<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-28064
eBAY INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 77-0430924
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
<TABLE>
<S> <C>
2145 Hamilton Ave
San Jose, California 95125
(Address of principal executive offices) (Zip Code)
</TABLE>
(408) 558-7400
(Registrant's telephone number, including area code)
----------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of May 1, 2000, there were 131,232,383 shares of the Registrant's Common
Stock outstanding.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eBAY INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ ----------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents........................... $219,679 $ 278,330
Short-term investments.............................. 181,086 66,521
Accounts receivable, net............................ 36,538 34,850
Other current assets................................ 22,531 37,009
-------- ----------
Total current assets.............................. 459,834 416,710
Property and equipment, net........................... 111,806 125,314
Long-term investments................................. 373,988 348,331
Notes receivable...................................... -- 1,848
Restricted cash....................................... -- 126,390
Deferred tax asset.................................... 5,639 6,187
Intangible and other assets, net...................... 12,675 11,187
-------- ----------
$963,942 $1,035,958
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 31,538 $ 26,349
Accrued expenses.................................... 32,550 19,341
Customer advances................................... 5,997 4,049
Debt and leases, current............................ 12,285 13,304
Income taxes payable................................ 6,455 6,398
Other current liabilities........................... -- 24,035
-------- ----------
Total current liabilities......................... 88,825 93,476
Debt and leases, long-term............................ 15,018 14,828
Minority interest..................................... 1,732 15,365
Other liabilities..................................... 5,900 5,900
-------- ----------
111,475 129,569
-------- ----------
Stockholders' equity:
Common Stock, $0.001 par value; 900,000 shares
authorized; 259,564 and 261,024 shares issued and
outstanding........................................ 260 261
Additional paid-in capital.......................... 823,620 869,790
Notes receivable from stockholders.................. (11) (11)
Unearned compensation............................... (4,124) (2,794)
Retained earnings................................... 27,628 33,911
Accumulated other comprehensive income.............. 5,094 5,232
-------- ----------
Total stockholders' equity........................ 852,467 906,389
-------- ----------
$963,942 $1,035,958
======== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------
1999 2000
-------- --------
<S> <C> <C>
Net revenues:
Fees and services........................................ $ 40,683 $ 79,088
Real estate rentals...................................... 1,057 1,493
Other.................................................... 1,061 5,172
-------- --------
Total net revenues..................................... 42,801 85,753
-------- --------
Cost of net revenues:
Fees and services........................................ 7,499 22,625
Real estate rentals...................................... 478 647
-------- --------
Total cost of net revenues............................. 7,977 23,272
-------- --------
Gross Profit......................................... 34,824 62,481
-------- --------
Operating expenses:
Sales and marketing...................................... 16,958 33,940
Product development...................................... 2,163 11,119
General and administrative............................... 7,614 15,794
Payroll expense on employee stock options................ -- 901
Amortization of acquired intangibles..................... 328 275
-------- --------
Income from operations..................................... 7,761 452
-------- --------
Interest and other income, net............................. 813 10,956
Interest expense........................................... (519) (845)
-------- --------
Income before income taxes, minority interest and equity
interest in partnership income............................ 8,055 10,563
Provision for income taxes................................. (4,271) (4,554)
Minority interest in consolidated company.................. (78) 279
Equity interest in partnership income...................... 59 --
Net income................................................. $ 3,765 $ 6,288
======== ========
Net income per share (Note 1):
Basic.................................................... $ 0.02 $ 0.03
======== ========
Diluted.................................................. $ 0.01 $ 0.02
======== ========
Weighted average shares (Note 1):
Basic.................................................... $195,363 $237,852
======== ========
Diluted.................................................. 264,654 276,443
======== ========
Supplemental pro forma information:
Income before income taxes, minority interest and equity
interest in partnership income.......................... $ 8,055 $ 10,563
Provision for income taxes as reported................... (4,271) (4,554)
Pro forma adjustment to provision for income taxes (Note
3)...................................................... 136 --
Minority interest in consolidated company as reported.... (78) 279
Equity interest in partnership income.................... 59 --
Pro forma net income....................................... $ 3,901 $ 6,288
======== ========
Pro forma net income per share:
Basic.................................................... $ 0.02 $ 0.03
======== ========
Diluted.................................................. $ 0.01 $ 0.02
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
eBAY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------
1999 2000
------- -------
<S> <C> <C>
Net income...................................................... $ 3,765 $ 6,288
Other comprehensive income:
Foreign currency translation adjustments...................... -- 576
Unrealized gains on securities................................ -- 12,693
Unrealized losses on securities............................... -- (4,666)
------- -------
Total other comprehensive income ........................... -- 14,891
------- -------
Estimated tax provision for other comprehensive income.......... -- (3,371)
------- -------
Comprehensive income............................................ $ 3,765 $11,520
======= =======
Net comprehensive income per share:
Basic......................................................... $ 0.02 $ 0.05
======= =======
Diluted....................................................... $ 0.01 $ 0.04
======= =======
Weighted average shares (Note 1):
Basic......................................................... 195,363 237,852
======= =======
Diluted....................................................... 264,654 276,443
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
eBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1999 2000
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 3,765 $ 6,288
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for doubtful accounts and authorized
credits.............................................. 1,940 3,742
Depreciation and amortization......................... 2,155 8,204
Amortization of unearned compensation................. 818 1,066
Write off of accounts receivable...................... -- (415)
Minority interest in combined companies............... 78 (287)
Loss on impairment of asset held for sale............. 100 126
Changes in assets and liabilities:
Accounts receivable................................. (7,647) (1,639)
Other current assets................................ (17,730) (14,478)
Other non-current assets............................ (27) (1,358)
Accounts payable.................................... 1,448 (5,189)
Accrued expenses.................................... 4,410 10,826
Income and other taxes payable...................... 2,703 4,497
Other liabilities................................... 248 (857)
-------- ---------
Net cash provided by operating activities......... (7,739) 10,526
-------- ---------
Cash flows from investing activities:
Purchases of property and equipment..................... (11,260) (21,379)
Purchases of long-term investments...................... -- (126,390)
Sale and maturity of short-term investments............. 8,280 114,565
Sale and maturity of long-term investments.............. -- 25,161
-------- ---------
Net cash used in investing activities............. (2,980) (8,043)
-------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock, net.................... 4,638 18,065
Proceeds from sale of minority interest................. -- 37,736
Stockholder loan repayments............................. 563 --
Principal payments on long-term debt and leases......... (704) (262)
Stockholder distributions............................... (1,323) --
-------- ---------
Net cash provided by financing activities......... 3,174 55,539
-------- ---------
Effect of exchange rates on cash........................ (9) 629
-------- ---------
Net increase in cash and cash equivalents................. (7,554) 58,651
Cash and cash equivalents at beginning of period.......... 37,285 219,679
-------- ---------
Cash and cash equivalents at end of period................ $ 29,731 $ 278,330
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
eBAY INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1--The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. ("eBay") was incorporated in California in May 1996,
reincorporated in Delaware in April 1998 and through March 31, 2000 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 our Billpoint, Inc.
("Billpoint") subsidiary.
Stock split
On April 19, 2000, eBay's Board of Directors approved a two-for-one Common
Stock split. Stockholders of record on May 9, 2000 will receive one additional
share for each share owned on May 24, 2000. All share and per share amounts in
these consolidated financial statements and notes thereto for all periods
presented reflect the stock split.
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, in March, 2000 Billpoint was
reincorporated in Delaware and sold 350 shares of common stock and 1,399,965
shares of Series A Preferred stock to Wells Fargo which represents
approximately 35% ownership in Billpoint. Simultaneously, eBay exchanged
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.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Principles of consolidation and basis of presentation
The accompanying condensed consolidated financial statements as of December
31, 1999 are audited, and the condensed consolidated financial statements as
of March 31, 2000, and for the three months ended March 31, 1999 and 2000 are
unaudited. The unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the annual consolidated financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly our
financial position, results of operations and cash flows as of March 31, 2000
and for the three months ended March 31, 1999 and 2000. These condensed
consolidated financial statements and notes thereto are unaudited and should
be read in conjunction with our audited consolidated financial statements and
related notes included in eBay's Report on Form 10-K for the year ended
December 31, 1999. The results for the three months ended March 31, 2000 are
not necessarily indicative of the expected results for the year ending
December 31, 2000.
6
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair value of financial instruments
eBay'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. Realized gains and losses are included in
earnings. Unrealized gains and losses are excluded from earnings and reported
as a component of stockholders' equity.
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.
Environmental expenditures
We own or control 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 we have 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 subsidiaries and general partnerships
Interests in subsidiaries and general partnerships in which eBay holds more
than 50 percent ownership and exerts control are consolidated. The
consolidated accounts include 100 percent of the assets and liabilities of
these subsidiaries and general partnerships and the ownership interests of
minority investors are recorded as minority interests and are included within
long-term liabilities. Investments in subsidiaries and general partnerships
that we hold more than 20 percent ownership and exert significant influence
are accounted for using the equity method of accounting and are recorded as
investment in partnerships and are included within other assets.
Third party investment
Third party investments in a subsidiary of eBay are considered for their
impact on the dilution of eBay's interest at the date these investments are
made. To the extent the proceeds of these investments differ from the third
party's percent ownership in the net equity of the subsidiary, we will record
these differences as a capital transaction and accordingly will reflect eBay's
share of the difference within additional paid in capital.
7
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of long-lived assets
eBay evaluates the recoverability of long-lived assets in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.
Revenue recognition
Online transaction revenues are derived primarily from placement fees
charged for the listing of items on the eBay website and success fees
calculated as a percentage of the final sales transaction value. Revenues
related to placement fees have historically been 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 our
historical experience.
We reviewed the Securities and Exchange Commission Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements," and its effect
on the recognition of listing and featured item fee revenue. While the effect
of SAB No. 101 on historical listing and featured item fee revenue is
insignificant, eBay adopted the prescribed method for placement fee revenue in
the first quarter of 2000. As such, listing and featured item fee revenue is
recognized ratably over the estimated period of the auction.
Kruse auction revenues are derived primarily from entry fees on auction
items, bidder registration fees and commission fees calculated as a percentage
of the final auction sales transaction value. Revenues related to these fees
are recognized upon the completion of an auction. Revenues are also derived
from sponsorship fees paid by various corporations. Sponsorship fee revenues
are recognized over the term of the sponsorship agreement. Advertising
revenues and auctioneer tuition fees do not represent a significant source of
revenues and are recognized as advertising and auctioneer training services
are provided.
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 and
commissions, has accounted for less than 5% of eBay's revenue. Historically,
we have recorded barter revenue only for the instances when we have history of
receiving or paying cash for similar advertising transactions. 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 eBay to maintain,
monitor and manage our website. We recognize 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, we
expense 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 for the development of website content are included in product
development expense in the accompanying consolidated statement of income.
8
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive income
Effective January 1, 1998 we 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. The change in comprehensive income
resulted from an increase in foreign currency translation and a net unrealized
gain on securities.
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. We will adopt SFAS No.
133 in our quarter ending June 30, 2000. To date, eBay's hedging activities
and use of derivative instruments has not been significant.
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 in January, 2000 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. eBay does not expect that the adoption of
EITF No. 99-17 will have a material impact on our consolidated financial
statements.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of
APB 25. This Interpretation clarifies (a) the definition of employee for
purposes of applying Opinion 25, (b) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination.
FIN 44 is effective July 1, 2000, however certain conclusions in this
Interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this Interpretation covers
events occurring during the period after December 15, 1998, or January 12,
2000, but before the effective date of July 1, 2000, the effects of applying
this Interpretation are recognized on a prospective basis from July 1, 2000.
eBay is currently assessing the impact, if any, of adopting this
interpretation.
9
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Net Income Per Share:
The following table sets forth the computation of basic and diluted net
income per share for the periods indicated, (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------
1999 2000
------- -------
<S> <C> <C>
Numerator:
Net income............................................. $ 3,765 $ 6,288
======= =======
Denominator (Note 1):
Weighted average shares................................ 246,850 260,186
Weighted average common shares subject to repurchase
agreements............................................ (51,487) (22,334)
------- -------
Denominator for basic calculation........................ 195,363 237,852
Weighted average effect of dilutive securities:
Warrants............................................... 2 --
Weighted average common shares subject to repurchase
agreements............................................ 51,487 22,334
Employee stock options................................. 17,802 16,257
------- -------
Denominator for diluted calculation...................... 264,654 276,443
======= =======
Net income per share:
Basic.................................................. $ 0.02 $ 0.03
======= =======
Diluted................................................ $ 0.01 $ 0.02
======= =======
</TABLE>
Note 3--Income Taxes:
Prior to the acquisition by eBay in 1999, B&B was taxed as an S Corporation.
In connection with the 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 that would have been applied if B&B were taxed as a C Corporation
prior to the acquisition.
Note 4--Segment Information:
Effective January 1, 1998, we adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 establishes the
standards for reporting information about operating segments in annual
financial statements and requires that certain selected information about
operating segments be reported in interim financial reports. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an
enterprise about which separate financial information is evaluated regularly
by the chief decision-maker in order to allocate resources and in assessing
performance.
eBay has identified two primary operating segments: online services and
offline, traditional auction services. The online services segment consists of
the operations of eBay, Billpoint and alando. The offline, traditional auction
segment consists of the current operations of B&B and Kruse.
10
<PAGE>
eBAY, INC.
NOTES TO CONDENSED 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>
Three Months Ended Three Months Ended
March 31, 1999 March 31, 2000
------------------------------- -------------------------------
Online Offline Consolidated Online Offline Consolidated
-------- ------- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues from
external customer ..... $ 34,010 $ 8,791 $ 42,801 $ 77,262 $ 8,491 $ 85,753
======== ======= ======== ======== ======= ==========
Operating income (loss)
before amortization of
acquired intangibles,
stock compensation, and
merger related costs... $ 9,926 $ (894) $ 9,032 $ 1,522 $ (795) $ 727
Interest and other
income, net............ 652 161 813 10,831 125 10,956
Interest expense........ -- (519) (519) (273) (572) (845)
Amortization of
intangibles, stock
compensation, and
merger related costs... (1,271) -- (1,271) (197) (78) (275)
-------- ------- -------- -------- ------- ----------
Income (loss) before
income taxes, excluding
minority interest, as
reported............... $ 9,307 $(1,271) $ 8,036 $ 11,808 $(1,245) $ 10,563
======== ======= ======== ======== ======= ==========
Total assets.......... $114,296 $51,867 $166,163 $942,791 $93,167 $1,035,958
======== ======= ======== ======== ======= ==========
</TABLE>
Note 5--Investments:
At December 31, 1999 and March 31, 2000, short and long-term investments
were classified as available-for-sale securities and are reported at fair
value as follows, (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
Gross Gross Gross 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>
11
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Short-term investments:
Municipal bonds and notes....... $ 33,782 $ -- $ (42) $ 33,740
Corporate bonds................. 13,013 -- (21) 12,992
Government securities........... 12,367 -- (46) 12,321
Other........................... 7,468 -- -- 7,468
-------- ------- ------- --------
Total......................... $ 66,630 $ -- $ (109) $ 66,521
======== ======= ======= ========
Long-term investments:
Municipal bonds and notes....... $317,000 $ -- $(3,341) $313,660
Corporate bonds................. -- -- -- --
Government securities........... -- -- -- --
Other........................... 21,978 12,693 -- 34,671
-------- ------- ------- --------
Total......................... $338,979 $12,693 $(3,341) $348,331
======== ======= ======= ========
</TABLE>
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, March 31,
1999 2000
------------ ---------
<S> <C> <C>
Due within one year or less........................... $ 247,513 $136,968
Due after one year through two years.................. 128,455 153,672
Due after two years through three years............... 153,884 89,541
Equity investments.................................... 25,222 34,671
--------- --------
$ 555,074 $414,852
========= ========
</TABLE>
Note 6--Debt:
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, March 31,
1999 2000
------------ ---------
<S> <C> <C>
Mortgage notes, prime plus 1%, due September 30,
2002.............................................. $ 1,797 $ 1,770
Mortgage notes, LIBOR plus 1.75%, due July 15,
2001.............................................. 3,501 3,450
Mortgage notes, 8.25%, due May 15, 2000............ 11,980 11,882
Mortgage notes, 5.2% variable, due August 1, 2003.. 9,300 9,300
10.5% loan on foreclosed property due October
2010.............................................. 549 542
6%-10.5% notes, due October 2000 through January
2003.............................................. 176 151
-------- --------
Subtotal......................................... 27,303 27,095
Less: Current portion.............................. (12,285) (12,267)
-------- --------
$ 15,018 $ 14,828
======== ========
</TABLE>
12
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Mortgage notes outstanding are on property owned by the B&B Companies. The
notes have variable interest rates and are secured by certain land, buildings
and improvements. The notes are repayable in equal monthly installments over
six to ten year terms, with final installments consisting of all remaining
unpaid principal and accrued interest at the end of the term.
During 1997, B&B foreclosed on secured receivables totaling $815,000 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
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 current asset in the accompanying
combined balance sheet, because B&B has not used the property in its business
operations and has actively listed the property for sale since the foreclosure
date. The related loan bears interest at a fixed rate of 10.5% and is due in
monthly principal and interest installments of $9,000.
Lease arrangement
On March 1, 2000, eBay 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 a spread over the London Interbank
Offering Rate ("LIBOR") applied to the $126.4 million cost of the facility
funded by the lessor. eBay has an option to renew the lease for up to two
five-year extensions subject to specific conditions. Under the terms of the
lease agreement, we were required to place $126.4 million of cash and
investment securities as collateral for the term of the lease. The cash and
investment securities are restricted as to their withdrawal from the third
party trustee and are classified as restricted in the accompanying balance
sheet.
Note 7--Contingencies:
Lawsuits
On September 1, 1999, eBay was served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleges that we violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition
("Section 17200"), based upon the listing of "bootleg" or "pirate" recordings
by eBay's users, allegedly in violation of California penal statutes relating
to the sale of unauthorized audio recordings. The lawsuit seeks declaratory
and injunctive relief, restitution and legal fees. We have filed a general
demurrer which has been sustained by the court with leave to amend. The
plaintiff has filed an amended complaint. 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
eBay was 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. On April 13, 2000, the judge in this
case tentatively ruled that he would grant us an injunction against Bidder's
Edge on trespass and violation of the computer fraud and abuse act grounds. We
intend to prosecute our claims and defend ourselves against Bidder's Edge's
counterclaims vigorously. However, this lawsuit will be costly and our
business would be harmed if we were to lose.
13
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On April 25, 2000 eBay was served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit is
filed on behalf of a purported class of eBay users who purchased forged
autographed sports memorabilia on eBay. The lawsuit claims eBay was negligent
in permitting certain named (and other unnamed) defendants to sell allegedly
forged memorabilia on eBay. In addition, the lawsuit claims eBay violated
section 17200 and a section of the California Civil Code which prohibits
"dealers" from selling sports memorabilia without a "Certificate of
Authenticity". The lawsuit seeks class action certification, compensatory
damages, a civil penalty of ten times actual damages, interest, costs and fees
and injunctive relief. We believe we have meritorious defenses to this lawsuit
and intend to defend ourselves vigorously. However, even if successful, this
defense could be costly. If we lose this lawsuit, it would harm our business.
From time to time, eBay is involved in disputes which have arisen in the
ordinary course of business. Management believes that the ultimate resolution
of these disputes will not have a material adverse impact on eBay's financial
position or results of operations.
Minimum Auction Guarantees
From time to time eBay, through our 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 prior to the
completion of the auction. We are 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 March 31, 2000, B&B had entered into two such agreements with
guaranteed net proceeds of $1.25 million and $2.0 million. The $2.0 agreement
is shared with another auction service, half of which is guaranteed by each
party.
GO.com
On February 6, 2000, we entered into a four-year marketing agreement with
GO.com. In accordance with the agreement, GO.com will provide us with online
and offline promotion, eBay 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.
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 was made in April, 2000 and
additional payments will be payable on the anniversary of such date in each of
the subsequent three years as long as the contract is in effect. If NEC is
unable to deliver the minimum level of confirmed registered users, then eBay
will have the right to repurchase shares of eBay Japan from NEC.
14
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
we have committed to provide certain marketing expenditures for the promotion
of the eBay service and additional automobile related services offered by
Autotrader.
15
<PAGE>
eBAY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 $10.3 million or $8.77 per unit.
AOL
In March 1999, eBay expanded the scope of its strategic relationship with
AOL. Under the amended agreement, eBay was granted a prominent presence
featuring it as the preferred provider of person-to-person trading services on
AOL's proprietary services (both domestic and international), AOL.com, Digital
Cities, ICQ, CompuServe (both domestic and international) and Netscape. In
addition, eBay has developed or will develop a co-branded version of its
service for each AOL property which will prominently feature each party's
brand. AOL will be entitled to all advertising revenue from the co-branded
site. eBay will pay $75 million over the four-year term of the contract. We
are recognizing these fees as sales and marketing expense over the greater of:
i) the ratio of the number of impressions delivered over the total number of
contracted impressions, or ii) a straight-line basis beginning with the
initial delivery of impressions and extending over the term of the contract.
At March 31, 2000, we had advanced $37.5 million under the amended agreement,
and had recognized $13.0 million as advertising expense commencing with the
launch of the co-branded program and delivery of advertising impressions.
In conjunction with the expanded strategic relationship, AOL terminated its
original contract with eBay in August of 1999. As a result, the remaining $8.0
million commitment associated with the original agreement has been waived. AOL
continued to deliver impressions under the original agreement through August
1999.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that involve risks
and uncertainties, such as statements of eBay's plans, objectives,
expectations and intentions. When used in this document, the words "expects",
"anticipates", "intends" and "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary
statements made in this document should be read as being applicable to all
related forward-looking statements wherever they appear in this document. Our
actual results could differ materially from those discussed in this document.
Factors that could cause or contribute to such differences include those
discussed below.
Overview
eBay pioneered online person-to-person trading by developing a Web-based
community in which buyers and sellers are brought together in an efficient and
entertaining format to buy and sell almost anything. The eBay service permits
sellers to list items for sale, buyers to bid on items of interest and all
eBay users to browse through listed items in a fully-automated, topically-
arranged, intuitive and easy-to-use online service that is available seven-
days-a-week. We extended our online offerings to include regional and
international trading, autos, "premium" priced items, and we acquired
Billpoint, a provider of online billing and payment solutions. eBay also
expanded into the traditional auction business, also called offline trading,
with our acquisitions of Butterfield & Butterfield and Kruse International.
Substantially all of our revenues comes from fees and commissions associated
with online and offline trading services. Online revenue is primarily 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 we expect 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 will continue to drive
the majority of revenue growth in the foreseeable future.
17
<PAGE>
The following table sets forth, for the periods presented, certain data from
eBay's consolidated statement of income as a percentage of net revenues. The
information contained in the table below should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
1999 2000
--------- ---------
<S> <C> <C>
Net revenues........................................... 100.0% 100.0%
Cost of net revenues................................... 18.6 27.1
--------- ---------
Gross profit......................................... 81.4 72.9
--------- ---------
Operating expenses:
Sales and marketing.................................. 39.6 39.6
Product development.................................. 5.1 13.0
General and administrative........................... 17.8 18.4
Payroll expense on employee stock options............ -- 1.1
Amortization of acquired intangibles................. 0.8 0.3
--------- ---------
Total operating expenses........................... 63.3 72.4
--------- ---------
Income from operations................................. 18.1 0.5
Interest and other income, net......................... 0.7 11.8
--------- ---------
Income before income taxes............................. 18.8 12.3
Provision for income taxes............................. (10.0) (5.3)
Minority interest in consolidated company.............. -- 0.3
--------- ---------
Net income............................................. 8.8% 7.3%
========= =========
</TABLE>
It is difficult for us to forecast revenues or earnings accurately and the
operating results in one or more future quarters may fall below the
expectations of securities analysts or investors. Although accurate revenue
forecasts are difficult, we have begun to recognize the seasonal nature of our
business. In particular, the online portion of our business has historically
noted stronger sequential quarterly revenue growth between the fourth quarter
and the first quarter, and a lower, relatively level growth rate throughout
the remainder of the year. Within offline auction operations, B&B typically
experiences a strong revenue growth in the second and fourth quarters, while
Kruse International experiences a strong 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. We expect to invest any revenue upside back into the business
across all expense categories. Quarterly and annual income statement expense
categories as a percentage of net revenues may be significantly different from
historical or projected rates. As a general note, we expect costs to increase
in absolute dollars across all income statement categories. As more users come
to the site for practical and one-time items like computers and automobiles,
we expect that the number of transactions per registered user will continue to
decline. Because the product mix is varied, the metrics for transactions
per registered user is decreasingly relevant. We expect that our gross margin
could 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. To a large extent, the
changes in the consolidated results of operations for the periods presented
are due to the growth of the online business, which will be the primary focus
of our year over year quarterly comparisons.
18
<PAGE>
Net Revenues
eBay derives revenue from a variety of sources including: listing, success,
and featured item fees for transactions occurring online, and auction related
fees, commissions, sponsorships, and rental income in traditional auction
operations. eBay's net revenues increased from $42.8 million in the three
months ended March 31, 1999 to $85.8 million in the comparable period of 2000.
The increases from 1999 to 2000 were almost entirely the result of increased
use of the eBay site. The growth in the eBay site is predominantly
attributable to the growth in the number of registered users, listings, and
gross merchandise sales. We expect that future revenue growth will be largely
driven by the online services.
We have reviewed the Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," and
its effect on the recognition of listing and featured item fee revenue. While
the effect of SAB No. 101 on historical listing and featured item fee revenue
is insignificant, eBay adopted the prescribed method for placement fee revenue
in the first quarter of 2000. As such, listing and featured item fee revenue
is recognized ratably over the estimated period of the auction.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs
associated with customer support and site operations. The costs included are
compensation and shared employee and facilities costs for customer support and
site operations personnel, ISP connectivity charges, and depreciation on site
equipment. Cost of net revenues in traditional auction operations primarily
includes compensation for auction, appraisal, and customer support personnel
and direct auction costs, such as event site rental. Cost of net revenues
increased from $8.0 million or 18.6% of net revenues for the three months
ended March 31, 1999 to $23.3 million or 27.1% of net revenues for the
comparable period in 2000. The increases from 1999 to 2000 were due almost
entirely to the eBay online business, including the operations of alando and
Billpoint. The increase in expenditures for the eBay online service from 1999
to 2000 resulted from the continued development and expansion of our customer
support and site operations departments, depreciation of the equipment
required for site operations, software licensing fees and ISP connectivity
charges. Cost of net revenues as a percentage of net revenues is expected to
remain at levels higher than those seen historically due to depreciation on
site equipment that is purchased in advance of demand, an increase in site
operations personnel related costs, and as we continue to grow our customer
support function. Changes in offline cost of net revenues roughly paralleled
the changes in net revenues during the periods reported.
Sales and Marketing
eBay's sales and marketing expenses for both the online and traditional
auction businesses are comprised primarily of compensation for our sales and
marketing personnel, advertising, tradeshow and other promotional costs,
expenses for creative design of the website and shared employee and facilities
costs. Sales and marketing expenses increased in absolute dollars from $17
million or 39.6% of net revenues for the three months ended March 31, 1999 to
$33.9 million or 39.6% of net revenues for the same period in 2000. Increases
from 1999 to 2000 were primarily the result of growth in online advertising,
including expenses associated with the marketing agreement with AOL, personnel
related costs, costs associated with the use of outside services and
consultants, and miscellaneous user and promotional costs.
Online sales and marketing expenses are expected to increase in absolute
dollars in 2000, due to a full year of advertising impressions delivered under
the strategic alliance with AOL, new alliances including agreements 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.
19
<PAGE>
Product Development
Product development expenses consist primarily of compensation for our
product development staff, payments to outside contractors, depreciation on
equipment used for development and shared employee and facilities costs. Our
product development expenses increased from $2.2 million or 5.1% of net
revenues for the three months ended March 31, 1999 to $11.1 million or 13% of
net revenues for the same period in 2000. The online business was the driver
of the year over year changes. Neither B&B nor Kruse had any product
development costs through March 31, 2000. The increase from 1999 to 2000
resulted primarily from an increase in personnel related costs as we
significantly increased the size of our research and development staff,
expenses related to contractors and consultants employed within product
development departments, and depreciation for equipment used in research and
development. This year over year increase also includes the operations at
Billpoint. Product development expenses are expected to increase in absolute
dollars during future periods primarily from personnel additions, the
continued impact of Billpoint product development, and additional depreciation
costs as we continue to purchase equipment to improve and expand operations
both domestically and internationally.
General and Administrative
General and administrative expenses consist primarily of compensation for
personnel and, to a lesser extent, fees for external professional advisors,
provisions for doubtful accounts and shared employee and facilities costs. Our
general and administrative expenses increased from $7.6 million or 17.8% of
net revenues in the three months ended March 31, 1999 to $15.8 million or
18.4% of net revenues for the same period in 2000. During the respective
periods in 1999 and 2000, increases in general and administrative expenses
were primarily driven by the online auction business. The year over year
increases resulted from growth in personnel related expenses in order to meet
the demands of our expanding business, including operations in new countries
and the integration of new businesses, the allowance for doubtful accounts,
fees for professional services and shared employee and facilities costs. We
expect that general and administrative expenses will increase in absolute
dollars and decrease as a percentage of net revenues in future periods as our
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.
Payroll Expense on Employee Stock Options
eBay is subject to employer payroll taxes on employee exercises of non-
qualified stock options. These employer payroll taxes would be recorded as a
charge to operations in the period such options are exercised based on actual
gains realized by employees. In addition, we would receive tax deductions for
gains realized by employees on the exercise of non-qualified stock options for
which the benefit is recorded as additional paid-in capital. eBay's quarterly
results of operations and cash flows could vary significantly depending on the
actual period that the stock options are exercised by employees and,
consequently, the amount of employer payroll taxes assessed.
Amortization of Acquired Intangibles
From time to time we have purchased, and expect to continue purchasing,
assets or businesses in order to maintain our leadership role in 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. Our amortization of acquired intangibles decreased from $328,000
or 0.8% of net revenues in the three months ended March 31, 1999 to $275,000
or 0.3% of net revenues in the same period in 2000. Acquisition related
intangibles will be amortized at varying rates through 2009.
20
<PAGE>
Interest and Other Income (Expense), Net
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, legal settlements, and income or
loss in partnership equity. Interest expense is primarily derived from
interest payments on building mortgages held by B&B. Our interest and other
income (expense), net increased from $294,000 or 0.7% of net revenues in 1999
to $10.1 million or 11.8% of net revenues in 2000. The increase from 1999 to
2000 was primarily the result of interest earned on cash, cash equivalents and
investments, particularly the interest earned on the net proceeds from eBay's
follow-on offering that was completed in April 1999. We expect interest and
other income to exceed interest expense for the remainder of 2000 due to the
interest earned on the proceeds from the follow-on offering as well as
positive cash flow from operations.
Provision for Income Taxes
eBay's effective federal and state income tax rate was 53% in the first
three months of 1999 compared to 42% for the same period in 2000. Prior to the
acquisition by eBay in 1999, B&B was taxed as an S Corporation. In connection
with the 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 that would have
been applied if B&B were taxed as a C Corporation prior to the acquisition. We
expect the consolidated effective tax rate to be at or near 42% during 2000.
Stock-Based Compensation
In connection with granting certain stock options and warrants from May 1997
through May 1999, we recorded aggregate unearned compensation totaling $13.1
million, which is being amortized over the four-year vesting period of the
options. Of the total unearned compensation, approximately $818,000 was
amortized in the first three months of 1999 and $1.1 million for the
comparable period in 2000. For the remainder of 2000, we expect amortization
to be $1.3 million, approximately $1.2 million of amortization in 2001, and
approximately $290,000 of amortization in 2002.
Liquidity and Capital Resources
Since inception, eBay has financed operations primarily from net cash
generated from operating activities. We obtained additional financing from the
sale of preferred stock and warrants, proceeds from the exercise of those
warrants, proceeds from the exercise of stock options, and proceeds from our
initial and follow-on public offerings.
Net cash used in operating activities was $7.7 million for the period of
March 31, 1999 compared to net cash provided by operations of $10.5 million
for the same period in 2000. Net cash provided by operating activities
resulted primarily from our net income before non-cash charges for
amortization of unearned compensation, the provision for doubtful accounts,
depreciation and amortization, as well as increases in accrued expenses,
offset by changes in accounts payable.
Net cash used in investing activities totaled $3.0 million for the period of
March 31, 1999 compared to $8.0 million for the same period in 2000. The
primary use for invested cash in the periods presented was purchases of
investments, property, equipment and intangibles. Additionally, $125 million
in cash was provided from the sale of short and long term investments to fund
the restricted cash required under the terms of our lease agreement.
Net cash provided by financing activities was $3.2 million for the three
months ended March 31, 1999 compared to $55.5 million for the same period in
2000. The increase from 1999 to 2000 was primarily driven by NEC's investment
in eBay Japan and Wells Fargo's investment in Billpoint.
21
<PAGE>
eBay had no material commitments for capital expenditures at March 31, 2000,
but expects such expenditures to be at least $40 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 $48.2 million under certain noncancellable operating leases and
notes payable obligations of $27.1 million through December 2004. In March
1999, eBay and AOL expanded the scope of their strategic relationship. Under
the agreement eBay will pay AOL $75 million over the four-year term of the
contract. To date, eBay has paid $18.5 million on the contract. See Note 7 of
Notes to Consolidated Financial Statements.
eBay believes that existing cash, cash equivalents and investments, and any
cash generated from operations will be sufficient to fund our operating
activities, capital expenditures and other obligations for the foreseeable
future. However, if during that period or thereafter we are not successful in
generating sufficient cash flow from operations or in raising additional
capital when required in sufficient amounts and on terms acceptable to us,
eBay's business could suffer.
Year 2000
Although we have not experienced any significant Year 2000 problems in our
own software or third-party systems, there remains a possibility that such
problems still exist. If so, we could face unexpected expenses to fix such
problems or suffer unexpected outages, either of which would harm our
business.
Stock Split
On April 19, 2000, eBay's Board of Directors approved a two-for-one Common
Stock split. Shareholders of record on May 9, 2000 will receive one additional
share for each share owned on May 24, 2000.
Risk Factors that may Affect Results of Operations and Financial Condition
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 still relatively early in our development, we face
substantial 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.
22
<PAGE>
We may be unable to accomplish one or more of these goals, which could cause
our business to suffer. In addition, accomplishing one or more of these goals
might be very expensive, which could harm our financial results.
Our operating results may fluctuate
Our operating results have varied on a quarterly basis during our operating
history. Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
. our ability to retain an active user base, to attract new users who list
items for sale and who purchase items through our service and to
maintain customer satisfaction;
. our ability to keep our website operational and to manage the number of
items listed on our service;
. the amount and timing of operating costs and capital expenditures
relating to the maintenance and expansion of our business, operations
and infrastructure;
. foreign, federal, state or local government regulation, including
investigations prompted by items improperly listed or sold by our users;
. the introduction of new sites, services and products by us or our
competitors;
. volume, size, timing and completion rate of trades on our 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 and other 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 and the new products and features we are regularly introducing.
This has reduced our margins. If we are unable to increase the capacity
of our systems at least as fast as the growth in demand for this
capacity, our website may become unstable and may cease to operate for
periods of time. We have experienced periodic unscheduled downtime.
Continued unscheduled downtime would harm our business and also could
anger users of our website and reduce future revenues.
. Customer Support. We 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 and product expansion;
. increase our brand name awareness; and
. provide our customers with superior community and trading experiences.
We are investing heavily in marketing and promotion, customer support,
further development of our website, technology and operating infrastructure
development. The costs of these investments have reduced our margins and are
expected to remain significant into the future. In addition, we have
significant ongoing commitments in some of these areas. As a result, we may be
unable to adjust our spending rapidly enough to compensate for any unexpected
revenue shortfall, which may harm our profitability. The existence of several
larger and more established companies that are rapidly enabling online sales
as well as new companies, many of whom do not charge for transactions on their
sites and others who are facilitating trading through other pricing formats
(fixed price, reverse auction, group buying, etc.) 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
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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 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.
The process of integrating any acquisition may create unforeseen operating
difficulties and expenditures and is itself risky. The areas where we may face
difficulties include:
. diversion of management time (at both companies) during the period of
negotiation through closing and further diversion of such time after
closing from focus on operating the businesses to issues of integration
and future products;
. decline in employee morale and retention issues resulting from changes
in compensation, reporting relationships, future prospects, or the
direction of the business;
. the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management and the lack of control if such integration is delayed or not
implemented; and
. the need to implement controls, procedures and policies appropriate for
a larger public company at companies that prior to acquisition had been
smaller, private companies.
Prior to the four large acquisitions we made in 1999, we had almost no
experience in managing this integration process. Most of our acquisitions to
date have involved either family run companies or very early stage companies,
which may worsen these integration issues. Moreover, the anticipated benefits
of 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. Several private lawsuits based upon such
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allegations are currently pending. See "Legal Proceedings". In order to reduce
our exposure to this liability, we have prohibited the listing of certain
items and increased the number of personnel reviewing questionable items. We
may in the future implement other protective measures that could require us to
spend substantial resources and/or to reduce revenues by discontinuing certain
service offerings. Any costs incurred as a result of liability or asserted
liability relating to the sale of unlawful goods or the unlawful sale of
goods, could harm our business. In addition, we have received significant and
continuing media attention relating to the listing or sale of unlawful goods
on our website. This negative publicity could damage our reputation and
diminish the value of our brand name. It also could make users reluctant to
continue to use our services.
Our business may be harmed by the listing or sale by our users of pirated
items
We have received in the past, and we anticipate we will receive in the
future, communications alleging that certain items listed or sold through our
service by our users infringe third-party copyrights, trademarks and
tradenames or other intellectual property rights. Although we have actively
sought to work with the content community to eliminate infringing listings on
our website, some content owners have expressed the view that our efforts are
insufficient. 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. In some cases
individuals have been arrested and convicted for fraudulent activities using
our website. While we can suspend the accounts of users who fail to fulfill
their delivery obligations to other users, we do not have the ability to
require users to make payments or deliver goods or otherwise make users whole
other than through our limited insurance program. Other than through this
program, we do not compensate users who believe they have been defrauded by
other users. We also periodically receive complaints from buyers as to the
quality of the goods purchased. Negative publicity generated as a result of
fraudulent or deceptive conduct by users of our service could damage our
reputation and diminish the value of our brand name. We expect to continue to
receive requests from users requesting reimbursement or threatening or
commencing legal action against us if no reimbursement is made. This sort of
litigation could be costly for us, divert management attention, result in
increased costs of doing business, lead to adverse judgments or could
otherwise harm our business.
Government inquiries may lead to charges or penalties
On January 29, 1999, we received 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. We are responding
to the subpoena.
Should these or any other investigations lead to civil or criminal charges
against us, we would likely be harmed by negative publicity, the costs of
litigation, the diversion of management time and other negative effects,
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even if we ultimately prevail. Our business would certainly suffer if we were
not to prevail in any action like these. Even the process of providing records
and information can be expensive, time consuming and result in the diversion
of management attention.
A large number of transactions occur on our website. We believe that
government regulators have received a substantial number of consumer
complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. As a result, we have from time
to time been contacted by various federal, state and local regulatory agencies
and been told that they have questions with respect to the adequacy of the
steps we take to protect our users from fraud. We are likely to receive
additional inquiries from regulatory agencies in the future, which may lead to
action against us. We have responded to all inquiries from regulatory agencies
by describing our current and planned antifraud efforts. If one or more of
these agencies is not satisfied with our response to current or future
inquiries, the resultant investigations and potential fines or other penalties
could harm our business.
We have recently provided information to the antitrust division of the
Department of Justice in connection with an inquiry into our conduct with
respect to "auction aggregators" including our licensing program and our
lawsuit against Bidder's Edge. Should the division decide to take action
against us, we would likely be harmed by negative publicity, the costs of the
action, possible private antitrust lawsuits, the diversion of management time
and effort and penalties we might suffer if we ultimately were not to prevail.
Some of our businesses are subject to regulation and others may be in the
future
Both 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 are
offering significant promotional incentives, 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
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United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on
the nature and content of the materials disseminated through their services.
Several private lawsuits seeking to impose liability upon us currently are
pending. In addition, federal, state and foreign legislation has been proposed
that imposes liability for or prohibits the transmission over the Internet of
certain types of information. Our service features a Feedback Forum, which
includes information from users regarding other users. Although all such
feedback is generated by users and not by us, it is possible that a claim of
defamation or other injury could be made against us for content posted in the
Feedback Forum. Claims like these become more likely and have a higher
probability of success in jurisdictions outside the U.S. If we become liable
for information provided by our users and carried on our service, we could be
directly harmed and we may be forced to implement new measures to reduce our
exposure to this liability. This may require us to expend substantial
resources and/or to discontinue certain service offerings, which would
negatively affect our financial results. In addition, the increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our
business. We carry liability insurance, but it may not be adequate to
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 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. We have filed a general demurrer which has been
sustained by the court with leave to amend. The plaintiff has filed an amended
complaint. 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. On April 13, 2000, the judge in this
case tentatively ruled that he would grant us an injunction against Bidder's
Edge on trespass and violation of the computer fraud and abuse act grounds. We
intend to prosecute our claims and defend ourselves against Bidder's Edge's
counterclaims vigorously. However, this lawsuit will be costly and our
business would be harmed if we were to lose.
On April 25, 2000 eBay was served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit is
filed on behalf of a purported class of eBay users who purchased forged
autographed sports memorabilia on eBay. The lawsuit claims eBay was negligent
in permitting certain named (and other unnamed) defendants to sell allegedly
forged autographed sports memorabilia on eBay. In addition, the lawsuit claims
eBay violated section 17200 and a section of the California Civil Code which
prohibits "dealers" from selling sports memorabilia without a "Certificate of
Authenticity". The lawsuit seeks class action certification, compensatory
damages, a civil penalty of ten times actual damages, interest, costs and fees
and injunctive relief. We believe we have meritorious defenses to this lawsuit
and intend to defend ourselves vigorously. However, even if successful, this
defense could be costly. If we lose this lawsuit, it would harm our business.
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
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this, whether meritorious or not, could be time-consuming, result in costly
litigation, cause service upgrade delays or require us to enter into royalty
or licensing agreements. These royalty or licensing agreements might not be
available on acceptable terms or at all. As a result, any claim like this
could harm our business.
From time to time, eBay is involved in disputes which have arisen in the
ordinary course of business. Management believes that the ultimate resolution
of these disputes will not have a material adverse impact on eBay's financial
position or results of operations.
The inability to expand our systems may limit our growth
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
website, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
revenues depend on the number of items listed by users, the volume of user
transactions that are successfully completed and the final prices paid for the
items listed. We need to expand and upgrade our technology, transaction
processing systems and network infrastructure both to meet increased traffic
on our site and to implement new features and functions, including those
required under our contracts with third parties. We may be unable to
accurately project the rate or timing of increases, if any, in the use of our
service or to 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 have been taking steps to
increase the reliability and redundancy of our system. These steps are
expensive, reduce our margins and may not be successful in reducing the
frequency or duration of unscheduled downtime. 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
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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;
. 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 (both in the
U.S. and abroad) and it is possible that laws and regulations will be adopted
with respect to the Internet or online services. These laws and regulations
could cover issues such as online contracts, user privacy, freedom of
expression, pricing, fraud, content and quality of products and
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services, taxation, advertising, intellectual property rights and information
security. Applicability to the Internet of existing laws governing issues such
as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain. The vast
majority of these laws were adopted prior to the advent of the Internet and
related technologies and, as a result, do not contemplate or address the
unique issues of the Internet and related technologies. Those laws that do
reference the Internet, such as the Digital Millennium Copyright Act, have not
yet been interpreted by the courts and their applicability and reach are
therefore uncertain. In addition, numerous states, including the State of
California, where our headquarters are located, have regulations regarding how
"auctions" may be conducted and the liability of "auctioneers" in conducting
such auctions. No final legal determination has been made with respect to the
applicability of the California regulations to 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.
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
have expanded our international activities, we have become obligated to comply
with the laws of the countries in which we operate. Laws regulating internet
companies outside of the U.S. may be less favorable then those in the U.S.,
giving greater rights to consumers, content owners and users. Compliance may
be more costly or may require us to change our business practices or restrict
our service offerings relative to those in the United States. Our failure to
comply with foreign laws could subject us to penalties ranging from fines to
bans on our ability to offer our services.
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. We
have historically experienced our strongest quarter of online growth in Q1.
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
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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. In 1999, we acquired alando, a leading
online German personal trading platform, and began operations in the United
Kingdom and, through a joint venture, in Australia. In the first quarter of
2000, we further expanded into Japan and formally launched our localized
Canadian operations. Expansion into international markets will require
management attention and resources. We have limited experience in localizing
our service to conform to local cultures, standards and policies. We may have
to compete with local companies who understand the local market better than we
do. We may not be successful in expanding into international markets or in
generating revenues from foreign operations. 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;
. higher telecommunications and internet service provider costs;
. more stringent consumer protection laws;
. cultural nonacceptance of online trading;
. stronger local competitors;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
Some of these factors may cause our international costs to exceed our
domestic costs of doing business. To the extent we expand our international
operations and have additional portions of our international revenues
denominated in foreign currencies, we also could become subject to increased
difficulties in collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations.
Our 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
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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 increases during the period following an
acquisition as employees evaluate possible changes in compensation, culture,
reporting relationships, and the direction of the business. Such increased
turnover could increase our costs and reduce our future revenues. Our future
success also will depend on our ability to attract, train, retain and motivate
highly skilled technical, managerial, marketing and customer support
personnel. Competition for these personnel is intense, especially for
engineers and other professionals 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 off-line 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 off-line auction businesses could suffer losses from price guarantees,
advances or rescissions of sales
In order to secure high quality auction properties from sellers, 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.
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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;
. adverse changes in the value of these properties, due to interest rate
changes, changes in the neighborhoods in which the properties are
located, or other factors;
. the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements; and
. possible disputes with tenants, partners or others.
Our market is intensely competitive
Online personal trading market is a new, rapidly evolving and intensely
competitive area. We expect competition to intensify in the future as the
barriers to entry are relatively low, and current and new competitors can
launch new sites at a nominal cost using commercially available software.
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 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
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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, eBay faces competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (an auction network
including Microsoft's MSN, Excite@Home, Dell Computer, ZD Net, Lycos and more
than 100 others), First Auction, Surplus Auction, uBid, Yahoo! Auctions and a
large number of other companies using an auction format for consumer-to-
consumer or business-to-consumer sales.
The principal competitive factors in our market include the following:
. ability to attract buyers
. volume of transactions and selection of goods;
. 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.
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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 offline 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
have entered this market, including competitors who are offering free services
and significant promotional incentives, and large companies, including banks
and credit card companies, are also beginning to enter this market.
Our business is dependent on the development and maintenance of the Web
infrastructure
The success of our service will depend largely on the development and
maintenance of the Web infrastructure. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity and security, as well
timely development of complementary products such as high speed modems, for
providing reliable Web access and services. Because global commerce and the
online exchange of information is new and evolving, we cannot predict whether
the Web will prove to be a viable commercial marketplace in the long term. The
Web has experienced, and is likely to continue to experience, significant
growth in the numbers of users and amount of traffic. If the Web continues to
experience increased numbers of users, increased frequency of use or increased
bandwidth requirements, the Web infrastructure may be unable to support the
demands placed on it. In addition, the performance of the Web may be harmed by
increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. 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.
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We must keep pace with rapid technological change to remain competitive
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent new service and product
introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the
apparent need of companies from a multitude of industries to offer Web-based
products and services. Our future success therefore will depend on our ability
to adapt to rapidly changing technologies, to adapt our services to evolving
industry standards and to continually improve the performance, features and
reliability of our service. Our failure to adapt to such changes would harm
our business. In addition, the widespread adoption of new Internet, networking
or telecommunications technologies or other technological changes could
require substantial expenditures to modify or adapt our services or
infrastructure.
We need to develop new services, features and functions in order to expand
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth
of services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our
overall market acceptance. If we launch a new business or service that is not
favorably received by consumers, it could damage our reputation and diminish
the value of our brand. We anticipate that future services may include pre-and
post-trade services, including the following:
. the scanning and uploading of photographs of listed items;
. authentication and appraisal; and
. arrangements to facilitate shipment of products.
We are pursuing strategic relationships with third parties to provide many
of these services. By using third parties to deliver these services, we may be
unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be
reduced. Expanding our operations in this manner also will require significant
additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand
We believe that our historical growth has been largely attributable to word
of mouth. We have benefited from frequent and high visibility media exposure
both nationally and locally. We do not expect the frequency or quality of this
media exposure to continue. However, we believe that continuing to strengthen
our brand will be critical to achieving widespread acceptance of our service.
Promoting and positioning our brand will depend largely on the success of our
marketing efforts and our ability to provide high quality services. In order
to promote our brand, we will need to increase our marketing budget and
otherwise increase our financial commitment to creating and maintaining brand
loyalty among users. Brand promotion activities may not yield increased
revenues, and even if they do, any increased revenues may not 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
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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 our service, resulting in reduced
revenues. In addition, consumer "fads" may temporarily inflate the volume of
certain types of items listed on our service, placing a significant strain
upon our infrastructure and transaction capacity. These trends also may cause
fluctuations in our operating results from one 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.
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ITEM 3. 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, we maintain our portfolio of cash
equivalents, short-term and long-term investments in a variety of securities,
including both government and corporate obligations and money market funds.
The following table presents the fair value balances of eBay'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 March 31, 2000, (dollars in thousands):
<TABLE>
<CAPTION>
Contractual maturity before
------------------------------
3/31/2001 3/31/2002 3/31/200 Total
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Cash equivalents.................. $278,330 -- -- $278,330
Average interest rates............ 3.9%
Investments excluding equity
investments...................... $136,968 $153,672 $89,541 $380,181
Average interest rates............ 6.3% 5.8% 5.5%
Equity investments................ -- -- -- $ 34,671
</TABLE>
Equity Price Risk
We are exposed to equity price risk on the marketable portion of equity
investments as such investments are subject to considerable market risk due to
their volatility. eBay typically does not attempt to reduce or eliminate its
market exposure in these equity investments. As of March 31, 2000, the
position in equity investments included unrealized gains of $12.7 million.
Foreign Currency Risk
International sales are made mostly from eBay's foreign sales subsidiaries
in the respective countries and are typically denominated in the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency. Our international business is subject
to risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. These intercompany accounts are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the
United States. eBay is also exposed to foreign exchange rate fluctuations as
the financial results of foreign subsidiaries are translated into U.S. dollars
in consolidation. As exchange rates vary, these results, when translated, may
vary from expectations and adversely impact overall expected profitability.
The effect of foreign exchange rate fluctuations on eBay in the quarter ended
March 31, 2000 was not significant.
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PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 1, 1999, we were served with a lawsuit filed by Randall Stoner,
on behalf of the general public, in San Francisco Superior Court (No. 305666).
The lawsuit alleges that we violated Section 17200 of the California Business
& Professions Code, a statute that relates to unfair competition, based upon
the listing of "bootleg" or "pirate" recordings by 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. We have filed a general demurrer which has been
sustained by the court with leave to amend. The plaintiff has filed an amended
complaint. 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. On April 13, 2000, the judge in this
case tentatively ruled that he would grant us an injunction against Bidder's
Edge on trespass and violation of the computer fraud and abuse act grounds. We
intend to prosecute our claims and defend ourselves against Bidder's Edge's
counterclaims vigorously. However, this lawsuit will be costly and our
business would be harmed if we were to lose.
On April 25, 2000 eBay was served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit is
filed on behalf of a purported class of eBay users who purchased forged
autographed sports memorabilia on eBay. The lawsuit claims eBay was negligent
in permitting certain named (and other unnamed) defendants to sell allegedly
forged autographed sports memorabilia on eBay. In addition, the lawsuit claims
eBay violated section 17200 and a section of the California Civil Code which
prohibits "dealers" from selling sports memorabilia without a "Certificate of
Authenticity". The lawsuit seeks class action certification, compensatory
damages, a civil penalty of ten times actual damages, interest, costs and fees
and injunctive relief. We believe we have meritorious defenses to this lawsuit
and intend to defend ourselves vigorously. However, even if successful, this
defense could be costly. If we lose this lawsuit, it would harm our business.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future technologies. We
expect that participants in our markets increasingly will be subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any claim like this, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. These royalty or
licensing agreements might not be available on acceptable terms or at all. As
a result, any claim like this could harm our business.
From time to time, eBay is involved in disputes which have arisen in the
ordinary course of business. Management believes that the ultimate resolution
of these disputes will not have a material adverse impact on eBay's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<C> <S>
27.01 Financial Data Schedule (EDGAR version only)
</TABLE>
(b) There were no reports on Form 8-K filed during the quarter ended March
31, 2000.
41
<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.
Date: May 15, 2000 eBay Inc.
/s/ Margaret C. Whitman
By: _________________________________
Margaret C. Whitman
President and Chief Executive
Officer
/s/ Gary F. Bengier
By: _________________________________
Gary F. Bengier
Chief Financial Officer and
Vice President of Operations
42
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EBAY INC.'S
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 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> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> MAR-31-1999 MAR-31-2000
<EXCHANGE-RATE> 1 1
<CASH> 219,679 278,330
<SECURITIES> 181,086 66,521
<RECEIVABLES> 44,940 46,579
<ALLOWANCES> (8,402) (11,729)
<INVENTORY> 681 584
<CURRENT-ASSETS> 459,834 416,710
<PP&E> 144,029 165,408
<DEPRECIATION> (32,223) (40,094)
<TOTAL-ASSETS> 963,942 1,035,958
<CURRENT-LIABILITIES> 88,825 93,476
<BONDS> 0 0
0 0
0 0
<COMMON> 260 261
<OTHER-SE> 852,207 906,128
<TOTAL-LIABILITY-AND-EQUITY> 963,942 1,035,958
<SALES> 0 0
<TOTAL-REVENUES> 42,801 85,753
<CGS> 0 0
<TOTAL-COSTS> 7,977 23,272
<OTHER-EXPENSES> 27,063 62,029
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (294) (10,111)
<INCOME-PRETAX> 8,036 10,842
<INCOME-TAX> 4,271 4,554
<INCOME-CONTINUING> 3,765 6,288
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,765 6,288
<EPS-BASIC> .02 .03
<EPS-DILUTED> .01 .02
</TABLE>
