908 891 1,799
Interest expense............................. (39) (2,152) (2,191)
Amortization of intangibles, stock
compensation, and merger related costs...... (5,486) -- (5,486)
------- ------- --------
Income before income taxes, as reported...... $ 6,956 $ 5,417 $ 12,373
======= ======= ========
Total assets................................. $92,545 $56,991 $149,536
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------
Online Offline Consolidated
-------- ------- ------------
<S> <C> <C> <C>
Net revenues from external customers....... $182,533 $42,191 $224,724
======== ======= ========
Operating income before amortization of
intangibles, stock compensation, and
merger related costs...................... $ 4,248 $ 3,188 $ 7,436
Interest and other income, net............. 23,135 209 23,344
Interest expense........................... (152) (1,815) (1,967)
Amortization of intangibles, stock
compensation, and merger related costs.... (6,766) (1,834) (8,600)
-------- ------- --------
Income (loss) before income taxes, as
reported.................................. $ 20,465 $ (252) $ 20,213
======== ======= ========
Total assets............................... $867,239 $96,703 $963,942
======== ======= ========
</TABLE>
60
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Investments:
At December 31, 1999, short and long-term investments were classified as
available-for-sale securities and are reported at fair value as follows, (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses 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........................... 12,012 13,210 -- 25,222
-------- ------- ------- --------
Total......................... $364,621 $13,210 $(3,843) $373,988
======== ======= ======= ========
</TABLE>
At December 31, 1998, short and long-term investments in marketable
securities were classified as available-for-sale and consisted entirely of
municipal bonds and notes, the fair value of which approximated cost.
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,
----------------
1998 1999
------- --------
<S> <C> <C>
Due within one year or less................................ $12,287 $247,513
Due after one year through two years....................... 28,114 128,455
Due after two years through three years.................... -- 153,884
Equity investments......................................... -- 25,222
------- --------
$40,401 $555,074
======= ========
</TABLE>
Note 6--Balance Sheet Components:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
(in thousands)
<S> <C> <C>
Cash and cash equivalents:
Cash and money market funds............................ $14,720 $ 55,414
Securities and cash equivalents........................ 22,565 164,265
------- --------
Total................................................ $37,285 $219,679
======= ========
Accounts receivable, net:
Accounts receivable.................................... $16,056 $ 44,940
Less: Allowance for doubtful accounts.................. (2,614) (6,722)
Allowance for authorized credits..................... (1,017) (1,680)
------- --------
Total.............................................. $12,425 $ 36,538
======= ========
</TABLE>
61
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Write-offs against the allowance for doubtful accounts were $562,000 and
$4.5 million in the years ended December 31, 1998 and 1999, respectively.
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
(in thousands)
<S> <C> <C>
Property and equipment, net:
Land and buildings..................................... $ 42,150 $ 61,274
Computer equipment and software........................ 10,730 64,872
Leasehold improvements................................. 2,312 6,510
Furniture and fixtures................................. 1,697 8,844
Vehicles and other..................................... 881 2,529
-------- --------
Total................................................ 57,770 144,029
Less: Accumulated depreciation and amortization.......... (13,708) (32,223)
-------- --------
Total................................................ $ 44,062 $111,806
======== ========
Within computer equipment and software, the Company capitalized $788,000 and
$5.8 million in site related software during the years ended December 31, 1998
and 1999, respectively.
Intangible assets, net:
Intangible assets...................................... $ 5,442 $ 12,601
Accumulated amortization............................... (1,714) (3,789)
-------- --------
Total................................................ $ 3,728 $ 8,812
======== ========
Accrued expenses and other current liabilities:
Accrued compensation and related benefits.............. $ 2,241 $ 5,826
Advertising accruals................................... 1,274 4,918
Professional fees...................................... 451 3,990
Other accruals......................................... 2,611 17,816
-------- --------
Total................................................ $ 6,577 $ 32,550
======== ========
</TABLE>
Note 7--Debt:
Credit facilities
At December 31, 1998, the Company maintained a revolving line of credit with
a bank that provided for borrowings of up to $4.5 million. The line of credit
accrued interest on outstanding borrowings at a rate equal to the bank's prime
rate. The line of credit was terminated during 1999.
62
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Notes payable
Notes payable consists of amounts payable to various financial institutions
and a former shareholder, which are secured by specific properties and are
detailed as follows:
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Revolving line of credit, prime rate.................. $ 2,991 $ --
Mortgage notes, prime plus 1%, due September 31,
2002................................................. 1,905 1,797
Mortgage notes, LIBOR plus 1.75%, due July 15, 2001... 3,638 3,501
Mortgage notes, LIBOR plus 1.75%, due May 15, 2000.... 12,249 11,980
Mortgage notes, 5.2% variable, due August 1, 2023..... -- 9,300
Notes on foreclosed property, prime plus 2%, due
August 2015.......................................... 618 549
8.5% loan in connection with Dunnings acquisition due
June 30, 2000........................................ 500 --
6%-10.5% notes, due May 1999 through April 2004....... 507 176
------- --------
Subtotal............................................ 22,408 27,303
Less: Current portion................................. (4,047) (12,285)
------- --------
Long-term portion................................... $18,361 $ 15,018
======= ========
</TABLE>
Mortgage notes outstanding are on property owned by the B&B Companies. The
notes have variable interest rates from 5.2% to 10.5% and are secured by
certain land, buildings and improvements. The notes are repayable in equal
monthly installments over three to thirty year terms, with final installments
consisting of all remaining unpaid principal and accrued interest at the end
of the term.
During 1997, B&B foreclosed on secured receivables totaling $815,000 and
assumed a related note payable for $668,000, plus unpaid property taxes of
$27,000. The property received in the foreclosure consisted of inventory with
an estimated value of $150,000 and real property recorded at the remaining
value of consideration given of $1.4 million, which approximates its fair
value. The real property has been classified as a non-current asset in the
accompanying consolidated balance sheet, because B&B has not used the property
in its business operations and has actively listed the property for sale since
the foreclosure date. The related loan bears interest at a variable rate of
prime plus 2% and is due in monthly principal and interest installments of
$9,000.
Minimum annual repayments on these notes at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
Year ending
December 31, Total
------------ -------
<S> <C>
2000.............................................................. $12,285
2001.............................................................. 3,624
2002.............................................................. 1,640
2003.............................................................. 41
2004.............................................................. 43
Thereafter........................................................ 9,670
-------
$27,303
=======
</TABLE>
Note 8--Leasing Arrangements:
The Company, through its B&B subsidiary, leases certain land and buildings.
These leases are classified as operating leases that expire at various
intervals between 2001 and 2013. Certain of these leases contain renewal
63
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
options and have escalation clauses tied to changes in the Consumer Price
Index. Under the terms of the leases, the tenants are generally responsible
for the payment of property taxes, insurance and maintenance costs related to
the leased property.
Property on operating leases and property held for lease
The following schedule provides a summary of the Company's investment in
property held for lease by major classes at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Land............................................. $ 7,265 $12,711
Building......................................... 8,581 20,789
Building improvements............................ 9,672 9,801
Other............................................ 37 --
------- -------
25,555 43,301
Less: Accumulated depreciation................... (4,249) (6,986)
------- -------
$21,306 $36,315
======= =======
</TABLE>
The following is a schedule by year of minimum future rental income on
noncancellable operating leases as of December 31, 1999, (in thousands):
<TABLE>
<CAPTION>
Year ending
December 31, Total
------------ -------
<S> <C>
2000............................................................. $ 5,324
2001............................................................. 5,342
2002............................................................. 5,226
2003............................................................. 5,245
2004............................................................. 5,201
Thereafter....................................................... 30,575
-------
Total minimum future rentals................................... $56,913
=======
</TABLE>
Note 9--Purchase and Sale of Properties or Property Interests:
From time to time and in the ordinary course of business, the Company elects
to sell properties previously held for lease, or purchase properties or
property interests for future rental. The Company views its rental properties
as sources of income, which may be derived either from property rental, or
potentially the sale of the property. During 1998, the partners of 131 North
Gilbert Avenue Partners, including the Company as a 63.3% holder, sold the
property to an unrelated party for $2.5 million in cash and recognized a gain
on the transaction of $200,000. In August 1998, the Company sold its Parthenia
property for $865,000 in cash and recognized a gain of $133,000, and in
November 1999, the Company sold its Curson property for $350,000 in cash and
recognized a gain of $182,000.
During 1999, the Company increased its ownership percentage in various
property partnerships acquired in the merger with B&B. In one case, the
Company became a majority owner in a property in which it had previously held
a minority interest.
64
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Commitments and Contingencies:
Leases
The Company leases property and equipment under non-cancelable operating
leases that expire at various dates. Future minimum rental payments under non-
cancelable operating leases subsequent to December 31, 1999, include those
leases entered into subsequent to December 31, 1999 are as follows, (in
thousands):
<TABLE>
<CAPTION>
Year ending Operating
December 31, Leases
------------ ---------
<S> <C>
2000............................................................ $10,080
2001............................................................ 10,105
2002............................................................ 10,148
2003............................................................ 10,143
2004............................................................ 10,299
Thereafter...................................................... 8,273
-------
Total minimum lease payments.................................. $59,048
=======
</TABLE>
Rent expense in the years ended December 31, 1997, 1998 and 1999 totaled
$223,000, $672,000 and $3.8 million, respectively.
Advertising
During 1998, the Company entered into a three-year marketing agreement with
America Online, Inc. ("AOL"). Under the terms of the agreement, the Company
will be provided with a specific number of advertising impressions featuring
it as the preferred provider of personal trading services on AOL's service. In
consideration, the Company committed to pay $12.0 million over the three-year
term of the agreement. The Company is recognizing these fees as sales and
marketing expenses over the greater of the ratio of the number of impressions
delivered over the total number of contracted impressions, or a straight-line
basis over the term of the contract. At December 31, 1998, the Company had
made a prepayment of $4.0 million to AOL, of which $1.7 million was recognized
as sales and marketing expense. In March 1999, the Company expanded the scope
of its strategic relationship with AOL. Under the amended agreement, eBay was
given a prominent presence featuring it as the preferred provider of personal
trading services on AOL's proprietary services (both domestic and
international), AOL.com, Digital Cities, ICQ, CompuServe (both domestic and
international) and Netscape. In consideration for this agreement, eBay will
pay $75 million over the four-year term of the contract. In conjunction with
the agreement, eBay developed a co-branded version of its service for each AOL
property which prominently features each party's brand. AOL will be entitled
to all advertising revenue from the co-branded site.
In conjunction with the expanded strategic relationship, AOL terminated its
original contract with the Company in August 1999. As a result, the remaining
$8.0 million commitment associated with the original agreement was waived.
During 1999, the Company had made a prepayment of $18.8 million under the
amended agreement, of which $8.5 million was recorded as sales and marketing
expense.
Minimum auction guarantees
From time to time the Company, through its B&B 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
65
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
prior to the completion of the auction. The Company 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.
At December 31, 1999, B&B had entered into an agreement with another auction
service to sell certain memorabilia owned by a third party. The memorabilia's
consignor was guaranteed minimum net proceeds of $2.0 million, half of which
was guaranteed by each party.
Other contingencies
On March 23, 1999, the Company was sued by Network Engineering Software,
Inc. ("NES") in the U.S. District Court for the Northern District of
California for alleged willful and deliberate violation of a patent. The suit
sought unspecified monetary damages as well as an injunction against the
Company's operations. It also sought treble damages and attorneys' fees and
costs. The Company has entered into a settlement agreement and license with
NES, and this suit has been dismissed with prejudice.
On September 1, 1999, the Company 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 the Company 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 the
site'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. Discovery has commenced. The
Company believes that it has meritorious defenses to this lawsuit and intends
to defend itself vigorously. Management believes that the ultimate resolution
of these disputes will not have a material adverse impact on the Company's
financial position or results of operations.
On December 10, 1999, the Company 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 the Company alleging that the Company violated the
antitrust laws by monopolizing or attempting to monopolize a market, competing
unfairly, and interfering with their contract with eBay magazine. Bidder's
Edge is seeking treble damages, an injunction and its fees and costs.
Expedited discovery in this case has commenced. The Company intends to
prosecute its claims and defend itself against Bidder's Edge counterclaims
vigorously. Management believes that the ultimate resolution of these disputes
will not have a material adverse impact on the Company's financial position or
results of operations.
Other third parties have from time to time claimed and may claim in the
future that the Company has infringed their past, current or future
technologies. The Company expects that participants in its 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. Management believes that the ultimate resolution
of these disputes will not have a material adverse impact on the Company's
financial position or results of operations.
From time to time, the Company 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 the
Company's financial position or results of operations.
66
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 11--Related Party Transactions:
Notes receivable from stockholders
At December 31, 1998, the Company held notes receivable from employees,
officers and a director totaling $1.1 million, $11,000 of which was
outstanding at December 31, 1999. Notes receivable from stockholders represent
amounts owed to the Company from the exercise of stock options. These full
recourse notes are secured by Common Stock and bear interest at a rate of 8%
per annum. Interest is due and payable on December 1st of each year, and the
principal is due on or before December 1, 2002.
Notes receivable from officer
At December 31, 1999, the Company held a note receivable from an officer of
the Company totaling $2.1 million. The note bears interest at a rate of 5.43%
per annum and is secured by a Deed of Trust, assigned to the Company. All
outstanding principal and interest are due and payable in 2000.
Professional services
In connection with the recruitment of its Chief Executive Officer, the
Company engaged the services of an executive search firm affiliated with a
holder of the Company's Series B Mandatorily Redeemable Convertible Preferred
Stock. During 1998, the Company paid fees for services performed of $93,000
and issued 46,248 shares of Series B Mandatorily Redeemable Convertible
Preferred Stock with a fair value on the date earned of $93,000. The amount
paid for the services and the fair value of the shares are included in general
and administrative expenses in the consolidated statement of income for the
year ended December 31, 1998.
Note 12--Preferred Stock and Convertible Preferred Stock:
Preferred Stock
The Company is authorized, subject to limitations prescribed by Delaware
law, to provide for the issuance of Preferred Stock in one or more series, to
establish from time to time the number of shares included within each series,
to fix the rights, preferences and privileges of the shares of each wholly
unissued series and any qualifications, limitations or restrictions thereon,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding) without any
further vote or action by the stockholders. At December 31, 1998, and 1999
there were 5,000,000 and 10,000,000 shares of Preferred Stock authorized for
issuance, and no shares issued or outstanding.
Convertible Preferred Stock
Convertible Preferred Stock prior to the initial public offering at
September 24, 1998 was composed of the following (in thousands):
<TABLE>
<CAPTION>
Liquidation
Shares Redemption
---------------------- -------------
Authorized Outstanding Amount Amount
---------- ----------- ------ ------
<S> <C> <C> <C> <C>
Series A ............................. 1,676 1,676 $1,000 $ --
Series B ............................. 1,415 1,415 6,300 5,093
Undesignated ......................... 2,909 -- -- --
----- ----- ------ ------
6,000 3,091 $7,300 $5,093
===== ===== ====== ======
</TABLE>
67
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 24, 1998, the Company completed its initial public offering of
Common Stock. At that time, all issued and outstanding shares of the Company's
Series A and Series B Convertible Preferred Stock were converted into an
aggregate of 27,827,019 shares of Common Stock.
Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
In connection with the issuance of Series B, the Company issued warrants to
purchase 400,000 additional shares of Series B with an exercise price of $5.00
per share. In May 1998, these warrants were exercised, resulting in the
issuance of 400,000 shares of Series B in exchange for cash proceeds totaling
$2.0 million.
Note 13--Common Stock:
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 900,000,000 shares of Common Stock. A portion of the shares
outstanding are subject to repurchase by the Company over a four-year period
from the earlier of the issuance date or employee hire date, as applicable. At
December 31, 1998 and 1999, there were 32,213,000 and 12,678,000 shares,
respectively, subject to repurchase rights at an average price of $0.04 and
$0.12, respectively, per share.
In June 1998, in connection with the appointment of two outside directors,
the Company sold an aggregate of 643,500 shares of Common Stock to two
directors and realized net proceeds of $2.0 million. The Company recognized
the $429,000 excess of the estimated fair value of the stock over the price
paid by the two directors as general and administrative expense in 1998.
At December 31, 1999, the Company had reserved 24,443,360 and 722,051 shares
of Common Stock for future issuance for the exercise of options under the
stock option plans and issuance of shares under the employee stock purchase
plan, respectively.
Note 14--Employee Benefit Plans:
401(k) Savings Plan
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the "401(k)
Plan"). Under the 401(k) Plan, participating employees may defer a percentage
(not to exceed 25%) of their eligible pretax earnings up to the Internal
Revenue Service's annual contribution limit. All employees on the United
States payroll of the Company age 21 years or older are eligible to
participate in the 401(k) Plan. The Company had not been required to
contribute to the 401(k) Plan but in 1998 elected to match contributions up to
a maximum of $1,500 per employee, and committed to matching contributions to a
maximum of $1,500 per employee per year in future periods. As a result, the
Company contributed and expensed $97,000 and $856,000 in the years ended
December 31, 1998 and 1999, respectively.
As a result of the mergers with the Company in 1999, both B&B and Kruse
terminated any existing defined savings contribution plans and adopted the
Company's 401(k) Plan.
Stock option plans
In December 1996, the Company's Board of Directors adopted the 1996 Stock
Option Plan (the "1996 Plan"), and in June 1997, adopted the 1997 Stock Option
Plan (the "1997 Plan") (collectively, the "Plans"). The Plans provide for the
granting of stock options to employees and consultants of the Company. Options
granted under the Plans may be either incentive stock options ("ISOs") or
nonqualified stock options ("NSOs"). ISOs may be granted only to the Company's
employees (including officers and directors who are also employees). NSOs may
be granted to the Company's employees and consultants.
68
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Equity Incentive Plan (the "1998 Plan") and
reserved 13,500,000 shares of Common Stock for issuance thereunder. The 1998
Plan authorized the award of options, restricted stock awards and stock
bonuses (each an "Award"). No person will be eligible to receive more than
3,000,000 shares in any calendar year pursuant to Awards under the 1998 Plan
other than a new employee of the Company who will be eligible to receive no
more than 6,000,000 shares in the calendar year in which such employee
commences employment. Options granted under the 1998 Plan may be either ISOs
or NSOs. ISOs may be granted only to Company employees (including officers and
directors who are also employees). NSOs may be granted to Company employees,
officers, directors, consultants, independent contractors and advisors of the
Company.
In October 1999, the Board of Directors adopted the 1999 Global Equity
Incentive Plan ("the 1999 Plan") and reserved 2,500,000 shares of Common Stock
for issuance thereunder. Options may be granted to Company employees,
directors, and consultants and in particular those to Company employees,
directors, and consultants who are neither citizens nor residents of the
United States of America.
In May 1999, in connection with the Company's acquisition of Billpoint, the
Company assumed Billpoint's 1999 Stock Plan, and all options outstanding under
the plan. At the time of the acquisition, the outstanding options became
options to purchase approximately 100,000 shares of eBay common stock. The
Company will make no further option grants under this plan.
Options under the Plans may be granted for periods of up to ten years and at
prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an
ISO granted to a 10% shareholder may not be less than 110% of the estimated
fair value of the shares on the date of grant. Options under the 1996 and 1997
Plans were exercisable immediately through June 30, 1998, subject to
repurchase rights held by the Company, which lapse over the vesting period,
which is generally four years. Options under the 1998 Plan are not immediately
exercisable and generally vest over a period of four years.
The following table summarizes activity under the Company's stock option
plans for the years ended December 31, 1997, 1998 and 1999, (shares in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1998 1999
---------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
period........... 675 $0.01 11,790 $0.02 9,246 $ 3.68
Granted ........ 11,592 0.02 17,287 2.15 6,105 129.17
Exercised ...... -- -- (19,477) 0.14 (1,775) 3.90
Cancelled ...... (477) 0.01 (354) 1.67 (458) 77.92
------ ------- ------
Outstanding at end
of period ....... 11,790 0.02 9,246 3.68 13,118 59.45
====== ======= ======
Options
exercisable at
end of period ... 11,790 0.02 370 0.03 1,827 10.06
====== ======= ======
Weighted average
fair value of
options granted
during period.... 0.10 2.80 210.06
</TABLE>
69
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about fixed stock options
outstanding at December 31, 1999, (shares in thousands):
<TABLE>
<CAPTION>
Options Outstanding at Options Exercisable
December 31, 1999 at December 31, 1999
---------------------- --------------------
Weighted Weighted
Number of Weighted Average Average Number of Average
Range of Shares Remaining Contractual Exercise Shares Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---------------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.01-$3.11............. 2,351 8.2 years $ 1.15 792 $ 0.87
4.67-4.67.............. 1,253 8.5 4.67 124 4.67
5.00-5.00.............. 3,768 8.6 5.00 821 5.00
16.85-127.06........... 2,269 9.5 98.97 18 75.56
127.88-152.06.......... 2,476 9.7 141.88 12 138.50
154.13-209.00.......... 1,001 9.5 176.37 60 166.50
------ -----
13,118 8.9 59.45 1,827 10.06
====== =====
</TABLE>
Fair value disclosures
The Company calculated the fair value of each option grant on the date of
grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates................................. 5.9% 4.9% 5.5%
Expected lives (in years)................................ 5.0 3.0 3.0
Dividend yield........................................... 0% 0% 0%
Expected volatility...................................... 0% 80% 100%
</TABLE>
Prior to the Company's initial public offering, the fair value of each
option grant was determined using the minimum value method. Subsequent to the
offering, the fair value was determined using the Black-Scholes model. The
compensation cost associated with the Company's stock-based compensation
plans, determined using the minimum value method prescribed by SFAS No. 123,
did not result in a material difference from the reported net income for the
year ended December 31, 1997. The effect of compensation cost on net income
and earnings per share for the years ended December 31, 1998 and 1999 are as
follows, (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1999
------ --------
<S> <C> <C>
Net income:
As reported ................................................ $7,273 $ 10,828
Pro forma .................................................. $6,497 $(60,190)
Net income/(loss) per share--basic:
As reported ................................................ $ 0.14 $ 0.10
Pro forma .................................................. $ 0.12 $ (0.56)
Net income/(loss) per share--diluted:
As reported ................................................ $ 0.06 $ 0.08
Pro forma .................................................. $ 0.06 $ (0.56)
</TABLE>
70
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998 Employee Stock Purchase Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Employee Stock Purchase Plan (the "Purchase
Plan") and reserved 900,000 shares of Common Stock for issuance thereunder. On
each January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the number of shares
purchased under the Purchase Plan in the preceding calendar year. The
aggregate number of shares reserved for issuance under the Purchase Plan shall
not exceed 4,500,000 shares. The Purchase Plan became effective on September
24, 1998, the first business day on which price quotations for the Company's
Common Stock were available on the Nasdaq National Market. Employees are
generally eligible to participate in the Purchase Plan if they are customarily
employed by the Company for more than 20 hours per week and more than five
months in a calendar year and are not (and would not become as a result of
being granted an option under the Purchase Plan) 5% stockholders of the
Company. Under the Purchase Plan, eligible employees may select a rate of
payroll deduction between 2% and 10% of their W-2 cash compensation subject to
certain maximum purchase limitations. Each Offering Period has a maximum
duration of two years (the "Offering Period") and consists of four six-month
Purchase Periods (each, a "Purchase Period"), with the exception of the first
Purchasing Period, which began on September 24, 1998 and ended on April 30,
1999 and a supplemental purchasing period to accommodate merged employees
which began on July 1, 1999 and ended on October 31, 1999. Offering Periods
and Purchase Periods thereafter will begin on May 1 and November 1. The price
at which the Common Stock is purchased under the Purchase Plan is 85% of the
lesser of the fair market value of the Company's Common Stock on the first day
of the applicable offering period or on the last day of that purchase period.
The Purchase Plan will terminate after a period of ten years unless terminated
earlier as permitted by the Purchase Plan.
1998 Directors Stock Option Plan
In July 1998, the Board adopted, and in August 1998 the Company's
stockholders approved, the 1998 Directors Stock Option Plan ("Directors Plan")
and reserved a total of 600,000 shares of the Company's Common Stock for
issuance thereunder. Members of the Board who are not employees of the
Company, or any parent, subsidiary or affiliate of the Company, are eligible
to participate in the Directors Plan. The option grants under the Directors
Plan are automatic and nondiscretionary, and the exercise price of the options
must be 100% of the fair market value of the Common Stock on the date of
grant. Each eligible director who first becomes a member of the Board on or
after September 24, 1998 will initially be granted an option to purchase
90,000 shares (an "Initial Grant") on the date such director first becomes a
director. Immediately following each Annual Meeting of the Company, each
eligible director will automatically be granted an additional option to
purchase 15,000 shares if such director has served continuously as a member of
the Board since the date of such director's Initial Grant or, if such director
was ineligible to receive an Initial Grant, since the Effective Date. In March
1999, the Board amended the Directors Plan to provide that no such grants
would be made to eligible directors at the 1999 Annual Meeting. The term of
such options is ten years, provided that they will terminate seven months
following the date the director ceases to be a director or a consultant of the
Company (twelve months if the termination is due to death or disability). All
options granted under the Directors Plan will vest as to 25% of the shares on
the first anniversary of the date of grant and as to 2.08% of the shares each
month thereafter, provided the optionee continues as a member of the Board or
as a consultant to the Company.
Unearned stock-based compensation
In connection with certain stock option and stock warrant grants during the
years ended December 31, 1997, 1998 and 1999, the Company recognized unearned
compensation totaling $1.4 million, $5.4 million and $6.3 million,
respectively, which is being amortized over the four-year vesting periods of
the options and the one year vesting period of the warrant as applicable.
Amortization expense recognized during the years ended December 31, 1997, 1998
and 1999 totaled approximately $25,000, $3.1 million and $4.7 million,
respectively.
71
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15--Income Taxes:
The components of income (loss) before income taxes for the years ended
December 31, 1997, 1998 and 1999 are as follows, (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
United States...................................... $8,032 $12,062 $25,187
Foreign............................................ -- -- (4,974)
------ ------- -------
$8,032 $12,062 $20,213
====== ======= =======
</TABLE>
The provision for income taxes is composed of the following, (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
-------------------
1997 1998 1999
---- ------ -------
<S> <C> <C> <C>
Current:
Federal............................................. $667 $2,419 $10,951
State and local..................................... 207 963 2,683
---- ------ -------
874 3,382 13,634
---- ------ -------
Deferred:
Federal............................................. 81 1,211 (3,347)
State and local..................................... 16 196 (902)
---- ------ -------
97 1,407 (4,249)
---- ------ -------
$971 $4,789 $ 9,385
==== ====== =======
</TABLE>
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% for 1997 and 1998 and 35% for 1999 to income before
income taxes, (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Provision at statutory rate................... $ 2,840 $ 4,255 $ 7,075
Permanent differences:
Foreign loss not recognized................. -- -- 1,741
S Corporation (income) loss not subject to
tax........................................ (2,307) (1,848) 978
Merger related expenses..................... -- 384 329
Stock-based compensation.................... -- 1,051 (379)
Tax-exempt interest income.................. -- (175) (4,223)
Other......................................... 169 328 2,706
State taxes, net of federal benefit........... 269 794 1,158
------- ------- -------
$ 971 $ 4,789 $ 9,385
======= ======= =======
</TABLE>
72
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Significant deferred tax assets and liabilities consist of the following, (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss.................................... $ -- $ 83,894
Accruals and reserves................................. 171 5,077
Depreciation.......................................... 61 2,617
State income taxes.................................... 43 --
Goodwill.............................................. -- 5,944
Amortization.......................................... 17 237
------- --------
Gross deferred tax assets............................. 292 97,769
Valuation allowance..................................... -- (83,894)
------- --------
292 13,875
------- --------
Deferred tax liabilities:
Accruals and reserves not currently deductible........ (1,724) --
Depreciation.......................................... (261) --
Net unrealized gains on marketable securities......... -- (3,731)
State income taxes.................................... -- (88)
------- --------
(1,985) (3,819)
------- --------
$(1,693) $ 10,056
======= ========
</TABLE>
As of December 31, 1999, the Company's federal and state net operating loss
carryforwards for income tax purposes were approximately $192.9 million and
$99.1 million, respectively. If not utilized, the federal net operating loss
carryforwards will begin to expire in 2019, and the state net operating loss
carryforwards will begin to expire in 2004. Deferred tax assets of
approximately $83.9 million at December 31, 1999 pertain to certain net
operating loss carryforwards resulting from the exercise of employee stock
options. When recognized, the tax benefit of these losses are accounted for as
a credit to additional paid-in capital rather than a reduction on the income
tax provision.
In connection with the acquisition of Butterfield & Butterfield by eBay,
Butterfield & Butterfield's status as an S Corporation was terminated and B&B
became subject to federal and state income taxes. The supplemental pro forma
information below includes an increase to the provisions for income taxes
based upon a combined federal and state tax rate of 42%. This amount
approximates the statutory tax rates that would have been applied if B&B had
been taxed as a C Corporation during the periods prior to its acquisition.
Because the acquisition of the B&B companies has been accounted for as a
pooling of interests, there has been no adjustment to the historical carrying
values of the real estate holdings. However, these properties are subject to
increases in tax basis which will result in a higher depreciable basis for
income and property tax purposes. As a result, a deferred tax asset and a
corresponding increase to stockholder's equity of approximately $8.8 million
was recorded in the second quarter of 1999 for the difference between the
financial statement carrying amounts and the tax basis of the related net
assets upon the closing of the transaction.
73
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The pro forma provision for income taxes is composed of the following, (in
thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1997 1998 1999
------ ------ -------
<S> <C> <C> <C>
Current:
Federal........................................... $2,942 $4,303 $10,267
State and local................................... 578 1,243 2,505
------ ------ -------
3,520 5,546 12,772
------ ------ -------
Deferred:
Federal........................................... 24 1,138 (3,566)
State and local................................... 3 176 (939)
------ ------ -------
27 1,314 (4,505)
------ ------ -------
$3,547 $6,860 $ 8,267
====== ====== =======
</TABLE>
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% for 1997 and 1998 and 35% for 1999 to income before
income taxes, (in thousands):
<TABLE>
<CAPTION>
Year Ended December
31,
---------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Provision at statutory rate......................... $2,840 $4,255 $7,075
Permanent differences:
Foreign loss not benefited........................ -- -- 1,741
Acquisition related expenses...................... -- 384 329
Stock based compensation.......................... -- 1,051 (379)
Tax exempt interest income........................ -- (175) (4,223)
Other............................................. 141 316 2,706
State taxes, net of federal benefit................. 566 1,029 1,018
------ ------ ------
$3,547 $6,860 $8,267
====== ====== ======
</TABLE>
Note 16--Subsequent Events:
GO.com
On February 6, 2000, the Company entered into a four-year marketing
agreement with GO.com. In accordance with the agreement, GO.com will provide
the Company with online and offline promotion, the Company and GO.com will
develop a co-branded version of the eBay service and both companies will
develop 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 will acquire
30% of eBay Japan and eBay will retain 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.
74
<PAGE>
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In accordance with the marketing agreement, NEC will provide 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 will pay NEC an annual up-front fee of
approximately $1.5 million. The first payment will be made within 10 days of
March 31, 2000 and subsequent 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.
Wells Fargo
On February 24, 2000, Billpoint and Wells Fargo Bank ("Wells Fargo") entered
into an agreement whereby Wells Fargo will be the exclusive provider of
Internet payment services (as defined) of domestic transactions for
Billpoint's customers. The service agreement expires February 28, 2007.
In connection with this transaction Billpoint will reincorporate in Delaware
and sell 350 shares of common stock and 1,399,965 shares of Series A Preferred
stock to Wells Fargo which represents approximately 35% ownership in
Billpoint. Simultaneously, eBay will exchange 25,999,350 common shares for
2,599,935 shares of Series A Preferred stock. eBay will continue to
consolidate Billpoint due to a majority ownership interest and will reflect a
minority interest for the equity interest of Wells Fargo Bank.
Lease arrangement
On March 1, 2000, the Company entered into a five-year lease for general
office facilities located in San Jose, California. Payment under this lease,
which commenced during 2000, are based on the London Interbank Offering Rate
("LIBOR") plus 0.394% applied to the $126.4 million cost of the facility
funded by the lessor. The Company 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, the Company 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.
AutoTrader.com
On March 6, 2000, eBay and Autotrader.com LLC ("Autotrader") entered into a
marketing and services agreement whereby eBay and Autotrader will develop 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,
eBay has committed to provide certain marketing expenditures for the promotion
of the eBay service and additional automobile related services offered by
Autotrader.
The following is a schedule by year of committed marketing and promotional
expenditures related to the agreement (in thousands):
<TABLE>
<S> <C>
Year 1............................................................. $ 7,000
Year 2............................................................. 8,000
Year 3............................................................. 9,000
Last 6 months...................................................... 5,000
-------
Total............................................................ $29,000
=======
</TABLE>
Under with the agreement, eBay acquired approximately a 3% equity investment
in Autotrader representing 1,173,876 of Autotrader.com Class A units in
exchange for cash proceeds of $9.2 million or $7.87 per unit.
75
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
eBAY INC.
Date: March 29, 2000
Principal Executive Officer: Principal Financial Officer and
Principal
Accounting Officer:
/s/ Margaret C. Whitman /s/ Gary F. Bengier
By : ________________________________ By : ________________________________
Margaret C. Whitman Gary F. Bengier
President and Chief Executive Vice President, Chief Financial
Officer Officer
Additional Directors
/s/ Pierre M. Omidyar /s/ Philippe Bourguignon
By : ________________________________ By : ________________________________
Pierre M. Omidyar Philippe Bourguignon
Founder, Chairman of the Board and Director
Director
/s/ Scott D. Cook /s/ Robert C. Kagle
By : ________________________________ By : ________________________________
Scott D. Cook Robert C. Kagle
Director Director
/s/ Dawn G. Lepore /s/ Howard D. Schultz
By : ________________________________ By : ________________________________
Dawn G. Lepore Howard D. Schultz
Director Director
76
<PAGE>
EXHIBIT 10.25
================================================================================
LEASE
between
eBAY REALTY TRUST,
as Lessor,
and
eBAY INC.,
as Lessee
___________________________
Dated as of March 1, 2000
___________________________
================================================================================
THIS LEASE IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF THE CHASE MANHATTAN
BANK, AS AGENT (THE "AGENT"), UNDER A CREDIT AGREEMENT, DATED AS OF MARCH 1,
2000 AMONG eBAY REALTY TRUST, THE LENDERS, AND THE AGENT, AS AMENDED OR
SUPPLEMENTED. THIS LEASE HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE
EXTENT, IF ANY, THAT THIS LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS
DEFINED IN THE UNIFORM COMMERCIAL CODE OF THE STATE OF CALIFORNIA OR NEW YORK),
NO SECURITY INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR
POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL COUNTERPART CONTAINING THE
RECEIPT THEREFOR EXECUTED BY THE AGENT ON THE SIGNATURE PAGE HEREOF.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS............................................................................... 1
1.1 Defined Terms........................................................................... 1
SECTION 2. PROPERTY AND TERM......................................................................... 1
2.1 Property................................................................................ 1
2.2 Lease Term.............................................................................. 1
2.3 Title................................................................................... 2
SECTION 3. RENT....................................................................................... 2
3.1 Rent.................................................................................... 2
3.2 Supplemental Rent....................................................................... 2
3.3 Performance on a Non-Business Day....................................................... 2
SECTION 4. UTILITY CHARGES........................................................................... 3
4.1 Utility Charges......................................................................... 3
SECTION 5. QUIET ENJOYMENT........................................................................... 3
5.1 Quiet Enjoyment......................................................................... 3
SECTION 6. NET LEASE................................................................................. 3
6.1 Net Lease; No Setoff; Etc............................................................... 3
6.2 No Termination or Abatement............................................................. 4
SECTION 7. OWNERSHIP OF PROPERTY..................................................................... 4
7.1 Ownership of the Property............................................................... 4
SECTION 8. CONDITION OF PROPERTY..................................................................... 6
8.1 Condition of the Property............................................................... 6
8.2 Possession and Use of the Property...................................................... 6
SECTION 9. COMPLIANCE................................................................................ 6
9.1 Compliance with Legal Requirements and Insurance Requirements........................... 6
9.2 Environmental Matters................................................................... 6
SECTION 10. MAINTENANCE AND REPAIR................................................................... 7
10.1 Maintenance and Repair; Return.......................................................... 7
10.2 Right of Inspection..................................................................... 8
10.3 Environmental Inspection................................................................ 8
SECTION 11. MODIFICATIONS............................................................................ 9
11.1 Modifications, Substitutions and Replacements........................................... 9
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
SECTION 12. TITLE.................................................................................... 10
12.1 Warranty of Title....................................................................... 10
12.2 Grants and Releases of Easements........................................................ 10
SECTION 13. PERMITTED CONTESTS....................................................................... 11
13.1 Permitted Contests Other Than in Respect of Impositions................................. 11
SECTION 14. INSURANCE................................................................................ 11
14.1 Public Liability and Workers' Compensation Insurance.................................... 11
14.2 Hazard and Other Insurance.............................................................. 11
14.3 Coverage................................................................................ 12
SECTION 15. CONDEMNATION AND CASUALTY................................................................ 13
15.1 Casualty and Condemnation............................................................... 13
SECTION 16. LEASE TERMINATION........................................................................ 15
16.1 Termination upon Certain Events......................................................... 15
16.2 Procedures.............................................................................. 15
SECTION 17. DEFAULT.................................................................................. 15
17.1 Lease Events of Default................................................................. 15
17.2 Final Payment........................................................................... 17
17.3 Lease Remedies.......................................................................... 17
17.4 Waiver of Certain Rights................................................................ 19
17.5 Assignment of Rights Under Contracts.................................................... 19
17.6 Remedies Cumulative..................................................................... 19
SECTION 18. LESSOR'S RIGHT TO CURE.................................................................. 20
18.1 Lessor's Right to Cure Lessee's Lease Defaults.......................................... 20
SECTION 19. LEASE TERMINATION........................................................................ 20
19.1 Provisions Relating to Lessee's Termination of this Lease or Exercise of
Purchase Option......................................................................... 20
SECTION 20. PURCHASE OPTION.......................................................................... 20
20.1 Purchase Option......................................................................... 20
20.2 Maturity Date Purchase Option........................................................... 21
SECTION 21. SALE OF PROPERTY......................................................................... 21
21.1 Sale Procedure.......................................................................... 21
21.2 Application of Proceeds of Sale......................................................... 22
21.3 Indemnity for Excessive Wear............................................................ 22
21.4 Appraisal Procedure..................................................................... 22
21.5 Certain Obligations Continue............................................................ 23
SECTION 22. HOLDING OVER............................................................................. 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
22.1 Holding Over............................................................................ 23
SECTION 23. RISK OF LOSS............................................................................. 23
23.1 Risk of Loss............................................................................ 23
SECTION 24. SUBLETTING AND ASSIGNMENT................................................................ 24
24.1 Subletting.............................................................................. 24
24.2 Subleases............................................................................... 24
24.3 Assignment of Rents..................................................................... 24
SECTION 25. ESTOPPEL CERTIFICATES.................................................................... 24
25.1 Estoppel Certificates................................................................... 24
SECTION 26. NO WAIVER................................................................................ 25
26.1 No Waiver............................................................................... 25
SECTION 27. ACCEPTANCE OF SURRENDER.................................................................. 25
27.1 Acceptance of Surrender................................................................. 25
SECTION 28. NO MERGER OF TITLE....................................................................... 25
28.1 No Merger of Title...................................................................... 25
SECTION 29. NOTICES.................................................................................. 25
29.1 Notices................................................................................. 25
SECTION 30. MISCELLANEOUS............................................................................ 25
30.1 Miscellaneous........................................................................... 25
30.2 Amendments and Modifications............................................................ 26
30.3 Successors and Assigns.................................................................. 26
30.4 Headings and Table of Contents.......................................................... 26
30.5 Counterparts............................................................................ 26
30.6 GOVERNING LAW........................................................................... 26
30.7 Limitations on Recourse................................................................. 26
30.8 Memorandum of Lease..................................................................... 27
30.9 Priority................................................................................ 27
</TABLE>
Exhibits
- --------
Exhibit A Memorandum of Lease
Schedules
- ---------
Schedule A The Land
<PAGE>
EXHIBIT 10.25
LEASE (this "Lease"), dated as of March 1, 2000 between eBAY REALTY TRUST,
-----
a Delaware business trust, having its principal office at Wilmington Trust
Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware
19890-0001, as lessor (the "Lessor"), and eBAY INC., a Delaware corporation,
------
having its principal office at 2125 Hamilton Avenue, San Jose, California 95125,
as lessee (the "Lessee").
------
In consideration of the mutual agreements herein contained, and of other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. Capitalized terms used herein but not otherwise
-------------
defined in this Lease shall have the respective meanings specified in Annex A to
the Participation Agreement dated as of the date hereof among Lessee, Lessor,
Agent, the Investor and the Lenders named therein, as such Participation
Agreement may be amended, supplemented or otherwise modified from time to time,
and the rules of usage set forth in Annex A to the Participation Agreement.
SECTION 2. PROPERTY AND TERM
2.1 Property. Subject to the terms and conditions hereinafter set
--------
forth, Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the
following (collectively, the "Property"):
(a) all of Lessor's right, title and interest in and to the Land
described on Schedule A attached hereto;
----------
(b) all of Lessor's right, title and interest in and to the
Improvements;
(c) all of Lessor's right, title and interest in and to all the
Appurtenant Rights;
(d) all of Lessor's right, title and interest in and to all the
Fixtures; and
(e) all of Lessor's right, title and interest in and to all leases of
any portion of the Improvements and rights to Rents thereunder.
2.2 Lease Term. (a) The Property is leased for the Term, unless
----------
extended or earlier terminated in accordance with the provisions of this Lease.
(b) The Term shall be automatically extended if the Maturity Date is
extended pursuant to Section 2.1(c) of the Credit Agreement so that the Term
will expire on the Maturity Date as so extended.
<PAGE>
2.3 Title. The Property is leased to Lessee without any
-----
representation or warranty, express or implied, by Lessor and subject to the
rights of parties in possession, the existing state of title (including, without
limitation, the Permitted Exceptions) and all applicable Legal Requirements.
Lessee shall in no event have any recourse against Lessor for any defect in
title to the Property.
SECTION 3. RENT
3.1 Rent. (a) On each applicable Payment Date, Lessee shall pay the
----
Basic Rent attributable to the Property.
(b) Basic Rent shall be due and payable in lawful money of the United
States and shall be paid by a single wire transfer of immediately available
funds on the due date therefor to such account at such bank or to such other
Person or in such other manner as Lessor shall from time to time direct.
3.2 Supplemental Rent. (a) Lessee shall pay to Lessor or the Person
-----------------
entitled thereto any and all Supplemental Rent promptly as the same shall become
due and payable, and if Lessee fails to pay any Supplemental Rent, Lessor shall
have all rights, powers and remedies provided for herein or by law or equity or
otherwise in the case of nonpayment of Basic Rent. Lessee shall pay to Lessor
as Supplemental Rent, among other things, on demand, to the extent permitted by
applicable Legal Requirements, interest at the applicable Overdue Rate on any
installment of Basic Rent not paid when due for the period for which the same
shall be overdue and on any payment of Supplemental Rent not paid when due or
demanded by Lessor for the period from the due date or the date of any such
demand, as the case may be, until the same shall be paid. The expiration or
other termination of Lessee's obligations to pay Basic Rent hereunder shall not
limit or modify the obligations of Lessee with respect to Supplemental Rent.
Unless expressly provided otherwise in this Lease or any other Operative
Agreement, in the event of any failure on the part of Lessee to pay and
discharge any Supplemental Rent as and when due, Lessee shall also promptly pay
and discharge any fine, penalty, interest or cost which may be assessed or added
for nonpayment or late payment of such Supplemental Rent, all of which shall
also constitute Supplemental Rent.
(b) Lessee shall make a payment of Supplemental Rent equal to the
Maximum Residual Guarantee Amount in accordance with Section 21.1(c).
3.3 Performance on a Non-Business Day. If any payment is required
---------------------------------
hereunder on a day that is not a Business Day, then such payment shall be due on
the next succeeding Business Day, unless, in the case of payments based on the
Eurodollar Rate, the result of such extension would be to extend such payment
into another calendar month, in which event such payment shall be made on the
immediately preceding Business Day.
<PAGE>
SECTION 4. UTILITY CHARGES
4.1 Utility Charges. Lessee shall pay, or cause to be paid, all
---------------
charges for electricity, power, gas, oil, water, telephone, sanitary sewer
service and all other rents and utilities used in or on the Property during the
Term. Lessee shall be entitled to receive any credit or refund with respect to
any utility charge paid by Lessee and the amount of any credit or refund
received by Lessor on account of any utility charges paid by Lessee, net of the
costs and expenses incurred by Lessor in obtaining such credit or refund, shall
be promptly paid over to Lessee. All charges for utilities imposed with respect
to the Property for a billing period during which this Lease expires or
terminates shall be adjusted and prorated on a daily basis between Lessor and
Lessee, and each party shall pay or reimburse the other for each party's pro
rata share thereof.
SECTION 5. QUIET ENJOYMENT
5.1 Quiet Enjoyment. So long as no Lease Event of Default shall have
---------------
occurred and be continuing, Lessee shall peaceably and quietly have, hold and
enjoy the Property for the Term, free of any claim or other action by Lessor or
anyone rightfully claiming by, through or under Lessor.
SECTION 6. NET LEASE
6.1 Net Lease; No Setoff; Etc. This Lease shall constitute a net
--------------------------
lease and, notwithstanding any other provision of this Lease, Lessee shall pay
Basic Rent and Supplemental Rent without counterclaim, setoff, deduction or
defense of any kind and without abatement, suspension, deferment, diminution or
reduction of any kind, and Lessee's obligation to pay all such amounts is
absolute and unconditional. The obligations and liabilities of Lessee hereunder
shall in no way be released, discharged or otherwise affected for any reason,
including, without limitation, to the maximum extent permitted by law: (a) any
defect in the condition, merchantability, design, construction, quality or
fitness for use of any portion of the Property, or any failure of the Property
to comply with all Legal Requirements, including any inability to occupy or use
the Property by reason of such non-compliance; (b) any damage to, abandonment,
loss, contamination of or Release from or destruction of or any requisition or
taking of the Property or any part thereof, including eviction; (c) any
restriction, prevention or curtailment of or interference with any use of the
Property or any part thereof, including eviction; (d) any defect in title to or
rights to the Property or any Lien on such title or rights or on the Property;
(e) any change, waiver, extension, indulgence or other action or omission or
breach in respect of any obligation or liability of or by Lessor, Investor,
Agent or any Lender; (f) any bankruptcy, insolvency, reorganization,
composition, adjustment, dissolution, liquidation or other like proceedings
relating to Lessee, Lessor, Investor, Agent, any Lender or any other Person, or
any action taken with respect to this Lease by any trustee or receiver of
Lessee, Lessor, Investor, Agent, any Lender or any other Person, or by any
court, in any such proceeding; (g) any claim that Lessee has or might have
against any Person, including, without limitation, Lessor, Investor, Agent or
any Lender; (h) any failure on the part of Lessor to perform or comply with any
of the terms of this Lease, any other Operative Agreement or of any other
agreement; (i) any invalidity
<PAGE>
or unenforceability or disaffirmance against or by Lessee of this Lease or any
provision hereof or any of the other Operative Agreements or any provision of
any thereof; (j) the impossibility of performance by Lessee, Lessor or both; (k)
any action by any court, administrative agency or other Governmental Authority;
(l) any restriction, prevention or curtailment of or any interference with the
construction on or any use of the Property or any part thereof; or (m) any other
occurrence whatsoever, whether similar or dissimilar to the foregoing, whether
or not Lessee shall have notice or knowledge of any of the foregoing. This Lease
shall be noncancellable by Lessee for any reason whatsoever except as expressly
provided herein, and Lessee, to the extent permitted by Legal Requirements,
waives all rights now or hereafter conferred by statute or otherwise to quit,
terminate or surrender this Lease, or to any diminution, abatement or reduction
of Rent payable by Lessee hereunder. If for any reason whatsoever this Lease
shall be terminated in whole or in part by operation of law or otherwise, except
as otherwise expressly provided herein, Lessee shall, unless prohibited by Legal
Requirements, nonetheless pay to Lessor (or, in the case of Supplemental Rent,
to whomever shall be entitled thereto) an amount equal to each Rent payment at
the time and in the manner that such payment would have become due and payable
under the terms of this Lease if it had not been terminated in whole or in part,
and in such case, so long as such payments are made and no Lease Event of
Default shall have occurred and be continuing, Lessor will deem this Lease to
have remained in effect. Each payment of Rent made by Lessee hereunder shall be
final and, absent manifest error in the computation of the amount thereof,
Lessee shall not seek or have any right to recover all or any part of such
payment from Lessor, Investor, Agent or any party to any agreements related
thereto for any reason whatsoever. Lessee assumes the sole responsibility for
the condition, use, operation, maintenance, and management of the Property and
Lessor shall have no responsibility in respect thereof and shall have no
liability for damage to the property of Lessee or any subtenant of Lessee on any
account or for any reason whatsoever, unless due to Lessor's gross negligence or
willful misconduct.
6.2 No Termination or Abatement. Lessee shall remain obligated under
---------------------------
this Lease in accordance with its terms and shall not take any action to
terminate, rescind or avoid this Lease, notwithstanding any action for
bankruptcy, insolvency, reorganization, liquidation, dissolution, or other
proceeding affecting Lessor, or any action with respect to this Lease which may
be taken by any trustee, receiver or liquidator of Lessor or by any court with
respect to Lessor, except as otherwise expressly provided herein. Lessee hereby
waives all right (i) to terminate or surrender this Lease, except as otherwise
expressly provided herein, or (ii) to avail itself of any abatement, suspension,
deferment, reduction, setoff, counterclaim or defense with respect to any Rent.
Lessee shall remain obligated under this Lease in accordance with its terms and
Lessee hereby waives any and all rights now or hereafter conferred by statute or
otherwise to modify or to avoid strict compliance with its obligations under
this Lease. Notwithstanding any such statute or otherwise, Lessee shall be
bound by all of the terms and conditions contained in this Lease.
SECTION 7. OWNERSHIP OF PROPERTY
7.1 Ownership of the Property. (a) Lessor and Lessee intend that (i)
-------------------------
for financial accounting purposes with respect to Lessee (A) this Lease will be
treated as an
<PAGE>
"operating lease" pursuant to Statement of Financial Accounting Standards (SFAS)
No. 13, as amended, (B) Lessor will be treated as the owner and lessor of the
Property and (C) Lessee will be treated as the lessee of the Property, but (ii)
for federal, state and local income tax and all other purposes (A) this Lease
will be treated as a financing arrangement, (B) the Lenders will be treated as
senior lenders making loans to Lessee in an amount equal to the Loans, which
Loans will be secured by the Property, (C) Investor will be treated as a
subordinated lender making a loan to Lessee in an amount equal to the Investor
Contribution, which loan is secured by the Property, and (D) Lessee will be
treated as the owner of the Property and will be entitled to all tax benefits
ordinarily available to an owner of property like the Property for such tax
purposes.
(b) Lessor and Lessee further intend and agree that, for the purpose
of securing Lessee's obligations for the repayment of the above-described loans,
(i) this Lease shall also be deemed to be a security agreement and financing
statement within the meaning of Article 9 of the Uniform Commercial Code and a
real property mortgage or deed of trust, as applicable; (ii) the conveyance
provided for in Section 2 shall be deemed a grant of a security interest in and
a mortgage lien on the Lessee's right, title and interest in the Property
(including the right to exercise all remedies as are contained in the applicable
Mortgage and Memorandum of Lease upon the occurrence of a Lease Event of
Default) and all proceeds of the conversion, voluntary or involuntary, of the
foregoing into cash, investments, securities or other property, whether in the
form of cash, investments, securities or other property, for the benefit of the
Lessor to secure the Lessee's payment of all amounts owed by the Lessee under
this Lease and the other Operative Agreements and Lessor holds title to the
Property so as to create and grant a first lien and prior security interest in
the Property (A) pursuant to this Lease for the benefit of the Agent under the
Assignment of Lease, to secure to the Agent the obligations of the Lessee under
the Lease and (B) pursuant to the Mortgage to secure to the Agent the
obligations of the Lessor under the Mortgage and the Notes; (iii) the possession
by Lessor or any of its agents of notes and such other items of property as
constitute instruments, money, negotiable documents or chattel paper shall be
deemed to be "possession by the secured party" for purposes of perfecting the
security interest pursuant to Section 9-305 of the Uniform Commercial Code; and
(iv) notifications to Persons holding such property, and acknowledgements,
receipts or confirmations from financial intermediaries, bankers or agents (as
applicable) of Lessee shall be deemed to have been given for the purpose of
perfecting such security interest under applicable law. Lessor and Lessee
shall, to the extent consistent with this Lease, take such actions as may be
necessary to ensure that, if this Lease were deemed to create a security
interest in the Property in accordance with this Section, such security interest
would be deemed to be a perfected security interest of first priority under
applicable law and will be maintained as such throughout the Basic Term.
Nevertheless, Lessee acknowledges and agrees that none of Lessor, Investor, the
Trust Company, Agent, or any Lender has provided or will provide tax, accounting
or legal advice to Lessee regarding this Lease, the Operative Agreements or the
transactions contemplated hereby and thereby, or made any representations or
warranties concerning the tax, accounting or legal characteristics of the
Operative Agreements, and that Lessee has obtained and relied upon such tax,
accounting and legal advice concerning the Operative Agreements as it deems
appropriate.
(c) Lessor and Lessee further intend and agree that in the event of
any insolvency or receivership proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency laws or statute of the United
States of America or any State or
<PAGE>
Commonwealth thereof affecting Lessee or Lessor, the transactions evidenced by
this Lease shall be regarded as loans made by an unrelated third party lender to
Lessee.
SECTION 8. CONDITION OF PROPERTY
8.1 Condition of the Property. LESSEE ACKNOWLEDGES AND AGREES THAT IT
-------------------------
IS RENTING THE PROPERTY "AS IS" WITHOUT REPRESENTATION, WARRANTY OR COVENANT
(EXPRESS OR IMPLIED) BY LESSOR AND SUBJECT TO (A) THE EXISTING STATE OF TITLE,
(B) THE RIGHTS OF ANY PARTIES IN POSSESSION THEREOF, (C) ANY STATE OF FACTS
WHICH AN ACCURATE SURVEY OR PHYSICAL INSPECTION MIGHT SHOW AND (D) VIOLATIONS OF
LEGAL REQUIREMENTS WHICH MAY EXIST ON THE DATE HEREOF. NONE OF LESSOR, THE
INVESTOR, THE AGENT AND ANY LENDER HAS MADE OR SHALL BE DEEMED TO HAVE MADE ANY
REPRESENTATION, WARRANTY OR COVENANT (EXPRESS OR IMPLIED, INCLUDING THE
CONDITION OF ANY IMPROVEMENTS THEREON, THE SOIL CONDITION, OR ANY ENVIRONMENTAL
OR HAZARDOUS MATERIAL CONDITION) OR SHALL BE DEEMED TO HAVE ANY LIABILITY
WHATSOEVER AS TO THE TITLE, VALUE, HABITABILITY, USE, CONDITION, DESIGN,
OPERATION, OR FITNESS FOR USE OF THE PROPERTY (OR ANY PART THEREOF), OR ANY
OTHER REPRESENTATION, WARRANTY OR COVENANT WHATSOEVER, EXPRESS OR IMPLIED, WITH
RESPECT TO THE PROPERTY (OR ANY PART THEREOF) AND NONE OF LESSOR, THE INVESTOR,
THE AGENT AND ANY LENDER SHALL BE LIABLE FOR ANY LATENT, HIDDEN, OR PATENT
DEFECT THEREIN OR THE FAILURE OF THE PROPERTY, OR ANY PART THEREOF, TO COMPLY
WITH ANY LEGAL REQUIREMENT.
8.2 Possession and Use of the Property. The Property shall be used in
----------------------------------
accordance with all applicable Legal Requirements. Lessee shall pay, or cause
to be paid, all charges and costs required in connection with the use of the
Property. Lessee shall not commit or permit any waste of the Property or any
part thereof.
SECTION 9. COMPLIANCE
9.1 Compliance with Legal Requirements and Insurance Requirements.
-------------------------------------------------------------
Subject to the terms of Section 13 relating to permitted contests, Lessee, at
its sole cost and expense, shall (a) comply with all Legal Requirements
(including all Environmental Laws) and Insurance Requirements relating to the
Property, including the use, construction, operation, maintenance, repair and
restoration thereof, whether or not compliance therewith shall require
structural or extraordinary changes in the Improvements or interfere with the
use and enjoyment of the Property, and (b) procure, maintain and comply with all
licenses, permits, orders, approvals, consents and other authorizations required
for the construction, renovation, use, maintenance and operation of the Property
and for the use, operation, maintenance, repair and restoration of the
Improvements.
<PAGE>
9.2 Environmental Matters. (a) Promptly upon Lessee's actual
---------------------
knowledge of the presence of Hazardous Substances in any portion of the Property
in concentrations and conditions that constitute an Environmental Violation,
Lessee shall notify Lessor in writing of such condition. In the event of such
Environmental Violation, Lessee shall, not later than thirty (30) days after
Lessee has actual knowledge of such Environmental Violation, deliver to Lessor
and the Agent an Officer's Certificate and either deliver a Termination Notice
with respect to the Property pursuant to Section 16.1, if applicable, or, at
Lessee's sole cost and expense, promptly and diligently undertake any response,
clean up, remedial or other action necessary to remove, cleanup or remediate the
Environmental Violation in accordance with the terms of Section 9.1. If Lessee
does not deliver a Termination Notice with respect to the Property pursuant to
Section 16.1, Lessee shall, upon completion of remedial action by Lessee, cause
to be prepared by an environmental consultant reasonably acceptable to Lessor a
report describing the Environmental Violation and the actions taken by Lessee
(or its agents) in response to such Environmental Violation, and a statement by
the consultant that such Environmental Violation has been remedied in full
compliance with applicable Environmental Laws.
(b) In addition, Lessee shall provide to Lessor, within five (5)
Business Days of receipt, copies of all written communications with any
Governmental Authority relating to any Environmental Law in connection with the
Property. Lessee shall also promptly provide such detailed reports of any such
environmental claims as reasonably may be requested by Lessor and the Agent.
SECTION 10. MAINTENANCE AND REPAIR
10.1 Maintenance and Repair; Return. (a) Lessee, at its sole cost
------------------------------
and expense, shall maintain the Property in good condition (ordinary wear and
tear excepted) and make all necessary repairs thereto, of every kind and nature
whatsoever, whether interior or exterior, ordinary or extraordinary, structural
or nonstructural or foreseen or unforeseen, in each case as required by all
Legal Requirements and Insurance Requirements and on a basis reasonably
consistent with the operation and maintenance of commercial properties
comparable in type and location to the Property, subject, however, to the
provisions of Section 15 with respect to Condemnation and Casualty.
(b) Lessor shall under no circumstances be required to build any
Improvements on the Property, make any repairs, replacements, alterations or
renewals of any nature or description to the Property, make any expenditure
whatsoever in connection with this Lease or maintain the Property in any way.
Lessor shall not be required to maintain, repair or rebuild all or any part of
the Property, and Lessee waives the right to (i) require Lessor to maintain,
repair, or rebuild all or any part of the Property, or (ii) make repairs at the
expense of Lessor pursuant to any Legal Requirement, Insurance Requirement,
contract, agreement, covenants, condition or restriction at any time in effect.
(c) Lessee shall, upon the expiration or earlier termination of the
Term with respect to the Property (other than as a result of Lessee's purchase
of the Property from Lessor as provided herein), vacate, surrender and transfer
the Property to Lessor, at Lessee's own expense,
<PAGE>
free and clear of all Liens other than Permitted Liens described in clauses (i)
and (viii) of the definition of Permitted Liens, Liens described in clause (ii)
of the definition of Permitted Exceptions, and Lessor Liens, in as good
condition as they were on the Closing Date, ordinary wear and tear excepted, and
in compliance with all Legal Requirements and the other requirements of this
Lease (and in any event without (x) any asbestos installed or maintained in any
part of the Property, (y) any polychlorinated byphenyls (PCBs) in, on or used,
stored or located at the Property, and (z) any other Hazardous Substances, other
than as disclosed in the Environmental Audit). If Lessee has not exercised its
Maturity Date Purchase Option, Lessee shall provide, or cause to be provided or
accomplished, at the sole cost and expense of Lessee, to or for the benefit of
Lessor or a purchaser, at least thirty Business Days prior to the expiration or
earlier termination of the Term with respect to the Property, each of the
following: (i) an endorsement to the title policy issued for the Property
showing (A) record title of the Lessor in the fee estate, subject to no Liens
other than Permitted Liens described in clauses (i) and (viii) of the definition
of Permitted Liens, Liens described in clause (ii) of the definition of
Permitted Exceptions, and Lessor Liens and (B) the Mortgage as a valid and
perfected first lien; (ii) an environmental assessment for the Property
satisfying the requirements set forth in Section 10.3 below; (iii) an assignment
(to the extent assignable) of all of the Lessee's right, title and interest in
and to each agreement executed by Lessee in connection with the construction,
renovation, development, use, maintenance or operation of the Property
(including all warranty, performance, service and indemnity provisions); (iv)
copies of all plans and specifications relating to the design, construction,
renovation or development of the Property; (v) an assignment (to the extent
assignable) of all permits, licenses, approvals and other authorizations from
all Governmental Authorities in connection with the construction, operation and
use of the Property; (vi) copies of all books and records, with respect to the
construction, renovation, maintenance, repair, operation or use of the Property.
Lessee shall reasonably cooperate with any independent purchaser of the Property
in order to facilitate the ownership and operation by such purchaser of the
Property after such expiration or earlier termination of the Term, including
providing all books, reports and records regarding the maintenance, repair and
ownership of the Property and all data and technical information relating
thereto, granting or assigning all licenses necessary for the operation and
maintenance of the Property and cooperating in seeking and obtaining all
necessary licenses, permits and approvals of Governmental Authorities. Lessee
shall have also paid the total cost for the completion of all Modifications
commenced prior to such expiration or earlier termination of the Term. The
obligation of Lessee under this Section 10.1(c) shall survive the expiration or
termination of this Lease.
10.2 Right of Inspection. Lessor may, at reasonable times and with
-------------------
reasonable prior notice, enter upon, inspect and examine at its own cost and
expense (unless a Lease Event of Default exists, in which case the out-of-pocket
costs and expenses of Lessor shall be paid by Lessee), the Property. Lessee
shall furnish to Lessor statements, no more than once per year, accurate in all
material respects, regarding the condition and state of repair of the Property.
Lessor shall have no duty to make any such inspection or inquiry and shall not
incur any liability or obligation by reason of not making any such inspection or
inquiry.
10.3 Environmental Inspection. Unless Lessee has previously
------------------------
irrevocably exercised the Maturity Date Purchase Option, not less than 12 months
prior to the Maturity Date and not more than thirty Business Days prior to
surrender of possession of the Property, Lessor
<PAGE>
shall, at Lessee's sole cost and expense, obtain a report by an environmental
consultant selected by Lessor and reasonably acceptable to Lessee certifying
that the Property or any portion thereof (i) does not contain Hazardous
Substances under circumstances or in concentrations that could result in a
violation of or liability under any Environmental Law and (ii) is in compliance
with all Environmental Laws. If such is not the case on either such date, then
Lessee shall be deemed to have irrevocably exercised the Maturity Date Purchase
Option pursuant to Section 20.2.
SECTION 11. MODIFICATIONS
11.1 Modifications, Substitutions and Replacements. (a) So long as
---------------------------------------------
no Lease Event of Default has occurred and is continuing, Lessee, at its sole
cost and expense, may at any time and from time to time make alterations,
renovations, improvements and additions to the Property or any part thereof
(collectively, "Modifications"); provided, that: (i) except for any Modification
------------- --------
required to be made pursuant to a Legal Requirement or an Insurance Requirement,
no Modification, individually, or when aggregated with any (A) other
Modification or (B) grant, dedication, transfer or release pursuant to Section
12.2, shall impair the value of the Property or the utility or useful life of
the Property from that which existed immediately prior to such Modification;
(ii) the Modification shall be performed expeditiously and in a good and
workmanlike manner; (iii) Lessee shall comply with all Legal Requirements
(including all Environmental Laws) and Insurance Requirements applicable to the
Modification, including the obtaining of all permits and certificates of
occupancy, and the structural integrity of the Property shall not be adversely
affected; (iv) Lessee shall maintain or cause to be maintained builders' risk
insurance at all times when a Modification in excess of $500,000 is in progress;
(v) subject to the terms of Section 13 relating to permitted contests, Lessee
shall pay all costs and expenses and discharge any Liens arising with respect to
the Modification; (vi) such Modifications shall comply with Sections 8.2 and
10.1 and shall not change the primary character of the Property as office or
commercial and/or research and development space, in compliance with local
zoning ordinances and (vii) no Improvements shall be demolished, except to the
extent such demolition does not impair the value, utility or useful life of the
Property. All Modifications (other than those that may be readily removed
without impairing the value, utility or remaining useful life of the Property)
shall remain part of the realty and shall be subject to this Lease, and title
thereto shall immediately vest in Lessor. So long as no Lease Event of Default
has occurred and is continuing, Lessee may place upon the Property any
inventory, trade fixtures, machinery, equipment or other property belonging to
Lessee or third parties and may remove the same at any time during the term of
this Lease; provided that such inventory, trade fixtures, machinery, equipment
--------
or other property, or their respective operations, do not materially impair the
value, utility or remaining useful life of the Property.
(b) Lessee shall notify Lessor of the undertaking of any Modifications
to the Property the cost of which is anticipated to exceed $500,000. Prior to
undertaking any such Modifications, Lessee shall deliver to Lessor (i) a brief
narrative of the work to be done and a copy of the plans and specifications
relating to such work; and (ii) an Officer's Certificate stating that such work
when completed will not impair the value, utility or remaining life of the
Property. Lessor, by itself or its agents, shall have the right, but not the
obligation, from time to
<PAGE>
time upon reasonable notice to inspect such Modifications to ensure that the
same is completed consistent with the plans and specifications.
(c) Lessee shall not without the consent of Lessor undertake any
Modifications to the Property if such Modifications cannot, in the reasonable
judgement of Agent, be completed on or prior to the date that is twelve months
prior to the Expiration Date that exceed $250,000 in cost.
SECTION 12. TITLE
12.1 Warranty of Title. (a) Lessee agrees that, except as otherwise
-----------------
provided herein and subject to the terms of Section 13 relating to permitted
contests, Lessee shall not directly or indirectly create or allow to remain, and
shall promptly discharge at its sole cost and expense, any Lien, defect,
attachment, levy, title retention agreement or claim upon the Property or any
Modifications or any Lien, attachment, levy or claim with respect to the Rent or
with respect to any amounts held by the Agent pursuant to the Credit Agreement,
other than Permitted Liens. Lessee shall promptly notify Lessor in the event it
receives knowledge that a Lien (other than a Permitted Lien) exists with respect
to the Property.
(b) Nothing contained in this Lease shall be construed as constituting
the consent or request of Lessor, expressed or implied, to or for the
performance by any contractor, mechanic, laborer, materialman, supplier or
vendor of any labor or services or for the furnishing of any materials for any
construction, alteration, addition, repair or demolition of or to the Property
or any part thereof. NOTICE IS HEREBY GIVEN THAT LESSOR IS NOT AND SHALL NOT BE
LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO
LESSEE, OR TO ANYONE HOLDING THE PROPERTY OR ANY PART THEREOF THROUGH OR UNDER
LESSEE, AND THAT NO MECHANIC'S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR
MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LESSOR IN AND TO THE
PROPERTY.
12.2 Grants and Releases of Easements. Provided that no Lease Event
--------------------------------
of Default shall have occurred and be continuing and subject to the provisions
of Sections 8, 9, 10 and 11, Lessor hereby consents to the following actions by
Lessee, in the name and stead of Lessor, but at Lessee's sole cost and expense:
(a) the granting (prior to the Lien of the Mortgage) of easements, licenses,
rights-of-way and other rights and privileges in the nature of easements
reasonably necessary or desirable for the construction, use, repair, renovation
or maintenance of the Property as herein provided; (b) the release (free and
clear of the Lien of the Mortgage) of existing easements or other rights in the
nature of easements which are for the benefit of the Property; (c) the
dedication or transfer (prior to the Lien of the Mortgage) of unimproved
portions of the Property for road, highway or other public purposes; (d) the
execution of petitions to have the Property annexed to any municipal corporation
or utility district; and (e) the execution of amendments to any covenants and
restrictions affecting the Property; provided, that in each case Lessee shall
--------
have delivered to Lessor an Officer's Certificate stating that: (i) such grant,
release, dedication or transfer does not impair the value or utility or
remaining useful life of the Property, (ii) such grant, release, dedication or
transfer is necessary or desirable in
<PAGE>
connection with the construction, use, maintenance, alteration, renovation or
improvement of the Property, (iii) Lessee shall remain obligated under this
Lease and under any instrument executed by Lessee consenting to the assignment
of Lessor's interest in this Lease as security for indebtedness, in each such
case in accordance with their terms, as though such grant, release, dedication
or transfer, had not been effected and (iv) Lessee shall pay and perform any
obligations of Lessor under such grant, release, dedication or transfer. Without
limiting the effectiveness of the foregoing, provided that no Lease Event of
Default shall have occurred and be continuing, Lessor shall, upon the request of
Lessee, and at Lessee's sole cost and expense, execute and deliver any
instruments necessary or appropriate to confirm any such grant, release,
dedication or transfer to any Person permitted under this Section.
SECTION 13. PERMITTED CONTESTS
13.1 Permitted Contests Other Than in Respect of Impositions. Except
-------------------------------------------------------
to the extent otherwise provided for in Section 12.2 of the Participation
Agreement, Lessee, on its own or on Lessor's behalf but at Lessee's sole cost
and expense, may contest, by appropriate administrative or judicial proceedings
conducted in good faith and with due diligence, the amount, validity or
application, in whole or in part, of any Legal Requirement, or utility charges
payable pursuant to Section 4.1 or any Lien, attachment, levy, encumbrance or
encroachment, and Lessor agrees not to pay, settle or otherwise compromise any
such item, provided that (a) the commencement and continuation of such
proceedings shall suspend the collection thereof from, and suspend the
enforcement thereof against the Property, Lessor, the Agent, the Investor and
the Lenders; (b) there shall be no risk of the imposition of a Lien (other than
a Permitted Lien) on the Property and no part of the Property nor any Rent would
be in any danger of being sold, forfeited, lost or deferred; (c) at no time
during the permitted contest shall there be a risk of the imposition of criminal
liability or civil liability on Lessor, the Agent or any Lender for failure to
comply therewith; and (d) in the event that, at any time, there shall be a
material risk of extending the application of such item beyond the earlier of
the Maturity Date and the Expiration Date for the Property, then Lessee shall
deliver to Lessor an Officer's Certificate certifying as to the matters set
forth in clauses (a), (b) and (c) of this Section 13.1. Lessor, at Lessee's
sole cost and expense, shall execute and deliver to Lessee such authorizations
and other documents as may reasonably be required in connection with any such
contest and, if reasonably requested by Lessee, shall join as a party therein at
Lessee's sole cost and expense.
SECTION 14. INSURANCE
14.1 Public Liability and Workers' Compensation Insurance. During
----------------------------------------------------
the Term, Lessee shall procure and carry, at Lessee's sole cost and expense,
commercial general liability insurance for claims for injuries or death
sustained by persons or damage to property while on the Property. Such
insurance shall be on terms and in amounts that are no less favorable than
insurance maintained by owners of similar properties, that are in accordance
with normal industry practice. The policy shall be endorsed to name Lessor, the
Trust Company, the Investor, the Agent and the Lenders as additional insureds.
The policy shall also specifically provide that the policy shall be considered
primary insurance which shall apply to any loss or claim before
<PAGE>
any contribution by any insurance which Lessor, the Trust Company, the Agent or
the Lenders may have in force. Lessee shall, in the operation of the Property,
comply with the applicable workers' compensation laws and protect Lessor against
any liability under such laws.
14.2 Hazard and Other Insurance. (a) During the Term, Lessee shall
--------------------------
keep the Property insured against loss or damage by fire and other risks on
terms and in amounts that are no less favorable than insurance maintained by
owners of similar properties, that are in accordance with normal industry
practice, are in amounts equal to the actual replacement cost of the
Improvements. Lessee shall keep the Property insured against loss or damage by
earthquake on terms and in amounts that are either (i) no less favorable than
insurance maintained by owners of similar properties, that are in accordance
with normal industry practice or (ii) on terms acceptable to Agent. In no
event, after the release or rerelease of the Cash Collateral pursuant to Section
8(b) of the Cash Collateral Agreement, shall insurance terms acceptable to Agent
be less favorable than insurance maintained by owners of similar properties,
that are in accordance with normal industry practice. So long as no Lease Event
of Default exists, any loss payable under the insurance policy required by this
Section will be paid to and adjusted solely by Lessee, subject to Section 15.
(b) If at any time during the Term the area in which the Property is
located is designated a "flood-prone" area pursuant to the Flood Disaster
Protection Act of 1973 or any amendments or supplements thereto, then Lessee
shall comply with the National Flood Insurance Program as set forth in the Flood
Disaster Protection Act of 1973, as may be amended. In addition, Lessee will
fully comply with the requirements of the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, as each may be amended from time
to time, and with any other Legal Requirement, concerning flood insurance to the
extent that it applies to the Property.
14.3 Coverage. (a) Lessee shall furnish Lessor and Agent with
--------
certificates showing the insurance required under Sections 14.1 and 14.2 to be
in effect and naming Agent, the Lenders, the Lessor, the Investor, and the Trust
Company as an additional insured with respect to liability insurance and showing
the mortgagee endorsement required by Section 14.3(c). All such insurance shall
be at the cost and expense of Lessee. Such certificates shall include a
provision in which the insurer agrees to provide thirty (30) days' advance
written notice by the insurer to Lessor and the Agent in the event of
cancellation or modification of such insurance that could be adverse to the
interests of Lessor, the Trust Company, the Agent, the Lenders or the Investor.
If a Lease Event of Default has occurred and is continuing and Lessor so
requests, Lessee shall deliver to Lessor copies of all insurance policies
required by this Lease.
(b) Lessee agrees that the insurance policy or policies required by
this Lease shall include an appropriate clause pursuant to which such policy
shall provide that it will not be invalidated should Lessee waive, in writing,
prior to a loss, any or all rights of recovery against any party for losses
covered by such policy. Lessee hereby waives any and all such rights against
Lessor, the Trust Company, the Investor, the Agent and the Lenders to the extent
of payments made under such policies.
<PAGE>
(c) All insurance policies required by Section 14.2 shall include a
"New York" or standard form mortgagee endorsement in favor of the Agent.
(d) Neither Lessor nor Lessee shall carry separate insurance
concurrent in kind or form or contributing in the event of loss with any
insurance required under this Lease except that Lessor may carry separate
liability insurance so long as (i) Lessee's insurance is designated as primary
and in no event excess or contributory to any insurance Lessor may have in force
which would apply to a loss covered under Lessee's policy and (ii) each such
insurance policy will not cause Lessee's insurance required under this Lease to
be subject to a coinsurance exception of any kind.
(e) Lessee shall pay as they become due all premiums for the insurance
required by this Lease, shall renew or replace each policy prior to the
expiration date thereof and shall promptly deliver to Lessor and the Agent
certificates for renewal and replacement policies.
SECTION 15. CONDEMNATION AND CASUALTY
15.1 Casualty and Condemnation. (a) Subject to the provisions of
-------------------------
this Section 15 and Section 16 (in the event Lessee delivers, or is obligated to
deliver, a Termination Notice), and prior to the occurrence and continuation of
a Lease Default, Lessee shall be entitled to receive (and Lessor hereby
irrevocably assigns to Lessee all of Lessor's right, title and interest in) any
award, compensation or insurance proceeds to which Lessee or Lessor may become
entitled by reason of their respective interests in the Property (i) if all or a
portion of the Property is damaged or destroyed in whole or in part by a
Casualty or (ii) if the use, access, occupancy, easement rights or title to the
Property or any part thereof is the subject of a Condemnation; provided,
--------
however, if a Lease Default shall have occurred and be continuing such award,
- -------
compensation or insurance proceeds shall be paid directly to Lessor or, if
received by Lessee, shall be held in trust for Lessor, and shall be paid over by
Lessee to Lessor, and provided further that in the event of any Casualty or
-------- -------
Condemnation, the estimated cost of restoration of which is in excess of
$5,000,000, any such award, compensation or insurance proceeds shall be paid
directly to Lessor, or if received by Lessee, shall be held in trust for Lessor
and shall be paid over by Lessee to Lessor to be held and applied by Lessor
toward payment of the cost of restoration in accordance with Section 15.1(e),
or, if applicable, in accordance with Section 16.
(b) Lessee may appear in any proceeding or action to negotiate,
prosecute, adjust or appeal any claim for any award, compensation or insurance
payment on account of any such Casualty or Condemnation and shall pay all
expenses thereof; provided that if the estimated cost of restoration of the
--------
Property or the payment on account of such title defect is in excess of
$5,000,000 and no Lease or Event of Default has occurred and is continuing, then
Lessor shall be entitled to participate in any such proceeding or action. At
Lessee's reasonable request, and at Lessee's sole cost and expense, Lessor and
the Agent shall participate in any such proceeding, action, negotiation,
prosecution or adjustment. Lessor and Lessee agree that this Lease shall
control the rights of Lessor and Lessee in and to any such award, compensation
or insurance payment.
<PAGE>
(c) If Lessor or Lessee shall receive notice of a Casualty relating to
any material portion of the Property or a possible Condemnation of the Property
or any interest therein, Lessor or Lessee, as the case may be, shall give notice
thereof to the other and to the Agent promptly after the receipt of such notice.
(d) In the event of a Casualty or receipt of notice by Lessee or
Lessor of a Condemnation, Lessee shall, not later than thirty (30) days after
such occurrence, deliver to Lessor and the Agent an Officer's Certificate
stating that either (i) (x) such Casualty is not a Significant Casualty or (y)
such Condemnation is neither a Total Condemnation nor a Significant Condemnation
and that this Lease shall remain in full force and effect with respect to the
Property and, at Lessee's sole cost and expense, Lessee shall promptly and
diligently restore the Property in accordance with the terms of Section 15.1(e)
or (ii) this Lease shall terminate with respect to the Property in accordance
with Section 16.1.
(e) If pursuant to this Section 15.1, this Lease shall continue in
full force and effect following a Casualty or Condemnation with respect to the
Property, Lessee shall, at its sole cost and expense, promptly and diligently
repair any damage to the Property caused by such Casualty or Condemnation in
conformity with the requirements of Sections 10.1 and 11.1 using the as-built
plans and specifications for the Property (as modified to give effect to any
subsequent Modifications, any Condemnation affecting the Property and all
applicable Legal Requirements) so as to restore the Property (i) substantially
to the same condition, operation, function and (ii) to the same value as existed
immediately prior to such Casualty or Condemnation. In such event, title to the
Property shall remain with Lessor. Lessor shall make disbursements from time to
time of any award, compensation or insurance proceeds held by it to Lessee for
application to the cost of restoration subject to the satisfaction of the
following conditions: (i) Lessor shall have received a fully executed
counterpart of a Requisition requesting funds in an amount not exceeding the
cost of work completed or incurred since the last disbursement, together with
reasonably satisfactory evidence of the stage of completion and of performance
of the work in a good and workman-like manner and in accordance with the as-
built plans and specifications, (ii) at the time of any such disbursement, no
Lease Default shall have occurred and be continuing, and no mechanic's or
materialmen's liens shall have been filed and remain undischarged, except those
discharged by the disbursement of the requested funds or bonded, (iii) Lessor
shall be reasonably satisfied that sufficient funds are available to complete
such restoration and (iv) title to the Property shall conform to the
representation set forth in Section 7.3(y) of the Participation Agreement.
Provided no Lease Default shall have occurred and be continuing, any award,
compensation or insurance proceeds remaining after restoration of the Project as
herein provided shall be paid to Lessee.
(f) In no event shall a Casualty or Condemnation with respect to which
this Lease remains in full force and effect under this Section 15.1 affect
Lessee's obligations to pay Rent pursuant to Section 3.1.
(g) Notwithstanding anything to the contrary set forth in Section
15.1(a) or Section 15.1(e), if during the Term a Casualty occurs with respect to
the Property or Lessee receives notice of a Condemnation with respect to the
Property, and following such Casualty or Condemnation, (i) the Property cannot
reasonably be restored on or before the date which is
<PAGE>
twelve months prior to the Maturity Date to substantially the same condition as
existed immediately prior to such Casualty or Condemnation or before such day
the Property is not in fact so restored or (ii) the estimated cost of
restoration of which is greater than $15,000,000, then Lessee shall exercise its
Purchase Option with respect to the Property on the next Payment Date or
irrevocably agree in writing to exercise the Maturity Date Purchase Option with
respect to the Property, and in either such event such remaining Casualty or
Condemnation proceeds shall be paid to the Agent, which shall pay such funds to
Lessee upon the closing of the purchase of the Property.
(h) Notwithstanding anything to the contrary set forth in Section
15.1(a) or Section 15.1(e), if during the Term either Lessor or Lessee receives
an amount greater than or equal to $15,000,000 from the proceeds of any title
insurance policy covering the Property, then Lessee shall exercise its Purchase
Option with respect to the Property on the next Payment Date, and such proceeds
shall be paid to the Agent, which shall pay such funds to Lessee upon the
closing of the purchase of the Property.
SECTION 16. LEASE TERMINATION
16.1 Termination upon Certain Events. (a) If Lessor or Lessee shall
-------------------------------
have received notice of a Total Condemnation, then Lessee shall be obligated,
within thirty (30) days after Lessee receives notice thereof, to deliver a
written notice in the form described in Section 16.2(a) (a "Termination Notice")
------------------
of the termination of this Lease.
(b) In the event Lessee or Lessor shall have received notice of a
Condemnation, Casualty or Environmental Violation, the Lessee shall be required
to deliver an Officer's Certificate stating the following: (i) if a
Condemnation occurs, the Officer's Certificate shall state whether such
Condemnation is a Significant Condemnation; or (ii) if a Casualty occurs, the
Officer's Certificate shall state whether such Casualty is a Significant
Casualty; or (iii) if an Environmental Violation occurs or is discovered, the
Officer's Certificate shall state whether, in the reasonable, good-faith
judgment of Lessee, the cost to remediate the same will exceed $5,000,000. If
Lessee confirms the occurrence of a Significant Condemnation, Significant
Casualty or an Environmental Violation involving remediation costs in excess of
$5,000,000, then, Lessee shall, simultaneously with the delivery of the
Officer's Certificate pursuant to the preceding clause (i), (ii) or (iii),
deliver a Termination Notice.
16.2 Procedures. (a) A Termination Notice shall contain: (i)
----------
notice of termination of this Lease on a date not more than thirty (30) days
after Lessor's receipt of such Termination Notice (the "Termination Date"); (ii)
----------------
a binding and irrevocable agreement of Lessee to pay the Termination Value and
purchase the Property on such Termination Date and (iii) the Officer's
Certificate described in Section 16.1(b).
(b) On the Termination Date, Lessee shall pay to Lessor the
Termination Value for the Property, plus all amounts owing in respect of Rent
for the Property (including Supplemental Rent) theretofore accruing and Lessor
shall convey the Property to Lessee (or Lessee's designee) all in accordance
with Section 19.1.
<PAGE>
SECTION 17. DEFAULT
17.1 Lease Events of Default. If any one or more of the following
-----------------------
events (each a "Lease Event of Default") shall occur:
----------------------
(a) Lessee shall fail to make payment of (i) any Basic Rent within
five (5) Business Days after the same has become due and payable or (ii)
any Maximum Residual Guarantee Amount, Purchase Option Price or Termination
Value after the same has become due and payable; or
(b) Lessee shall fail to make payment of any other Supplemental Rent
due and payable within five (5) Business Days after receipt of notice
thereof; or
(c) Lessee shall fail to maintain insurance as required by Section 14;
or
(d) Lessee or the Guarantor shall fail to observe or perform any term,
covenant or condition of Lessee or the Guarantor, respectively, under this
Lease, the Participation Agreement, the Guarantee or any other Operative
Agreement to which it is a party (other than those set forth in Section
17.1(a), (b) or (c) hereof) or any representation or warranty by Lessee or
the Guarantor, respectively, set forth in this Lease, the Guarantee or in
any other Operative Agreement or in any document entered into in connection
herewith or therewith or in any document, certificate or financial or other
statement delivered in connection herewith or therewith shall be false or
inaccurate in any material way (including those representations and
warranties set forth in Section 7.3 of the Participation Agreement, which
representations and warranties are made only on and as of the Closing
Date); or
(e) Lessee, the Guarantor or a Material Subsidiary shall (i) admit in
writing its inability to pay its debts generally as they become due, (ii)
file a petition under the United States bankruptcy laws or any other
applicable insolvency law or statute of the United States of America or any
State or Commonwealth thereof, (iii) make a general assignment for the
benefit of its creditors, (iv) consent to the appointment of a receiver of
itself or the whole or any substantial part of its property, (v) fail to
cause the discharge of any custodian, trustee or receiver appointed for
Lessee or the Guarantor or the whole or a substantial part of its property
within ninety (90) days after such appointment, or (vi) file a petition or
answer seeking or consenting to reorganization under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof; or
(f) insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof shall be
filed against Lessee, the Guarantor or a Material Subsidiary and not
dismissed within ninety (90) days from the date of its filing, or a court
of competent jurisdiction shall enter an order or decree appointing,
without its
<PAGE>
consent of, a receiver of Lessee or the Guarantor or the whole or a
substantial part of its property, and such order or decree shall not be
vacated or set aside within ninety (90) days from the date of the entry
thereof; or
(g) Lessee or the Guarantor or any Subsidiary shall engage in any
"prohibited transaction" (as defined in Section 406 of ERISA or Section
4975 of the Code) involving any Plan, (ii) any "accumulated funding
deficiency" (as defined in Section 302 of ERISA), whether or not waived,
shall exist with respect to any Plan or any Lien in favor of the PBGC or a
Plan shall arise on the assets of the Lessee or any Subsidiary, (iii) a
Reportable Event shall occur with respect to, or proceedings shall commence
to have a trustee appointed, or a trustee shall be appointed, to administer
or to terminate, any Single Employer Plan, which Reportable Event or
commencement of proceedings or appointment of a trustee is, in the
reasonable opinion of the Required Lenders, likely to result in the
termination of such Plan for purposes of Title IV of ERISA, (iv) any Single
Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the
Lessee or any Subsidiary shall, or in the reasonable opinion of the
Required Lenders is likely to, incur any liability in connection with a
withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with respect
to a Plan; and in each case in clauses (i) through (vi) above, such event
or condition, together with all other such events or conditions, if any,
could reasonably be expected to have a Material Adverse Effect; or
(h) a Credit Agreement Event of Default pursuant to Section 6.1(g),
(i), (j) or (l) of the Credit Agreement shall have occurred and be
continuing;
then, in any such event, Lessor may, in addition to the other rights and
remedies provided for in this Section 17 and in Section 18.1, terminate this
Lease by giving Lessee ten (10) days notice of such termination, and this Lease
shall terminate. Lessee shall, to the fullest extent permitted by law, pay as
Supplemental Rent all costs and expenses incurred by or on behalf of Lessor,
including fees and expenses of counsel, as a result of any Lease Event of
Default hereunder.
17.2 Final Payment. If an Event of Default shall have occurred and
-------------
be continuing, Lessor shall have the right to recover, by demand to Lessee and
at Lessor's election, and Lessee shall pay to Lessor, as and for a final
payment, but exclusive of the indemnities payable under Section 12 of the
Participation Agreement, and in lieu of all damages beyond the date of such
demand the sum of (a) the Termination Value, plus (b) all other amounts owing in
respect of Rent and Supplemental Rent theretofore accruing under this Lease;
provided, however, if an Event of Default has occurred pursuant to Section
- --------
17.1(e) or (f), such final payment shall be immediately due and payable without
demand or notice. Upon payment of the amount specified pursuant to the first
sentence of this Section 17.2, Lessee shall be entitled to receive from Lessor,
at Lessee's request and cost, an assignment of Lessor's right, title and
interest in the Property, in each case in recordable form and otherwise in
conformity with local custom and free and clear of the Lien of this Lease and
Lessor Liens. The Property shall be quitclaimed to Lessee (or Lessee's
designee) "AS IS" and in their then present physical condition. If any statute
or rule of law shall limit the amount of such final payment to less than the
amount agreed upon, Lessor shall be entitled to the maximum amount allowable
under such statute or rule of law. It is the intent of the
<PAGE>
Lessor and the Lessee that the payment required to be made pursuant to this
Section together with the payment of the Maximum Residual Guarantee Amount shall
be treated as an obligation on the part of the Lessee to repay a loan obligation
to the Lenders and the Lessor in such amounts; provided, that Lessee shall not
--------
be entitled to receive an assignment of Lessor's interest in the Property unless
Lessee shall have paid in full the Termination Value of the Property.
17.3 Lease Remedies. Lessor and Lessee intend that for commercial
--------------
law and bankruptcy law purposes, this Lease will be treated as a financing
arrangement, as set forth in Section 7. If, as a result of applicable state
law, which cannot be waived, this Lease is deemed to be a lease of the Property,
rather than a financing arrangement, and Lessor is unable to enforce the
remedies set forth in Section 17.2, the following remedies shall be available to
Lessor:
(a) Surrender of Possession. If a Lease Event of Default shall have
-----------------------
occurred and be continuing, and whether or not this Lease shall have been
terminated pursuant to Section 17.1, Lessee shall, upon thirty (30) days written
notice, surrender to Lessor possession of the Property and Lessee shall quit the
same. Lessor may enter upon and repossess the Property by such means as are
available at law or in equity, and may remove Lessee and any and all personal
property and Lessee's equipment and personalty and severable Modifications from
the Property. Lessor shall have no liability by reason of any such entry,
repossession or removal performed in accordance with applicable law.
(b) Reletting. If a Lease Event of Default shall have occurred and be
---------
continuing, and whether or not this Lease shall have been terminated pursuant to
Section 17.1, Lessor may, but shall be under no obligation to, relet all, or any
portion, of the Property, for the account of Lessee or otherwise, for such term
or terms (which may be greater or less than the period which would otherwise
have constituted the balance of the Term) and on such conditions (which may
include concessions or free rent) and for such purposes as Lessor may determine,
and Lessor may collect, receive and retain the rents resulting from such
reletting. Lessor shall not be liable to Lessee for any failure to relet the
Property or for any failure to collect any rent due upon such reletting.
(c) Damages. None of (i) the termination of this Lease pursuant to
-------
Section 17.1; (ii) the repossession of the Property; or (iii) except to the
extent required by applicable law, the failure of Lessor to relet all, or any
portion, of the Property, the reletting of all or any portion thereof, nor the
failure of Lessor to collect or receive any rentals due upon any such reletting
shall relieve Lessee of its liability and obligations hereunder, all of which
shall survive any such termination, repossession or reletting. If any Lease
Event of Default shall have occurred and be continuing and notwithstanding any
termination of this Lease pursuant to Section 17.1, Lessee shall forthwith pay
to Lessor all Basic Rent and other sums due and payable hereunder to and
including the date of such termination. Thereafter, on the days on which the
Basic Rent or Supplemental Rent, as applicable, are payable under this Lease or
would have been payable under this Lease if the same had not been terminated
pursuant to Section 17.1 and until the end of the Term or what would have been
the Term in the absence of such termination, Lessee shall pay Lessor, as current
liquidated damages (it being agreed that it would be impossible accurately to
determine actual damages) an amount equal to the Basic Rent and Supplemental
Rent that are payable under this Lease or would have been payable by Lessee
hereunder if this Lease had not
<PAGE>
been terminated pursuant to Section 17.1, less the net proceeds, if any, which
are actually received by Lessor with respect to the period in question of any
reletting of the Property or any portion thereof; provided that Lessee's
--------
obligation to make payments of Basic Rent and Supplemental Rent under this
Section 17.3 shall continue only so long as Lessor shall not have received the
amounts specified in Section 17.2. In calculating the amount of such net
proceeds from reletting, there shall be deducted all of Lessor's, the Agent's
and any Lenders' reasonable expenses in connection therewith, including
repossession costs, brokerage commissions, fees and expenses for counsel and any
necessary repair or alteration costs and expenses incurred in preparation for
such reletting. To the extent Lessor receives any damages pursuant to this
Section 17.3, such amounts shall be regarded as amounts paid on account of Rent.
(d) Acceleration of Rent. If a Lease Event of Default shall have
--------------------
occurred and be continuing, and this Lease shall not have been terminated
pursuant to Section 17.1, and whether or not Lessor shall have collected any
current liquidated damages pursuant to Section 17.3(c), Lessor may upon written
notice to Lessee accelerate all payments of Basic Rent due hereunder and, upon
such acceleration, Lessee shall immediately pay Lessor, as and for final
liquidated damages and in lieu of all current liquidated damages on account of
such Lease Event of Default beyond the date of such acceleration (it being
agreed that it would be impossible accurately to determine actual damages) an
amount equal to the sum of (a) all Basic Rent (assuming interest at a rate per
annum equal to the Overdue Rate), as applicable, due from the date of such
acceleration until the end of the Term, plus (b) the Maximum Residual Guarantee
----
Amount that would be payable under Section 21.1(c) assuming the proceeds of the
sale pursuant to such Section 21.1(c) are equal to zero, which sum is then
discounted to present value at a rate equal to the rate then being paid on
United States treasury securities with maturities corresponding to the then
remaining Term. Following payment of such amount by Lessee, Lessee will be
permitted to stay in possession of the Property for the remainder of the Term,
subject to the terms and conditions of this Lease, including the obligation to
pay Supplemental Rent, provided that no further Lease Event of Default shall
occur and be continuing, following which Lessor shall have all the rights and
remedies set forth in this Section 17 (but not including those set forth in this
Section 17.3). If any statute or rule of law shall limit the amount of such
final liquidated damages to less than the amount agreed upon, Lessor shall be
entitled to the maximum amount allowable under such statute or rule of law.
17.4 Waiver of Certain Rights. If this Lease shall be terminated
------------------------
pursuant to Section 17.1, Lessee waives, to the fullest extent permitted by law,
(a) any notice of re-entry or the institution of legal proceedings to obtain re-
entry or possession; (b) any right of redemption, re-entry or repossession; (c)
the benefit of any laws now or hereafter in force exempting property from
liability for rent or for debt; and (d) any other rights which might otherwise
limit or modify any of Lessor's rights or remedies under this Section 17.
17.5 Assignment of Rights Under Contracts. If a Lease Event of
------------------------------------
Default shall have occurred and be continuing, and whether or not this Lease
shall have been terminated pursuant to Section 17.1, Lessee shall upon Lessor's
demand immediately assign, transfer and set over to Lessor all of Lessee's
right, title and interest in and to each agreement executed by Lessee in
connection with the construction, renovation, development, use or operation of
the Property (including all right, title and interest of Lessee with respect to
all warranty, performance, service
<PAGE>
and indemnity provisions), as and to the extent that the same relate to the
construction renovation, and operation of the Property.
17.6 Remedies Cumulative. Lessor shall be entitled to enforce
-------------------
payment of the indebtedness and performance of the obligations secured hereby
and to exercise all rights and powers under this instrument or under any of the
other Operative Agreements or other agreement or any laws now or hereafter in
force, notwithstanding some or all of the obligation secured hereby may now or
hereafter be otherwise secured, whether by mortgage, security agreement, pledge,
lien, assignment or otherwise. Neither the acceptance of this instrument nor
its enforcement, shall prejudice or in any manner affect Lessor's right to
realize upon or enforce any other security now or hereafter held by Lessor, it
being agreed that Lessor shall be entitled to enforce this instrument and any
other security now or hereafter held by Lessor in such order and manner as
Lessor may determine in its absolute discretion. No remedy herein conferred
upon or reserved to Lessor is intended to be exclusive of any other remedy
herein or by law provided or permitted, but each shall be cumulative and shall
be in addition to every other remedy given hereunder or now or hereafter
existing at law or in equity or by statute. Every power or remedy given by any
of the Operative Agreements to Lessor or to which it may otherwise be entitled
may be exercised, concurrently or independently, from time to time and as often
as may be deemed expedient by Lessor. In no event shall Lessor, in the exercise
of the remedies provided in this instrument, be deemed a "mortgagee in
possession," and Lessor shall not in any way be made liable for any act, either
of commission or omission, in connection with the exercise of such remedies.
SECTION 18. LESSOR'S RIGHT TO CURE
18.1 Lessor's Right to Cure Lessee's Lease Defaults. Lessor, without
----------------------------------------------
waiving or releasing any obligation or Lease Event of Default, may (but shall be
under no obligation to) remedy any Lease Event of Default for the account and at
the sole cost and expense of Lessee, including the failure by Lessee to maintain
any insurance required by Section 14, and may, to the fullest extent permitted
by law, and notwithstanding any right of quiet enjoyment in favor of Lessee,
enter upon the Property for such purpose and take all such action thereon as may
be necessary or appropriate therefor. No such entry shall be deemed an eviction
of Lessee. All reasonable out-of-pocket costs and expenses so incurred
(including the fees and expenses of counsel), together with interest thereon at
the Overdue Rate from the date on which such sums or expenses are paid by
Lessor, shall be paid by Lessee to Lessor on demand as Supplemental Rent.
SECTION 19. LEASE TERMINATION
19.1 Provisions Relating to Lessee's Termination of this Lease or
------------------------------------------------------------
Exercise of Purchase Option. In connection with the termination of this Lease
- ---------------------------
pursuant to the terms of Section 16.2, or in connection with Lessee's exercise
of its Purchase Option or Maturity Date Purchase Option, upon the date on which
this Lease is to terminate or upon the Expiration Date, and upon tender by
Lessee of the amounts set forth in Section 16.2(b), 20.1 or 20.2, as applicable:
<PAGE>
(a) Lessor shall execute and deliver to Lessee (or to Lessee's
designee) at Lessee's cost and expense an assignment of Lessor's entire
interest in the Property, in each case in recordable form and otherwise in
conformity with local custom and free and clear of the Lien of the Mortgage
and any Lessor Liens; and
(b) The Property shall be conveyed to Lessee "AS IS" and in then
present physical condition.
SECTION 20. PURCHASE OPTION
20.1 Purchase Option. Provided that no Lease Default or Lease Event
---------------
of Default shall have occurred and be continuing, Lessee shall have the option
(exercisable by giving Lessor irrevocable written notice (the "Purchase Notice")
---------------
of Lessee's election, which election shall be irrevocable, to exercise such
option not less than ten (10) days prior to the date of purchase pursuant to
such option) to purchase the Property on the date specified in such Purchase
Notice, which date must occur prior to the date which is twelve months prior to
the Maturity Date, at a price equal to the Termination Value (the "Purchase
--------
Option Price") (which the parties do not intend to be a "bargain" purchase
- ------------
price) of the Property. If Lessee exercises its option to purchase the Property
pursuant to this Section 20.1 (the "Purchase Option"), Lessor shall quitclaim to
---------------
Lessee or Lessee's designee all of Lessor's right, title and interest in and to
the Property as of the date specified in the Purchase Notice upon receipt of the
Purchase Option Price and all Rent and other amounts then due and payable under
this Lease and any other Operative Agreement, in accordance with Section 19.1.
20.2 Maturity Date Purchase Option. Not less than twelve months
-----------------------------
prior to the Maturity Date, if Lessee does not give Lessor and Agent written
notice to the contrary, Lessee shall be deemed to have given Lessor and Agent
irrevocable notice (the "Maturity Date Election Notice") that Lessee is electing
-----------------------------
to exercise the Maturity Date Purchase Option. If Lessee gives notice that it
will not exercise the Maturity Date Election Notice on or before the date twelve
months prior to the Maturity Date, then Lessee shall be obligated to remarket
the Property pursuant to Section 21. If Lessee has elected to exercise the
Maturity Date Purchase Option, then on the Maturity Date Lessee shall pay to
Lessor an amount equal to the Termination Value for all the Property (which the
parties do not intend to be a "bargain" purchase price) and, upon receipt of
such amount plus all Rent and other amounts then due and payable under this
Lease and any other Operative Agreement, Lessor shall transfer to Lessee or
Lessee's designee all of Lessor's right, title and interest in and to the
Property in accordance with Section 19.1.
SECTION 21. SALE OF PROPERTY
21.1 Sale Procedure. (a) Unless Lessee shall have elected to
--------------
purchase the Property and has paid the Purchase Option Price with respect
thereto, or otherwise terminated this Lease with respect thereto and paid the
Termination Value with respect thereto, Lessee shall
<PAGE>
(i) pay to Lessor the Maximum Residual Guarantee Amount as provided for in
Section 21.1(c), and (ii) sell the Property to one or more third parties for
cash in accordance with Section 21.1(b).
(b) During the Marketing Period, Lessee, as nonexclusive broker for
Lessor, shall use its best efforts to obtain bids for the cash purchase of the
Property being sold for the highest price available in the relevant market,
shall notify Lessor promptly of the name and address of each prospective
purchaser and the cash price which each prospective purchaser shall have offered
to pay for the Property and shall provide Lessor with such additional
information about the bids and the bid solicitation procedure as Lessor may
request from time to time. In connection with any such sale of the Property,
the Lessee will provide to the prospective purchaser all customary seller's
indemnities, representations and warranties regarding title, absence of Liens
(except Permitted Liens and Lessor Liens) and the condition of the Property, as
well as such other terms and conditions as may be negotiated between the Lessee
and the prospective purchaser. Lessee shall have obtained, at its cost and
expense, all required governmental and regulatory consents and approvals and
shall have made all filings as required by applicable law in order to carry out
and complete the transfer of the Property. As to Lessor, any such sale shall be
made on an "as is, with all faults" basis without representation or warranty by
the Lessor other than the absence of Lessor Liens. Lessor may reject any and
all bids and may assume sole responsibility for obtaining bids by giving Lessee
written notice to that effect; provided, however, that notwithstanding the
-------- -------
foregoing, Lessor may not reject a bid if such bid, together with any amounts to
be paid pursuant to Section 21.3, is greater than or equal to the sum of the
Limited Deficiency Amount and all costs and expenses referred to in Section
21.2(i) and is a bona fide offer by a third party purchaser who is not an
Affiliate of Lessee. If the price which a prospective purchaser shall have
offered to pay for the Property is less than the sum of the Limited Deficiency
Amount and all costs and expenses referred to in Section 21.2(i), Lessor may
elect to retain the Property by giving Lessee at least two Business Days' prior
written notice of Lessor's election to retain the Property, and upon receipt of
such notice, Lessee shall surrender the Property to Lessor pursuant to Section
10.1(c). Unless Lessor shall have elected to retain the Property pursuant to
the preceding sentence, Lessor shall sell the Property free of any Lessor Liens
attributable to it, without recourse or warranty, for cash to the purchaser or
purchasers identified by Lessee or Lessor, as the case may be. Lessee shall
surrender the Property so sold to each purchaser in the condition specified in
Section 10.1.
(c) On the earlier of (i) the date on which the Property is sold
pursuant to Section 21.1(b), and (ii) the Maturity Date, Lessee shall pay to
Lessor the Maximum Residual Guarantee Amount.
21.2 Application of Proceeds of Sale. Lessor shall apply the
-------------------------------
proceeds of sale of the Property in the following order of priority:
(i) FIRST, to pay or to reimburse Lessor for the payment of all
-----
reasonable costs and expenses incurred by Lessor in connection with the
sale; and
(ii) SECOND, the balance shall be paid to the Agent to be applied
------
pursuant to the provisions of the Credit Agreement.
<PAGE>
21.3 Indemnity for Excessive Wear. If the proceeds of the sale
----------------------------
described in Section 21.1(b), less all expenses incurred by Lessor in connection
with such sale, shall be less than the Limited Deficiency Amount at the time of
such sale and if it shall have been determined (pursuant to the Appraisal
Procedure) that the Fair Market Sales Value shall have been impaired by greater
than expected wear and tear during the Term, Lessee shall pay to Lessor within
ten (10) days after receipt of Lessor's written statement (i) the amount of such
excess wear and tear determined by the Appraisal Procedure or (ii) the amount of
the Net Sale Proceeds Shortfall, whichever amount is less.
21.4 Appraisal Procedure. For determining the Fair Market Sales
-------------------
Value of the Property or any other amount which may, pursuant to any provision
of any Operative Agreement, be determined by an appraisal procedure, Lessor and
Lessee shall use the following procedure (the "Appraisal Procedure"). Lessor
-------------------
and Lessee shall endeavor in good faith to reach a mutual agreement as to such
amount for a period of ten (10) days from commencement of the Appraisal
Procedure, and if they cannot agree within ten (10) days, then two qualified
appraisers, one chosen by Lessee and one chosen by Lessor, shall mutually agree
thereupon, but if either party shall fail to choose an appraiser within twenty
(20) days after notice from the other party of the selection of its appraiser,
then the appraisal by such appointed appraiser shall be binding on Lessee and
Lessor. If the two appraisers cannot agree within twenty (20) days after both
shall have been appointed, then a third appraiser shall be selected by the two
appraisers or, failing agreement as to such third appraiser within thirty (30)
days after both shall have been appointed, by the American Arbitration
Association. The decisions of the three appraisers shall be given within twenty
(20) days of the appointment of the third appraiser and the decision of the
appraiser most different from the average of the other two shall be discarded
and such average shall be binding on Lessor and Lessee; provided that if the
--------
highest appraisal and the lowest appraisal are equidistant from the third
appraisal, the third appraisal shall be binding on Lessor and Lessee. The fees
and expenses of all of the appraisers shall be paid by the Lessee.
21.5 Certain Obligations Continue. During the Marketing Period, the
----------------------------
obligation of Lessee to pay Rent with respect to the Property (including the
installment of Basic Rent due on the Maturity Date) shall continue undiminished
until payment in full to Lessor of the sale proceeds, the Maximum Residual
Guarantee Amount, if any, the amount due under Section 21.3, if any, and all
other amounts due to Lessor with respect to the Property. Lessor shall have the
right, but shall be under no duty, to solicit bids, to inquire into the efforts
of Lessee to obtain bids or otherwise to take action in connection with any such
sale, other than as expressly provided in this Section 21.
SECTION 22. HOLDING OVER
22.1 Holding Over. If Lessee shall for any reason remain in
------------
possession of the Property after the expiration or earlier termination of this
Lease (unless the Property is conveyed to Lessee), such possession shall be as a
tenancy at sufferance during which time Lessee shall continue to pay
Supplemental Rent that would be payable by Lessee hereunder were the Lease then
in full force and effect with respect to the Property and Lessee shall continue
to pay Basic Rent at an annual rate equal to the rate payable hereunder
immediately preceding such expiration
<PAGE>
or earlier termination; provided, however, that from and after the sixtieth
-------- -------
(60th) day Lessee shall remain in possession of the Property after such
expiration or earlier termination, Lessee shall pay Basic Rent at an annual rate
equal to two hundred percent (200%) of the Basic Rent payable hereunder
immediately preceding such expiration or earlier termination. Such Basic Rent
shall be payable from time to time upon demand by Lessor. During any period of
tenancy at sufferance, Lessee shall, subject to the second preceding sentence,
be obligated to perform and observe all of the terms, covenants and conditions
of this Lease, but shall have no rights hereunder other than the right, to the
extent given by law to tenants at sufferance, to continue its occupancy and use
of the Property. Nothing contained in this Section 22 shall constitute the
consent, express or implied, of Lessor to the holding over of Lessee after the
expiration or earlier termination of this Lease as to the Property and nothing
contained herein shall be read or construed as preventing Lessor from
maintaining a suit for possession of the Property or exercising any other remedy
available to Lessor at law or in equity.
SECTION 23. RISK OF LOSS
23.1 Risk of Loss. The risk of loss of or decrease in the enjoyment
------------
and beneficial use of the Property as a result of the damage or destruction
thereof by fire, the elements, casualties, thefts, riots, wars or otherwise is
assumed by Lessee, and Lessor shall in no event be answerable or accountable
therefor.
SECTION 24. SUBLETTING AND ASSIGNMENT
24.1 Subletting. (a) The Lessee may not assign this Lease hereunder
----------
in whole or in part. The Lessee from time to time, may sublease the Property or
any portion thereof to any Person and extend, modify or renew any sublease
without the approval of Lessor, the Agent or the Lenders; provided, however,
that (i) no sublease or other relinquishment of possession of all or any portion
of the Property shall in any way discharge or diminish any of the Lessee's
obligations to the Lessor hereunder, and the Lessee shall remain directly and
primarily liable under this Lease as to the Property, or portion thereof, so
sublet and (ii) each sublease to an Affiliate of the Lessee shall be made
subject and subordinate to this Lease and the rights of the Lessor hereunder.
(b) Lessor hereby agrees, that, in the event of the early termination
of this Lease from any cause whatsoever, and while any sublease is in full force
and effect, such termination of this Lease shall not act as a merger or other
termination of such sublease, and Lessee's interest as sublessor in such
sublease shall be deemed automatically assigned, transferred, and conveyed to
Lessor; and, from and after such termination, Lessor shall be bound by the
provisions of the sublease then in full force and effect on the part of the
Lessee, as sublessor; and that the sublessee shall be deemed thereupon and
without further act to have attorned to Lessor. It is the intention hereof to
provide that the termination of this Lease while such sublease is in full force
and effect shall not, in any way, by reason thereof, terminate such sublease or
affect the rights of such sublessee. The foregoing is subject to the right of
Lessee (or Lessor, if the Lease has terminated) to terminate any sublease which
is in default (notice thereof, if any required, having been given and the time
for curing such default having expired) and any other rights and
<PAGE>
remedies reserved to Lessee in such sublease, the right of Lessor to terminate
any sublease made (i) with an Affiliate of Lessee, (ii) on terms less than fair
market value for similar properties in the San Jose, California metropolitan
area at the inception of such sublease or (iii) having an area of 7,500 square
feet or less, and any other rights and remedies afforded to a lessor of real
property against a defaulting lessee.
24.2 Subleases. Promptly following the execution and delivery of any
---------
sublease permitted by this Section 24, Lessee shall deliver a copy of such
executed sublease to Lessor and the Agent.
24.3 Assignment of Rents. As long as a Lease Event of Default does
-------------------
not occur, Lessee shall collect and receive all rents from any sublessees.
SECTION 25. ESTOPPEL CERTIFICATES
25.1 Estoppel Certificates. At any time and from time to time upon
---------------------
not less than twenty (20) days' prior request by Lessor or Lessee (the
"Requesting Party"), the other shall furnish to the Requesting Party an
Officer's Certificate certifying that this Lease is in full force and effect (or
that this Lease is in full force and effect as modified and setting forth the
modifications); the dates to which the Basic Rent or Renewal Rent and
Supplemental Rent have been paid; to the best knowledge of the signer of such
certificate, whether or not the Lessor is in default under any of its
obligations hereunder (and, if so, the nature of such alleged default); and such
other matters under this Lease as the Requesting Party may reasonably request.
Any such certificate furnished pursuant to this Section 25 may be relied upon by
the Requesting Party, and any existing or prospective mortgagee, purchaser or
lender, and any accountant or auditor, of, from or to the Requesting Party (or
any Affiliate or assignee thereof).
SECTION 26. NO WAIVER
26.1 No Waiver. No failure by Lessor or Lessee to insist upon the
---------
strict performance of any term hereof or to exercise any right, power or remedy
upon a default hereunder, and no acceptance of full or partial payment of Rent
during the continuance of any such default, shall constitute a waiver of any
such default or of any such term. To the fullest extent permitted by law, no
waiver of any default shall affect or alter this Lease, and this Lease shall
continue in full force and effect with respect to any other then existing or
subsequent default.
<PAGE>
SECTION 27. ACCEPTANCE OF SURRENDER
27.1 Acceptance of Surrender. Except as otherwise expressly provided
-----------------------
in this Lease, no surrender to Lessor of this Lease or of all or any portion of
the Property or of any interest therein shall be valid or effective unless
agreed to and accepted in writing by Lessor and, prior to the payment or
performance of all obligations under the Credit Documents, the Agent, and no act
by Lessor or the Agent or any representative or agent of Lessor or the Agent,
other than a written acceptance, shall constitute an acceptance of any such
surrender.
SECTION 28. NO MERGER OF TITLE
28.1 No Merger of Title. There shall be no merger of this Lease or
------------------
of the leasehold estate created hereby by reason of the fact that the same
Person may acquire, own or hold, directly or indirectly, in whole or in part,
(a) this Lease or the leasehold estate created hereby or any interest in this
Lease or such leasehold estate, (b) the fee estate in the Property, except as
may expressly be stated in a written instrument duly executed and delivered by
the appropriate Person, or (c) a beneficial interest in Lessor.
SECTION 29. NOTICES
29.1 Notices. All notices, requests and demands to or upon the
-------
respective parties hereto to be effective shall be given pursuant to the
provisions of Section 13.3 of the Participation Agreement.
SECTION 30. MISCELLANEOUS
30.1 Miscellaneous. Anything contained in this Lease to the contrary
-------------
notwithstanding, all claims against and liabilities of Lessee or Lessor arising
from events commencing prior to the expiration or earlier termination of this
Lease shall survive such expiration or earlier termination. If any term or
provision of this Lease or any application thereof shall be declared invalid or
unenforceable, the remainder of this Lease and any other application of such
term or provision shall not be affected thereby. If any right or option of
Lessee provided in this Lease, including any right or option described in
Sections 15, 16, 22 or 21, would, in the absence of the limitation imposed by
this sentence, be invalid or unenforceable as being in violation of the rule
against perpetuities or any other rule of law relating to the vesting of an
interest in or the suspension of the power of alienation of property, then such
right or option shall be exercisable only during the period which shall end
twenty-one (21) years after the date of death of the last survivor of the
descendants of Franklin D. Roosevelt, the former President of the United States,
Henry Ford, the deceased automobile manufacturer, and John D. Rockefeller, the
founder of the Standard Oil Company, known to be alive on the date of the
execution and delivery of this Lease.
<PAGE>
30.2 Amendments and Modifications. Neither this Lease nor any
----------------------------
provision hereof may be amended, waived, discharged or terminated except by an
instrument in writing signed by Lessor and Lessee.
30.3 Successors and Assigns. All the terms and provisions of this
----------------------
Lease shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
30.4 Headings and Table of Contents. The headings and table of
------------------------------
contents in this Lease are for convenience of reference only and shall not limit
or otherwise affect the meaning hereof.
30.5 Counterparts. This Lease may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which shall
together constitute one and the same instrument.
30.6 GOVERNING LAW. THIS LEASE HAS BEEN DELIVERED IN, AND SHALL IN
-------------
ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE, EXCEPT AS TO MATTERS RELATING TO THE CREATION, PERFECTION AND
ENFORCEMENT OF LIENS AND SECURITY INTERESTS AND THE EXERCISE OF REMEDIES WITH
RESPECT THERETO, WHICH SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
30.7 Limitations on Recourse. Except as expressly set forth in the
-----------------------
Operative Agreements, Lessee agrees to look solely to Lessor's estate and
interest in the Property, the proceeds of sale thereof, any insurance proceeds
or any other award or any third party proceeds received by Lessor in connection
with the Property for the collection of any judgment requiring the payment of
money by Lessor in the event of liability by Lessor, and no other property or
assets of Lessor, the Trust Company member, partner or other owner of an
interest, direct or indirect, in Lessor, or any director, officer, shareholder,
employee, beneficiary, Affiliate of any of the foregoing shall be subject to
levy, execution or other enforcement procedure for the satisfaction of Lessee's
remedies under or with respect to this Lease, the relationship of Lessor and
Lessee hereunder or Lessee's use of the Property or any other liability of
Lessor to Lessee; provided that nothing in this Section shall be construed to
--------
impair or limit the rights of Lessee against the Investor under the Operative
Agreements. Nothing in this Section shall be interpreted so as to limit the
terms of Section 6.1 or 6.2.
30.8 Memorandum of Lease. This Lease shall not be recorded, but
-------------------
Lessor and Lessee shall execute and deliver a memorandum of this Lease (a
"Memorandum of Lease") substantially in the form of Exhibit A and otherwise in
- -------------------- ---------
form suitable for recording under the laws of the State of California, which
memorandum shall be recorded at Lessee's sole cost and expense.
<PAGE>
30.9 Priority. On and prior to the Maturity Date, the Mortgage shall
--------
be subject and subordinate to this Lease and following the Maturity Date, the
Mortgage, at the sole election of the Agent, shall be senior to this Lease
without any further act by any Person.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Lease be duly
executed and delivered as of the date first above written.
eBAY INC.
By: ____________________________________
Name:
Title:
eBAY REALTY TRUST
By: WILMINGTON TRUST COMPANY, not
individually but solely as Trustee
By: ____________________________________
Name:
Title:
Receipt of this original counterpart of the foregoing Lease is hereby
acknowledged on this 1st day of March, 2000.
THE CHASE MANHATTAN BANK, as the
Agent for the Lenders
By: ____________________________________
Name:
Title:
<PAGE>
EXHIBIT 10.26
EXHIBIT D
TO PARTICIPATION AGREEMENT
--------------------------
CASH COLLATERAL AGREEMENT
CASH COLLATERAL AGREEMENT dated as of March 1, 2000, made by eBAY INC., a
Delaware corporation (the "Pledgor") in favor of the Chase Manhattan Bank
-------
("Chase"), as Agent (in such capacity, the "Agent") and as Securities
- ------- -----
Intermediary (in such capacity, the "Securities Intermediary"), for the
-----------------------
Beneficiaries (as hereinafter defined).
Preliminary Statement
---------------------
Pledgor wishes to induce (i) the Lenders to enter into the Credit
Agreement and the other Operative Agreements to which they are party and (ii)
Scotiabanc Inc. (the "Investor") to enter into the Participation Agreement (as
--------
hereinafter defined) and the other Operative Agreements to which it is party.
WHEREAS, in order to induce (i) the Lessor to enter into the Lease and
the other Operative Agreements to which it is a party; (ii) the Lenders to enter
into the Credit Agreement and the other Operative Agreements to which they are
party; and (iii) the Investor to enter into the Participation Agreement and the
other Operative Agreements to which it is a party, the Pledgor agrees, for the
benefit of the Lessor, the Agent, for the ratable benefit of the Lenders, and
the Investor and their respective successors and assigns (individually a
"Beneficiary", collectively, the "Beneficiaries") to enter into the Guarantee
---------- -------------
and additionally agrees as follows:
1. Defined Terms. (a) Capitalized terms not otherwise defined
-------------
herein shall have the meanings set forth on Annex A to the Participation
Agreement dated as of the date hereof among the Lessee, eBay Realty Trust (the
"Lessor"), the Investor, the Agent, and the Lenders.
------
(b) As used herein, the following terms shall have the following
meanings:
"Agreement": this Cash Collateral Agreement, as the same may be amended,
---------
modified or otherwise supplemented from time to time.
"Cash Collateral": the collective reference to:
---------------
(1) all cash, instruments, securities, other financial assets and funds
deposited from time to time in the Cash Collateral Account, including, without
limitation, all cash or other money proceeds of any collateral subject to a
security interest for the benefit of the Agent under any Security Document;
(2) all investments of funds in the Cash Collateral Account and all
instruments, securities and other financial assets evidencing such investments;
and
<PAGE>
(3) all interest, dividends, cash, instruments, securities and other
financial assets and other property received in respect of, or as proceeds of,
or in substitution or exchange for, any of the foregoing; and
(4) any security entitlement to any of the foregoing.
"Cash Collateral Account": account no. 323143598 and JSD1159477
-----------------------
established at the office of the Securities Intermediary at 270 Park Avenue, New
York, New York 10017, 37th Floor, Attention: Edmond DeForest, for the Agent as
entitlement holder thereto designated "eBay Cash Collateral Account of the Chase
Manhattan Bank as Agent for certain Lenders and Investor pursuant to that
certain Cash Collateral Agreement dated March 1, 2000 between eBay Inc. and the
Chase Manhattan Bank."
"Collateral": the collective reference to the Cash Collateral and the Cash
----------
Collateral Account.
"Permitted Investments" means:
---------------------
(1) investments in certificates of deposit and time deposits maturing
within 5 years from the date of acquisition thereof issued or guaranteed by or
placed with, and money market deposit accounts issued or offered by, the
domestic office of the Agent; or
(2) direct obligations of, or obligations the principal of and interest on
which are unconditionally guaranteed by, the United States (or by any agency
thereof to the extent such obligations are backed by the full faith and credit
of the United States) and marked to market on a daily basis, in each case
maturing within one year.
"Secured Obligations": the collective reference to the Guaranteed
-------------------
Obligations and all obligations and liabilities of the Pledgor which may arise
under or in connection with this Agreement or any other Operative Agreement to
which the Pledgor is a party, whether on account of reimbursement obligations,
fees, indemnities, costs, expenses or otherwise (including, without limitation,
all fees and disbursements of counsel to the Agent or to the Beneficiaries that
are required to be paid by the Pledgor pursuant to the terms of this Agreement
or any other Operative Agreement to which the Pledgor is a party).
(c) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement, and section and paragraph
references are to this Agreement unless otherwise specified.
(d) The meanings given to terms defined herein shall be equally
applicable to both the singular and plural forms of such terms.
2. Grant of Security Interest. As collateral security for the
--------------------------
prompt and complete payment and performance when due (whether at the stated
maturity, by acceleration or
<PAGE>
otherwise) of the Secured Obligations, the Pledgor hereby grants to the Agent,
for the ratable benefit of the Beneficiaries, a security interest in the
Collateral.
3. Maintenance of Cash Collateral Account. (a) The Cash Collateral
--------------------------------------
Account shall be maintained until the Secured Obligations have been paid and
performed in full or the Guarantee has been released in accordance with its
terms.
(b) The Collateral shall be subject to the exclusive dominion and
control of the Agent, which shall hold the Cash Collateral and administer the
Cash Collateral Account subject to the terms and conditions of this Agreement.
The Pledgor shall have no right of withdrawal from the Cash Collateral Account
nor any other right or power with respect to the Collateral, except as expressly
provided herein.
(c) The Cash Collateral Account shall be a "securities account" as
such term is defined in Section 8-501(a) of the UCC. The Securities Intermediary
shall treat the Agent as entitled to exercise the rights that comprise any
financial asset credited to the Cash Collateral Account. All securities or other
property underlying any financial assets credited to the Cash Collateral Account
shall be registered in the name of the Securities Intermediary, indorsed to the
Securities Intermediary or in blank or credited to another securities account
maintained in the name of the Securities Intermediary and in no case will any
financial asset credited to the Cash Collateral Account be registered in the
name of the Pledgor, payable to the order of the Pledgor or specially indorsed
to the Pledgor except to the extent the foregoing have been specially indorsed
to the Securities Intermediary or in blank.
(d) The Securities Intermediary hereby agrees that each item of
property (whether investment property, financial asset, security, instrument or
cash) credited to the Securities Account shall be treated as a "financial asset"
within the meaning of Section 8-102(a)(9) of the UCC.
4. Deposit of Funds. Simultaneously with the execution and
----------------
delivery of this Agreement, the Pledgor shall deposit in the Cash Collateral
Account immediately available funds in the amount equal to $126,390,000, or more
if required pursuant to Section 7(a) of this Agreement. Pledgor shall redeposit
such amount or any other amount equal to $126,390,000, or more if required
pursuant to Section 7(a) of this Agreement, in the Cash Collateral Account
within one Business Day if Pledgor obtained a release of the Cash Collateral
pursuant to Section 8(b) and fails to maintain an investment grade rating equal
to or exceeding BBB- from S&P or Baa3 from Moody's.
5. Representations and Warranties. The Pledgor represents and
------------------------------
warrants to the Agent that:
(a) The Pledgor has the corporate power and authority and the legal
right to execute and deliver, to perform its obligations under, and to grant the
security interest in the Collateral pursuant to, this Agreement and has taken
all necessary corporate action to authorize its execution, delivery and
performance of, and grant of the security interest in the Collateral pursuant
to, this Agreement.
<PAGE>
(b) This Agreement constitutes a legal, valid and binding obligation
of the Pledgor enforceable in accordance with its terms and creates in favor of
the Agent a perfected, first priority security interest in the Collateral,
enforceable in accordance with its terms, except in each case as affected by
bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at law)
and an implied covenant of good faith and fair dealing.
(c) The execution, delivery and performance of this Agreement will
not violate any provision of any Requirement of Law or Contractual Obligation of
the Pledgor and will not result in the creation or imposition of any Lien on any
of the properties or revenues of the Pledgor pursuant to any Requirement of Law
or Contractual Obligation of the Pledgor, except as contemplated hereby.
(d) No consent or authorization of, filing with, or other act by or
in respect of, any arbitrator or Governmental Authority and no consent of any
other Person (including, without limitation, any stockholder or creditor of the
Pledgor), is required in connection with the execution, delivery, performance,
validity or enforceability of this Agreement.
(e) No litigation, investigation or proceeding of or before any
arbitrator or Governmental Authority is pending or, to the knowledge of the
Pledgor, threatened by or against the Pledgor or against any of its properties
or revenues with respect to this Agreement or any of the transactions
contemplated hereby.
6. Covenants. The Pledgor covenants and agrees with the Agent that:
---------
(a) The Pledgor will not sell, assign, transfer, exchange, or
otherwise dispose of, or grant any option with respect to, the Collateral, or
create, incur or permit to exist any Lien or option in favor of, or any claim of
any Person with respect to, any of the Collateral, or any interest therein,
except for the security interest created by this Agreement.
(b) The Pledgor will maintain the security interest created by this
Agreement as a first, perfected security interest and defend the right, title
and interest of the Agent and the Beneficiaries in and to the Collateral against
the claims and demands of all Persons whomsoever. At any time and from time to
time, upon the written request of the Agent, and at the sole expense of the
Pledgor, the Pledgor will promptly and duly execute and deliver such further
instruments and documents and take such further actions as the Agent reasonably
may request for the purposes of obtaining or preserving the full benefits of
this Agreement and of the rights and powers herein granted, including, without
limitation, of financing statements under the UCC.
7. Investment of Cash Collateral. (a) Subject to the provisions of
-----------------------------
paragraph, collected funds on deposit in the Cash Collateral Account shall be
invested by the Securities Intermediary from time to time in Permitted
Investments; provided, however, that so long as no Default shall have occurred
-------- -------
and be continuing, the Securities Intermediary shall make such investments at
the direction of the Pledgor. If the Pledgor directs the Securities
Intermediary to invest all or a portion of the funds on deposit in the Cash
Collateral Account in obligations permitted under clause (2) of the definition
of Permitted Investments, then the sum of
<PAGE>
all Permitted Investments made under clause (1) of such definition and the
marked to market value (on a daily basis) of the Permitted Investments made
under clause (2) must exceed the sum of the Permitted Investments made under
clause (1) of such definition and the product of 1.01 and the number obtained by
subtracting the sum of Permitted Investments made under clause (1) of such
definition from $126,390,000. The Pledgor shall have one Business Day to cure
any failure to comply with the terms of the foregoing sentence. All investments
shall be made in the name of the Agent or a nominee of the Agent and in a
manner, determined by the Agent in its sole discretion, that preserves the
Agent's perfected, first priority security interest on behalf of the Lenders and
Investor in such investments.
(b) The Securities Intermediary shall have no obligation to invest
collected funds during the first night after their collection.
(c) The Securities Intermediary shall have no responsibility to the
Pledgor for any loss or liability arising in respect of such investments of the
Cash Collateral (including, without limitation, as a result of the liquidation
of any portion thereof before maturity), except to the extent that such loss or
liability arises from the Securities Intermediary's gross negligence or willful
misconduct. Any Permitted Investment made under clause (1) of the definition of
Permitted Investments shall be a general deposit in the Agent. Any Permitted
Investment made under clause (2) of such definition shall be for the risk and
account of the Pledgor, subject to the provisions of this Agreement.
(d) The Pledgor will pay or reimburse the Securities Intermediary for
any and all costs, expenses and liabilities of the Securities Intermediary
incurred in connection with this Agreement, the maintenance and operation of the
Cash Collateral Account and the investment of the Cash Collateral, including,
without limitation, any investment, brokerage or placement commissions and fees
incurred by the Securities Intermediary in connection with the investment or
reinvestment of Cash Collateral, and any investment charges or other fees of
Chase in connection with maintenance of the Cash Collateral Account.
8. Release of Cash Collateral. (a) Within ten (10) Business Days
--------------------------
after the end of each calendar quarter, the Securities Intermediary shall
release to the Pledgor Cash Collateral in an amount equal to interest collected
and credited to the Cash Collateral Account in respect of such period.
(b) The Securities Intermediary shall release all Cash Collateral to
the Pledgor upon satisfaction of each and all of the following conditions:
i. Pledgor obtains an investment grade rating equal to or exceeding
BBB- from S&P and Baa3 from Moody's; and
ii. Pledgor thereafter requests Securities Intermediary and Agent in
writing to release of all Cash Collateral;
iii. both (i) the Agent and (ii) Lenders and Investors holding 66 2/3%
or more of the combined Loans and the Investor Contribution
approve such request;
<PAGE>
iv. Pledgor shall be in compliance with all requirements of Section
14 of the Lease (including earthquake insurance); and
v. Pledgor thereafter opts to release all Cash Collateral if the
investment grade rating of Pledgor has not changed since such
request was approved in the foregoing clause (iii).
(c) Notwithstanding any other provision of this paragraph, the Agent
shall have no obligation to release Cash Collateral unless each of the following
conditions is satisfied at the time of such release:
(i) No Lease Default or Lease Event of Default shall have occurred
and be continuing or shall result from the release of the Cash
Collateral; and
(ii) such release shall not require termination of any investment
prior to its maturity.
9. Remedies. (a) Upon the occurrence of a Lease Event of Default,
--------
the Agent may, without notice of any kind, except for notices required by law
which may not be waived, apply the Collateral, after deducting all reasonable
costs and expenses of every kind incurred in respect thereof or incidental to
the care or safekeeping of any of the Collateral or in any way relating to the
Collateral or the rights of the Agent and the Beneficiaries hereunder,
including, without limitation, reasonable attorneys' fees and disbursements of
counsel to the Agent, to the payment in whole or in part of the Secured
Obligations, in such order as is specified in Section 8.2 of the Credit
Agreement, and only after such application and after the payment by the Agent of
any other amount required by any provision of law, including, without
limitation, Section 9-504(1)(c) of the UCC, need the Agent account for the
surplus, if any, to the Pledgor. In addition to the rights, powers and remedies
granted to it under this Agreement and in any other agreement securing,
evidencing or relating to the Secured Obligations, the Agent shall have all the
rights, powers and remedies available at law, including, without limitation, the
rights and remedies of a secured party under the UCC. To the extent permitted
by law, the Pledgor waives presentment, demand, protest and all notices of any
kind and all claims, damages and demands it may acquire against the Agent or any
Beneficiary arising out of the exercise by them of any rights hereunder.
(b) The Pledgor waives and agrees not to assert any rights or
privileges which it may acquire under Section 9-112 of the UCC. The Pledgor
shall remain liable for any deficiency if the proceeds of any sale or other
disposition of the Collateral are insufficient to pay the Secured Obligations
and the fees and disbursements of any attorneys employed by the Agent or any
Beneficiary to collect such deficiency.
10. Agent's Appointment as Attorney-in-Fact. (a) The Pledgor
---------------------------------------
hereby irrevocably constitutes and appoints the Agent and any officer or agent
of the Agent, with full power of substitution, as its true and lawful attorney-
in-fact with full irrevocable power and authority in the place and stead of the
Pledgor and in the name of the Pledgor or in the Agent's own name, from time to
time in the Agent's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents
<PAGE>
and instruments which may be necessary or desirable to accomplish the purposes
of this Agreement, including, without limitation, any financing statements,
endorsements, assignments or other instruments of transfer.
(b) The Pledgor hereby ratifies all that said attorneys shall
lawfully do or cause to be done pursuant to the power of attorney granted in
paragraph . All powers, authorizations and agencies contained in this Agreement
are coupled with an interest and are irrevocable until this Agreement is
terminated and the security interests created hereby are released.
11. Duty of the Securities Intermediary and the Agent. The
-------------------------------------------------
Securities Intermediary's and the Agent's sole duty with respect to the custody,
safekeeping and physical preservation of the Collateral in its possession, under
Section 9-207 of the UCC or otherwise, shall be to comply with the specific
duties and responsibilities set forth herein. The powers conferred on the Agent
in this Agreement are solely for the protection of the Agent's and the
Beneficiaries' interests in the Collateral and shall not impose any duty upon
the Agent or any Beneficiary to exercise any such powers. Neither the Agent nor
any Beneficiary nor its or their directors, officers, employees or agents shall
be liable for any action lawfully taken or omitted to be taken by any of them
under or in connection with the Collateral or this Agreement, except for its or
their gross negligence or willful misconduct.
12. Execution of Financing Statements. Pursuant to Section 9-402 of
---------------------------------
the UCC, the Pledgor authorizes the Agent to file financing statements with
respect to the Collateral without the signature of the Pledgor in such form and
in such filing offices as the Agent reasonably determines appropriate to perfect
the security interests of the Agent under this Agreement. A carbon,
photographic or other reproduction of this Agreement shall be sufficient as a
financing statement for filing in any jurisdiction.
13. Authority of Agent. The Pledgor acknowledges that the rights and
------------------
responsibilities of the Agent under this Agreement with respect to any action
taken by the Agent or the exercise or non-exercise by the Agent of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Agreement shall, as between the Agent and the
Beneficiaries, be governed by the Credit Agreement and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
the Agent and the Pledgor, the Agent shall be conclusively presumed to be acting
as agent for the Beneficiaries with full and valid authority so to act or
refrain from acting, and the Pledgor shall not be under any obligation, or
entitlement, to make any inquiry respecting such authority.
14. Notices. All notices, requests and demands to or upon the
-------
respective parties hereto to be effective shall be given pursuant to the
provisions of Section 13.3 of the Participation Agreement.
15. Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
<PAGE>
16. Amendments in Writing; No Waiver; Cumulative Remedies. (a)
-----------------------------------------------------
None of the terms or provisions of this Agreement may be waived, amended,
supplemented or otherwise modified except by a written instrument executed by
the Pledgor, the Agent and the Securities Intermediary, provided that any
--------
provision of this Agreement may be waived by the Agent and the Beneficiaries in
a letter or agreement executed by the Agent or by telex or facsimile
transmission from the Agent.
(b) Neither the Agent nor any Beneficiary shall by any act (except by
a written instrument pursuant to paragraph hereof) of delay, indulgence,
omission or otherwise be deemed to have waived any right or remedy hereunder or
to have acquiesced in any Default or Event of Default or in any breach of any of
the terms and conditions hereof. No failure to exercise, nor any delay in
exercising, on the part of the Agent or any Beneficiary, any right, power or
privilege hereunder shall operate as a waiver thereof. No single or partial
exercise of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
A waiver by the Agent or any Beneficiary of any right or remedy hereunder on any
one occasion shall not be construed as a bar to any right or remedy which the
Agent or such Beneficiary would otherwise have on any future occasion.
(c) The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any other rights or
remedies provided by law.
17. Section Headings. The section headings used in this Agreement
----------------
are for convenience of reference only and are not to affect the construction
hereof or be taken into consideration in the interpretation hereof.
18. Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors and assigns of the Pledgor and shall inure to the benefit of the
Agent and the Beneficiaries and their successors and assigns.
19. Governing Law. This Agreement shall be governed by, and
-------------
construed and interpreted in accordance with, the law of the State of New York.
For purposes of the UCC, New York shall be deemed to be the Securities
Intermediary's jurisdiction (and there shall be no contrary agreement of the
Securities Intermediary with the Agent or the Pledgor governing the Cash
Collateral Account and providing for any other such jurisdiction, in either case
without the consent of the Required Lenders) and the Cash Collateral Account (as
well as the securities entitlements related thereto) shall be governed by the
laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, the Pledgor, the Agent and the Securities
Intermediary have caused this Cash Collateral Agreement to be duly executed and
delivered as of the date first above written.
eBAY INC.
By: ___________________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as the Agent
By: ___________________________________
Name:
Title:
THE CHASE MANHATTAN BANK, as the
Securities Intermediary
By: ___________________________________
Name:
Title:
<PAGE>
EXHIBIT NO. 21.01
eBay Inc.
FORM 10-K
LIST OF SUBSIDIARIES
DOMESTIC
- --------
1. Billpoint, Inc. (California)
2. Blackthorne Software, Inc. (Delaware)
3. Kruse, Inc.* (Indiana)
4. Dan Kruse Classic Car Production, Inc. (Texas)
5. Jump Incorporated** (Ohio)
6. Auburn Cordage, Inc.* (Indiana)
7. Butterfield & Butterfield Auctioneers Corporation (Delaware)
8. Butterfield's Credit Corporation, Inc. (California)
9. eBay Real Estate No. 1, Inc. (Delaware)
10. eBay Real Estate No. 2, Inc. (Delaware)
11. 111 Potrero Partners LLC (California)
12. HBJ Partners, LLC (California)
13. 2959 Victoria Street Partners (California)
14. 17600 Santa Fe Avenue Partners (California)
15. 6700 Cherry Avenue Partners (California)
. *dba Kruse International
. **dba Up4Sale
INTERNATIONAL
- -------------
1. eBay International AG (Swiss)
2. eBay Canada Ltd. (New Brunswick)
3. eBay GmbH (Germany)
4. eBay Japan Inc.
5. eBay (UK) Ltd.
6. eBay Global Holdings B.V.
7. eBay Australia and New Zealand Pty Ltd.
8. eBay Australia Pty Ltd.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EBAY INC.'S
ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001065088
<NAME> EBAY INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 219,679
<SECURITIES> 181,086
<RECEIVABLES> 44,940
<ALLOWANCES> (8,402)
<INVENTORY> 681
<CURRENT-ASSETS> 459,834
<PP&E> 144,029
<DEPRECIATION> (32,223)
<TOTAL-ASSETS> 963,942
<CURRENT-LIABILITIES> 88,825
<BONDS> 0
0
0
<COMMON> 130
<OTHER-SE> 852,337
<TOTAL-LIABILITY-AND-EQUITY> 963,942
<SALES> 0
<TOTAL-REVENUES> 224,724
<CGS> 0
<TOTAL-COSTS> 57,588
<OTHER-EXPENSES> 168,300
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,943
<INCOME-PRETAX> 20,315
<INCOME-TAX> 9,385
<INCOME-CONTINUING> 10,828
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<NET-INCOME> 10,828
<EPS-BASIC> .10
<EPS-DILUTED> .08
</TABLE>
