Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 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 000-24821
EBAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0430924
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2145 HAMILTON AVENUE
SAN JOSE, CALIFORNIA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of March 1, 2001 there were 269,310,946 shares of the Registrant's
common stock, $0.001 par value, outstanding, which is the only class of common
or voting stock of the registrant issued as of that date. The aggregate market
value of the voting stock held by non-affiliates computed by reference to the
closing price for the common stock as quoted by the Nasdaq Stock Market as of
March 1, 2001 was approximately $5,395,955,138.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 through 13 are incorporated by reference to eBay's Proxy Statement
for the 2001 Annual Meeting of stockholders to be filed by April 30, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
PART I
ITEM 1: BUSINESS
This Annual Report on Form 10-K contains forward-looking statements based
on our current expectations about our company and our industry. You can identify
these forward-looking statements when you see us using words such as "expect,"
"anticipate," "estimate" and other similar expressions. These forward-looking
statements involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of the factors described in the "Risk Factors" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this report. We undertake no obligation to publicly update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
CORPORATE BACKGROUND
eBay Inc. was formed as a sole proprietorship in September 1995, and was
incorporated in California in May 1996. In March 1998, we reincorporated in
Delaware and completed our initial public offering in September 1998. Our
principal executive offices are located at 2145 Hamilton Ave., San Jose,
California, 95125, and our telephone number is (408) 558-7400. When we refer to
"we" or "eBay" in this Annual Report on Form 10-K, we mean the current Delaware
corporation (eBay Inc.) and its California predecessor, as well as all of our
consolidated subsidiaries. When we refer to "eBay.com", we mean the U.S.-based
dynamic pricing online trading platform located at www.ebay.com.
THE COMPANY
eBay owns and operates eBay.com, which, based upon the aggregate value of
goods traded, is the world's largest and most popular online marketplace. Our
mission is to develop a global online trading platform that will help
practically anyone buy or sell practically anything.
eBay pioneered online personal trading by developing a Web-based community
in which buyers and sellers are brought together in an efficient and
entertaining format to buy and sell items such as collectibles, automobiles,
high-end or premium art items, jewelry, consumer electronics and a host of
practical and miscellaneous items. The eBay dynamic pricing (i.e. auction-style)
format permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items. eBay's service is
fully automated, topically arranged, intuitive and easy to use.
As of March 1, 2001, through our wholly-owned and partially-owned
subsidiaries and affiliates, we operated dynamic pricing online trading
platforms in the United States, Germany, the United Kingdom, Australia, Japan,
Canada, France, Austria, Italy and South Korea. In February 2001, we announced
an agreement to acquire 100% of the outstanding stock of iBazar S.A., a leading
provider of online trading services in Europe and Brazil. With the completion of
this acquisition, currently scheduled for the second quarter of 2001, we expect
to broaden our international reach in online trading to include Spain, the
Netherlands, Belgium, Portugal, Sweden and Brazil. eBay also owns and operates
Half.com, which provides an alternative, fixed-price format for trading books,
recorded music, movies (VHS, DVD) and video games. Through our 65 percent owned
subsidiary Billpoint Inc., we also facilitate online trading transactions by
providing sellers and buyers with the necessary tools to conduct
person-to-person credit card and electronic check payments safely over the Web.
From December 31, 1998 to December 31, 2000, the number of registered eBay
users grew from approximately 2 million to approximately 22 million. eBay users
listed over 79 million items for sale in more than 8,000 categories during the
fourth quarter of 2000, up from 41 million items in the fourth quarter of 1999.
This includes items listed on eBay.com, eBay's international sites and items
sold on Half.com. The aggregate value of goods sold, or gross merchandise sales,
on the various eBay and Half.com sites in the fourth quarter of 2000, was
approximately $1.6 billion, up from $901 million in the fourth quarter of 1999.
In 2000, eBay users listed more than 264.7 million items and completed
transactions with an aggregate value of more than $5.4 billion.
1
3
eBay also owns and operates Butterfields Auctioneers ("Butterfields") and
Kruse International ("Kruse"), which provide traditional offline auction
services for fine art, antiques and collectibles and collector cars,
respectively.
Butterfields, established in 1865, is the largest auction house in the
Western United States, with full-service galleries in San Francisco and Los
Angeles and a regional office in Seattle.
Kruse is one of the world's leading collector car auction companies and
sold thousands of cars per year in more than 20 events. In addition to collector
cars, the company has auctioned distinctive real estate, vintage aircraft,
islands, zoos, railroads and three entire towns.
INDUSTRY BACKGROUND
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium enabling millions of people
worldwide to share information, communicate and conduct electronic commerce
transactions. According to Nua Internet Surveys, as of November 2000, more than
400 million people worldwide had access to the Internet either at home or work.
And, according to Forrester Research, the total value of global e-commerce
transactions in 2001 is expected to be more than $1.2 trillion, up from
approximately $657 billion in 2000.
The Internet offers the first opportunity to create a compelling global
business that overcomes the inefficiencies associated with traditional trading
among buyers and sellers of all types. An Internet-based, centralized trading
place offers the following benefits:
- facilitates buyers and sellers meeting, listing items for sale,
exchanging information, interacting with each other and, ultimately,
consummating transactions;
- allows buyers and sellers to trade directly, bypassing traditional
intermediaries and lowering costs for both parties;
- is global in reach, offering buyers a significantly broader selection of
goods to purchase and providing sellers the opportunity to sell their
goods efficiently to a broader base of buyers;
- offers significant convenience, allowing trading at all hours and
providing continuously updated information;
- fosters a sense of community through direct buyer and seller
communication, thereby enabling interaction between individuals with
mutual interests; and
- establishes fair market prices for items where no efficient market is in
place (e.g. rare items, distressed and surplus goods).
The Opportunity of Online Trading
eBay's online trading platform has historically offered the exchange of
goods among buyers and sellers of all types, competing with classified
advertisements, collectibles shows, garage sales, flea markets and other venues
such as auction houses. As eBay's service has evolved, its applicability has
expanded to broader categories of items, and to a broader and more global user
base. As a result, eBay's product mix has shifted from primarily collectible
items to practical everyday items, such as household goods, computers, consumer
electronics and other items. With the shift to a broader product offering, its
competition has also broadened, and now includes distributors, liquidators,
retailers, import and export companies, catalog and mail order companies, and
virtually all online and offline commerce participants (consumer-to-consumer,
business-to-consumer, and business-to-business).
Many of these traditional trading forums are inefficient because:
- they often have a fragmented, regional nature making it difficult and
expensive for buyers and sellers to meet, exchange information and
complete transactions;
2
4
- they may offer a limited variety or breadth of goods;
- they often have high transaction costs; and
- they are often information inefficient, as buyers and sellers lack a
reliable and convenient means of setting prices for sales or purchases.
THE EBAY ONLINE TRADING PLATFORM
The core eBay online trading platform permits sellers to list items for
sale, buyers to bid for and purchase items of interest and all eBay users to
browse through listed items from any place in the world at any time. The eBay
website offers buyers a large selection of new and used items that can be
difficult and costly to find through traditional distribution channels and
offers sellers one of the most efficient and vibrant online distribution
channels available. The Half.com fixed price platform permits sellers to list
books, recorded music, movies (VHS and DVD) and video games for sale, buyers to
purchase items at a price pre-established by the seller, and all Half.com users
to browse through listed items from any place at any time.
The eBay service was originally introduced in September 1995 to create an
efficient forum for individuals to trade with one another. Since its beginning
as a grassroots online trading community, eBay has primarily attracted buyers
and sellers through word of mouth and by providing buyers and sellers a place to
socialize, discuss topics of common interest and ultimately to trade goods with
one another. The number of categories under which eBay users list goods for sale
has grown from 10, when eBay was first introduced, to more than 8,000 as of
December 31, 2000. The main categories on eBay.com currently include, antiques
and art, books, movies, music, coins and stamps, collectibles, computers, dolls,
dollhouses, jewelry, photo and electronics, pottery and glass, real estate,
sports, toys and miscellaneous items ("everything else"). Specialty marketplaces
have also been added to serve the specialized needs of buyers and sellers, for
example eBay Motors was developed to serve the automotive marketplace, including
vehicles, parts and accessories; eBay Premier was developed to leverage the
premium art and collectibles marketplace in conjunction with Butterfields and
Half.com is focused on providing a fixed-price trading environment, initially
for books, music, videos and video games.
The principal reasons for eBay's success to date are as follows:
Largest Online Trading Forum. Unlike other commerce trading forums, eBay
has aggregated a critical mass of buyers, sellers and items listed for sale,
which in turn has resulted in an extremely vibrant and robust trading
environment. eBay sellers enjoy generally high sell-through or conversion rates
and buyers enjoy an extensive selection of broadly priced goods and services. At
December 31, 2000, eBay had over 22 million registered users, offered more than
8,000 product categories and listed more than 6 million items for sale in an
auction-style format and more than 8 million items for sale in fixed-price
format on Half.com.
Compelling Trading Environment. eBay has created a distinctive trading
environment by utilizing entertaining pricing formats, establishing procedural
rules and promoting community values that are designed to facilitate trade and
communications between buyers and sellers. The trading environment's efficiency
is illustrated by the limited need for eBay to intervene or play a significant
role in the trading process. The auction pricing format found on eBay creates a
sense of urgency among buyers to bid for goods because of the uncertain future
availability of unique items on the website. Similarly, by accepting multiple
bids at increasing prices, the auction pricing format provides sellers a more
efficient means of obtaining a fair market price for their products. While the
dynamic and exciting auction format appeals to certain users and is particularly
appropriate for unique and other hard-to-value items, many mass-market product
categories are more effectively merchandised in a fixed price format, and
certain users prefer the immediacy and convenience of a fixed price purchase.
Our acquisition of Half.com in July 2000, and the implementation of our "Buy it
Now" fixed price feature on eBay.com, have expanded our marketplace by
attracting a new consumer demographic and accelerated the velocity of trading by
reducing the length of time between listing an item and completing the
transaction.
Trust and Safety Programs. eBay has developed a number of programs designed
to make users more comfortable dealing with an unknown trading partner over the
Web. eBay's Feedback Forum encourages every
3
5
user to provide comments and feedback on other eBay users with whom they
interact and offers user profiles that provide feedback ratings and incorporate
user experiences. In addition, eBay's expanded SafeHarbor(TM) program provides
guidelines for trading, helps provide information to resolve user disputes,
responds to reports of misuse of the eBay service and, if necessary, warns or
suspends users who violate the terms of its user agreement. eBay's ongoing trust
and safety initiatives, including user verification, credit card requirements
for sellers, insurance, integrated escrow, authentication and methods to help
keep previously suspended users from re-registering on eBay, are all intended to
bolster eBay's reputation as a safe place to trade. eBay has also developed an
extensive set of rules and guidelines designed to educate users and help
implement its policy of prohibiting the sale of illegal or pirated items.
Cost-Effective, Convenient Trading. eBay allows its buyers and sellers to
bypass traditionally expensive, regionally fragmented intermediaries and
transact business on a 24 hour, seven days a week basis. Because sellers bypass
costly intermediaries, they frequently have lower selling costs and an increased
likelihood of finding buyers willing to pay the target price. Listing an item on
eBay requires sellers to generally pay a nominal placement fee ranging from
$0.30 to $3.30 and an additional success fee from 1.25% to 5% of the transaction
value if the sale is successfully concluded. Certain categories, namely autos
and real estate, have a different fee policy that consists of a $25 and $50
listing fee, respectively, and a $25 success fee for autos and no success fee
for real estate. Listing an item on Half.com is free; successful sellers are
charged a commission equal to 15% of the final sale price at the time a buyer
pays the seller as well as a shipping fee. As a result of these pricing
policies, sellers can cost-effectively sell relatively inexpensive items that
had previously been prohibitively expensive to list through most traditional
trading forums. By allowing sellers to conveniently and easily reach a broad
range of buyers, eBay also addresses the time-consuming, logistical
inconvenience of individual selling. Buyers have access to a broad selection of
items and avoid the need to pay expensive markups or commissions to
intermediaries. The critical mass of items listed on eBay provides a mutual
benefit for buyers and sellers allowing both to effectively determine an
appropriate price for an item.
Strong Community Affinity. eBay believes that fostering direct interaction
between buyers and sellers with similar interests has enabled it to create a
loyal, active community of users. eBay has introduced a variety of features and
services designed to strengthen this sense of community among eBay users. eBay
facilitates communications between buyers and sellers by offering chat rooms,
bulletin boards, threaded discussion boards, customer support assistance from
its personnel or other eBay users and by providing "About Me" user pages. These
community features encourage consumer loyalty and repeat usage.
Intuitive User Experience. The eBay trading platform is a fully automated,
topically arranged, intuitive and easy-to-use online service that is available
on a 24 hour, seven day a week basis. On the dynamic trading platform, a seller
can list items for sale within minutes of completing a simple online form and
buyers can submit bids for items quickly and easily. Buyers can easily search
the millions of items listed by category or specific item. During the course of
the transaction, bidders are notified by email of the status of their bids on a
daily basis and are notified immediately if they are outbid. Sellers and
successful bidders are automatically notified when a transaction is completed.
To assist users further, eBay offers email customer support staffed on a seven
day a week basis. On the Half.com fixed price platform, sellers can easily list
items by simply entering the ISBN or UPC bar code number of their item, along
with the item's condition and selling price. Half.com automatically adds
descriptions and pictures to each listing, so sellers do not need to do it
themselves. Buying at Half.com is similar to the shopping experience at other
leading online retailers. Buyers can browse by category or search by title or
artist/author. When they want to buy, they simply put items in their cart, enter
their credit card number and check out. Customers can also see real-time price
comparisons of new versions of the same item through an on-screen shopping
agent.
EBAY STRATEGY
eBay's objective is to build upon its position as the world's leading
community-commerce model and the most compelling commerce platform on the
Internet. Our vision is to help practically anyone buy or sell practically
anything in the world. The key elements of eBay's strategy are to:
4
6
Broaden the eBay Trading Platform. eBay has pursued a multi-pronged
strategy for growing the eBay platform in several dimensions: within existing
product categories, across new product categories, through geographic expansion,
both local and international, and through introduction of additional pricing
formats such as fixed price sales. eBay targeted key product categories in its
user programs and marketing activities. eBay has expanded and developed existing
product categories by introducing category-specific bulletin boards and chat
rooms, integrating category-specific content, advertising its service in
targeted publications and participating in targeted trade shows. In addition,
eBay broadened the range of users and added product categories, content,
features and other services to meet this new user demand. The increasing number
and importance of practical (as opposed to collectible) items on the site is
illustrative of this broadened range. eBay has also broadened the range of
products that it offers to facilitate trading on the site, including payment
services, shipping services, authentication, appraisal, vehicle inspection and
escrow services. In addition, eBay has successful introduced two fixed-price
formats through Half.com and the "Buy It Now" feature.
During 2000, a number of improvements intended to broaden the eBay trading
platform were introduced, including:
- the acquisition of Half.com, a fixed-price, person-to-person trading
website where buyers and sellers can trade used books, CDs, movies and
video games at fixed prices that are less than the list price;
- the launch of eBay Motors in association with AutoTrader.com, which
created the Internet's largest auction-style website for consumers and
dealers to buy and sell used cars;
- the launch of additional eBay Regional sites. In 2000, eBay launched
eight regional sites to encourage the sale of items that are too bulky or
expensive to ship, items of local interest and items that people prefer
to view before purchasing;
- the launch of over 5,000 new categories that make it easier to find items
in diverse categories;
- the launch of the eBay "Application Program Interface (API) and
Developers Program", which allows other companies to use eBay content to
drive their own businesses. The API provides three basic benefits. First,
it allows eBay to be fully integrated into independent sites across the
Internet. A new site will be able to use the eBay commerce engine to
power its business, eliminating time and expense from the start-up
process. As a second benefit, the API will allow eBay and its commercial
partners to more easily and rapidly add eBay's services to new devices,
such as wireless telephones and handheld computers. Finally, the new
platform interface will improve the user experience by allowing more
companies to provide services to eBay users;
- the introduction of Live Auctions technology on eBay Premier. Providing
real-time bidding via the Internet, this new feature allows individuals
to participate in the excitement of traditional live sales from auction
house floors anywhere in the world;
- the launch of Electronic Checks as a new payment option. Electronic Check
is the latest innovation in Internet-based payments, providing buyers and
sellers with a means for faster transactions without returned checks,
with no paperwork and no charge back risk. For eBay buyers, Electronic
Check combines the convenience of paper checks with the safety,
convenience and speed of electronic payments. For eBay sellers,
Electronic Check is a cost-effective alternative to paper checks and
credit cards where payment is guaranteed;
- the launch of eBay Anywhere, a comprehensive mobile strategy that aims to
make eBay accessible from any Internet-enabled mobile device. From WAP
mobile phones to the latest PDAs, eBay Anywhere brings together leading
technology companies, mobile carriers, portals and hardware vendors with
the goal of making eBay accessible to any user's choice of handheld
Internet device;
- the launch of a new category called eBay Real Estate, intended to make
property transactions on eBay easier for buyers and sellers, and to
provide a dedicated home for eBay's emerging real estate marketplace.
5
7
Foster eBay Community Affinity. eBay continues to enhance what is already
the largest and one of the most loyal online trading communities on the Web. By
instilling a vibrant eBay community experience, eBay seeks to maintain a
critical mass of frequent buyers and sellers with a vested interest in the eBay
community. eBay believes that new community tools, such as About Me personal
pages and threaded message boards will continue to contribute to the community
vibrancy. eBay's trust and safety initiatives, including user verification,
requirements for new sellers to have a credit card on file, insurance,
integrated escrow, authentication and appraisal are intended to bolster eBay's
reputation as a safe place to trade. Consistent with its desire to foster
community, eBay has organized a charitable fund, known as the eBay Foundation,
and involves the members of the eBay community in determining to which
charitable purposes the eBay Foundation's funds will be applied. See "The eBay
Service -- Community Services."
Enhance Features and Functionality. eBay intends to continually update and
enhance the features and functionality of the eBay and Half.com websites to
ensure continuous improvement to the trading experience. During 2000, eBay added
many new features and services to help buyers and sellers trade with greater
ease, including a single login feature, smart search, counters for sellers,
Highlight and Feature Plus!, integrated photo hosting, "List in Two Categories,"
a feature that allows users to cross merchandise their items in two categories
simultaneously, a pre-approve bidder tool that gives sellers the ability to set
up their own pre-qualification guidelines for bidders, and "Buy It Now," a
feature that allows buyers to purchase items immediately and skip the auction
process.
Expand Value-Added Services. In order to offer an end-to-end personal
trading service, eBay provides a variety of "pre-trade" and "post-trade"
services to enhance the user experience and make trading easier. "Pre-trade"
services make listing items for sale easier and include photo hosting,
authentication and seller productivity software. "Post-trade" services make
transactions easier and more comfortable to consummate, such as payment
facilitation, insurance, vehicle inspections, escrow, shipping and postage. eBay
currently provides, or will provide, these services directly or through
strategic partnerships with third parties.
Value-added services introduced during 2000 include:
- the launch of eBay Picture Services, powered by iPIX, which provides eBay
users with an easy-to-use, robust set of imaging services that allow
sellers to simply drag and drop images into image wells on the eBay Sell
Your Item form. Users may also preview their images on the Sell Your Item
form and have their images automatically resized and formatted for
optimal viewing;
- the addition of Saturn and its retailers to provide a nationwide
automobile inspection service. The new inspection service, developed and
offered by Saturn, is now part of eBay Motors and AutoTrader.com's
co-branded automobile site; and
- the integration of Keen.com, the first Live Answer Community(TM), into
key areas of eBay's online trading platform. The integration is intended
to make it more convenient for eBay's 22 million users to contact
Keen.com's members and get live answers to questions on many topics,
including trading and collectibles.
Continue to Develop United States and International Markets. eBay believes
that the Internet provides a significant opportunity for the creation of
efficient trading platforms in local, national and international markets and
that over time, these platforms can be transformed into a seamless, truly global
trading environment. eBay intends to take advantage of this opportunity by
developing eBay for selected local, national and international markets and
actively marketing and promoting these services. On the local level, eBay has
already rolled out local trading for 60 geographic regions in the United States
and has launched a similar regional service offering in Germany, the United
Kingdom, Canada and Australia. The creation of regional trading sites makes it
easier and more practical to buy and sell items of local interest and items too
large, expensive or complex to effectively trade on a wider geographical level.
eBay will continue to consider the addition of regional sites in U.S. and
international markets that offer a critical mass of users and a significant
electronic commerce opportunity. Internationally, eBay has introduced
country-specific services for Canada, the United Kingdom, Australia, Germany,
Japan, France, Austria, Italy and through the February
6
8
2001 acquisition of Internet Auction Company Ltd., South Korea. eBay believes
that its user base already includes users located in over 200 countries.
eBay can choose from several strategies to enter new international markets,
including building a user community solely through internal efforts, acquiring a
company already in the local trading market or partnering with strong local
companies. eBay has employed each of these strategies where appropriate, as
follows:
- our presence in the United Kingdom, Canada, France, and Italy was built
with local management teams and a combination of grass roots and online
marketing programs;
- our presence in Germany was built primarily through the June 1999
acquisition of alando.de.ag, an existing German trading service;
- we entered into a joint venture with a subsidiary of one of the largest
media companies in Australia to penetrate this market;
- in February 2000, we announced a relationship with NEC to jointly address
the market in Japan. As part of that agreement, NEC agreed to purchase a
30% equity interest in eBay Japan;
- in February 2001, we acquired a majority ownership interest in Internet
Auction Co. Ltd., South Korea's largest online trading service; and
- in February 2001, we announced an agreement to acquire 100% of iBazar
S.A., Europe's largest online trading platform. iBazar has a leading
presence in 7 of its 8 markets, which include France, Italy, Spain,
Portugal, the Netherlands, Belgium, Brazil and Sweden.
THE EBAY DYNAMIC PRICING FORMAT
The eBay dynamic pricing trading platform is a robust, Internet-based,
centralized trading environment that facilitates buying and selling of a wide
variety of items.
Registration. While any visitor to eBay can browse through the eBay service
and view the items listed for sale, in order to bid for an item or to list an
item for sale, buyers and sellers must first register with eBay. Users register
by completing a short online form and thereafter can immediately bid for an item
or list an item for sale. Users in Canada, Germany, Japan, Australia, the United
Kingdom, France, Italy, Austria may instead register through country-specific
home pages.
Buying on eBay. Buyers typically enter eBay through its home page, which
contains a listing of product categories that allows for easy exploration of
current items for sale. Bidders can search for specific items by browsing
through a list of items within a category or subcategory and then "clicking
through" to a detailed description for a particular item. Bidders also can
search specific categories, interest pages or the entire database of item
listings using keywords to describe the types of products in which they are
interested. eBay's search engine will then generate a list of relevant items
with links to the detailed descriptions. Each item is assigned a unique
identifier so that users can easily search for and track specific items. Users
also can search for a particular bidder or seller by name in order to review his
or her item for sale and feedback history as well as search for products by
specific region or search in the "Gallery" mode. Once a bidder has found an item
of interest and registered with eBay, the bidder enters the maximum amount he or
she is willing to pay at that time. In the event of competitive bids, the eBay
service automatically increases bidding in increments based upon the then
current highest bid for the item, up to the bidder's maximum price. As eBay
encourages direct interaction between buyers and sellers, bidders wishing
additional information about a listed item can contact the seller through email
functionality. eBay believes that this interaction between bidders and sellers
enhances the personal, one-on-one nature of trading on the Web and is an
important element of the eBay experience. Once each bid is made, eBay sends a
confirmation to the bidder via email, an outbid notice to the next highest
bidder and automatically updates the item's auction status. During the course of
the sale, eBay notifies bidders immediately via email if they are outbid.
Bidders are not charged for making bids or purchases through eBay. In addition,
buyers can also specify items of interest on a service called "Favorite
Searches" (previously called "Personal Shopper") and receive automated email
messages when these particular items are available for sale
7
9
on eBay. In November 2000, eBay implemented the "Buy it Now" feature. Sellers
can choose to use the Buy It Now feature at the time of listing, which allows
sellers to name a price at which they would be willing to sell the item to any
buyer. Listings are run in the normal auction format, but will also feature a
Buy It Now icon and price. Until the first bid is placed, or in the case of a
reserve auction, until the reserve price is met, buyers have the option to buy
the item instantly at the specified price without waiting for the listing to
end.
Selling on eBay. Sellers registered with eBay can list a product for sale
by completing a short online form or using "Mr. Lister," "Auction Assistant" or
third party tools that facilitate the listing of multiple items. The seller
selects a minimum price for opening bids for the item and chooses whether the
sale will last three, five, seven or ten days. Additionally, a seller may select
a reserve price for an item, which is the minimum price at which the seller is
willing to sell the item and is typically higher than the minimum price set for
the opening bid. The reserve price is not disclosed to bidders. A seller can
elect to sell items in individual item listings or, if he or she has multiple
identical items, can elect to hold a "Dutch Auction." For example, an individual
wishing to sell 10 identical watches could hold 10 individual auctions or hold a
Dutch Auction in which the 10 highest bidders would each receive a watch at the
same price and all lower bids would be rejected. To be eligible to hold a Dutch
auction, a seller must have a sufficiently high feedback rating and must have
been a registered seller for at least 60 days. A seller may also specify that an
auction will be a private auction. With this format, bidders' e-mail addresses
are not disclosed on the item screen or bidding history screen.
Throughout 2000, sellers generally paid a nominal placement fee to list
items for sale -- $0.25 for an item listing with a minimum starting price of
less than $10.00; $0.50 for a minimum starting price of $10.00 to $24.99; $1.00
for a minimum starting price of $25.00 to $49.99; and $2.00 for a minimum
starting price of $50.00 or more. As of January 31, 2001, listing fees were
increased as follows -- $0.30 for an item listing with a minimum starting price
of less than $10.00; $0.55 for a minimum starting price of $10.00 to $24.99;
$1.10 for a minimum starting price of $25.00 to $49.99; $2.20 for a minimum
starting price of $50.00 to $199.99; and $3.30 for a minimum starting price of
$200 or more. By paying an additional $0.50 for items with a starting price of
$0.01 to $24.99 or $1.00 for items with a starting price of $25 or more, sellers
can choose to have a reserve selling price, which establishes a minimum level at
which they are obligated to sell the item. By paying incremental placement fees,
sellers can have items featured in various ways. A seller can highlight his or
her item for sale by utilizing a bold font for the item heading for an
additional fee of $2.00. A seller with a favorable feedback rating can have his
or her auction featured as a "Featured Auction" for $99.95, which allows the
seller's item to be rotated on the eBay home page, or as a "Featured Plus!" for
$19.95, which allows his or her item to appear in its category Featured Item
section and in bidder's search results, and the item may be selected for display
in another area -- the category index page Featured Items section. A seller can
also include a description of the product. In addition, a seller can include a
photograph in the item's description if the seller posts the photograph on a
website and provides eBay with the appropriate Web address. Items may be
showcased in the Gallery section with a catalog of pictures rather than text. A
seller who uses a photograph in his or her listing can have this photograph
included in the Gallery section for $0.25 or featured in the Gallery section for
$19.95. Certain categories of items, including real estate, automobiles and
"Premier" have different pricing. A seller can choose to list his or her item
with the "List in Two Categories" feature, which gives the item added visibility
by listing it in two separate categories. The charge for "List in Two
Categories" is double the insertion and optional feature fees (excluding home
page featured). In addition, for $0.10 a seller can choose to list his or her
item for 10 days, the longest available duration. All pricing is subject to
change.
How Transactions are Completed. When an auction ends, the eBay system
validates if a bid exceeded the minimum price, and the reserve price if one has
been set. If the sale was successful, eBay automatically notifies the buyer and
seller via email and the buyer and seller can then consummate the transaction
independent of eBay. At the time of the email notification, eBay generally
charges the seller a success fee equal to 5% of the first $25 of the purchase
price, 2.5% of that portion of the purchase price from $25.01 to $1,000, and
1.25% of that portion of the purchase price over $1,000. At no point during the
process does eBay take possession of either the item being sold or the buyer's
payment for the item. Rather, the buyer and seller must independently arrange
for the shipment of and payment for the item, with the buyer typically paying
for
8
10
shipping. Under the terms of eBay's user agreement, if a seller receives one or
more bids above the stated minimum or reserve price, whichever is higher, the
seller is obligated to complete a transaction, although eBay has no power to
force the seller or buyer to complete the transaction other than to suspend them
from using the eBay service. In the event the buyer and seller are unable to
complete the transaction and the seller notifies eBay, eBay credits the seller
the amount of the success fee. When items that have a reserve price sell,
sellers are credited the $1.00 reserve fee. Invoices for placement fees,
additional listing fees and success fees are sent via email to sellers on a
monthly basis. All new sellers are required to have a credit card account on
file with eBay. Sellers who pay by credit card are charged shortly after the
invoice is sent.
Feedback Forum. eBay pioneered a feature to facilitate the establishment of
reputations within its community by encouraging individuals to record comments
about their trading partners on each transaction. Every registered eBay user has
a feedback profile containing compliments, criticisms and other comments by
users who have conducted business or interacted with the person. The Feedback
Forum requires feedback to be related to specific transactions and provides an
easy tool for them to match up transaction numbers with the user names of their
trading partners. This information is recorded in a feedback profile that
includes a feedback rating for the person and indicates comments from other eBay
users who have interacted with that person over the past seven days, the past
month, the past six months and beyond. A user who has developed positive
reputations over time will have a color-coded star symbol displayed next to his
or her user name to indicate the amount of positive feedback received by the
user. eBay users may review a person's feedback profile to check on the person's
reputation within the eBay community before deciding to bid on an item listed by
that person or in determining how to complete the payment for and delivery of
the item.
The terms of eBay's user agreement prohibit actions that would undermine
the integrity of the Feedback Forum, such as a person's leaving positive
feedback about himself or herself through other accounts or leaving multiple
negative feedback for others through other accounts. The Feedback Forum system
has several automated features designed to detect and prevent some forms of
abuse. For example, feedback posting from the same account, positive or
negative, cannot affect a user's net feedback rating (i.e., the number of
positive postings, less the number of negative postings) by more than one point,
no matter how many comments an individual makes. Furthermore, a user can only
give feedback to his or her trading partners in completed transactions. Users
who receive a sufficiently negative net feedback rating have their registrations
suspended and are unable to bid on or list items for sale. eBay believes its
Feedback Forum is extremely useful in overcoming initial user hesitancy when
trading over the Internet, as it reduces the anonymity and uncertainty of
dealing with an unknown trading partner. See "Risk Factors -- We are subject to
risks associated with information disseminated through our service."
Trust and Safety Initiatives. eBay developed a number of programs designed
to make users more comfortable with dealing with an unknown trading partner over
the Web. In addition to the Feedback Forum, eBay offers the SafeHarbor(TM)
program, which provides guidelines for trading, helps provide information to
resolve user disputes and responds to reports of misuses of the eBay service.
eBay's SafeHarbor(TM) staff investigates users' complaints of possible misuse of
eBay and take appropriate action, including issuing warnings to users or
suspending users from bidding on or listing items for sale. Some of the
complaints the SafeHarbor(TM) staff investigates include various forms of bid
manipulation, malicious posting of negative feedback and posting illegal items
for sale. The SafeHarbor(TM) group is organized into three areas;
investigations, community watch and fraud prevention. The investigations group
investigates reported trading infractions and misuse of eBay. The fraud
prevention department provides information to assist users with disputes over
the quality of the goods sold or potentially fraudulent transactions and, upon
receipt of an officially filed, written claim of fraud from a user, will
generally suspend the offending user from eBay. The community watch department
investigates the listing of illegal, infringing or inappropriate items on the
eBay site and violations of certain eBay policies. Upon receipt of a written
claim of intellectual property infringement by the owner of the intellectual
property, eBay will remove the offending item from eBay. Users who repeatedly
infringe intellectual property rights are suspended. In addition, eBay has
increased the number of personnel reviewing potentially illegal items. eBay's
trust and safety initiatives, including user identity verification, insurance,
integrated escrow and authentication, are intended to bolster eBay's reputation
as a safe place to trade. See "Risk Factors -- Our business may be harmed by
fraudulent activities on our
9
11
website." eBay has also partnered with Infoglide, a leading provider of
similarity search technology, to help keep previously suspended users from
re-registering on eBay. eBay has introduced a requirement that new sellers must
provide a credit card or pass an identity verification check before being
allowed to sell. The identify verification process is performed by Equifax.
What Can Be Purchased or Sold on eBay. The eBay service has grown from
offering 10 product categories when it was first introduced in September 1995 to
offering more than 8,000 categories as of December 31, 2000. As the number of
product categories has grown, eBay periodically organizes the categories under
different headings to reflect the major types of items currently listed. As of
March 2001, these product categories were organized under the following
headings:
MAJOR CATEGORIES SPECIALTY SITES
- Antiques & Art - Photo - eBay Motors
- Books - Electronics - eBay Premier
- Movies - Pottery & Glass - Services for Business
- Music - Real Estate - Half.com
- Business - Sports
- Clothing & Accessories - Tickets
- Coins - Travel
- Stamps - Toys
- Collectibles - Hobbies & Crafts
- Computers - Everything Else
- Network IT
- Dolls & Bears
- Home & Garden
- Jewelry, Gemstones
Each major category has numerous subcategories. As of December 31, 2000,
eBay offered a selection of over 6 million items, with the most popular items
sold on eBay being those that are relatively standardized, well-represented with
a photo (and therefore can be evaluated to some degree without a physical
inspection), small and easily shipped and relatively inexpensive. As the eBay
community grows and additional items are listed, eBay will continue to organize
items for sale under additional categories to respond to the needs of the eBay
community.
Community Services. Beyond providing a convenient means of trading, eBay
has devoted substantial resources to building an online trading community, which
eBay believes is one of the strongest on the Web. Key components of eBay's
community philosophy are maintaining an honest and open marketplace and treating
individual users with respect. eBay offers a variety of community and support
features that are designed to solidify the growth of the eBay community and to
build eBay user affinity and loyalty such as announcement and bulletin boards,
customer support boards as well as other topical or category-specific
information exchanges.
eBay offers My eBay, which permits users to receive a report of their
recent activity on eBay, including bidding activity, selling activity, account
balances, favorite categories and recent feedback. Users with their own Web
pages also can post links from the user's page to eBay and to a list of items
the user is selling on eBay. eBay also offers About Me, which offers users the
opportunity to create their own personal home page free of charge on eBay using
step-by-step instructions provided by eBay. The About Me home page can include
personal information, items listed for sale, eBay feedback ratings, images and
links to other favorite sites.
In addition, in June 1998, eBay donated 643,500 shares of common stock to
the Community Foundation Silicon Valley, a tax-exempt donor-advised public
charity, and established a fund known as the "eBay Foundation." Through the
Community Foundation Silicon Valley, the eBay Foundation sponsors programs
including a recent program in which teachers travel abroad and share their
experiences with their students. Since its inception, the eBay foundation has
made million of dollars in grants to dozens of programs and
10
12
initiatives focusing on education and expanded access to technology. eBay also
solicits user suggestions for worthwhile charities through the eBay website,
where charity auctions and other unique promotions are held to support such
causes
Customer Support. eBay devotes significant resources to providing
personalized, timely customer service and support. eBay offers customer support
on a seven day a week basis. Most customer support inquiries are handled via
email, with customer email inquiries typically being answered within 24 hours
after submission. In 2000, eBay continued its relationship with SatMetrix
(formerly known as Customer Cast), an online customer satisfaction survey
company, to help eBay understand and improve overall customer support. Overall
customer satisfaction with eBay's support services has remained extremely high.
eBay also offers an online tutorial for new eBay users. In 2000, eBay completed
the relocation of all customer support personnel to its center in Salt Lake
City, Utah.
THE HALF.COM FIXED-PRICE FORMAT
Half.com offers a fixed-price, online website to buy and sell high quality,
previously owned goods at discounted prices. Unlike auctions, where the selling
price is based on bidding, the seller fixes the price for items at the time an
item is listed.
Registration. While any visitor to Half.com can browse through the site and
view the items listed for sale, in order to buy an item or to list an item for
sale, buyers and sellers must first register with Half.com. To register,
visitors must provide their name, address, phone number and email address. To
become a buyer, visitors must provide valid credit card information. To become a
seller, visitors must have a valid credit card, and, for some sellers, Half.com
will require bank account information, tax identification number or a social
security number.
Buying on Half.com. Buying at Half.com is similar to the shopping
experience at other leading on-line retailers. Shoppers can easily search for
specific books, CDs, movies and video games or browse for items that are
categorized and surrounded with product descriptions, reviews and artwork. Just
like any online retail store, shoppers fill their shopping cart and check out
with a credit card. Customers can also see real-time price comparisons of new
versions of the same item through an on-screen shopping agent that shows prices
from other Internet retailers.
Selling on Half.com. Sellers wishing to sell items on the Half.com site
simply type in the ISBN or UPC bar code number, select the item's condition,
confirm the sale price, and the item is immediately listed. Half.com
automatically adds descriptions and pictures to each listing, so sellers do not
need to do it themselves. There are no fees to list items on Half.com.
Until recently, a Seller could enter any price they wished -- as long as it
was less than half-off the original list price. To increase the selection of
items available to buy and sell, especially with newly released and hard-
to-find items, Half.com now allows sellers to list items above half price in
each category
In an effort to help users price their products competitively, Half.com
provides a suggested selling price. The suggested selling price for an item is
calculated as a percentage of the best on-line retail price for a new copy of
the item, depending on the quality of the item. The Half.com pricing
recommendations as a percentage of the best online retail price are as follows:
CONDITION SUGGESTED PERCENTAGE
--------- --------------------
Like New 50%
Very Good 45%
Good 40%
Acceptable 35%
How transactions are completed. When a buyer selects an item for purchase,
sellers are sent an email notifying them to ship the item. Once the seller
confirms that the item is being shipped, the buyer's credit card is charged. At
least once a month, sellers are sent a check from Half.com for all items sold
during the previous period, less Half.com's 15% commission. Sellers also receive
an allowance for shipping costs.
11
13
Buyer Protection Policy. Half.com reserves the right to suspend the
membership of any Buyer or Seller that Half.com feels has attempted to commit
fraud by misusing the Half.com Buyer Protection Policy for his or her own
personal gain. Half.com also reserves the right to reduce a Seller's account
balance, withdrawal from a Seller's ACH account or charge the Seller's credit
card in order to recover damages related to fraud. In addition, abuse of this
policy is a criminal offense and violators will be prosecuted to the fullest
extent of the law.
MARKETING
eBay's marketing strategy is to promote its brand and attract buyers and
sellers to the eBay and Half.com services. To attract users, eBay historically
has relied primarily on word of mouth and, to a lesser extent, on distribution
or sponsorship relationships with high traffic websites. Today, eBay employs a
variety of methods to promote its brand and attract potential buyers and
sellers. Currently, eBay uses strategic purchases of online advertising to place
advertisements in areas in which eBay believes it can reach its target audience.
eBay also engages in a number of marketing activities in traditional media such
as radio, broadcast and national and local TV advertising, print media, trade
shows and other events. eBay also advertises in a number of category-specific
publications. eBay continues to benefit from frequent and high visibility media
exposure both nationally and locally. While eBay does not expect the frequency
or quality of this type of publicity to continue, eBay promotes public relations
through initiatives such as online eBay/special event tie-ins and executive
speaking engagements. In March 1999, eBay expanded the scope of its preexisting
strategic relationship with AOL. Under the amended agreement, eBay is given a
prominent presence featuring it as the preferred provider of online trading
services on AOL's proprietary services (both domestic and international),
AOL.com, Digital Cities, ICQ, CompuServe (both domestic and international) and
Netscape. eBay will pay $75 million over the four-year term of the contract.
eBay has developed a co-branded version of its service for each AOL property
which prominently features each party's brand. AOL is entitled to all
advertising revenue from the co-branded sites.
OPERATIONS AND TECHNOLOGY
eBay has a scalable user interface and transaction processing system that
is based on internally-developed proprietary software. The eBay system
facilitates the sale process, including notifying users via email when they
initially register for the service, when they place a successful bid, are
outbid, place an item for sale, and when an auction ends. Furthermore, the
system sends daily status updates to any active sellers and bidders regarding
the status of their current auctions. The system maintains user registration
information, billing accounts, current auctions and historical listings. All
information is regularly archived for record-keeping and analysis purposes.
Complete listings of all items for sale are generated regularly. The system
regularly updates a text-based search engine with the titles and descriptions of
new items, as well as pricing and bidding updates for active items. Every time
an item is listed on the service, a listing enhancement option is selected by a
seller, or an auction closes with a bid in excess of the seller-specified
minimum bid, the system makes an entry into the seller's billing account. The
system sends electronic invoices to all sellers via email on a monthly basis.
For convenience, sellers may place a credit card account number on file with
eBay, and their account balance is billed directly. Sellers that are new to the
eBay service are now required to place a credit card account number on file. In
addition to these features, the eBay service also supports a number of community
bulletin board and chat areas where users and eBay customer support personnel
can interact.
Half.com's technology is similarly scalable and multi-purpose. Also based
on internally-developed software, the Half.com system facilitates the listing
process and sale transaction for fixed price items in select categories
including books, movies, music and video games. The Half.com system allows a
seller to list inventory easily by providing the UPC, ISBN (or other similar
product identification code), the price at which the seller desires to sell the
item and the quality of the item. All other product information and descriptions
are provided on the Half.com site. The Half.com system notifies a seller when a
buyer places an offer, asks the seller to confirm within two days and, if the
sale is accepted, ship the item within one day. The Half.com system further
facilitates transactions by enabling a buyer's credit card or bank account to be
debited (at the member's choice), and enabling a seller's bank account to be
credited or sending the seller a check (again, at
12
14
the members' choice). Information on Half.com's systems is regularly archived
for record-keeping and analysis purposes. Half.com is expecting to accelerate
their ongoing effort to offer enhanced search features.
eBay's system has been designed around industry standard architectures and
has been designed to reduce downtime in the event of outages or catastrophic
occurrences. The eBay service provides 24 hour, seven day a week availability,
subject to a maintenance period for a few hours during one night per week.
eBay's system hardware is hosted at the Exodus and Abovenet facilities in Santa
Clara, California, which provide redundant communications lines and emergency
power backup. eBay's system consists of Sun database servers running Oracle
relational database management systems with a mix of Sun and Hitachi storage and
a suite of Pentium-based Internet servers running the Windows NT operating
system. eBay uses Resonate Inc.'s load balancing systems and its own redundant
servers to provide for fault tolerance. eBay has experienced periodic system
interruptions, which it believes will continue to occur from time to time. These
outages have stemmed from a variety of causes, including third-party hardware
and software problems, human error and eBay proprietary software issues. The
volume of traffic on eBay's website and the number of items being listed by
users has been increasing continually, requiring eBay to expand and upgrade its
technology, transaction processing systems and network infrastructure and add
new engineering personnel. The process of upgrading and expansion is part of the
routine maintenance and revision of the site. Hardware and software changes
associated with the continuous revision have been capitalized in accordance with
company policy and are included in computer equipment and software. Due to the
speed of change and continuous nature of site revision, internal expenses often
are judged to have useful lives of less than one year, or have been more
appropriately classified as maintenance-related costs. As such, these costs are
expensed as incurred. eBay may be unable to accurately project the rate or
timing of increases, if any, in the use of the eBay service or expand and
upgrade its systems and infrastructure to accommodate these increases in a
timely manner. Any failure to expand or upgrade its systems at least as fast as
the growth in demand for capacity could cause the website to become unstable and
possibly cease to operate for periods of time. Unscheduled downtime could harm
eBay's business.
eBay uses internally developed systems to operate its service and for
transaction processing, including billing and collections processing. eBay must
continually improve these systems to accommodate the level of use of its
website. In addition, eBay may add new features and functionality to its
services that would result in the need to develop or license additional
technologies. eBay's inability to add additional software and hardware or to
upgrade its technology, transaction processing systems or network infrastructure
to accommodate increased traffic or transaction volume could have adverse
consequences. These consequences include unanticipated system disruptions,
slower response times, degradation in levels of customer support, impaired
quality of the users' experience on its service and delays in reporting accurate
financial information. eBay's failure to provide new features or functionality
also could result in these consequences. eBay may be unable to effectively
upgrade and expand its systems in a timely manner or integrate smoothly any
newly developed or purchased technologies with its existing systems. These
difficulties could harm or limit its ability to expand its business. See "Risk
Factors -- The inability to expand our systems may limit our growth
and -- System failures could harm our business."
eBay incurred $4.6 million, $24.8 million and $55.9 million in product
development expenses in 1998, 1999 and 2000, respectively. eBay anticipates that
it will continue to devote significant resources to product development in the
future as it adds new features and functionality to the eBay service. eBay
capitalizes hardware and software associated with added features or
functionality in accordance with company policy and includes such amounts in
computer equipment and software. Internal expenses are often judged to have
useful lives of less than one year, or have been more appropriately classified
as maintenance-related costs. As such, these costs are expensed as incurred. The
space in which eBay competes is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product announcements,
introductions and enhancements and changing customer demands. Accordingly,
eBay's future success will depend on its ability to adapt to rapidly changing
technologies, adapt its services to evolving industry standards and to improve
the performance, features and reliability of its service in response to
competitive service and product offerings and evolving demands of the Internet.
To address the need for rapid change as well as stability, eBay has undertaken a
project to enhance its current architecture. The new architecture is intended to
facilitate
13
15
continued stability, improved availability and load balancing. The proposed
architecture should also improve search and listing functionality. This project,
which is in the analysis and design phase, is expected to be on-going, with
phased rollouts through 2003. We plan to time these rollouts so as to minimize
the impact to our community. The failure of eBay to adapt to these changes would
harm eBay's business. In addition, the widespread adoption of new Internet,
networking or telecommunications technologies or other technological changes
could require substantial expenditures by eBay to modify or adapt eBay's
services or infrastructure. See "Risk Factors -- Our failure to manage growth
could harm us, -- We must keep pace with rapid technological change to remain
competitive and -- We need to develop new services, features and functions in
order to expand."
COMPETITION
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. The Internet is a new, rapidly
evolving and intensely competitive area. eBay expects competition to intensify
in the future as the barriers to entry are relatively low, and current and new
competitors can launch new sites at a nominal cost using commercially available
software. eBay's 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, Costco, Sam's Club as well as Amazon.com, Buy.com, AOL.com,
Yahoo! shopping and MSN.
Antiques: Christie's, eHammer, Sotheby's/Sothebys.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, KB Toys, Toys.com
Premium Collectibles: Christies, DuPont Registry, Greg Manning Auctions,
iCollector, Lycos/Skinner Auctions, Millionaire.com, Phillips (LVMH), Sotheby's,
Sothebys.com
Automotive (used cars): Autobytel.com, AutoVantage.com, AutoWeb.com,
Barrett-Jackson, CarOrder.com, CarPoint, Collectorcartraderonline.com,
eClassics.com, Edmunds, CarsDirect.com, Hemmings, imotors.com, vehix.com,
newspaper classifieds, used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, DVD Express, Wherehouse,
Alibris.com, Emusic.com, Bookfinders.com
Clothing: Bluefly.com, Dockers.com, FashionMall.com, The Gap, J. Crew,
LandsEnd.com, The Limited, 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
Home & Garden: IKEA, Crate & Barrel, Home Depot, Garden.com, Pottery Barn,
Ethan Allen, Frontgate, Lowes
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, MVP.com, PlanetOutdoors.com, Play It Again Sports, REI, Sports
Authority, Sportsline.com
Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware,
OSH, Lowes
14
16
Business-to-Business: Ariba, BidFreight.com, BizBuyer.com, bLiquid.com,
CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets,
Oracle, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, UnionStreet.com,
Ventro, VerticalNet
Additionally, 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. Overseas, we face competition from Yahoo!
Auctions in most countries and from a large number of regional and national
competitors in each country.
The principal competitive factors for eBay include the following:
- ability to attract buyers;
- volume of transactions and selection of goods;
- customer service; and
- brand recognition.
With respect to eBay's online competition, additional competitive factors
are:
- community cohesion and interaction;
- system reliability;
- reliability of delivery and payment;
- website convenience and accessibility;
- level of service fees; and
- quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet spaces than eBay does. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online trading services may be acquired by, receive investments from or enter
into other commercial relationships with larger, well-established and
well-financed companies. As a result, some of eBay's competitors with other
revenue sources may be able to devote more resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we are able
to. Increased competition may result in reduced operating margins, loss of
market share and diminished value of our brand. Some of eBay's competitors have
offered services for free, and others may do this as well. eBay may be unable to
compete successfully against current and future competitors.
In order to respond to changes in the competitive environment, eBay may,
from time to time, make pricing, service or marketing decisions or acquisitions
that could harm its business. For example, eBay has implemented an insurance
program that generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no cost to the
user. New technologies may increase the competitive pressures by enabling our
competitors to offer a lower cost service. Some Internet-based applications that
direct Internet traffic to certain websites may channel users to trading
services that compete with eBay.
Although eBay has established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of its service. In addition,
companies that control access to transactions through network access or Internet
browsers could promote eBay's competitors or charge eBay substantial fees for
inclusion.
15
17
The offline auction business is intensely competitive. Butterfields
competes with two larger and better known auction companies, Sotheby's Holdings,
Inc. and Christie's International plc, as well as numerous regional auction
companies. To the extent that these companies increase their focus on the middle
market properties that form the core of Butterfields' business or in the western
United States, 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 space, 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 space. Half.com competes directly with online retailers in its
product categories such as Amazon.com which offers a directly competitive
service, as well as with traditional sellers of used books, videos and CDs.
EMPLOYEES
As of March 1, 2001, eBay had 1,927 full-time employees. eBay's future is
substantially dependent on the performance of its senior management and key
technical personnel, and its continuing ability to find and retain highly
qualified technical and managerial personnel. See "Risk Factors -- We are
dependent on key personnel."
ISSUES RELATED TO THE LISTING OR SALE BY USERS OF UNLAWFUL ITEMS
eBay has 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 its users infringe third-party copyrights, trademarks and tradenames
or other intellectual property rights. Although eBay has actively sought to work
with the content community to eliminate infringing listings on its website, some
content owners have expressed the view that our efforts are insufficient.
Content owners have been active in defending their rights against online
companies, including eBay. An allegation of infringement of third-party
intellectual property rights may result in litigation against eBay. Any such
litigation could be costly for eBay, could result in increased costs of doing
business through adverse judgment or settlement, could require eBay to change
its business practices in expensive ways, or could otherwise harm its business.
Litigation against other online companies could result in interpretations of the
law that could also require eBay to change its business practices or otherwise
increase its costs. See "Legal Proceedings" and "Risk Factors -- We are subject
to intellectual property and other litigation."
FRAUDULENT ACTIVITIES ON THE EBAY WEBSITE
eBay's future success will depend largely upon sellers reliably delivering
and accurately representing their listed goods and buyers paying the agreed
purchase price. eBay has received in the past, and anticipates that it will
receive in the future, communications from users who did not receive the
purchase price or the goods that were to have been exchanged. In some cases
individuals have been arrested and convicted for fraudulent activities using
eBay's website. While eBay can suspend the accounts of users who fail to fulfill
their delivery obligations to other users, eBay does not have the ability to
require users to make payments or deliver goods or otherwise make users whole
other than through its limited insurance program. Other than through this
program, eBay does not compensate users who believe they have been defrauded by
other users. eBay also periodically receives complaints from buyers as to the
quality of the goods purchased. Negative publicity generated as a result of
fraudulent or deceptive conduct by users of its service could damage our
reputation and diminish the value of our brand name. eBay expects 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 its business. See "Risk Factors -- Our business may be harmed by fraudulent
activities on our website."
GOVERNMENT INQUIRIES
On January 29, 1999, eBay received initial requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with its website.
16
18
eBay was informed that the inquiry includes an examination of its practices with
respect to these transactions. eBay has provided further information in
connection with this ongoing inquiry. In order to protect the investigation, the
court has ordered that no further public disclosures be made with respect to the
matter.
On March 24, 2000, Butterfields received a grand jury subpoena from the
Antitrust Division of the Department of Justice requesting documents relating
to, among other things, changes in Butterfields' seller commissions and buyer
premiums and discussions, agreements or understandings with other auction
houses, in each case since 1992. eBay believes this request may be related to a
publicly reported criminal investigation of auction houses for price fixing.
eBay has provided the information requested in the subpoena.
Should these or any other investigations lead to civil or criminal charges
against eBay, we would likely be harmed by negative publicity, the costs of
litigation, the diversion of management time and other negative effects, even if
eBay ultimately prevails. eBay's business would suffer if it were not to prevail
in any actions like these. Even the process of providing records and information
can be expensive, time consuming and result in the diversion of management
attention.
A large number of transactions occur on eBay's websites. eBay believes that
government regulators have received a substantial number of consumer complaints
about eBay which, while small as a percentage of its total transactions, are
large in aggregate numbers. As a result, eBay has from time to time been
contacted by various foreign, federal, state and local regulatory agencies and
been told that they have questions with respect to the adequacy of the steps
eBay takes to protect its users from fraud. eBay is likely to receive additional
inquiries from regulatory agencies in the future, which may lead to action
against it. eBay has responded to all inquiries from regulatory agencies by
describing its current and planned antifraud efforts. If one or more of these
agencies is not satisfied with eBay's response to current or future inquiries,
the resultant investigations and potential fines or other penalties could harm
its business.
eBay has provided information to the antitrust division of the Department
of Justice in connection with an inquiry into its conduct with respect to
"auction aggregators" including our licensing program and our recently settled
lawsuit against Bidder's Edge. Should the division decide to take action against
eBay, 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.
PRIVACY POLICY
eBay believes that issues relating to privacy and the use of personal
information relating to Internet users are becoming increasingly important as
the Internet and its commercial use grow. eBay has adopted a detailed privacy
policy that outlines how eBay uses information concerning its users and the
extent to which other registered eBay users may have access to this information.
Users must acknowledge and agree to this policy when registering for the eBay
service. eBay does not sell or rent any personally identifiable information
about its users to any third party; however, eBay does disclose information to
sellers and winning bidders that contains the seller's and winning bidder's
name, email address and telephone number. eBay also discloses certain personally
identifiable information to its subsidiaries and business partners in connection
with the provision of services by these entities. eBay also will disclose
customer information in its possession (other than credit card information) to a
law enforcement agency or member of the eBay's Verified Rights Owner program
that requests this information in connection with a civil, criminal or
regulatory investigation. eBay also uses information about its users for
internal purposes in order to improve marketing and promotional efforts, to
analyze website usage statistically, and to improve content, product offerings
and website layout. eBay is a member of the TRUSTe program, a non-profit
independent organization that audits websites' privacy statements and audits
their adherence thereto.
NEW AND EXISTING REGULATION OF THE INTERNET
eBay is subject to the same federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels (both
in the U.S. and abroad) and it is possible that laws and
17
19
regulations will be adopted with respect to the Internet or online services.
These laws and regulations could cover issues such as user privacy, freedom of
expression, pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights and information security.
Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of these laws
were adopted prior to the advent of the Internet and related technologies and,
as a result, do not contemplate or address the unique issues of the Internet and
related technologies. Those laws that do reference the Internet, such as the
Digital Millennium Copyright Act, are only beginning to be interpreted by the
courts and their applicability and reach are therefore uncertain. In addition,
numerous states, including the State of California, where our headquarters is
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 its business to date and little precedent exists in this area.
Several states are considering imposing these regulations upon us or our users,
which could harm our business. In addition, as the nature of the products listed
by our users change, we may become subject to new regulatory restrictions.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also settled
several proceedings regarding the manner in which personal information is
collected from users and provided to third parties. Changes to existing laws or
the passage of new laws intended to address these issues could directly affect
the way we do business or could create uncertainty on the Internet. This could
reduce demand for its services, increase the cost of doing business as a result
of litigation costs or increased service delivery costs, or otherwise harm our
business. In addition, because our services are accessible worldwide, and we
facilitate sales of goods to users worldwide, foreign jurisdictions may claim
that we are required to comply with their laws. For example, a French court has
recently ruled that a U.S. website must comply with French laws regarding
content. As we have expanded our international activities, we have become
obligated to comply with the laws of the countries in which we operate. Laws
regulating Internet companies outside of the United States are in many ways less
favorable then those in the United States, giving greater rights to consumers,
content owners and users or placing more extensive restrictions on our
operations than exist in the U.S. Compliance may be more costly or may require
us to change our business practices or restrict its service offerings relative
to those in the United States. Our failure to comply with foreign laws could
subject eBay to penalties ranging from fines to bans on our ability to offer our
services. See "Risk Factors -- There are many risks associated with our
international operations."
ITEM 2: PROPERTIES
On March 1, 2000, eBay entered into a five-year lease for approximately
460,000 square feet of which the online segment occupies approximately 190,000
square feet of general office facilities located in San Jose, California.
Payments under this lease, which commenced during 2000, are based on a spread
over the London Interbank Offering Rate ("LIBOR") applied to the $126.4 million
cost of the facility funded by the lessor. eBay has an option to renew the lease
for up to two five-year extensions subject to specific conditions. Under the
terms of the lease agreement, eBay was required to place $126.4 million of cash
and investment securities as collateral for the term of the lease. The cash and
investment securities are restricted as to their withdrawal from the third party
trustee and are classified as long-term restricted cash and investments in the
accompanying balance sheet.
eBay entered into two interest rate swaps on June 19 and July 20, 2000,
totaling $95 million, to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow eBay to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments which effectively changes the interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease.
The online segment leases an additional 140,000 square feet of office
space. This office space is primarily for eBay's customer call center in Utah
and Half.com's administrative offices in Pennsylvania. Office space for
18
20
the online segment's international subsidiaries is leased in Australia, England,
Germany, Japan, Italy, Switzerland and France.
The offline segment owns facilities in California and Indiana with an
aggregate of approximately 700,000 square feet. Of the 700,000 square feet, eBay
is a majority interest holder in 187,000 square feet of office space and the
sole owner of the remaining balance.
eBay believes that its existing facilities are adequate to meet its needs
for the immediate future and future growth can be accommodated by leasing
additional or alternative space.
ITEM 3: LEGAL PROCEEDINGS
On 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 alleged that eBay violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit sought declaratory and injunctive relief,
restitution and legal fees. eBay filed a general demurrer which was sustained by
the court with leave to amend. The plaintiff subsequently filed an amended
complaint. eBay filed a motion for summary judgement. On November 7, 2000,
eBay's motion for summary judgement was granted.
On December 10, 1999, eBay sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
eBay alleging that eBay violated the antitrust laws by monopolizing or
attempting to monopolize a market, that eBay competed unfairly, and that eBay
interfered with Bidder's Edge's contract with eBay magazine. Bidder's Edge
sought treble damages, an injunction and its fees and costs. On May 24, 2000,
the court granted us a preliminary injunction against the use by Bidder's Edge
of robotic means to copy eBay's site. In February 2001, the parties settled this
lawsuit. All claims by both parties were dismissed, and Bidder's Edge paid eBay
an undisclosed amount.
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 was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims eBay was
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims eBay violated Section 17200 and a section of the California Civil
Code which prohibits "dealers" from selling sports memorabilia without a
"Certificate of Authenticity." On January 26, 2001, the Court issued a ruling
dismissing all claims against eBay in the lawsuit. The Court ruled that eBay's
business falls within the safe harbor provisions of 47 USC 230, which grants
internet service providers such as eBay with immunity from state claims based on
the conduct of third parties. The Court also noted that eBay was not a "dealer"
under California law and thus not required to provide certificates of
authenticity with autographs sold over its site by third parties. All counts of
the plaintiffs' suit were dismissed with prejudice as to eBay. Plaintiffs have
appealed this ruling. We believe that we have meritorious defenses and intend to
defend ourselves vigorously.
Other third parties have from time to time claimed and may claim in the
future that eBay has infringed their past, current or future intellectual
property rights. eBay may become more vulnerable to such claims as laws such as
the Digital Millennium Copyright Act are interpreted by the courts. eBay expects
that it will increasingly be subject to infringement claims as the number of
services and direct competitors grow. These claims, whether meritorious or not,
could be time-consuming, result in costly litigation, cause service upgrade
delays, require expensive changes in our methods of doing business or could
require eBay to enter into costly royalty or licensing agreements, if available.
As a result, these claims could harm our business.
19
21
From time to time, eBay is involved in disputes that have arisen in the
ordinary course of business. Management believes that the ultimate resolution of
these disputes will not have a material adverse impact on eBay's financial
position, results of operations or cash flows.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no submissions of matters to a vote of security holders during
the fourth quarter ended December 31, 2000.
20
22
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
eBay's common stock has been traded on The Nasdaq Stock Market(SM) under
the symbol "EBAY" since September 24, 1998. The following table sets forth the
high and low sales prices of eBay's common stock for the periods indicated and
are as reported on The Nasdaq Stock Market(SM). The stock quotes are adjusted to
reflect the stock splits in 1999 and 2000.
HIGH LOW
------- ------
Year Ended December 31, 1999
First Quarter........................................... $ 88.69 $27.67
Second Quarter.......................................... 117.00 63.34
Third Quarter........................................... 80.50 35.14
Fourth Quarter.......................................... 93.00 62.25
Year Ended December 31, 2000
First Quarter........................................... 127.50 58.69
Second Quarter.......................................... 93.88 48.56
Third Quarter........................................... 77.56 43.50
Fourth Quarter.......................................... 70.25 26.75
As of March 1, 2001 there were approximately 1,500 stockholders of record
of the eBay's common stock, although eBay believes that there is a significantly
larger number of beneficial owners of its common stock.
DIVIDEND POLICY
eBay has never paid cash dividends on its stock, and anticipates that it
will continue to retain any future earnings to finance the growth of its
business.
21
23
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report. The consolidated statement of income and the consolidated balance sheet
data for the years ended December 31, 1996, 1997, 1998, 1999 and 2000, are
derived from, and are qualified by reference to, the audited consolidated
financial statements of eBay.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME
DATA:
Net revenues......................... $32,051 $ 41,370 $ 86,129 $224,724 $431,424
Cost of net revenues................. 6,803 8,404 16,094 57,588 95,453
------- -------- -------- -------- --------
Gross profit............... 25,248 32,966 70,035 167,136 335,971
------- -------- -------- -------- --------
Operating expenses:
Sales and marketing................ 13,139 15,618 35,976 96,239 166,767
Product development................ 28 831 4,640 24,847 55,863
General and administrative......... 5,661 6,534 15,849 43,919 73,027
Payroll expense on employee
stock options................... -- -- -- -- 2,337
Amortization of acquired
intangibles..................... -- -- 805 1,145 1,433
Merger related costs............... -- -- -- 4,359 1,550
------- -------- -------- -------- --------
Total operating expenses... 18,828 22,983 57,270 170,509 300,977
------- -------- -------- -------- --------
Income (loss) from operations........ 6,420 9,983 12,765 (3,373) 34,994
Interest and other income (expense),
net................................ (2,607) (1,951) (703) 21,412 46,025
------- -------- -------- -------- --------
Income before income taxes........... 3,813 8,032 12,062 18,039 81,019
Provision for income taxes........... (475) (971) (4,789) (8,472) (32,725)
------- -------- -------- -------- --------
Net income........................... $ 3,338 $ 7,061 $ 7,273 $ 9,567 $ 48,294
======= ======== ======== ======== ========
Net income per share(1):
Basic.............................. $ 0.20 $ 0.14 $ 0.07 $ 0.04 $ 0.19
======= ======== ======== ======== ========
Diluted............................ $ 0.04 $ 0.04 $ 0.03 $ 0.04 $ 0.17
======= ======== ======== ======== ========
Weighted average shares:
Basic.............................. 16,979 48,854 104,128 217,674 251,776
======= ======== ======== ======== ========
Diluted............................ 90,119 169,550 233,519 273,033 280,346
======= ======== ======== ======== ========
SUPPLEMENTAL OPERATING DATA
(UNAUDITED):
Number of registered users at
end of period...................... 41 341 2,181 10,006 22,472
Gross merchandise sales, in
millions(2)........................ $ 7 $ 95 $ 745 $ 2,805 $ 5,422
Number of items listed, in
millions........................... 289 4,394 33,668 129,560 264,653
22
24
DECEMBER 31,
--------------------------------------------------------
1996 1997 1998 1999 2000
------- ------- -------- -------- ----------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 2,909 $12,109 $ 37,285 $221,801 $ 201,873
Short-term investments............... -- -- 40,401 181,086 354,166
Long-term investments................ -- -- -- 373,988 218,197
Restricted cash and investments...... -- -- -- -- 126,390
Working capital...................... (1,676) (1,881) 72,934 372,266 538,022
Total assets......................... 49,909 62,350 149,536 969,825 1,182,403
Long-term debt....................... 19,709 16,307 18,361 15,018 11,404
Total stockholders' equity........... 6,600 9,722 100,538 854,129 1,013,760
- ---------------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the method used to compute basic and diluted net income per share,
respectively.
(2) Represents the aggregate sales prices of all goods for which an auction was
successfully concluded (i.e., there was at least one bid above the seller's
specified minimum price or reserve price, whichever is higher).
23
25
ITEM 7: 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
We pioneered online person-to-person trading by developing a global online
trading platform that will help practically anyone buy or sell practically
anything. Our service permits sellers to list items for sale, buyers to bid on
items of interest and all eBay users to browse through listed items in a
fully-automated, topically-arranged, intuitive and easy-to-use online service
that is available 24 hours a day, seven days a week. We have extended our online
offerings to include regional and international trading, autos, "premium" priced
items, and through our acquisition of Half.com and our recently introduced "Buy
it Now" feature, we now offer fixed-price functionality. Additionally, Billpoint
provides online billing and payment solutions. We also expanded into the
traditional auction business, also called offline trading, with our acquisitions
of Butterfields and Kruse.
Substantially all of our revenues come from fees and commissions associated
with online and offline trading services. Online revenue is primarily derived
from placement fees, success fees, commissions paid by sellers, and commissions
paid by buyers for "premium" priced items. Sellers pay a nominal placement fee,
and by paying additional fees, sellers can have items featured in various ways.
Sellers also pay a success fee based on the final purchase price. In addition,
we receive revenues from end-to-end service providers whose services increase
the velocity of transactions to the site, revenues from commercial alliances
designed to build out a category or other functions and from direct advertising
which includes promotional payments from unrelated third parties. Although we
expect these end-to-end, commercial alliance and direct advertising revenues to
increase in the future, they are subject to considerable uncertainty. See "Risk
Factors -- Our revenue from end-to-end service providers, commercial alliances
and advertising is subject to factors beyond our control." To date, online
payment solutions provided by Billpoint and fixed price trading provided by
Half.com have not made significant contributions to net revenues, although we
expect Billpoint's and Half.com's revenues to increase in the future. Offline
revenue is derived from a variety of sources including sellers' commissions,
buyers' premiums, bidder registration fees, and auction-related services
including appraisal and authentication. We expect that the online business will
continue to represent the majority of revenue growth in the foreseeable future.
ACQUISITIONS
Half.com
On July 11, 2000, we acquired Half.com. Half.com provides a fixed-price,
person-to-person e-commerce site allowing people to buy and sell previously
owned goods at discounted prices. In connection with the merger, we issued, or
reserved for issuance, a total of approximately 5,484,000 shares of our common
stock to Half.com's existing shareholders, option holders and warrant holders.
The merger has been accounted for as a pooling-of-interests.
Internet Auction
On February 15, 2001, we acquired a majority interest in Internet Auction
Co., Ltd., a South Korean company("Internet Auction"). Internet Auction
introduced person-to-person trading in Korea when it
24
26
launched in April 1998. Internet Auction is listed on the KOSDAQ and is expected
to continue to trade on KOSDAQ.
We acquired 6,274,795 of the outstanding shares of Internet Auction,
slightly more than 50%, at a fixed price of 24,000 Korean won per share or
approximately $120 million in the aggregate. The transaction will be accounted
for using the purchase method of accounting and accordingly, the purchase price
will be allocated to the tangible and intangible assets acquired and the
liabilities assumed on the basis of their respective fair values on the
acquisition date.
iBazar S.A.
On February 21, 2001, we signed a binding agreement to acquire iBazar S.A.
(iBazar). iBazar is based in Paris and introduced online, person-to-person
trading in France when it launched in October 1998. Currently, iBazar has
websites in Belgium, Brazil, France, Italy, the Netherlands, Portugal, Spain,
and Sweden.
As consideration for 100% of the outstanding shares of iBazar, we will
issue approximately 2,250,000 shares of our common stock, subject to a minimum
valuation of approximately $66 million and a maximum valuation of approximately
$112 million, based on the value of our stock at closing. The acquisition will
be accounted for as a purchase business combination and is subject to various
regulatory approvals.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain data
from our consolidated statements 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.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
Net revenues................................................ 100.0% 100.0% 100.0%
Cost of net revenues........................................ 18.7 25.6 22.1
----- ----- -----
Gross profit...................................... 81.3 74.4 77.9
----- ----- -----
Operating expenses:
Sales and marketing....................................... 41.8 42.8 38.7
Product development....................................... 5.4 11.1 12.9
General and administrative................................ 18.4 19.5 16.9
Payroll expense on employee stock options................. -- -- 0.5
Amortization of acquired intangibles...................... 0.9 0.5 0.3
Merger related costs...................................... -- 1.9 0.4
----- ----- -----
Total operating expenses.......................... 66.5 75.8 69.7
----- ----- -----
Income/(loss) from operations............................... 14.8 (1.4) 8.2
Interest and other income, net.............................. 2.2 10.6 10.7
Interest expense............................................ (2.5) (1.0) (0.8)
----- ----- -----
Income before income taxes and minority interest............ 14.5 8.2 18.1
Provision for income taxes.................................. (5.6) (3.8) (7.6)
Minority interest in consolidated companies................. (0.5) (0.1) 0.7
----- ----- -----
Net income.................................................. 8.4% 4.3% 11.2%
===== ===== =====
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
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 our first
fiscal quarter, although our shift to more "practical" items may cause our
seasonal patterns to look more like a typical retailer. Both Butterfields and
Kruse have significant quarter-to-quarter variations in their results of
25
27
operations depending on the timing of auctions and the availability of high
quality items from large collections and estates. Butterfields typically has its
best operating results in the traditional fall and spring auction seasons and
has historically incurred operating losses in the first and third quarters.
Kruse typically sees a seasonal peak in operations in the third quarter.
Seasonal or cyclical variations in our business may become more pronounced over
time and may harm our results of operations in the future.
Due to the inherent difficulty in forecasting net revenues, it is also
difficult to forecast income statement expense categories as a percentage of net
revenues. Quarterly and annual income statement expense categories as a
percentage of net revenues may be significantly different from historical or
projected rates. As a general note, we expect costs to increase in absolute
dollars across all income statement categories.
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 comparisons.
Net Revenues
We derive revenue from a variety of sources including: listing, success and
featured item fees, end-to-end services, commercial alliances, sponsorships and
other advertising. In addition, we derive commissions and rental income from our
traditional offline auction operations. Our net revenues increased from $86.1
million to $224.7 million for the years ended December 31, 1998 and 1999 and
further increased to $431.4 million in the year ended December 31, 2000. The
successive year-over-year growth from 1998 through 2000 was predominantly the
result of increased use of our website, reflected in 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 growth of online services including
end-to-end services, commercial alliance revenues and direct advertising.
The Securities and Exchange Commission issued Staff Accounting Bulletin
("SAB") No. 101, "Revenue Recognition in Financial Statements." As it relates to
eBay, SAB 101 requires that listing and featured item fee revenue be recognized
ratably over the estimated period of the auction. We implemented SAB 101 in the
first quarter of 2000, and the effect was insignificant.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs
associated with customer support and site operations. The costs included are
compensation, employee and facilities costs for customer support and site
operations personnel, ISP connectivity charges and depreciation on site
equipment. Cost of net revenues in traditional auction operations primarily
includes compensation for auction, appraisal, and customer support personnel and
direct auction costs, such as event site rental. Cost of net revenues increased
from $16.1 million or 18.7% of net revenues to $57.6 million or 25.6% of net
revenues for the years ended December 31, 1998 and 1999 and further increased in
absolute dollars but decreased as a percentage of sales to $95.5 million or
22.1% of net revenues in the year ended December 31, 2000. The successive
year-over-year growth from 1998 through 2000 was due almost entirely to our
online business, including our international operations, as well as our
acquisition of Billpoint in 1999 and Half.com in 2000. The increase in absolute
dollars in expenditures for the online service resulted from the continued
development and expansion of our customer support and site operations
departments, depreciation of the equipment required for site operations,
software licensing fees and ISP connectivity charges. The decrease in cost of
net revenues as a percentage of net revenue from 1999 to 2000 resulted from cost
management in customer support and site operations and increases in higher gross
margin businesses such as autos and end-to-end trading solutions. As a result of
these efficiencies, we expect the cost of net revenues to increase in absolute
dollars but decrease as a percentage of net revenues in 2001.
Sales and Marketing
Our sales and marketing expenses for both the online and traditional
auction businesses are comprised primarily of compensation for our sales and
marketing personnel, advertising, tradeshow and other promotional costs,
employee and facilities costs. Sales and marketing expenses increased from $36.0
million or 41.8% of net revenues to $96.2 million or 42.8% of net revenues for
the years ended December 31, 1998 and 1999 and
26
28
further increased in absolute dollars but decreased as a percentage of sales to
$166.8 million or 38.7% of net revenues in the year ended December 31, 2000. The
successive year-over-year growth from 1998 through 2000 was primarily the result
of growth in online and traditional advertising, including expenses for various
marketing agreements, personnel related costs, costs associated with the use of
outside services and consultants and miscellaneous user and promotional costs.
Online sales and marketing expenses are expected to increase in absolute
dollars for 2001 as we plan to build the eBay brand more broadly. We expect to
build our brand further with continued advertising impressions delivered under
the strategic alliances with America Online ("AOL"), Autotrader.com and GO.com
(a wholly owned subsidiary of the Walt Disney Company) an increase in mass media
advertising and the expansion of international advertising. Sales and marketing
expenses in the traditional auction businesses are expected to remain comparable
with historical levels.
Product Development
Product development expenses consist primarily of compensation for our
product development staff, payments to outside contractors, depreciation on
equipment used for development, employee and facilities costs. Our product
development expenses increased from $4.6 million or 5.4% of net revenues to
$24.8 million or 11.1% of net revenues for the years ended December 31, 1998 and
1999 and further increased to $55.9 million or 12.9 % of net revenues in the
year ended December 31, 2000. The successive year over year growth from 1998
through 2000 was primarily the result of an increase in personnel-related costs
as we significantly increased the size of our product development staff,
expenses related to contractors and consultants employed within product
development departments, and maintenance and depreciation for equipment used in
research and development. The year-over-year increase also resulted from the
addition of product development operations at Billpoint in 1999 and Half.com in
2000 including a one-time, stock-based compensation expense at Half.com
resulting from the acquisition. Product development expenses are expected to
increase in absolute dollars during future periods primarily from personnel
additions, the continued impact of Billpoint and Half.com product development,
additional depreciation costs as we continue to purchase equipment to improve
and expand operations both domestically and internationally and expected
amortization costs associated with the phased rollout of our next generation
three-tier architecture.
General and Administrative
General and administrative expenses consist primarily of compensation for
personnel and, to a lesser extent, fees for external professional advisors,
provisions for doubtful accounts, employee and facilities costs. Our general and
administrative expenses increased from $15.8 million or 18.4% of net revenues to
$43.9 million or 19.5% of net revenues for the years ended December 31, 1998 and
1999 and increased in absolute dollars but decreased as a percentage of sales to
$73.0 million or 16.9% of net revenues in the year ended December 31, 2000. The
year-over-year increases resulted from growth in personnel-related expenses in
order to meet the demands of our expanding business, including operations in new
countries and the integration of new businesses, fees for professional services,
employee and facilities costs. We expect that general and administrative
expenses will increase in absolute dollars in future periods as we continue to
invest in the infrastructure that is necessary for our business.
Payroll Expense on Employee Stock Options
We are subject to employer payroll taxes on employee exercises of
non-qualified stock options. These employer payroll taxes are recorded as a
charge to operations in the period such options are exercised and sold based on
actual gains realized by employees. Our quarterly results of operations and cash
flows could vary significantly depending on the actual period that the stock
options are exercised by employees and, consequently, the amount of employer
payroll taxes assessed.
27
29
Amortization of Acquired Intangible Assets
From time to time we have purchased, and expect to continue purchasing,
assets or businesses in order to maintain our leadership role in online trading.
These purchases may result in the creation of intangible assets and lead to a
corresponding increase in the amortization in the related periods. Our
amortization of acquired intangible assets increased in absolute dollars from
$805,000 or 0.9% of net revenues to $1.1 million or 0.5% of net revenues for the
years ended December 31, 1998 and 1999 and further increased in absolute dollars
to $1.4 million or 0.3% of net revenues in the year ended December 31, 2000. We
expect the amortization of intangible assets to increase in 2001 due to our
recent acquisition of Internet Auction in Korea and our agreement to acquire
iBazar S.A. Both acquisitions will be accounted for as purchase business
combinations.
Merger-related Costs
In 1999, eBay incurred direct merger related transaction costs of $4.4
million which were primarily related to the acquisitions of Billpoint,
Butterfields, Kruse and alando.de.ag. In 2000, eBay incurred direct merger
transaction costs of $1.6 million primarily associated with the acquisition of
Half.com. There were no comparable expenses for the same period in 1998. As
opportunities present themselves, eBay may continue to acquire new companies;
such acquisitions could lead to additional direct and indirect expenses which
could negatively affect eBay's results of operations.
Interest and Other Income, Net
Interest and other income, net consists of interest earned on cash, cash
equivalents, and investments offset by foreign exchange gains or losses. Our
interest and other income, net increased from $1.8 million or 2.2% of net
revenues to $23.8 million or 10.6% of net revenues for the years ended December
31, 1998 and 1999 and increased to $46.3 million or 10.7% of net revenues in the
year ended December 31, 2000. The year-over-year increases resulted from
interest earned on cash, cash equivalents and investments. We expect interest
and other income will continue to exceed interest expense in 2001.
Provision for Income Taxes
Our effective federal and state income tax rates were 39.7%, 47.0%, and
40.4% in the years ended December 31, 1998, 1999 and 2000, respectively. The tax
rates in 1998 and 1999 include the effects of our acquisitions. Additionally, we
receive tax deductions for gains realized by employees on the exercise of non-
qualified stock options for which the benefit is recognized as a component of
paid-in capital. We have provided for a valuation allowance on the deferred tax
assets relating to these stock option deductions.
Prior to the acquisition by eBay in 1999, Butterfields was taxed as an S
Corporation. In connection with the acquisition, Butterfields' status as an S
Corporation was terminated, and Butterfields became subject to federal and state
income taxes. The supplemental pro forma financial information presented in the
financial statements includes an increase to the provisions for income taxes
based upon a combined federal and state tax rate. This rate approximates the
statutory tax rate that would have been applied if Butterfields were taxed as a
C Corporation prior to the acquisition.
Stock-Based Compensation
In connection with granting certain stock options from May 1997 through May
1999, we recorded aggregate unearned compensation totaling $13.1 million, which
is being amortized over the four-year vesting period of the options. In
connection with certain stock options granted between July 1999 and March 2000
by companies that we subsequently acquired, we recorded unearned compensation
totaling $4.9 million. Of the total unearned stock compensation, approximately
$3.1 million, $4.8 million and $7.1 million was amortized in 1998, 1999 and
2000, respectively. Of the amortization in 2000, approximately $4.8 was related
to the acquisition of Half.com. We expect additional amortization of unearned
stock compensation as a result of our acquisition of Internet Auction and
potential acquisition of iBazar S.A.
28
30
LIQUIDITY AND CAPITAL RESOURCES
Since inception, eBay has financed operations primarily from net cash
generated from operating activities. We obtained additional financing from the
sale of preferred stock and warrants, proceeds from the exercise of those
warrants, proceeds from the exercise of stock options, and proceeds from our
initial and follow-on public offerings.
Net cash provided by operating activities was $6.0 million in 1998, $62.9
million in 1999 and $100.1 million in 2000. Net cash provided by operating
activities resulted primarily from our net income before non-cash charges for
depreciation and amortization, and changes in accrued expenses offset by changes
in accounts receivable and other assets.
Net cash used in investing activities was $53.0 million in 1998, $603.4
million in 1999, and $206.1 million in 2000. The primary use for invested cash
in the periods presented was purchases of investments, property, and equipment.
Net cash provided by financing activities was $72.2 million in 1998, $725.0
million in 1999, and $86.0 million in 2000. We remained cash flow positive from
financing activities primarily due to our public offering in 1998 and our
subsequent follow-on offering in 1999. To a lesser extent, financing activities
included the sale of common stock under employee benefit plans. In 2000, net
cash provided by financing activities primarily resulted from the issuance of
common stock to third parties by our subsidiaries.
We had no material commitments for capital expenditures at December 31,
2000, but expect such expenditures to approximate $86.0 million during 2001
without taking into account any acquisitions. Of the $86.0 million,
approximately $20.0 million has been committed for capital expenditures relating
to hardware and software for the development of our new architecture. The
remaining balance will be used primarily for computer equipment, furniture and
fixtures and leasehold improvements. We also have total minimum lease
obligations of $43.9 million under certain noncancellable operating leases and
notes payable obligations of $26.7 million through August 2023. Under our
agreement with AOL, we will pay AOL $75 million over the four-year term of the
contract. To date, we have paid $37.5 million on the contract. In February 2000,
we signed an agreement with GO.com. In consideration for this agreement, we will
pay a minimum of $30 million to GO.com over the four-year term. In 2001, Disney
announced that it was dissolving GO.com; consequently, eBay is currently in the
process of renegotiating new contract terms with Disney.
We believe that existing cash, cash equivalents and investments, and any
cash generated from operations will be sufficient to fund our operating
activities, capital expenditures and other obligations for the foreseeable
future. However, if during that period or thereafter we are not successful in
generating sufficient cash flow from operations or in raising additional capital
when required in sufficient amounts and on terms acceptable to us, our business
could suffer.
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 June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date until the first
fiscal year ending on or after June 30, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities-an Amendment of SFAS 133." SFAS No. 138 amends certain terms
and conditions of SFAS 133. SFAS 133 requires that all derivative instruments be
recognized at fair value as either assets or liabilities in the statement of
financial position. The accounting for changes in the fair value (i.e., gains or
losses) of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of hedging
relationship. We will adopt SFAS No. 133, as amended, in our quarter ending
March 31, 2001. Upon adoption, the cumulative effect to net income and other
comprehensive income of this
29
31
change in accounting method is a gain of approximately $650,000 and a loss of
approximately $2.6 million, respectively, net of tax.
In July 2000, the Emerging Issues Task Force ("EITF") reached a consensus
with respect to EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal
versus Net as an Agent." EITF 99-19 addressed whether a company should report
revenue based on the gross amount billed to a customer because it has earned
revenue from the sale of the goods or services or the net amount retained (that
is, the amount billed to the customer less the amount paid to a supplier)
because it has earned a commission or fee. We adopted EITF 99-19, and such
adoption did not have a material impact on its consolidated financial
statements.
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. We evaluated the provisions of the guidance in
conjunction with our policies and concluded that we are in compliance with this
pronouncement.
In July 2000, the EITF issued EITF Issue No. 00-15, "Classification in the
Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option." EITF 00-15 addresses the
cash flow statement presentation of the tax benefit associated with the exercise
of nonqualified stock options. We receive an income tax deduction for the
difference between the exercise price and the market price of a nonqualified
stock option upon exercise by the employee. EITF 00-15 concludes that the income
tax benefit realized by us upon employee exercise should be classified in the
operating section of the cash flow statement. The EITF is effective for all
quarters ending after July 20, 2000. We adopted EITF 00-15, and such adoption
did not have a material impact on our consolidated financial statements.
In July 2000, the EITF issued EITF Issue No. 00-16, "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation."
This Issue addresses how an entity should account for employer payroll taxes on
stock-based compensation under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and SFAS No. 123, "Accounting for
Stock-Based Compensation." This Issue addresses our timing for recognizing our
payroll tax liability and requires that this liability be recognized when the
tax obligation is due and payable. We adopted EITF 00-16 effective July 31,
2000. Such adoption did not have a material impact on our consolidated financial
statements.
RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The risks and uncertainties described below are not the only ones facing
eBay. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following risks or such other risks actually occur, our business could be
harmed.
WE HAVE A LIMITED OPERATING HISTORY
Our company was formed as a sole proprietorship in September 1995 and was
incorporated in May 1996. We have only a limited operating history on which you
can base an evaluation of our business and prospects. As an online commerce
company still relatively early in our development, we face substantial risks,
uncertainties, expenses and difficulties. To address these risks and
uncertainties, we and our subsidiaries must do the following:
- maintain and increase our number of registered users, items listed on our
service and completed sales;
- expand into new areas;
- maintain and grow our website and customer support operations at a
reasonable cost;
- continue to make trading through our service safer for users;
- maintain and enhance our brand;
- continue to develop and upgrade our technology and information processing
systems;
30
32
- continue to enhance and expand our service to meet the changing
requirements of our users;
- provide superior customer service;
- remain attractive to our commercial partners;
- respond to competitive developments; and
- attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these goals, which could
cause our business to suffer. In addition, accomplishing one or more of these
goals might be very expensive, which could harm our financial results.
OUR OPERATING RESULTS MAY FLUCTUATE
Our operating results have varied on a quarterly basis during our operating
history. Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
- our ability to retain an active user base, to attract new users who list
items for sale and who purchase items through our service and to maintain
customer satisfaction;
- our ability to keep our website operational and to manage the number of
items listed on our service;
- the amount and timing of operating costs and capital expenditures
relating to the maintenance and expansion of our business, operations and
infrastructure;
- foreign, federal, state or local government regulation, including
investigations prompted by items improperly listed or sold by our users;
- the introduction of new sites, services and products by us or our
competitors;
- volume, size, timing and completion rate of trades on our websites;
- consumer confidence in the security of transactions on our websites;
- our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
- technical difficulties or service interruptions;
- our ability to attract new personnel in a timely and effective manner;
- our ability to retain key employees in both our online businesses and our
acquisitions;
- our ability to successfully integrate and manage our acquisitions;
- our ability to successfully expand our product offerings involving fixed
price trading;
- the ability of our land-based auction businesses to acquire high quality
properties for auction;
- the timing, cost and availability of advertising in traditional media and
on other websites and online services;
- the timing of payments to us and of marketing and other expenses under
existing and future contracts;
- 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 websites; and
31
33
- general economic conditions and economic conditions specific to the
Internet and e-commerce industries.
Our limited operating history and growing competition make it difficult for
us to forecast the level or source of our revenues or earnings accurately. We
believe that period-to-period comparisons of our operating results may not be
meaningful, and you should not rely upon them as an indication of future
performance. We do not have backlog, and almost all of our net revenues each
quarter come from transactions for items that are listed and sold during that
quarter. Our operating results in one or more future quarters may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
OUR FAILURE TO MANAGE GROWTH COULD HARM US
We currently are experiencing a period of expansion in our headcount,
facilities and infrastructure, and we anticipate that further expansion will be
required to address potential growth in our customer base and number of listings
as well as our expansion into new geographic areas, types of goods and
alternative methods of sale. This expansion has placed, and we expect it will
continue to place, a significant strain on our management, operational and
financial resources. The areas that are put under strain by our growth include
the following:
- The Websites. We must constantly add new hardware, update software and
add new engineering personnel to accommodate the increased use of our and
our subsidiaries' websites and the new products and features we are
regularly introducing. This is expensive and the increased complexity of
our websites increases the cost of additional enhancements. If we are
unable to increase the capacity of our systems at least as fast as the
growth in demand for this capacity, our websites may become unstable and
may cease to operate for periods of time. We have experienced periodic
unscheduled downtime. Continued unscheduled downtime would harm our
business and also could anger users of our website and reduce future
revenues.
- Customer Support. We are expanding our customer support operations to
accommodate the increased number of users and transactions on our
websites. If we are unable to hire and successfully train sufficient
employees or contractors in this area in a cost effective manner, users
of our websites may have negative experiences, and current and future
revenues could suffer or our margins may decrease.
- 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 perform poorly, or if we are unsuccessful in hiring, training and
integrating these new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the expected growth of
our operations and personnel, we will need to improve our transaction
processing, operational and financial systems, procedures and controls. This is
a special challenge when we acquire new operations with different systems. 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 websites, customer support and
international and product expansion;
32
34
- 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 websites, technology and operating infrastructure
development. The costs of these investments 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 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 (e.g. fixed price, reverse auction, group buying,
etc.) may limit our ability to raise user fees in response to declines in
profitability. In addition, we are spending in advance of anticipated growth,
which may also harm our profitability. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful. You should
not rely upon our historical results as indications of our future performance.
ACQUISITIONS COULD RESULT IN DILUTION, OPERATING DIFFICULTIES AND OTHER HARMFUL
CONSEQUENCES
We have acquired a number of businesses, including our recently completed
acquisitions of Half.com and Internet Auction Company Ltd. in Korea and our
announced acquisition of iBazar S.A., and may in the future acquire businesses,
technologies, services or products that we believe are strategic. The process of
integrating any acquisition may create unforeseen operating difficulties and
expenditures and is itself risky. The areas where we may face difficulties
include:
- diversion of management time (at both companies) during the period of
negotiation through closing and further diversion of such time after
closing from focus on operating the businesses to issues of integration
and future products;
- decline in employee morale and retention issues resulting from changes in
compensation, reporting relationships, future prospects or the direction
of the business;
- the need to integrate each company's accounting, management information,
human resource and other administrative systems to permit effective
management, and the lack of control if such integration is delayed or not
implemented; and
- the need to implement controls, procedures and policies appropriate for a
larger public company at companies that prior to acquisition had been
smaller, private companies.
Prior to the four large acquisitions we made in 1999, we had almost no
experience in managing this integration process. Many of our acquisitions to
date have involved either family-run companies or very early stage companies,
which may worsen these integration issues. Foreign acquisitions involve special
risks including those related to integration of operations across different
cultures, currency risks and the particular economic and political risks
associated with specific countries. Moreover, the anticipated benefits of any or
all of our acquisitions may not be realized. Future acquisitions or mergers
could result in potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could harm our business.
Future acquisitions or mergers may require us to obtain additional equity or
debt financing, which may not be available on favorable terms or at all. Even if
available, this financing may be dilutive.
THE INABILITY TO EXPAND OUR SYSTEMS MAY LIMIT OUR GROWTH
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
websites, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
revenues depend primarily on the number of items listed by users, the volume of
user transactions that are successfully completed and the final prices paid for
the items listed. We need to expand and upgrade our technology,
33
35
transaction processing systems and network infrastructure both to meet increased
traffic on our site and to implement new features and functions, including those
required under our contracts with third parties. We may be unable to accurately
project the rate or timing of increases, if any, in the use of our service or to
expand and upgrade our systems and infrastructure to accommodate any increases
in a timely fashion.
We use internally developed systems to operate our service for transaction
processing, including billing and collections processing. We must continually
improve these systems in order to accommodate the level of use of our website.
In addition, we may add new features and functionality to our services that
would result in the need to develop or license additional technologies. We
capitalize hardware and software costs associated with this development in
accordance with generally accepted accounting principles and include such
amounts in property and equipment. Our inability to add additional software and
hardware or to upgrade our technology, transaction processing systems or network
infrastructure to accommodate increased traffic or transaction volume could have
adverse consequences. These consequences include unanticipated system
disruptions, slower response times, degradation in levels of customer support,
impaired quality of the users' experience of our service and delays in reporting
accurate financial information. Our failure to provide new features or
functionality also could result in these consequences. We may be unable to
effectively upgrade and expand our systems in a timely manner or to integrate
smoothly any newly developed or purchased technologies with our existing
systems. These difficulties could harm or limit our ability to expand our
business.
UNAUTHORIZED BREAK-INS OR OTHER ASSAULTS ON OUR SERVICE COULD HARM OUR BUSINESS
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data, public release of confidential data or the inability to complete
customer transactions. In addition, unauthorized persons may improperly access
our data. We have experienced an unauthorized break-in by a "hacker" who has
stated that he can in the future damage or change our system or take
confidential information. We have also experienced "denial of service" type
attacks on our system that have made all or portions of our website unavailable
for periods of time. These and other types of attacks could harm us. Actions of
this sort may be very expensive to remedy and could damage our reputation and
discourage new and existing users from using our service.
THERE ARE MANY RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS
We are expanding internationally. In 1999, we acquired alando.de.ag, a
leading online German personal trading platform, and began operations in the
United Kingdom and, through a joint venture, in Australia. In the first quarter
of 2000, we further expanded into Japan and formally launched our localized
Canadian operations. In October 2000, we launched our French site. In January
2001, we launched our Italian site. In February 2001, we completed our
acquisition of a majority interest in Internet Auction Company, Ltd. and
announced our intended acquisition of iBazar S.A., a French company with online
trading operations in eight countries, primarily in Europe. Expansion into
international markets requires management attention and resources. We have
limited experience in localizing our service to conform to local cultures,
standards and policies. In most countries, we will have to compete with local
companies who understand the local market better than we do. We may not be
successful in expanding into international markets or in generating revenues
from foreign operations. Even if we are successful, the costs of operating are
expected to exceed our net revenues for at least 12 months in most countries. As
we continue to expand internationally, we are subject to risks of doing business
internationally, including the following:
- regulatory requirements, including regulation of "auctions," that may
limit or prevent the offering of our services in local jurisdictions, may
prevent enforceable agreements between sellers and buyers or may prohibit
certain categories of goods;
- legal uncertainty regarding liability for the listings of our users,
including less Internet-friendly legal systems, unique local laws and
lack of clear precedent or applicable law;
- government-imposed limitations on the public's access to the Internet;
34
36
- difficulties in staffing and managing foreign operations;
- longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
- higher telecommunications and Internet service provider costs;
- more stringent consumer protection laws;
- cultural non-acceptance of online trading;
- stronger local competitors;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Some of these factors may cause our international costs to exceed our
domestic costs of doing business. To the extent we expand our international
operations and have additional portions of our international revenues
denominated in foreign currencies, we also could become subject to increased
difficulties in collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations.
OUR REVENUE FROM END-TO-END SERVICE PROVIDERS, COMMERCIAL PARTNERS AND
ADVERTISING IS SUBJECT TO FACTORS BEYOND OUR CONTROL
We are receiving revenues from end-to-end service providers, commercial
partnerships and direct advertising promotions. These revenues may be affected
by the financial condition of the parties with whom we have these relationships
and by the success of online promotions generally. The profitability of online
advertisements has deteriorated markedly recently. Our direct advertising
revenue is dependent in significant part on the performance of AOL's sales
force, which we do not control. Reduction in these revenues, whether due to the
softening of the demand for online advertising in general or particular problems
facing parties with whom we have commercial relationships, could adversely
affect our results.
OUR BUSINESS MAY BE HARMED BY THE LISTING OR SALE BY OUR USERS OF ILLEGAL ITEMS
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, tobacco
products, alcohol and other goods that may be subject to regulation by local,
state or federal authorities, have been listed and traded on our service. We may
be unable to prevent the sale of unlawful goods, or the sale of goods in an
unlawful manner, by users of our service, and we may be subject to allegations
of civil or criminal liability for unlawful activities carried out by users
through our service. We have been subject to several lawsuits based upon such
allegations. See "-- We are subject to intellectual property and other
litigation" and "Legal Proceedings." In order to reduce our exposure to this
liability, we have prohibited the listing of certain items and increased the
number of personnel reviewing questionable items. We may in the future implement
other protective measures that could require us to spend substantial resources
and/or to reduce revenues by discontinuing certain service offerings. Any costs
incurred as a result of liability or asserted liability relating to the sale of
unlawful goods or the unlawful sale of goods, could harm our business. In
addition, we have received significant and continuing media attention relating
to the listing or sale of unlawful goods on our website. This negative publicity
could damage our reputation and diminish the value of our brand name. It also
could make users reluctant to continue to use our services.
OUR BUSINESS MAY BE HARMED BY THE LISTING OR SALE BY OUR USERS OF PIRATED ITEMS
We have received in the past, and we anticipate we will receive in the
future, communications alleging that certain items listed or sold through our
service by our users infringe third-party copyrights, trademarks and tradenames
or other intellectual property rights. Although we have actively sought to work
with the content community to eliminate infringing listings on our website, some
content owners have expressed the view that our efforts are insufficient.
Content owners have been active in defending their rights against online
companies, including eBay. An allegation of infringement of third-party
intellectual property rights may result
35
37
in litigation against us. Any such litigation could be costly for us, could
result in increased costs of doing business through adverse judgment or
settlement, could require us to change our business practices in expensive ways,
or could otherwise harm our business. Litigation against other online companies
could result in interpretations of the law that could also require us to change
our business practices or otherwise increase our costs. See "Legal Proceedings"
and "Risk Factors -- We are subject to intellectual property and other
litigation."
OUR BUSINESS MAY BE HARMED BY FRAUDULENT ACTIVITIES ON OUR WEBSITE
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed goods and buyers paying the agreed purchase
price. We have received in the past, and anticipate that we will receive in the
future, communications from users who did not receive the purchase price or the
goods that were to have been exchanged. In some cases individuals have been
arrested and convicted for fraudulent activities using our website. While we can
suspend the accounts of users who fail to fulfill their delivery obligations to
other users, we do not have the ability to require users to make payments or
deliver goods or otherwise make users whole other than through our limited
insurance program. Other than through this program, we do not compensate users
who believe they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased.
Negative publicity generated as a result of fraudulent or deceptive conduct by
users of our service could damage our reputation and diminish the value of our
brand name. We expect to continue to receive requests from users requesting
reimbursement or threatening or commencing legal action against us if no
reimbursement is made. This sort of litigation could be costly for us, divert
management attention, result in increased costs of doing business, lead to
adverse judgments or could otherwise harm our business.
GOVERNMENT INQUIRIES MAY LEAD TO CHARGES OR PENALTIES
On January 29, 1999, we received initial requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with our website. We were
informed that the inquiry includes an examination of our practices with respect
to these transactions. We have provided further information in connection with
this ongoing inquiry. In order to protect the investigation, the court has
ordered that no further public disclosures be made with respect to the matter.
On March 24, 2000, Butterfields received a grand jury subpoena from the
Antitrust Division of the Department of Justice requesting documents relating
to, among other things, changes in Butterfields' seller commissions and buyer
premiums and discussions, agreements or understandings with other auction
houses, in each case since 1992. We believe this request may be related to a
publicly reported criminal investigation of auction houses for price fixing. We
have provided the information requested in the subpoena.
Should these or any other investigations lead to civil or criminal charges
against us, we would likely be harmed by negative publicity, the costs of
litigation, the diversion of management time and other negative effects, even if
we ultimately prevail. Our business would suffer if we were not to prevail in
any actions like these. Even the process of providing records and information
can be expensive, time consuming and result in the diversion of management
attention.
A large number of transactions occur on our website. We believe that
government regulators have received a substantial number of consumer complaints
about us which, while small as a percentage of our total transactions, are large
in aggregate numbers. As a result, we have from time to time been contacted by
various federal, state and local regulatory agencies and been told that they
have questions with respect to the adequacy of the steps we take to protect our
users from fraud. We are likely to receive additional inquiries from regulatory
agencies in the future, which may lead to action against us. We have responded
to all inquiries from regulatory agencies by describing our current and planned
antifraud efforts. If one or more of these agencies is not satisfied with our
response to current or future inquiries, the resultant investigations and
potential fines or other penalties could harm our business.
We have provided information to the antitrust division of the Department of
Justice in connection with an inquiry into our conduct with respect to "auction
aggregators" including our licensing program and our
36
38
recently settled lawsuit against Bidder's Edge. Should the division decide to
take action against us, we would likely be harmed by negative publicity, the
costs of the action, possible private antitrust lawsuits, the diversion of
management time and effort and penalties we might suffer if we ultimately were
not to prevail.
SOME OF OUR BUSINESSES ARE SUBJECT TO REGULATION AND OTHERS MAY BE IN THE FUTURE
Both Butterfields and Kruse are subject to regulation in some jurisdictions
governing the manner in which live auctions are conducted. Both are required to
obtain licenses in these jurisdictions with respect to their business or to
permit the sale of categories of items (e.g. wine, automobiles and real estate).
These licenses generally must be renewed regularly and are subject to revocation
for violation of law, violation of the regulations governing auctions in general
or the sale of the particular item and other events. If either company was
unable to renew a license or had a license revoked, its business would be
harmed. In addition, changes to the regulations or the licensure requirements
could increase the complexity and the cost of doing auctions, thereby harming
us.
As our activities and the types of goods listed on our site expand, state
regulatory agencies may claim that we are subject to licensure in their
jurisdiction. These claims could result in costly litigation or could require us
to change our manner of doing business in ways that increase our costs or reduce
our revenues or force us to prohibit listings of certain items. We could also be
subject to fines or other penalties. Any of these outcomes could harm our
business.
As we have expanded internationally, we have become subject to new
regulations, including regulations on the transmission of personal information.
These laws may require costly changes to our business practices. If we are found
to have violated any of these laws, we could be subject to fines or penalties,
and our business could be harmed.
COMPANIES THAT HANDLE PAYMENTS, INCLUDING OUR SUBSIDIARIES BILLPOINT AND
HALF.COM MAY BE SUBJECT TO ADDITIONAL REGULATION
The Half.com business model involves the handling of payments by buyers for
the items listed by Half.com's sellers. Internet Auction Company, Ltd. also has
a business model involving the handling of payments by buyers. Billpoint handles
its customer funds as a provider of Internet payment solutions. Businesses that
handle consumers' funds are subject to numerous regulations, including those
related to banking, credit cards, escrow, fair credit reporting and others.
Billpoint is a new business with a relatively novel approach to facilitating
payments. It is not yet known how regulatory agencies will treat Billpoint. The
cost and complexity of Billpoint's business may increase if certain regulations
are deemed to apply to its business. In addition to the need to comply with
these regulations, Billpoint's business is also subject to risks of fraud, the
need to grow systems and processes rapidly if its products are well received, a
high level of competition, including larger and better financed competitors and
the need to coordinate systems and policies among itself, us and Wells Fargo
Bank, which is the provider of payment services. Similarly, Half.com may be
subject to certain regulations regarding payments and the cost and complexity of
its business may increase if these regulations are deemed to apply to its
business.
WE ARE SUBJECT TO RISKS ASSOCIATED WITH INFORMATION DISSEMINATED THROUGH OUR
SERVICE
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both
United States and foreign law for defamation, libel, invasion of privacy,
negligence, copyright or trademark infringement, or other theories based on the
nature and content of the materials disseminated through their services. Several
private lawsuits seeking to impose liability upon us have brought against us. 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
37
39
jurisdictions outside the U.S. If we become liable for information provided by
our users and carried on our service in any jurisdiction in which we operate, we
could be directly harmed and we may be forced to implement new measures to
reduce our exposure to this liability. This may require us to expend substantial
resources and/or to discontinue certain service offerings, which would
negatively affect our financial results. In addition, the increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our
business. Any costs incurred as a result of this liability or asserted liability
could harm our business.
WE ARE SUBJECT TO INTELLECTUAL PROPERTY AND OTHER LITIGATION
On September 1, 1999, we were served with a lawsuit filed by Randall
Stoner, on behalf of the general public, in San Francisco Superior Court (No.
305666). The lawsuit alleged that we violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit sought declaratory and injunctive relief,
restitution and legal fees. We filed a general demurrer which was sustained by
the court with leave to amend. The plaintiff subsequently filed an amended
complaint. We filed a motion for summary judgement. On November 7, 2000, our
motion for summary judgement was granted.
On December 10, 1999, we sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
us alleging that we violated the antitrust laws by monopolizing or attempting to
monopolize a market, that we competed unfairly, and that we interfered with
their contract with eBay magazine. Bidder's Edge sought treble damages, an
injunction and its fees and costs. On May 24, 2000, the court granted us a
preliminary injunction against the use by Bidder's Edge of robotic means to copy
our site. In February 2001, the parties settled this lawsuit. All claims by both
parties were dismissed, and Bidder's Edge paid us an undisclosed amount.
On April 25, 2000, we were served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims we were
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims we violated Section 17200 and a section of the California Civil
Code which prohibits "dealers" from selling sports memorabilia without a
"Certificate of Authenticity." On January 26, 2001, the Court issued a ruling
dismissing all claims against us in the lawsuit. The Court ruled that our
business falls within the safe harbor provisions of 47 USC 230, which grants
internet service providers such as eBay with immunity from state claims based on
the conduct of third parties. The Court also noted that we were not a "dealer"
under California law and thus not required to provide certificates of
authenticity with autographs sold over our site by third parties. All counts of
the plaintiffs' suit were dismissed with prejudice as to eBay. Plaintiffs have
filed an appeal of this ruling. We believe we have meritorious defenses and
intend to defend ourselves vigorously.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future intellectual
property rights. We may become more vulnerable to such claims as laws such as
the Digital Millennium Copyright Act are interpreted by the courts. We expect
that we will increasingly be subject to infringement claims as the number of
services and competitors in our segment grow. These claims whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays require expensive changes in our methods of doing business or
could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.
From time to time, we are involved in disputes that have arisen in the
ordinary course of business. Management believes that the ultimate resolution of
these disputes will not have a material adverse impact on our financial position
or results of operations.
38
40
SYSTEM FAILURES COULD HARM OUR BUSINESS
We have experienced system failures from time to time. Our website has been
interrupted for periods of up to 22 hours. In addition to placing increased
burdens on our engineering staff, these outages create a flood of user questions
and complaints that need to be addressed by our customer support personnel. Any
unscheduled interruption in our service results in an immediate loss of revenues
that can be substantial and may cause some users to switch to our competitors.
If we experience frequent or persistent system failures, our reputation and
brand could be permanently harmed. We have been taking steps to increase the
reliability and redundancy of our system. These steps are expensive, reduce our
margins and may not be successful in reducing the frequency or duration of
unscheduled downtime.
Substantially all of our computer hardware for operating our services
(other than Half.com) currently is located at the facilities of Exodus
Communications, Inc. in Santa Clara, California and AboveNet Communications in
San Jose, California. The computer hardware for the Half.com service is located
in the facilities of Level 3 Communications in Philadelphia, Pennsylvania. These
systems and operations are vulnerable to damage or interruption from
earthquakes, floods, fires, power loss, telecommunication failures and similar
events. They are also subject to break-ins, sabotage, intentional acts of
vandalism and similar misconduct. We do not maintain fully redundant systems or
alternative providers of hosting services, and we do not carry business
interruption insurance sufficient to compensate us for losses that may occur.
Despite any precautions we may take, the occurrence of a natural disaster or
other unanticipated problems at any of the Exodus, AboveNet or Level 3
facilities could result in interruptions in our services. In addition, the
failure by Exodus, AboveNet or Level 3 to provide our required data
communications capacity could result in interruptions in our service. Any damage
to or failure of our systems could result in interruptions in our service.
Interruptions in our service will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable.
RISKS RELATING TO POSSIBLE CALIFORNIA POWER OUTAGES
The State of California is currently experiencing a chronic shortage of
power and, as a result, power outages may occur. Although we have emergency
backup power capabilities at the facilities of Exodus, AboveNet, Level 3
Communications and limited backup power at our headquarters, repeated or lengthy
power outages may adversely affect our business.
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 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.
39
41
In addition, the trading price of Internet stocks in general, and ours in
particular, have experienced extreme price and volume fluctuations in recent
periods. These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extraordinarily high based on conventional valuation
standards such as price-to-earnings and price-to-sales ratios. The trading price
of our common stock has increased enormously from the initial public offering
price. These trading prices and valuations may not be sustained. Any negative
change in the public's perception of the prospects of Internet or e-commerce
companies could depress our stock price regardless of our results. Other broad
market and industry factors may decrease the market price of our common stock,
regardless of our operating performance. Market fluctuations, as well as general
political and economic conditions, such as recession or interest rate or
currency rate fluctuations, also may decrease the market price of our common
stock. In the past, following declines in the market price of a company's
securities, securities class-action litigation often has been instituted.
Litigation of this type, if instituted, could result in substantial costs and a
diversion of management's attention and resources.
NEW AND EXISTING REGULATIONS COULD HARM OUR BUSINESS
We are subject to the same federal, state and local laws as other companies
conducting business on the Internet. Today there are relatively few laws
specifically directed towards online services. However, due to the increasing
popularity and use of the Internet and online services, many laws relating to
the Internet are being debated at the state and federal levels (both in the U.S.
and abroad) and it is possible that laws and regulations will be adopted with
respect to the Internet or online services. These laws and regulations could
cover issues such as user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. Applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of these laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies. Those laws that do reference the Internet, such as the Digital
Millennium Copyright Act, are only beginning to be 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
change, we may become subject to new regulatory restrictions.
Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has settled
several proceedings regarding the manner in which personal information is
collected from users and provided to third parties. Changes to existing laws or
the passage of new laws intended to address these issues could directly affect
the way we do business or could create uncertainty on the Internet. This could
reduce demand for our services, increase the cost of doing business as a result
of litigation costs or increased service delivery costs, or otherwise harm our
business. In addition, because our services are accessible worldwide, and we
facilitate sales of goods to users worldwide, foreign jurisdictions may claim
that we are required to comply with their laws. For example, a French court has
recently ruled that a U.S. website must comply with French laws regarding
content. As we have expanded our international activities, we have become
obligated to comply with the laws of the countries in which we operate. Laws
regulating Internet companies outside of the United States may be less favorable
then those in the United States, giving greater rights to consumers, content
owners and users. Compliance may be more costly or may require us to change our
business practices or restrict our service offerings relative to those in the
United States. Our failure to comply with foreign laws could subject us to
penalties ranging from fines to bans on our ability to offer our services.
40
42
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 our
first fiscal quarter, although our shift to more "practical" items may cause our
seasonal patterns to look more like a typical retailer. Both Butterfields and
Kruse have significant quarter-to-quarter variations in their results of
operations depending on the timing of auctions and the availability of high
quality items from large collections and estates. Butterfields typically has its
best operating results in the traditional fall and spring auction seasons and
has historically incurred operating losses in the first and third quarters.
Kruse typically sees a seasonal peak in operations in the third quarter.
Seasonal or cyclical variations in our business may become more pronounced over
time and may harm our results of operations in the future.
WE ARE DEPENDENT ON THE CONTINUED GROWTH OF ONLINE COMMERCE
The business of selling goods over the Internet, particularly through
personal trading, is new and dynamic. Our future net revenues and profits will
be substantially dependent upon the widespread acceptance of the Internet and
online services as a medium for commerce by consumers. Rapid growth in the use
of and interest in the Internet and online services is a recent phenomenon. This
acceptance and use may not continue. Even if the Internet is accepted, concerns
about fraud, privacy and other problems may mean that a sufficiently broad base
of consumers will not adopt the Internet as a medium of commerce. In particular,
our website requires users to make publicly available their e-mail addresses and
other personal information that some potential users may be unwilling to
provide. These concerns may increase as additional publicity over privacy issues
on eBay or generally over the Internet increase. Market acceptance for recently
introduced services and products over the Internet is highly uncertain, and
there are few proven services and products. In order to expand our user base, we
must appeal to and acquire consumers who historically have used traditional
means of commerce to purchase goods. If these consumers prove to be less active
than our earlier users, and we are unable to gain efficiencies in our operating
costs, including our cost of acquiring new customers, our business could be
adversely impacted.
OUR BUSINESS MAY BE SUBJECT TO SALES AND OTHER TAXES
We do not collect sales or other similar taxes on goods sold by users
through our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
e-commerce, and could diminish our opportunity to derive financial benefit from
our activities. In 1998, the U.S. federal government enacted legislation
prohibiting states or other local authorities from imposing new taxes on
Internet commerce for a period of three years. This tax moratorium will last
only for a limited period and does not prohibit states or the Internal Revenue
Service from collecting taxes on our income, if any, or from collecting taxes
that are due under existing tax rules. A successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on the
exchange of merchandise on our system would harm our business.
WE ARE DEPENDENT ON KEY PERSONNEL
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to retain and motivate our other
officers and key personnel. 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 personnel. 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. We have had some turnover of these
personnel, and continued losses could result in the loss of significant future
business and would harm us. In
41
43
addition, employee turnover frequently increases during the period following an
acquisition as employees evaluate possible changes in compensation, culture,
reporting relationships, and the direction of the business. Such increased
turnover could increase our costs and reduce our future revenues. Our future
success also will depend on our ability to attract, train, retain and motivate
highly skilled technical, managerial, marketing and customer support personnel.
Competition for these personnel is intense, especially for engineers and other
professionals, especially in the San Francisco Bay Area, and we may be unable to
successfully attract, integrate or retain sufficiently qualified personnel. In
making employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock options they
are to receive in connection with their employment. Fluctuations in our stock
price may make it more difficult to retain and motivate employees whose stock
option strike prices are substantially above current market prices.
OUR OFFLINE AUCTION BUSINESSES NEED TO CONTINUE TO ACQUIRE AUCTION PROPERTIES
The businesses of Butterfields and Kruse are dependent on the continued
acquisition of high quality auction properties from sellers. Their future
success will depend in part on their ability to maintain an adequate supply of
high quality auction property, particularly fine and decorative arts and
collectibles and collectible automobiles, respectively. There is intense
competition for these pieces with other auction companies and dealers. In
addition, a small number of key senior management and specialists maintain the
relationships with the primary sources of auction property and the loss of any
of these individuals could harm the business of Butterfields and Kruse.
OUR OFFLINE AUCTION BUSINESSES COULD SUFFER LOSSES FROM PRICE GUARANTEES,
ADVANCES OR RESCISSIONS OF SALES
In order to secure high quality auction properties from sellers,
Butterfields and Kruse may give a guaranteed minimum price or a cash advance to
a seller, based on the estimated value of the property. If the auction proceeds
are less than the amount guaranteed, or less than the amount advanced and the
seller does not repay the difference, the company involved will suffer a loss.
In addition, under certain circumstances a buyer who believes that an item
purchased at auction does not have good title, provenance or authenticity may
rescind the purchase. Under these circumstances, the company involved will lose
its commissions and fees on the sale even if the seller, in accordance with the
terms and conditions of sale, in turn accepts back the item and returns the
funds he or she received from the sale.
WE ARE SUBJECT TO THE RISKS OF OWNING REAL PROPERTY
In connection with the acquisitions of Kruse and Butterfields we acquired
real property including land, buildings and interests in partnerships holding
land and buildings. We have no experience in managing real property. Ownership
of this property subjects us to new risks, including:
- the possibility of environmental contamination and the costs associated
with fixing any environmental problems;
- adverse changes in the value of these properties, due to interest rate
changes, changes in the neighborhoods in which the properties are
located, or other factors;
- the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements; and
- possible disputes with tenants, partners or others.
OUR MARKET IS INTENSELY COMPETITIVE
Depending on the category of product, we currently or potentially compete
with a number of companies serving particular categories of goods as well as
those serving broader ranges of goods. The Internet is a new, rapidly evolving
and intensely competitive area. We expect competition to intensify in the future
as the barriers to entry are relatively low, and current and new competitors can
launch new sites at a nominal cost using commercially available software. Our
broad-based competitors include the vast majority of traditional department and
general merchandise stores as well as emerging online retailers. These include
most
42
44
prominently: Wal-Mart, Kmart, Target, Sears, Macy's, JC Penney, Costco, Sam's
Club as well as Amazon.com, Buy.com, AOL.com, Yahoo! shopping and MSN.
In addition, we face competition from specialty retailers and exchanges in
each of its categories of products. For example:
Antiques: Christie's, eHammer, Sotheby's/Sothebys.com
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, KB Toys, Toys.com
Premium Collectibles: Christies, DuPont Registry, Greg Manning Auctions,
iCollector, Lycos/Skinner Auctions, Millionaire.com, Phillips (LVMH), Sotheby's,
Sothebys.com
Automotive (used cars): Autobytel.com, AutoVantage.com, AutoWeb.com,
Barrett-Jackson, CarOrder.com, CarPoint, Collectorcartraderonline.com,
eClassics.com, Edmunds, CarsDirect.com, Hemmings, imotors.com, vehix.com,
newspaper classifieds, used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, DVD Express, Wherehouse,
Alibris.com, Emusic.com, Bookfinders.com
Clothing: Bluefly.com, Dockers.com, FashionMall.com, The Gap, J. Crew,
LandsEnd.com, The Limited, 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
Home & Garden: IKEA, Crate & Barrel, Home Depot, Garden.com, Pottery Barn,
Ethan Allen, Frontgate
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, MVP.com, PlanetOutdoors.com, Play It Again Sports, REI, Sports
Authority, Sportsline.com
Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware,
OSH
Business-to-Business: Ariba, BidFreight.com, BizBuyer.com, bLiquid.com,
CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets,
Oracle, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, UnionStreet.com,
Ventro, VerticalNet
Additionally, we face competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (an auction network
including Microsoft's MSN, Excite@Home, Dell Computer, ZD Net, Lycos and more
than 100 others), First Auction, Surplus Auction, uBid, Yahoo! Auctions and a
large number of other companies using an auction format for consumer-to-consumer
or business-to-consumer sales. Overseas, we face competition from Yahoo!
Auctions in most countries and from a large number of regional and national
competitors in each country.
The principal competitive factors for eBay include the following:
- ability to attract buyers;
- volume of transactions and selection of goods;
- customer service; and
43
45
- brand recognition.
With respect to our online competition, additional competitive factors are:
- community cohesion and interaction;
- system reliability;
- reliability of delivery and payment;
- website convenience and accessibility;
- level of service fees; and
- quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet spaces 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 have implemented an insurance program
that generally insures items up to a value of $200, with a $25 deductible, for
users with a non-negative feedback rating at no cost to the user. New
technologies may increase the competitive pressures by enabling our competitors
to offer a lower cost service. Some Internet-based applications that direct
Internet traffic to certain websites may channel users to trading services that
compete with us.
Although we have established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Internet
browsers could promote our competitors or charge us substantial fees for
inclusion.
The off-line auction business is intensely competitive. Butterfields
competes with two larger and better known auction companies, Sotheby's Holdings,
Inc. and Christie's International plc, as well as numerous regional auction
companies. To the extent that these companies increase their focus on the middle
market properties that form the core of Butterfields' business or in the western
United States, 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 space, 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 space. Half.com competes directly with online retailers in its
product categories such as Amazon.com which offers a directly competitive
service, as well as with traditional sellers of used books, videos and CDs.
OUR BUSINESS IS DEPENDENT ON THE DEVELOPMENT AND MAINTENANCE OF THE INTERNET
INFRASTRUCTURE
The success of our service will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security,
as well as timely development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and is likely to
continue to experience, significant
44
46
growth in the numbers of users and amount of traffic. If the Internet continues
to experience increased numbers of users, increased frequency of use or
increased bandwidth requirements, the Internet infrastructure may be unable to
support the demands placed on it. In addition, the performance of the Internet
may be harmed by increased number of users or bandwidth requirements. The
Internet has experienced a variety of outages and other delays as a result of
damage to portions of its infrastructure, and it could face outages and delays
in the future. These outages and delays could reduce the level of Internet usage
as well as the level of traffic and the processing transactions on our service.
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. Billpoint's users routinely provide credit card and other
financial information. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new discoveries
in the field of cryptography, or other developments may result in a compromise
or breach of the technology used by us to protect customer transaction data. A
number of websites have reported breaches of their security. Any compromise of
our security could harm our reputation and, therefore, our business. In
addition, a party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
An individual has claimed to have misappropriated some of our confidential
information by breaking into our computer system. We may need to expend
significant resources to protect against security breaches or to address
problems caused by breaches. These issues are likely to become more difficult as
we expand the number of places where we operate. Security breaches could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches.
WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE
The space 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
characteristics are worsened by the emerging and changing nature of the
Internet. Our future success therefore will depend on our ability to adapt to
rapidly changing technologies, to adapt our services to evolving industry
standards and to continually improve the performance, features and reliability
of our service. Our failure to adapt to such changes would harm our business.
New technologies, such as the development of a peer to peer personal trading
technology, could adversely affect us. 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
acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation and diminish the value of
our brand. We anticipate that future services will include pre-and post-trade
services.
We are pursuing strategic relationships with third parties to provide many
of these services. Because we use 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
acceptance of any new services could harm our business.
45
47
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 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 OWN INTELLECTUAL PROPERTY RIGHTS
ADEQUATELY
We regard the protection of our URLs, copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our success. We rely on
a combination of patent, copyright, trademark, service mark and trade secret
laws and contractual restrictions to protect our proprietary rights in products
and services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
parties with whom we conduct business in order to limit access to and disclosure
of our proprietary information. These contractual arrangements and the other
steps taken by us to protect our intellectual property may not prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. We pursue the registration of our URLs, trademarks and
service marks in the U.S. and internationally. Effective copyright, service
mark, trademark, trade dress and trade secret protection is very expensive to
maintain, and protection may not be available in every country in which our
services are made available online. Furthermore, we must also protect our URLs
in an increasing number of jurisdictions, a process that is expensive and may
not be successful in every location. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation. We
also rely on certain technologies that we license from third parties, such as
Oracle Corporation, Microsoft Corporation and Sun Microsystems Inc., the
suppliers of key database technologies, the operating system and specific
hardware components for our service. These third-party technology licenses may
not continue to be available to us on commercially reasonable terms. The loss of
these technologies could require us to obtain substitute technologies of lower
quality or performance standards or at greater cost.
OUR BUSINESS IS SUBJECT TO CONSUMER TRENDS AND DISCRETIONARY CONSUMER SPENDING
We derive most of our revenues from fees received from sellers for listing
products for sale on our service and fees received from successfully completed
transactions. Our future revenues will depend upon continued demand for the
types of goods that are listed by users of our service. The popularity of
certain categories of items, such as toys, dolls and memorabilia, among
consumers may vary over time due to perceived scarcity, subjective value, and
societal and consumer trends in general. A decline in the popularity of, or
demand for, certain collectibles or other items sold through our service could
reduce the overall volume of transactions on our service, resulting in reduced
revenues. In addition, consumer "fads" may temporarily inflate the volume of
certain types of items listed on our service, placing a significant strain upon
our infrastructure and transaction capacity. These trends also may cause
fluctuations in our operating results from one reporting period to the next. Any
decline in demand for the goods offered through our service as a result of
changes in consumer trends could harm our business. A decline in consumer
spending would harm our land-based auction businesses. Sales of fine and
decorative art, collectable cars and other collectibles would be adversely
affected by a decline in discretionary consumer spending, especially for luxury
items. Changes in buyers' tastes, economic conditions or consumer trends could
cause declines in the number or dollar volume of items sold and thereby harm the
business of these companies.
46
48
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 restriction could have the effect of delaying or
preventing a change of control.
WE ARE CONTROLLED BY CERTAIN STOCKHOLDERS, EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors (and their affiliates) own
approximately one-half of our outstanding common stock. As a result, they have
the ability to control our company and direct our affairs and business,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may have the effect of delaying,
deferring or preventing a change in control of our company and may make some
transactions more difficult or impossible without the support of these
stockholders. Any of these events could decrease the market price of our common
stock.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve principal
while at the same time maximizing yields without significantly increasing risk.
To achieve this objective, we maintain our portfolio of cash equivalents,
short-term and long-term investments in a variety of securities, including both
government and corporate obligations and money market funds. These securities
are generally classified as available for sale and consequently are recorded on
the balance sheet at fair value with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income, net of estimated
tax.
Investments in both fixed rate and floating rate interest earning
instruments carry varying degrees of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates. In general, longer dated securities are subject to greater interest rate
risk than shorter dated securities. While floating rate securities generally are
subject to less interest rate risk than fixed rate securities, floating rate
securities may produce less income than expected if interest rates decrease. Due
in part to these factors, our investment income may fall short of expectations
or we may suffer losses in principal if securities are sold that have declined
in market value due to changes in interest rates. As of December 31, 2000, our
fixed income investments earned a pretax yield of approximately 6.4% and had a
weighted average maturity of 0.6 years. If interest rates were to
instantaneously increase (decrease) by 100 basis points using a duration
modeling technique, the fair market value of the total investment portfolio
could decrease (increase) by approximately $4.9 million. Assuming an average
investment balance of $750 million, if rates were to increase (decrease) by 100
basis points, this would translate to an increase (decrease) in interest income
of $7.5 million annually.
We entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow for us to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments which effectively changes our interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease. Of the $126.4 million
operating lease, the interest rate is fixed on $95 million with the balance of
$31.4 million remaining at a floating rate of interest based on the spread over
3-month LIBOR. If the 3-month LIBOR rates were to increase (decrease) by 100
basis points, then our lease payments would increase (decrease) by $78,000 per
quarter.
47
49
EQUITY PRICE RISK
We are exposed to equity price risk on the marketable portion of equity
investments as such investments we hold, typically as the result of strategic
investments in strategic partners are subject to considerable market risk due to
their volatility. We typically do not attempt to reduce or eliminate our market
exposure in these equity investments. As of December 31, 2000, the position in
equity investments included a net unrealized loss of $1.6 million, net of tax.
FOREIGN CURRENCY RISK
International sales are made mostly from our sales in the respective
countries by our foreign subsidiaries and are typically denominated in the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency. Our international business is subject to
risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. These financial statements are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the United
States. We are also exposed to foreign exchange rate fluctuations as the
financial results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability. The
effect of foreign exchange rate fluctuations on eBay as of December 31, 2000 was
a translation gain of approximately $745,000.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Annual Financial Statements: See Part IV, Item 14 of this Form 10-K.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
50
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference to eBay's Proxy Statement to be filed on or
before April 30, 2001
ITEM 11: EXECUTIVE COMPENSATION
Incorporated by reference to eBay's Proxy Statement to be filed on or
before April 30, 2001.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to eBay's Proxy Statement to be filed on or
before April 30, 2001.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to eBay's Proxy Statement to be filed on or
before April 30, 2001.
49
51
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Upon written request, eBay will provide, without charge, a copy of this
Report on Form 10-K, including the consolidated financial statements, financial
statement schedules and any exhibits for eBay's most recent fiscal year. All
requests should be sent to:
eBay Inc.
Investor Relations
2145 Hamilton Ave.
San Jose, CA 95125
(408) 558-7400
In addition, the Securities and Exchange Commission maintains a website
that provides access to all filings made electronically by eBay at www.sec.gov.
eBay's website is located at www.ebay.com. Information contained on eBay's
website is not a part of this Annual Report on Form 10-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements:
PAGE
NUMBER
------
Report of Independent Accountants........................... 52
Consolidated Balance Sheet.................................. 53
Consolidated Statement of Income............................ 54
Consolidated Statement of Comprehensive Income.............. 55
Consolidated Statement of Stockholders' Equity.............. 56
Consolidated Statement of Cash Flows........................ 57
Notes to Consolidated Financial Statements.................. 58
2. Financial Statement Schedules.
All schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.
3. Exhibits.
The following exhibits are filed as part of, or incorporated by reference
into, this Form 10-K:
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
2.01 Agreement and Plan of Merger and Reorganization among
Registrant, Margarine Acquisition Sub Corp., Butterfield &
Butterfield Auctioneers Corp, HBJ Partners, LLC and 111
Potrero LLC.(6)
2.04 Agreement and Plan of Merger and Reorganization among
Registrant and Kruse, Inc.(5)
2.05 Agreement and Plan of Merger and Reorganization among
Registrant and Billpoint, Inc.(6)
3.01 Registrant's Amended and Restated Certificate of
Incorporation.(2)
3.02 Registrant's Certificate of Amendment of Certificate of
Incorporation.
3.03 Registrant's Corrected Certificate of Certificate of
Amendment of Certificate of Incorporation of Registrant.
3.04 Registrant's Amended and Restated Bylaws.(2)
4.01 Form of Specimen Certificate for Registrant's Common
Stock.(1)
4.02 Investor Rights Agreement, dated June 20, 1997, between the
Registrant and certain stockholders named therein.(1)
10.01 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers.(1)
10.02 Registrant's 1996 Stock Option Plan and related
documents.(1)
50
52
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
10.03 Registrant's 1997 Stock Option Plan and related
documents.(1)
10.04 Registrant's 1998 Equity Incentive Plan and related
documents.(1)
10.05 Registrant's 1998 Directors Stock Option Plan and related
documents.(1)
10.06 Amendment No. 1 to Registrant's 1998 Directors Stock Option
Plan.(3)
10.07 Registrant's 1998 Employee Stock Purchase Plan.(1)
10.08 Registrant's 1999 Global Equity Incentive Plan and related
documents.(10)
10.09 Employment Letter Agreement dated October 16, 1996 between
Jeff Skoll and Registrant.(1)
10.10 Employment Letter Agreement dated September 15, 1997 between
Gary Bengier and Registrant.(1)
10.11 Employment Letter Agreement dated January 16, 1998 between
Margaret C. Whitman and Registrant.(1)
10.12 Employment Letter Agreement dated August 14, 1998 between
Brian T. Swette and Registrant.(1)
10.13 Employment Letter Agreement dated August 20, 1998 between
Michael R. Jacobson and Registrant.(1)
10.14 Offer Letter to Maynard Webb.(8)
10.15 Retention Bonus Plan between Registrant and Maynard Webb,
dated January 10, 2001.
10.16 Offer Letter to Jeffrey D. Jordan.(8)
10.17 Retention Bonus Plan between Registrant and Jeffrey D.
Jordan, dated May 16, 2000.
10.18 Lease between eBay Realty Trust and Registrant, dated March
1, 2000.(9)
10.19 Cash Collateral Agreement between Registrant and Chase
Manhattan Bank as Agent, Dated March 1, 2000.(9)
21.01 List of Subsidiaries.
23.01 PricewaterhouseCoopers LLP consent.
- ---------------
(1) Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 (No. 33-59097) filed in connection with eBay's initial public
offering and incorporated by reference herein.
(2) Previously filed as an Exhibit to the Registrant's Form 10-Q filed on
November 13, 1998 and incorporated by reference herein.
(3) Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 (No. 33-75009) filed on March 25, 1999 and incorporated by
reference herein.
(4) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1998 and incorporated by reference herein.
(5) Previously filed as an Exhibit to the Registrant's Form 8-K filed on May 8,
1999 and incorporated by reference herein.
(6) Previously filed as an Exhibit to the Registrant's Form 8-K filed on June
7, 1999 and incorporated by reference herein.
(7) Previously filed as an Exhibit to the Registrant's Form 10-Q filed on
November 15, 1999 and incorporated by reference herein.
(8) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-3 (No. 333-88205) filed on September 30, 1999 and incorporated by
reference herein.
(9) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999 and incorporated by reference herein.
(10) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-41944) filed on July 21, 2000 and incorporated by
reference herein.
51
53
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of eBay Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of eBay Inc. and its subsidiaries ("the Company") at December 31, 1999
and 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 18, 2001
52
54
EBAY INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
----------------------
1999 2000
-------- ----------
Current assets:
Cash and cash equivalents................................. $221,801 $ 201,873
Short-term investments.................................... 181,086 354,166
Accounts receivable, net.................................. 36,538 67,163
Other current assets...................................... 25,882 52,262
-------- ----------
Total current assets.............................. 465,307 675,464
Long-term investments....................................... 373,988 218,197
Property and equipment, net................................. 112,202 125,161
Intangible and other assets, net............................ 12,689 23,299
Restricted cash and investments............................. -- 126,390
Deferred tax assets......................................... 5,639 13,892
-------- ----------
$969,825 $1,182,403
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 32,133 $ 31,725
Accrued expenses.......................................... 32,173 60,882
Deferred revenue and customer advances.................... 5,997 12,656
Short-term debt........................................... 15,781 15,272
Income taxes payable...................................... 6,455 11,092
Other current liabilities................................. 502 5,815
-------- ----------
Total current liabilities......................... 93,041 137,442
Long-term debt.............................................. 15,018 11,404
Other liabilities........................................... 5,905 6,549
Minority interests.......................................... 1,732 13,248
-------- ----------
115,696 168,643
-------- ----------
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred Stock, $0.001 par value; 10,000 shares
authorized, no shares issued or outstanding............ -- --
Common Stock, $0.001 par value; 900,000 shares authorized;
262,087 and 269,250 shares issued and outstanding...... 262 269
Additional paid-in capital................................ 831,121 941,285
Notes receivable from stockholders........................ (11) --
Unearned stock-based compensation......................... (8,704) (1,423)
Retained earnings......................................... 26,367 74,504
Accumulated other comprehensive income (loss)............. 5,094 (875)
-------- ----------
Total stockholders' equity........................ 854,129 1,013,760
-------- ----------
$969,825 $1,182,403
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
53
55
EBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Net revenues............................................... $ 86,129 $224,724 $431,424
Cost of net revenues....................................... 16,094 57,588 95,453
-------- -------- --------
Gross profit..................................... 70,035 167,136 335,971
-------- -------- --------
Operating expenses:
Sales and marketing...................................... 35,976 96,239 166,767
Product development...................................... 4,640 24,847 55,863
General and administrative............................... 15,849 43,919 73,027
Payroll expense on employee stock options................ -- -- 2,337
Amortization of acquired intangibles..................... 805 1,145 1,433
Merger related costs..................................... -- 4,359 1,550
-------- -------- --------
Total operating expenses......................... 57,270 170,509 300,977
-------- -------- --------
Income (loss) from operations.............................. 12,765 (3,373) 34,994
Interest and other income, net............................. 1,799 23,833 46,337
Interest expense........................................... (2,191) (2,319) (3,374)
-------- -------- --------
Income before income taxes, minority interest and equity
interest in partnership income........................... 12,373 18,141 77,957
Provision for income taxes................................. (4,789) (8,472) (32,725)
Minority interest in consolidated company.................. (381) (256) 3,062
Equity interest in partnership income...................... 70 154 --
-------- -------- --------
Net income................................................. $ 7,273 $ 9,567 $ 48,294
======== ======== ========
Net income per share:
Basic.................................................... $ 0.07 $ 0.04 $ 0.19
======== ======== ========
Diluted.................................................. $ 0.03 $ 0.04 $ 0.17
======== ======== ========
Weighted average shares:
Basic.................................................... 104,128 217,674 251,776
======== ======== ========
Diluted.................................................. 233,519 273,033 280,346
======== ======== ========
Supplemental pro forma information:
Income before income taxes, minority interest and equity
interest in partnership income........................ $ 12,373 $ 18,141 $ 77,957
Provision for income taxes as reported................... (4,789) (8,472) (32,725)
Pro forma adjustment to provision for income taxes (Note
15)................................................... (2,071) 1,118 --
Minority interest in consolidated company as reported.... (381) (256) 3,062
Equity interest in partnership income as reported........ 70 154 --
-------- -------- --------
Pro forma net income....................................... $ 5,202 $ 10,685 $ 48,294
======== ======== ========
Pro forma net income per share:
Basic.................................................... $ 0.05 $ 0.05 $ 0.19
======== ======== ========
Diluted.................................................. $ 0.02 $ 0.04 $ 0.17
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
54
56
EBAY INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------ ------- --------
Net income.................................................. $7,273 $ 9,567 $ 48,294
Other comprehensive income (loss):
Foreign currency translation adjustments.................. -- (58) 803
Unrealized gains (losses) on investments, net............. -- 8,883 (11,583)
Estimated tax benefit (provision) on other comprehensive
income................................................. -- (3,731) 4,811
------ ------- --------
Net change in other comprehensive income (loss)............. -- 5,094 (5,969)
------ ------- --------
Comprehensive income........................................ $7,273 $14,661 $ 42,325
====== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
55
57
EBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
-------- -------- ----------
Convertible preferred stock:
Balance, beginning of year................................ $ 4 $ -- $ --
Conversion of preferred stock to common stock............. (4) -- --
-------- -------- ----------
Balance, end of year............................... -- -- --
-------- -------- ----------
Common stock:
Balance, beginning of year................................ 126 246 262
Conversion of preferred to common stock................... 56 -- --
Common stock issued....................................... 64 16 7
-------- -------- ----------
Balance, end of year............................... 246 262 269
-------- -------- ----------
Additional Paid-in-capital:
Balance, beginning of year................................ 2,476 87,656 831,121
Conversion of preferred to common stock................... 5,105 -- --
Common stock issued....................................... 73,944 714,319 49,043
Common stock repurchased.................................. -- (1,397) (365)
Contributions from partners and minority interest......... 300 -- 23,816
Unearned stock-based compensation......................... 5,831 10,686 187
Tax benefit related to acquisitions....................... -- 8,753 --
Stock option income tax benefit........................... -- 11,104 37,483
-------- -------- ----------
Balance, end of year............................... 87,656 831,121 941,285
-------- -------- ----------
Notes receivable from stockholders:
Balance, beginning of year................................ (68) (1,130) (11)
Common stock issued for notes............................. (1,378) -- --
Note repayments........................................... 316 1,066 11
Cancellation or repurchase of shares...................... -- 53 --
-------- -------- ----------
Balance, end of year............................... (1,130) (11) --
-------- -------- ----------
Unearned stock-based compensation:
Balance, beginning of year................................ (1,399) (4,139) (8,704)
Unearned stock-based compensation......................... (5,831) (10,686) (187)
Amortization of unearned stock-based compensation......... 3,091 4,781 7,141
Cancellation or repurchase of shares...................... -- 1,340 327
-------- -------- ----------
Balance, end of year............................... (4,139) (8,704) (1,423)
-------- -------- ----------
Retained earnings:
Balance, beginning of year................................ 8,583 17,905 26,367
Accretion of mandatorily redeemable convertible preferred
stock................................................... (46) -- --
Partnership contributions................................. 5,323 -- --
Partnership distributions................................. (3,228) (1,105) (157)
Net income................................................ 7,273 9,567 48,294
-------- -------- ----------
Balance, end of year............................... 17,905 26,367 74,504
-------- -------- ----------
Other comprehensive income:
Balance, beginning of year................................ -- -- 5,094
Unrealized gain (loss) on investments, net of tax......... -- 5,152 (6,772)
Foreign currency translation adjustment................... -- (58) 803
-------- -------- ----------
Balance, end of year............................... -- 5,094 (875)
-------- -------- ----------
Total stockholders' equity..................... $100,538 $854,129 $1,013,760
======== ======== ==========
NUMBER OF SHARES
----------------------------------
Common stock:
Balance, beginning of year................................ 126,630 246,450 262,087
Conversion of preferred to common stock................... 55,654 -- --
Issuance of common stock for cash and notes............... 38,579 3,614 4,593
Issuance of common stock at public offering............... 24,086 8,500 --
Issuance of common stock for acquisition.................. 857 3,523 2,570
Contribution of common stock for charitable foundation.... 644 -- --
-------- -------- ----------
Balance, end of year............................... 246,450 262,087 269,250
======== ======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
56
58
EBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1999 2000
-------- --------- ---------
Cash flows from operating activities:
Net income............................................. $ 7,273 $ 9,567 $ 48,294
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts and authorized
credits........................................... 3,939 9,271 18,237
Depreciation and amortization....................... 4,526 20,742 38,050
Amortization of unearned stock-based compensation... 2,661 4,781 7,141
Tax benefit on stock options........................ -- 11,104 37,483
Other............................................... (1,507) 1,751 (1,475)
Changes in assets and liabilities:
Accounts receivable............................... (8,931) (33,384) (48,862)
Other current and non-current assets.............. (3,702) (18,701) (40,775)
Accounts payable.................................. (3,112) 22,137 (408)
Accrued expenses.................................. 3,164 26,099 28,709
Income tax payable................................ (35) 6,143 4,637
Other liabilities................................. 1,765 3,342 9,117
-------- --------- ---------
Net cash provided by operating activities................ 6,041 62,852 100,148
-------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment.................... (12,758) (86,907) (49,753)
Purchases of investments............................... (40,401) (620,733) (398,998)
Maturities of investments.............................. -- 111,154 247,398
Sales of investments................................... -- -- 1,149
Proceeds from sale of property and equipment........... 1,274 173 --
Purchases of intangible assets......................... (1,248) (7,159) (5,850)
Payments on notes receivable........................... 109 109 --
-------- --------- ---------
Net cash used in investing activities.................... (53,024) (603,363) (206,054)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock, net......... 2,110 -- --
Proceeds from issuance of common stock, net............ 69,305 713,252 45,556
Proceeds from issuance of common stock by
subsidiaries........................................ -- -- 37,737
Repurchased shares..................................... -- -- (38)
Repayments of stockholder loans........................ 316 1,062 11
Proceeds (principal payments) on long-term debt........ (1,967) 4,894 2,869
Proceeds from notes payable............................ -- 3,507 --
Partnership contributions.............................. 5,623 6,204 --
Partnership distributions.............................. (3,228) (3,892) (157)
-------- --------- ---------
Net cash provided by financing activities................ 72,159 725,027 85,978
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents..... 25,176 184,516 (19,928)
Cash and cash equivalents at beginning of year........... 12,109 37,285 221,801
-------- --------- ---------
Cash and cash equivalents at end of year................. $ 37,285 $ 221,801 $ 201,873
======== ========= =========
Supplemental cash flow disclosures:
Cash paid for interest................................. $ 1,710 $ 1,465 $ 1,915
Cash paid for income taxes............................. $ 4,932 $ -- $ --
Non-cash investing and financing activities:
Common stock issued for notes receivable............... $ 1,378 $ -- $ --
Common stock issued for acquisition.................... $ 2,000 $ 9,744 $ 17,341
Preferred stock issued for notes payable............... $ -- $ -- $ 3,494
Building and inventory obtained in connection with
foreclosure......................................... $ 751 $ -- $ --
Receivables cancelled in connection with foreclosure... $ 500 $ -- $ --
Land and building transferred for assumption of debt... $ 835 $ -- $ --
The accompanying notes are an integral part of these consolidated financial
statements.
57
59
EBAY INC.
NOTES TO 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, and
reincorporated in Delaware in March 1998 and by December 31, 2000 had operations
in the United States, Switzerland, the United Kingdom, Germany, France, Austria,
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's acquisition of
Half.com, Inc. ("Half.com") enables eBay to offer an online website to buy and
sell using a fixed-price trading platform. eBay also engages in the traditional
auction business through its subsidiaries, Butterfields Auctioneer Corporation
("Butterfields") and Kruse International ("Kruse") and in online payment
processing through its Billpoint, Inc. ("Billpoint") subsidiary.
Reincorporation
As a result of the reincorporation in April 1998, eBay was authorized to
issue 180,000,000 shares of $0.001 par value common stock and 6,000,000 shares
of $0.001 par value Preferred Stock. The Board of Directors and the stockholders
subsequently amended the number of authorized shares such that eBay was
authorized to issue 900,000,000 shares of common stock and 10,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof.
Stock split
During January 1999 and April 2000, eBay's Board of Directors approved a
three-for-one and two-for-one common stock split, respectively. Stockholders of
record on February 9, 1999, received two additional shares on March 1, 1999.
Stockholders of record on May 9, 2000, received one additional share for each
share owned on May 24, 2000. All share and per share amounts in these
consolidated financial statements and notes thereto for all periods presented
reflect the stock splits in all periods presented.
Public offerings
On September 24, 1998, eBay completed its initial public offering of
24,150,000 shares of its common stock which were sold at a price of $3.00 per
share. Of the 24,150,000 shares, 64,000 shares were sold on behalf of a
charitable foundation established by eBay. The proceeds resulted in net proceeds
to eBay of approximately $66.1 million. At the closing of the offering, all
issued and outstanding shares of eBay's Convertible Preferred Stock and
Mandatorily Redeemable Convertible Preferred Stock were converted into an
aggregate of 55,654,038 shares of common stock.
On April 16, 1999, eBay completed a follow-on public offering of common
stock. A total of 8,500,000 shares were sold by eBay at a price of $85.00 per
share. The offering resulted in net proceeds to eBay of approximately $696.2
million.
Sale of subsidiary stock
WELLS FARGO BANK
On February 24, 2000, Billpoint and Wells Fargo Bank ("Wells Fargo")
entered into an agreement whereby Wells Fargo became the exclusive provider of
Internet payment services of domestic transactions for Billpoint's customers.
The service agreement expires February 28, 2007.
58
60
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Billpoint was reincorporated in Delaware and sold 350 shares of common
stock and 1,399,965 shares of Series A preferred stock to Wells Fargo which
represented approximately 35% ownership in Billpoint. Simultaneously, eBay
exchanged 25,999,350 of Billpoint's common shares for 2,599,935 shares of Series
A preferred stock. eBay continues to consolidate the financial statements of
Billpoint and reflects a minority interest for the equity interest of Wells
Fargo.
NEC
On February 17, 2000, eBay Japan Inc., a wholly owned subsidiary of eBay,
entered into a shareholder and marketing services agreement with NEC
Corporation. In accordance with the shareholder agreement, NEC acquired 30% of
eBay Japan and eBay retained the remaining 70% interest of eBay Japan. eBay will
continue to consolidate the financial statements of eBay Japan due to a majority
ownership interest and will reflect a minority interest for the equity interest
of NEC.
In accordance with the marketing agreement, NEC provided marketing and
services to eBay Japan in an effort to deliver a minimum level of confirmed
registered users. As compensation for the marketing and other services performed
by NEC, eBay Japan paid NEC an annual up-front fee of approximately $1.5
million. The first payment was made in April, 2000, and additional payments will
be payable on the anniversary of such date in each of the subsequent three years
as long as the contract is in effect. If NEC is unable to deliver the minimum
level of confirmed registered users, then eBay will have the right to repurchase
shares of eBay Japan from NEC.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of consolidation and basis of presentation
The financial statements as of December 31, 1999 and 2000 and for the three
years ended December 31, 2000 are consolidated and include eBay and its majority
owned subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. Certain prior period balances have been
reclassified to conform to the current period presentation.
Investments in subsidiaries and general partnerships
Subsidiaries and general partnerships in which eBay holds more than 50
percent ownership 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. Investments in entities and general partnerships where eBay
holds more than 20 percent ownership but less than 50 percent ownership and has
the ability to significantly influence the operations of the investee are
accounted for using the equity method of accounting, are recorded as investments
in partnerships or equity investees and are included within other assets.
Investments by third parties in the stock of eBay subsidiaries are
evaluated for their impact on the carrying amount of eBay's interest at the date
such investments are made. To the extent the proceeds from these investments
differ from the carrying amount of the third party's ownership interest in the
net equity of the subsidiary, such differences are recognized as a component of
stockholders' equity.
59
61
EBAY INC.
NOTES TO 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. Cash and
cash equivalents are short-term, highly liquid investments with original
maturities of three months or less when purchased. 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 using the specific identification method. Realized gains and losses are
included in earnings. Unrealized gains and losses are excluded from earnings and
reported as other comprehensive income, net of estimated tax provisions or
benefits.
Concentrations of credit risk
Financial instruments that potentially subject eBay to a concentration of
credit risk consist of cash, cash equivalents, investments and accounts
receivable. Cash, cash equivalents and investments are deposited with high
credit, quality financial institutions. eBay's accounts receivable are derived
from revenue earned from customers located in the U.S. and internationally. The
revenues earned from the U.S. site are denominated in U.S. dollars and revenue
earned from eBay's international sites are denominated in the country's
functional currency. Accounts receivable balances are typically settled through
customer credit cards and, as a result, the majority of accounts receivable are
collected upon processing of credit card transactions. eBay maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. Generally, due to the relative small
amount of individual outstanding accounts receivable balances, eBay does not
require collateral on these balances. eBay also entered into two interest rate
swaps with two separate financial institutions in order to reduce its interest
rate exposure on its lease payments. If either of these financial institutions
should fail to deliver under these contracts, eBay may be subject to variable
interest rate payments. During the years ended December 31, 1998, 1999 and 2000
no customers accounted for more than 10% of net revenues or net accounts
receivable.
Foreign currency
All of eBay's foreign subsidiaries use the local currency of their
respective countries as their functional currency. Assets and liabilities are
translated at exchange rates prevailing at the balance sheet dates. Revenues,
costs and expenses are translated into United States dollars at average exchange
rates for the period. Gains and losses resulting from translation are
accumulated as a component of other comprehensive income.
Realized gains and losses from foreign currency transactions are recognized
as a component of net income as incurred.
Property and equipment
Property and equipment are stated at historical cost less accumulated
depreciation. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the assets, generally 5 years or less
for equipment and furniture, and up to 40 years for buildings and building
improvements.
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
60
62
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such 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. During the year
ended December 31, 2000, a subsidiary of eBay purchased the technology and
related workforce from the Precision Buying Service, a division of Deja.com, in
which eBay recorded an intangible asset of approximately $5.9 million.
Intangible assets are amortized from eight months to ten years on a
straight-line basis which represents the estimated periods of benefit.
Environmental expenditures
eBay owns or controls real estate properties that are either used in the
auction business or leased to unrelated parties for various commercial
applications. Certain environmental and structural deficiencies have been
identified in the past for which eBay has remediation responsibility. The
amounts accrued to correct these matters are based upon estimates developed in
preliminary studies by external consultants. Due to uncertainties inherent in
the estimation process, the amounts accrued for these matters may be revised in
future periods as additional information is obtained.
Environmental expenditures that relate to 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. As of December 31, 1999 and 2000, estimated
liabilities of approximately $5.8 million are included within other liabilities.
Comprehensive income
eBay accounts for comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. The change in comprehensive income for
all periods presented resulted from foreign currency translation gains and
losses and unrealized gains and losses on securities.
Revenue recognition
Online transaction revenues are derived primarily from placement fees
charged for the listing of items on the eBay website, success fees calculated as
a percentage of the final sales transaction value for both eBay and Half.com,
and to a lesser extent, online advertising.
Listing and featured item fee revenue is recognized ratably over the
estimated period of the auction while revenues related to success fees are
recognized at the time that the transaction is successfully concluded. A
transaction is considered successfully concluded when at least one buyer has bid
above the seller's specified minimum price or reserve price, whichever is
higher, at the end of the transaction term. Advertising revenues, which are
principally derived from the sale of banners or sponsorship on the eBay site,
are recognized as the impressions are delivered, or ratably over the term of the
agreement where such agreements provide for minimum monthly or quarterly
advertising commitments or such commitments are fixed throughout the term.
Provisions for doubtful accounts and authorized credits to sellers are made at
the time of revenue recognition based upon our historical experience.
61
63
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Kruse auction revenues are derived primarily from entry fees on auction
items, bidder registration fees and commission fees calculated as a percentage
of the final auction sales transaction value. Revenues related to these fees are
recognized upon the completion of an auction. Revenues are also derived from
sponsorship fees paid by various corporations. Sponsorship fee revenues are
recognized over the term of the sponsorship agreement. Advertising revenues and
auctioneer tuition fees do not represent a significant source of revenues and
are recognized as advertising and auctioneer training services are provided.
Butterfields auction revenues are derived primarily from auction
commissions and fees from the sale of property through the auction process.
Revenues from these sources are recognized at the date the related auction is
concluded. Service revenues are derived from financial, appraisal and other
related services and are recognized as such services are rendered. Rental
revenues are derived from property rentals to third parties.
To date, barter advertising has accounted for less than 1% of eBay's
revenue. eBay records barter revenue in accordance with Emerging Issues Task
Force ("EITF") Issue No. 99-17, "Accounting for Advertising Barter Transactions"
which requires that barter transactions be recognized at the fair value of the
advertising surrendered when an entity has a historical practice of receiving
cash or marketable securities for similar advertising transactions. A period not
to exceed six months prior to the date of the barter transaction has been used
to determine whether eBay has a historical practice of receiving cash or
marketable securities for similar advertising. In addition, the recognition of
revenue on barter advertising is limited by the dollar amount of the cash
received for similar transactions during the same period.
Website development costs
eBay recognizes website development costs in accordance with EITF Issue No.
00-02, "Accounting for Website Development Costs." As such, eBay expenses all
costs incurred that relate to the planning and post implementation phases of
development of its website. Direct costs incurred in the development phase are
capitalized and recognized over the product's estimated useful life. Costs
associated with repair or maintenance for the website are included in cost of
net revenues in the accompanying consolidated statement of income.
Advertising expense
eBay recognizes advertising expenses in accordance with SOP 93-7 "Reporting
on Advertising Costs." As such, eBay expenses the costs of producing
advertisements at the time production occurs, and expenses the cost of
communicating advertising in the period during which the advertising space or
airtime is used. Internet advertising expenses are recognized based on the terms
of the individual agreements, which is generally over the greater of the ratio
of the number of impressions delivered over the total number of contracted
impressions, or a straight-line basis over the term of the contract. Advertising
expenses totaled $15.4 million, $46.1 million, and $85.4 million during the
years ended December 31, 1998, 1999 and 2000, respectively.
Stock-based compensation
eBay accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," FASB Interpretation No. 44 ("FIN
44") "Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25," and complies with the disclosure provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation." Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of eBay's stock and the exercise price. eBay
accounts for stock issued to non-employees in accordance with the provisions of
SFAS No. 123 and the EITF Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring, or in Conjunction with
Selling Goods or Services."
62
64
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in eBay's financial statements or tax returns. The
measurement of current and deferred tax assets and liabilities are based on
provisions of the enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
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 June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which deferred the effective date until the first
fiscal year ending on or after June 30, 2000. In June 2000, the FASB issued SFAS
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities -- an Amendment of SFAS 133." SFAS No. 138 amends certain
terms and conditions of SFAS 133. SFAS 133 requires that all derivative
instruments be recognized at fair value as either assets or liabilities in the
statement of financial position. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether it has
been designated and qualifies as part of a hedging relationship and further, on
the type of hedging relationship. eBay will adopt SFAS No. 133, as amended, in
its quarter ending March 31, 2001. Upon adoption, the cumulative effect to net
income and other comprehensive income of this change in accounting method is a
gain of approximately $650,000 and a loss of approximately $2.6 million,
respectively, net of tax.
In July 2000, the EITF reached a consensus with respect to EITF Issue No.
99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." EITF
99-19 addressed whether a company should report revenue based on the gross
amount billed to a customer because it has earned revenue from the sale of the
goods or services or the net amount retained (that is, the amount billed to the
customer less the amount paid to a supplier) because it has earned a commission
or fee. eBay adopted EITF 99-19, and such adoption did not have a material
impact on its consolidated financial statements.
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. eBay evaluated the provisions of the guidance in
conjunction with its policies and concluded that eBay is in compliance with this
pronouncement.
In July 2000, the EITF issued EITF Issue No. 00-15, "Classification in the
Statement of Cash Flows of the Income Tax Benefit Realized by a Company upon
Employee Exercise of a Non-qualified Stock Option." EITF 00-15 addresses the
cash flow statement presentation of the tax benefit associated with nonqualified
stock options. eBay receives an income tax deduction for the difference between
the exercise price and the market price of a nonqualified stock option upon
exercise by the employee. EITF 00-15 concludes that the income tax benefit
realized by eBay upon an employee exercise of stock options should be classified
in the operating section of the cash flow statement. The EITF is effective for
all quarters ending after July 20, 2000. eBay adopted EITF 00-15, and such
adoption did not have a material impact on its consolidated financial
statements.
In July 2000, the EITF issued EITF Issue No. 00-16, "Recognition and
Measurement of Employer Payroll Taxes on Employee Stock-Based Compensation."
This Issue addresses how an entity should account
63
65
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for employer payroll taxes on stock-based compensation under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
SFAS No. 123, "Accounting for Stock-Based Compensation." This Issue addresses
eBay's timing for recognizing the payroll tax liability and requires that this
liability be recognized when the tax obligation becomes due and payable. eBay
adopted EITF 00-16 effective July 31, 2000 and such adoption did not have a
material impact on its consolidated financial statements.
NOTE 2 -- NET INCOME PER SHARE:
eBay computes net income per share in accordance with SFAS No. 128,
"Earnings per Share." Under the provisions of SFAS No. 128, basic net income per
share is computed by dividing the net income available to common stockholders
for the period by the weighted average number of common shares outstanding
during the period. Diluted net income per share is computed by dividing the net
income for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares,
composed of unvested, restricted common stock and incremental common shares
issuable upon the exercise of stock options and warrants and upon conversion of
Series A and Series B Convertible Preferred Stock, are included in diluted net
income per share to the extent such shares are dilutive.
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):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Numerator:
Net income....................................... $ 7,273 $ 9,567 $ 48,294
Accretion of Series B Mandatorily Redeemable
Convertible Preferred Stock to redemption
value......................................... (46) -- --
-------- -------- --------
Net income available to common stockholders...... $ 7,227 $ 9,567 $ 48,294
======== ======== ========
Denominator:
Weighted average shares.......................... 183,284 255,806 266,826
Weighted average unvested common shares subject
to repurchase agreements...................... (79,156) (38,132) (15,050)
-------- -------- --------
Denominator for basic calculation................ 104,128 217,674 251,776
Weighted average effect of dilutive securities:
Series A Preferred Stock...................... 22,074 -- --
Series B Preferred Stock...................... 16,108 -- --
Warrants...................................... 2,197 7 93
Weighted average common shares subject to
repurchase agreements....................... 79,156 38,132 15,050
Employee stock options........................ 9,856 17,220 13,427
-------- -------- --------
Denominator for diluted calculation.............. 233,519 273,033 280,346
======== ======== ========
Net income per share:
Basic............................................ $ 0.07 $ 0.04 $ 0.19
======== ======== ========
Diluted.......................................... $ 0.03 $ 0.04 $ 0.17
======== ======== ========
NOTE 3 -- ACQUISITIONS:
Jump Incorporated
Effective June 30, 1998, eBay acquired all the outstanding shares of Jump
Incorporated ("Jump"), an online personal trading community. The total purchase
price of approximately $2.3 million consisted of
64
66
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
857,088 shares of eBay's common stock with an estimated fair value of
approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete
agreements totaling approximately $208,000 and legal and other professional
fees. Of the total purchase price, approximately $150,000 was allocated to
in-process technology and was immediately charged to operations because such
in-process technology had not reached the stage of technological feasibility at
the acquisition date and had no alternative future use. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($31,000) and
intangible assets, including completed technology ($500,000), customer list
($1.5 million), covenants not to compete ($208,000) and goodwill ($24,000). The
intangible assets are being amortized over their estimated useful lives of 8 to
24 months.
Kruse International
On May 18, 1999, eBay acquired Kruse, Inc. (d/b/a Kruse International) and
all affiliated entities under common control including: Auburn Cordage, Inc.,
ACD Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic
Advertising & Promotions, Inc., each an Indiana corporation, and Kruse Montana,
Inc., a Montana corporation (collectively, "Kruse" or the "Kruse Companies").
Kruse International was founded in 1971 and operated as a sole
proprietorship until it was incorporated in the state of Indiana in August 1986.
The Kruse Companies conduct auctions, perform appraisal services and auctioneer
training for classic car auctions in various locations in the United States,
England, Germany and the Netherlands.
The aggregate consideration exchanged for the acquisition was 1,574,624
shares of eBay common stock for all shares of capital stock of the Kruse
Companies. The acquisition has been accounted for as a pooling of interests.
Billpoint
On May 25, 1999, eBay acquired Billpoint, Inc. ("Billpoint"). Billpoint has
developed a centralized, turnkey authorization, billing and payment fulfillment
solution that permits individuals and small merchants to accept credit cards as
payment for Internet-based sales transactions. Billpoint's service is now being
made available to eBay's users, providing the ability to accept credit cards for
payment.
In connection with the acquisition, eBay issued 1,048,264 shares of eBay
common stock to the existing Billpoint shareholders as consideration for all
shares of capital stock, and all options and warrants to purchase shares of
common stock of Billpoint outstanding immediately prior to the consummation of
the merger were converted into options and warrants to purchase shares of eBay
common stock. The acquisition has been accounted for as a pooling of interests.
Butterfields
On May 28, 1999, eBay acquired Butterfields Auctioneers Corporation, a
Delaware corporation and all affiliated entities under common control including
Butterfield Credit Corporation Inc., 111 Potrero Partners, LLC and HBJ Partners,
LLC (collectively "Butterfields").
Butterfields was established in 1865, incorporated in California in July
1970 and reincorporated in the state of Delaware in March 1999. Butterfields
conducts auctions and performs appraisal services of fine art, jewelry, antiques
and other collectibles primarily in San Francisco, Los Angeles and Chicago.
Butterfield Credit Corporation Inc. ("BCCI") is a wholly-owned subsidiary
of Butterfields and is incorporated in California. BCCI operates as a financing
corporation whose sole purpose is serving Butterfield's clients.
65
67
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
111 Potrero Partners, LLC ("111 Potrero") is a limited liability
corporation organized in May 1996. 111 Potrero owns several commercial
properties located in San Francisco and Los Angeles, which are currently
occupied by Butterfields and third parties.
HBJ Partners, LLC ("HBJ") is a limited liability corporation organized in
California in September 1996. HBJ owns several commercial properties located in
San Francisco, which are currently occupied by Butterfields and third parties.
HBJ also has general partnership interests in 17600 Santa Fe Avenue Partners and
2959 Victoria Street. As of December 31, 2000, ownership interests in the above
partnerships were 94% and 85%, respectively.
The aggregate consideration exchanged for the acquisition was 2,654,740
shares of eBay common stock. The acquisition has been accounted for as a pooling
of interests. In April 1999, Butterfields withdrew its registration statement
for its initial public offering. Accordingly, in the second quarter of 1999,
eBay recorded a charge of approximately $2.6 million related to the costs of the
withdrawn offering.
alando.de.ag
On June 15, 1999, eBay acquired all of the outstanding stock of
alando.de.ag ("alando"). alando began operations on February 19, 1999 and is
Germany's leading online personal trading community. The aggregate consideration
exchanged for the acquisition was 632,000 shares of eBay common stock. The
acquisition has been accounted for as a pooling of interests.
Half.com
On July 11, 2000, eBay acquired Half.com. Half.com was incorporated in
Pennsylvania in June 1999 and provides a fixed-price, person-to-person
e-commerce site that allows people to buy and sell previously owned goods at
discounted prices.
In connection with the merger, eBay issued, or reserved for issuance, a
total of approximately 5,484,000 shares of eBay common stock to Half.com's
existing shareholders, option holders and warrant holders as consideration for
all shares of capital stock, options and warrants of Half.com held immediately
prior to consummation of the merger. The merger has been accounted for as a
pooling-of-interests.
The results of operations previously reported by eBay and Half.com are
summarized as follows (in thousands):
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------- DECEMBER 31,
1999 2000 1999
------- -------- ------------
Net revenues:
eBay......................................... $92,280 $183,152 $224,724
Half.com..................................... -- 887 --
------- -------- --------
$92,280 $184,039 $224,724
======= ======== ========
Net income (loss):
eBay......................................... $ 4,581 $ 17,878 $ 10,828
Half.com..................................... -- (8,661) (1,261)
------- -------- --------
$ 4,581 $ 9,217 $ 9,567
======= ======== ========
There were no adjustments required to conform the accounting policies of
Half.com to those of eBay.
See Subsequent Events -- Note 16.
66
68
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SEGMENT INFORMATION:
Effective January 1, 1998, eBay adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes the standards for reporting information about operating segments
in annual financial statements and requires that certain selected information
about operating segments be reported in interim financial reports. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is evaluated regularly by the chief
operating decisionmaker in order to allocate resources and in assessing
performance.
eBay has identified two primary reporting segments: online trading services
and offline, traditional auction services. The online trading services segment
consists of the operations of eBay, Billpoint, alando.de.ag and Half.com. The
offline, traditional auction segment consists of the current operations of
Butterfields and Kruse.
Segment selection is based upon the internal organization structure, the
manner in which these operations are managed and their performance evaluated by
management, the availability of separate financial information, and overall
materiality considerations. Segment performance measurement is based on
operating income before income taxes, amortization of intangibles, stock-based
compensation, payroll expense on employee stock options and merger related
costs. The operating information for the two segments identified are as follows
(in thousands):
YEAR ENDED DECEMBER 31, 1998
----------------------------------
ONLINE OFFLINE CONSOLIDATED
------- ------- ------------
Net revenues from external customers................ $47,352 $38,777 $ 86,129
======= ======= ========
Operating income before amortization of intangibles,
stock-based compensation, payroll expense on
employee stock options and merger related costs... $11,573 $ 6,678 $ 18,251
Interest and other income, net...................... 908 891 1,799
Interest expense.................................... (39) (2,152) (2,191)
Amortization of intangibles, stock-based
compensation, payroll expense on employee stock
options and merger related costs.................. (5,486) -- (5,486)
------- ------- --------
Income before income taxes, minority interest and
equity interest in partnership income............. $ 6,956 $ 5,417 $ 12,373
======= ======= ========
Total assets.............................. $92,545 $56,991 $149,536
======= ======= ========
YEAR ENDED DECEMBER 31, 1999
-----------------------------------
ONLINE OFFLINE CONSOLIDATED
-------- ------- ------------
Net revenues from external customers............... $182,533 $42,191 $224,724
======== ======= ========
Operating income before amortization of
intangibles, stock-based compensation, payroll
expense on employee stock options and merger
related costs.................................... $ 3,970 $ 3,188 $ 7,158
Interest and other income, net..................... 23,624 209 23,833
Interest expense................................... (504) (1,815) (2,319)
Amortization of intangibles, stock-based
compensation, payroll expense on employee stock
options and merger related costs................. (8,697) (1,834) (10,531)
-------- ------- --------
Income (loss) before income taxes, minority
interest and equity interest in partnership
income........................................... $ 18,393 $ (252) $ 18,141
======== ======= ========
Total assets....................................... $873,122 $96,703 $969,825
======== ======= ========
67
69
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
-------------------------------------
ONLINE OFFLINE CONSOLIDATED
---------- ------- ------------
Net revenues from external customers............. $ 391,952 $39,472 $ 431,424
========== ======= ==========
Operating income (loss) before amortization of
intangibles, stock-based compensation, payroll
expense on employee stock options and merger
related costs.................................. $ 49,767 $(2,312) $ 47,455
Interest and other income, net................... 45,642 695 46,337
Interest expense................................. (1,071) (2,303) (3,374)
Amortization of intangibles, stock-based
compensation, payroll expense on employee stock
options and merger related costs............... (11,464) (997) (12,461)
---------- ------- ----------
Income (loss) before income taxes, minority
interest and equity interest in partnership
income......................................... $ 82,874 $(4,917) $ 77,957
========== ======= ==========
Total assets..................................... $1,084,909 $97,494 $1,182,403
========== ======= ==========
NOTE 5 -- INVESTMENTS:
At December 31, 1999 and 2000, short and long-term investments were
classified as available-for-sale securities and are reported at fair value as
follows (in thousands):
DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
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
Equity instruments.................... 12,012 13,210 -- 25,222
-------- ------- ------- --------
Total......................... $364,621 $13,210 $(3,843) $373,988
======== ======= ======= ========
68
70
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
---------------------------------------------------
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Short-term investments:
Municipal bonds and notes............. $112,488 $ 15 $ (116) $112,387
Corporate bonds....................... 21,193 70 -- 21,263
Government securities................. 219,674 842 -- 220,516
-------- ---- ------- --------
Total......................... $353,355 $927 $ (116) $354,166
======== ==== ======= ========
Long-term investments:
Municipal bonds and notes............. $141,861 $ 69 $ (269) $141,661
Government securities................. 151,732 694 (81) 152,345
Equity instruments and other.......... 54,505 -- (3,924) 50,581
-------- ---- ------- --------
Total......................... $348,098 $763 $(4,274) $344,587
======== ==== ======= ========
In 2000, restricted cash of $126,390 is included within long-term
investments.
The estimated fair value of short and long-term investments classified by
date of contractual maturity are as follows (in thousands):
DECEMBER 31,
2000
------------
Due within one year or less................................. $354,166
Due after one year through two years........................ 191,873
Due after two years through three years..................... 5,028
Restricted cash and investments expiring in less than five
years..................................................... 126,390
Equity investments.......................................... 21,296
--------
$698,753
========
NOTE 6 -- BALANCE SHEET COMPONENTS:
DECEMBER 31,
--------------------
1999 2000
-------- --------
(IN THOUSANDS)
Cash and cash equivalents:
Cash and money market funds............................... $ 57,536 $ 75,338
Securities and cash equivalents........................... 164,265 126,535
-------- --------
Total............................................. $221,801 $201,873
======== ========
Accounts receivable, net:
Accounts receivable....................................... $ 44,940 $ 81,293
Allowance for doubtful accounts........................ (6,722) (12,122)
Allowance for authorized credits....................... (1,680) (2,008)
-------- --------
Total............................................. $ 36,538 $ 67,163
======== ========
69
71
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Write-offs against the allowance for doubtful accounts were $562,000, $4.5
million and $12.5 million in the years ended December 31, 1998, 1999 and 2000,
respectively.
DECEMBER 31,
--------------------
1999 2000
-------- --------
(IN THOUSANDS)
Property and equipment, net:
Land and buildings................................... $ 61,274 $ 60,575
Computer equipment and software...................... 65,268 113,917
Leasehold improvements............................... 6,510 7,193
Furniture and fixtures............................... 8,844 12,114
Vehicles and other................................... 2,529 379
-------- --------
Total........................................ 144,425 194,178
Accumulated depreciation and amortization......... (32,223) (69,017)
-------- --------
Total........................................ $112,202 $125,161
======== ========
Within computer equipment and software, eBay capitalized $5.8 million and
$9.4 million and recorded amortization expense of $2.4 million and $6.6 million
for site related software during the years ended December 31, 1999 and 2000,
respectively.
Total depreciation expense for years ended December 31, 1998, 1999 and 2000
totaled $1.7 million, $18.6 million and $36.7 million, respectively.
DECEMBER 31,
------------------
1999 2000
------- -------
(IN THOUSANDS)
Intangible assets and other assets, net:
Intangible assets...................................... $12,601 $18,234
Accumulated amortization............................... (3,789) (5,171)
------- -------
Subtotal............................................... 8,812 13,063
Other assets........................................... 3,877 10,236
------- -------
Total.......................................... $12,689 $23,299
======= =======
Accrued expenses:
Accrued compensation and related benefits.............. $ 5,826 $10,320
Advertising accruals................................... 4,918 13,258
Professional fees...................................... 3,990 5,853
Other accruals......................................... 17,439 31,451
------- -------
Total.......................................... $32,173 $60,882
======= =======
DECEMBER 31,
------------------
1999 2000
------- -------
(IN THOUSANDS)
Other comprehensive income
Unrealized gain/(loss) on investments.................. $ 8,883 $(2,700)
Foreign currency translation adjustment................ (58) 745
Deferred tax asset/(liability) on unrealized gains and
losses.............................................. (3,731) 1,080
------- -------
Total.......................................... $ 5,094 $ (875)
======= =======
70
72
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- DEBT:
Notes payable
Notes payable consists of amounts payable to various financial
institutions, which are collateralized by specific properties and are detailed
as follows:
DECEMBER 31,
--------------------
1999 2000
-------- --------
(IN THOUSANDS)
Mortgage notes, prime plus 1%, due September 30,
2002................................................. $ 1,797 $ 1,689
Mortgage notes, LIBOR plus 1.75%, due July 15, 2001.... 3,501 3,351
Mortgage notes, 8.25%, due November 15, 2001........... 11,980 11,812
Mortgage notes, 8.175% variable, due August 1, 2023.... 9,300 9,300
Convertible note, prime plus 1%, due April 3, 2000..... 3,496 --
Loan on foreclosed property, prime plus 2%, due August
9, 2015.............................................. 549 524
6% - 10.5% notes, due October 2000 through January
2003................................................. 176 --
-------- --------
Subtotal..................................... 30,799 26,676
Less: Current portion.................................. (15,781) (15,272)
-------- --------
Long-term portion............................ $ 15,018 $ 11,404
======== ========
Mortgage notes outstanding are on property owned by Butterfields. The notes
have variable interest rates, payment terms and are collateralized by certain
land, buildings and improvements. Generally, the principal and interest are paid
on a monthly basis.
The mortgage notes bearing an interest rate of 8.25% were originally due on
May 15, 2000. The maturity was extended to November 15, 2001.
The convertible note was related to Half.com and was used as a bridge loan
until funding was received from their preferred stock issuance. The convertible
note was converted to Half.com's preferred stock in January 2000.
Minimum annual repayments on these notes at December 31, 2000 are as
follows (in thousands):
YEAR ENDING
DECEMBER 31, TOTAL
------------ -------
2001..................................................... $15,272
2002..................................................... 1,612
2003..................................................... 35
2004..................................................... 40
2005..................................................... 44
Thereafter............................................... 9,673
-------
$26,676
=======
NOTE 8 -- LEASING ARRANGEMENTS:
eBay, through its Butterfields subsidiary, leases certain land and
buildings. These leases are classified as operating leases that expire at
various intervals between 2001 and 2013. Certain of these leases contain renewal
options and have escalation clauses tied to changes in the Consumer Price Index.
Under the terms of the leases, the tenants are generally responsible for the
payment of property taxes, insurance and maintenance costs related to the leased
property.
71
73
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property under operating leases and property held for lease
The following schedule provides a summary of eBay's investment in property
held for lease by major classes, in thousands:
DECEMBER 31,
----------------------------
1999 2000
------------ ------------
Land and building.................................. $33,500 $ 44,095
Building improvements.............................. 9,801 11,990
------- --------
43,301 56,085
Less: Accumulated depreciation..................... (6,986) (12,029)
------- --------
$36,315 $ 44,056
======= ========
The following is a schedule by year of minimum future rental income on
noncancellable operating leases as of December 31, 2000 (in thousands):
YEAR ENDING
DECEMBER 31, TOTAL
------------ -------
2001...................................................... $ 5,342
2002...................................................... 5,226
2003...................................................... 5,245
2004...................................................... 5,201
2005...................................................... 5,187
Thereafter................................................ 25,768
-------
Total minimum future rentals...................... $51,969
=======
NOTE 9 -- PURCHASE AND SALE OF PROPERTIES OR PROPERTY INTERESTS:
From time to time and in the ordinary course of business, eBay elects to
sell properties previously held for lease, or purchase properties or property
interests for future rental. eBay views its rental properties as sources of
income, which may be derived either from property rental, or potentially the
sale of the property. In November 1999, eBay sold its Curson property for
$350,000 in cash and recognized a gain of $182,000.
During 1999 and 2000 eBay increased its ownership percentage in various
property partnerships acquired in the merger with Butterfields. eBay became a
majority owner in some properties in which it had previously held a minority
interest.
See Subsequent Events -- Note 16
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
Litigation
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 alleged that eBay violated Section 17200 of the California
Business & Professions Code, a statute that relates to unfair competition, based
upon the listing of "bootleg" or "pirate" recordings by eBay's users, allegedly
in violation of California penal statutes relating to the sale of unauthorized
audio recordings. The lawsuit sought declaratory and injunctive relief,
restitution and legal fees. eBay filed a general demurrer which was sustained by
the court with leave to amend. The plaintiff subsequently filed an amended
complaint. eBay filed a motion for summary judgement. On November 7, 2000,
eBay's motion for summary judgement was granted.
72
74
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 10, 1999, eBay sued Bidder's Edge, Inc. in the United States
District Court for the Northern District of California alleging trespass, unfair
competition, violation of the computer fraud and abuse act, misappropriation,
false advertising, trademark dilution, injury to business reputation,
interference with prospective economic advantage, and unjust enrichment. On
February 7, 2000, Bidder's Edge denied these claims and counterclaimed against
eBay alleging that eBay violated the antitrust laws by monopolizing or
attempting to monopolize a market, that competed unfairly, and interfered with
Bidder's Edge's contract with eBay magazine. Bidder's Edge sought treble
damages, an injunction and its fees and costs. On May 24, 2000, the court
granted us a preliminary injunction against the use by Bidder's Edge of robotic
means to copy eBay's site. See Subsequent Events -- Note 16.
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 was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims eBay was
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims eBay violated Section 17200 and a section of the California Civil
Code which prohibits "dealers" from selling sports memorabilia without a
"Certificate of Authenticity." See Subsequent Events -- Note 16.
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 consolidated
financial positions, results of operations or cash flows.
Lease arrangement
On March 1, 2000, eBay entered into a five-year lease for general office
facilities located in San Jose, California. Payments under this lease are based
on a spread over the London Interbank Offering Rate ("LIBOR") applied to the
$126.4 million cost of the facility funded by the lessor. eBay has an option to
renew the lease for up to two five-year extensions subject to specific
conditions. Under the terms of the lease agreement, eBay was required to place
$126.4 million of cash and investment securities as collateral for the term of
the lease. The cash and investment securities are restricted as to their
withdrawal from the third party trustee and are classified as long-term
restricted cash and investments in the accompanying balance sheet.
eBay entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow eBay to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments which effectively amends the interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease. The interest rate swaps
have been accounted for under the accrual method of accounting. The fair value
of the interest rate swaps on December 31, 2000 was a $4.4 million loss based on
discounted cash flows.
73
75
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
eBay leases property and equipment under non-cancelable operating leases
that expire at various dates. Future minimum rental payments under
non-cancelable operating leases subsequent to December 31, 2000, are as follows
(in thousands):
YEAR ENDING OPERATING
DECEMBER 31, LEASES
------------ ---------
2001..................................................... $10,383
2002..................................................... 10,356
2003..................................................... 10,351
2004..................................................... 10,473
2005..................................................... 2,269
Thereafter............................................... 52
-------
Total minimum lease payments..................... $43,884
=======
Rent expense in the years ended December 31, 1998, 1999 and 2000 totaled
$672,000, $3.9 million and $4.8 million, respectively.
Advertising
GO.com
On February 6, 2000, eBay entered into a four-year marketing agreement with
GO.com. In accordance with the agreement, GO.com provided eBay with online and
offline promotion, eBay and GO.com developed a co-branded version of the eBay
service and both companies developed a site featuring merchandise from GO.com
affiliates. These affiliates include but are not limited to The Walt Disney
Company, ESPN and ABC. In consideration for this agreement, eBay will pay a
minimum of $30 million to GO.com over the four-year term. See Subsequent
Events -- Note 16.
NEC
On February 17, 2000, eBay Japan Inc., a wholly owned subsidiary of eBay,
entered into a shareholder and marketing services agreement with NEC
Corporation. In accordance with the shareholder agreement, NEC acquired 30% of
eBay Japan and eBay retained the remaining 70% interest in eBay Japan. eBay will
continue to consolidate eBay Japan due to a majority ownership interest and will
reflect a minority interest for the equity interest of NEC.
In accordance with the marketing agreement, NEC provided marketing and
services to eBay Japan in an effort to deliver a minimum level of confirmed
registered users. As compensation for the marketing and other services performed
by NEC, eBay Japan paid NEC an annual up-front fee of approximately $1.5
million. The first payment was made in April, 2000, and additional payments will
be payable on the anniversary of such date in each of the subsequent three years
as long as the contract is in effect. If NEC is unable to deliver the minimum
level of confirmed registered users, then eBay will have the right to repurchase
shares of eBay Japan from NEC.
AutoTrader.com
On March 6, 2000, eBay and Autotrader.com LLC ("Autotrader") entered into a
marketing and services agreement whereby eBay and Autotrader developed a
co-branded site, and Autotrader will refer customers desiring an auction pricing
format to eBay for a referral fee. Under the terms of the agreement, eBay has
committed to provide certain marketing expenditures for the promotion of the
eBay service and additional automobile related services offered by Autotrader.
In consideration for these expenditures, eBay is committed to pay $29 million
over the 3.5-year term.
74
76
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under the agreement, eBay acquired 1,439,040, approximately 3.3% of the
equity of Autotrader for approximately $11.0 million in cash or $7.63 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. eBay is 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 December 31, 2000,
eBay had advanced $37.5 million under the amended agreement, and had recognized
$28.5 million as advertising expense commencing with the launch of the
co-branded program and delivery of advertising impressions.
In conjunction with the expanded strategic relationship, AOL terminated its
original contract with eBay in August 1999. As a result, the remaining $8.0
million commitment associated with the original agreement was waived. AOL
continued to deliver impressions under the original agreement through August
1999.
Minimum auction guarantees
From time to time eBay, through its Butterfields subsidiary, guarantees the
minimum net proceeds with respect to the sale of properties at future auctions.
Such guaranteed proceeds are often advanced to the consignor prior to the
completion of the auction. eBay is responsible for the shortfall, if any,
between the guaranteed minimum proceeds and the actual net proceeds upon the
completion of the auction. Losses, if any, are recognized at the conclusion of
the auction. In 2000, Butterfields had entered into two such agreements with
guaranteed net proceeds of $1.25 million and $2.0 million. The $2.0 million
agreement is shared with another auction service, half of which is guaranteed by
each party. In June and October 2000, the minimum guarantee auctions took place,
and at the conclusion of the auctions, the minimum net proceed amounts were not
obtained. Butterfields recognized an insignificant loss for the shortfall
between the minimum proceeds it guaranteed and the actual net proceeds received.
NOTE 11 -- RELATED PARTY TRANSACTIONS:
In February 2000, a subsidiary of eBay entered into a service contract with
a related party whereby the subsidiary agreed to provide services with respect
to the design of the related party's system. The related party remitted payment
totaling $1.5 million to the subsidiary of which $35,000 was treated as a cost
reimbursement for product development expenses, and the remainder was accounted
for as revenue. Both amounts are included in the accompanying consolidated
statement of income.
In February 2000, a subsidiary of eBay entered in to a marketing agreement
with a related party. Total payments under this agreement were approximately
$1.5 million.
In July 2000, eBay purchased shares representing beneficial interest of
less than five percent of a company affiliated with a director of eBay. In
connection with the transaction, eBay received a warrant that would, if
exercised, increase eBay's beneficial interest to less than ten percent. eBay
recorded the investment at cost. Separately, eBay entered into a commercial
agreement whereby eBay provided approximately $1.3 million of advertising
services to the related party. The amount is included in the accompanying
consolidated statements of income.
75
77
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In July 2000, eBay had also entered into an agreement whereby eBay
purchased shares representing beneficial interest of less than five percent of a
company affiliated with a director of eBay. Additionally, eBay received a
warrant that, if exercised, eBay's beneficial interest would remain at less than
five percent. eBay recorded the investment at cost. Separately, eBay entered
into a commercial agreement whereby eBay provided approximately $1.3 million of
advertising services to the related party. The amount is included in the
accompanying consolidated statements of income.
In April 2000, eBay entered into an agreement with a company that is
affiliated with a director of eBay, eBay recorded approximately $4.1 million in
income relating to advertising services. eBay also entered into an agreement
whereby eBay purchased shares representing less than one percent of the related
party's total shares outstanding. Additionally, eBay received a warrant that, if
exercised, eBay s beneficial interest would remain at less than one percent.
All contracts with related parties are at rates and terms that management
believes are comparable with those entered into with independent third parties.
Note receivable from stockholders
At December 31, 1999, eBay held a note receivable from an employee totaling
$11,000 which was fully paid at December 31, 2000. Note receivable from
stockholders represented amounts owed to eBay from the exercise of stock
options. These full recourse notes were collateralized by common stock and
interest was at a rate of 8% per annum.
Notes receivable from eBay executive officers
At December 31, 2000, eBay held notes receivable from two executive
officers of eBay totaling $3.2 million. The promissory note held by one officer
of eBay as of December 31, 1999 was amended in 2000. The amended note bears
interest at a rate of 6.37% per annum as compared to the previous rate of 5.43%
and remains collateralized by a Deed of Trust, held by eBay. The other note
bears interest at a rate of 6.40% per annum and is collateralized by a Deed of
Trust, held by eBay. Both notes' outstanding principal and interest are due and
payable by 2004.
NOTE 12 -- PREFERRED STOCK:
Preferred Stock
eBay is authorized, subject to limitations prescribed by Delaware law, to
provide for the issuance of Preferred Stock in one or more series, to establish
from time to time the number of shares included within each series, to fix the
rights, preferences and privileges of the shares of each wholly unissued series
and any qualifications, limitations or restrictions thereon, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding) without any further vote or action by
the stockholders. At December 31, 1999 and 2000 there were 10,000,000 shares of
Preferred Stock authorized for issuance, and no shares issued or outstanding.
NOTE 13 -- COMMON STOCK:
eBay's Certificate of Incorporation, as amended, authorizes eBay to issue
900,000,000 shares of common stock. A portion of the shares outstanding are
subject to repurchase by eBay over a four-year period from the earlier of the
issuance date or employee hire date, as applicable. At December 31, 1999 and
2000, there were 25,356,000 and 7,509,000 shares, respectively, subject to
repurchase rights at an average price of $0.06 and $0.12, respectively, per
share.
76
78
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, in connection with the appointment of two outside directors,
eBay sold an aggregate of 1,287,000 shares of common stock to two directors and
realized net proceeds of $2.0 million. eBay recognized the $429,000 excess of
the estimated fair value of the stock over the price paid by the two directors
as general and administrative expense in 1998.
At December 31, 2000, eBay had reserved 18,114,107 and 1,005,652 shares of
common stock for future issuance for the exercise of options under the stock
option plans and issuance of shares under the employee stock purchase plan,
respectively.
NOTE 14 -- EMPLOYEE BENEFIT PLANS:
401(k) Savings Plan
eBay has a savings plan that qualifies as a deferred salary arrangement
under Section 401(k) of the Internal Revenue Code (the "401(k) Plan"). Under the
401(k) Plan, participating employees may defer a percentage (not to exceed 25%)
of their eligible pretax earnings up to the Internal Revenue Service's annual
contribution limit. All employees on the United States payroll of eBay age 21
years or older are eligible to participate in the 401(k) Plan. eBay had not been
required to contribute to the 401(k) Plan but in 1998 elected to match
contributions up to a maximum of $1,500 per employee, and committed to matching
contributions to a maximum of $1,500 per employee per year in future periods. As
a result, eBay contributed and expensed $97,000, $856,000 and $1.8 million in
the years ended December 31, 1998, 1999 and 2000, respectively.
As a result of the mergers with eBay in 1999 and 2000, Butterfields, Kruse,
Billpoint, and Half.com terminated any existing defined savings contribution
plans and adopted eBay's 401(k) Plan.
Stock option plans
In December 1996, eBay's Board of Directors adopted the 1996 Stock Option
Plan (the "1996 Plan"), in June 1997, adopted the 1997 Stock Option Plan (the
"1997 Plan"), in August 1998, adopted the 1998 Stock Option Plan (the "1998
Plan"), and in 1999 the 1999 Global Equity Incentive Plan (the "1999 Plan")
(collectively, the "Plans"). The Plans provide for the granting of stock options
to employees and consultants of eBay. Options granted under the Plans may
generally be either incentive stock options ("ISOs") or nonqualified stock
options ("NSOs"). ISOs may be granted only to eBay's employees (including
officers and directors who are also employees). NSOs may be granted to eBay's
employees and consultants.
In July 1998, the Board adopted, and in August 1998 eBay's stockholders
approved, the 1998 Equity Incentive Plan (the "1998 Plan") and reserved
27,000,000 shares of common stock for issuance thereunder. The 1998 Plan
authorized the award of options, restricted stock awards and stock bonuses (each
an "Award"). No person will be eligible to receive more than 6,000,000 shares in
any calendar year pursuant to Awards under the 1998 Plan other than a new
employee of eBay who will be eligible to receive no more than 12,000,000 shares
in the calendar year in which such employee commences employment. Options
granted under the 1998 Plan may be either ISOs or NSOs. ISOs may be granted only
to eBay's employees (including officers and directors who are also employees).
NSOs may be granted to eBay's employees, officers, directors, consultants,
independent contractors and advisors of eBay.
In October 1999, the Board of Directors adopted the 1999 Global Equity
Incentive Plan (the "1999 Plan") and reserved 5,000,000 shares of common stock
for issuance thereunder. Options may be granted to eBay's employees, directors,
and consultants and in particular to eBay's employees, directors, and
consultants who are neither citizens nor residents of the United States of
America. The 1999 plan was approved by the stockholders at the Annual
Stockholders Meeting in May 2000.
77
79
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In May 1999, in connection with eBay's acquisition of Billpoint, eBay
assumed Billpoint's 1999 Stock Plan, and all options outstanding under the plan.
At the time of the acquisition, the outstanding options became options to
purchase approximately 200,000 shares of eBay common stock. eBay will make no
further option grants under this plan.
Options under the Plans may be granted for periods of up to ten years and
at prices no less than 85% of the estimated fair value of the shares on the date
of grant as determined by the Board of Directors, provided, however, that (i)
the exercise price of an ISO may not be less than 100% of the estimated fair
value of the shares on the date of grant, and (ii) the exercise price of an ISO
granted to a 10% shareholder may not be less than 110% of the estimated fair
value of the shares on the date of grant. Options under the 1996 and 1997 Plans
were exercisable immediately through June 30, 1998, subject to repurchase rights
held by eBay, which lapse over the vesting period, which is generally four
years. Options under the 1998 Plan are not immediately exercisable and generally
vest over a period of four years.
The following table summarizes activity under eBay's stock option plans for
the years ended December 31, 1998, 1999 and 2000 (shares in thousands):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1999 2000
------------------- ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------ -------- ------ --------
Outstanding at beginning of
period......................... 23,580 $0.01 18,493 $ 1.84 26,236 $ 29.73
Granted........................ 34,574 1.07 12,210 64.59 9,037 62.69
Exercised...................... (38,954) 0.07 (3,551) 1.95 (4,499) 6.23
Cancelled...................... (707) 0.83 (916) 38.96 (4,525) 65.41
------- ------ ------
Outstanding at end of period..... 18,493 1.84 26,236 29.73 26,249 38.99
======= ====== ======
Options exercisable at end of
period......................... 740 0.02 3,654 5.03 7,006 27.73
======= ===== ====== ======= ====== =======
Weighted average grant date fair
value of options granted during
period......................... $1.40 $105.03 $103.79
===== ======= =======
The following table summarizes information about fixed stock options
outstanding at December 31, 2000, (shares in thousands):
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
DECEMBER 31, 2000 DECEMBER 31, 2000
----------------------------------------- ----------------------
WEIGHTED WEIGHTED
NUMBER OF WEIGHTED AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF SHARES REMAINING EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- ---------------- -------- ----------- --------
$ 0.01 - $ 2.33.. 4,865 7.4years $ 1.43 1,968 $ 1.33
2.50 - 2.50.. 5,900 7.7 2.50 2,228 2.50
3.83 - 53.83.. 4,368 9.2 43.96 667 44.02
53.88 - 66.63.. 3,444 9.2 60.56 521 62.13
66.91 - 75.19.. 4,070 8.9 71.07 944 70.38
75.25 - 116.31.. 3,602 8.9 86.57 678 85.44
------ -----
26,249 8.4 $38.99 7,006 $27.73
====== =====
78
80
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Fair value disclosures
eBay calculated the fair value of each option grant on the date of grant
using the Black-Scholes option pricing model as prescribed by SFAS No. 123 using
the following assumptions:
YEAR ENDED
DECEMBER 31,
--------------------
1998 1999 2000
---- ---- ----
Risk-free interest rates.................................... 4.9% 5.5% 4.9%
Expected lives (in years)................................... 3.0 3.0 3.0
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 80% 100% 115%
Prior to eBay's initial public offering, the fair value of each option
grant to employees of eBay was determined using the minimum value method.
Subsequent to the offering, the fair value was determined using the
Black-Scholes model. The effect of compensation cost on net income and earnings
per share are as follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
------ -------- --------
Net income (loss):
As reported................................ $7,273 $ 9,567 $ 48,294
Pro forma.................................. $6,497 $(41,357) $(90,677)
Net income (loss) per share--basic:
As reported................................ $ 0.07 $ 0.04 $ 0.19
Pro forma.................................. $ 0.06 $ (0.19) $ (0.36)
Net income (loss) per share--diluted:
As reported................................ $ 0.03 $ 0.04 $ 0.17
Pro forma.................................. $ 0.03 $ (0.19) $ (0.36)
1998 Employee Stock Purchase Plan
In July 1998, the Board adopted, and in August 1998 eBay's stockholders
approved, the 1998 Employee Stock Purchase Plan (the "Purchase Plan") and
reserved 1,800,000 shares of common stock for issuance thereunder. On each
January 1, the aggregate number of shares reserved for issuance under the
Purchase Plan will be increased automatically by the number of shares purchased
under the Purchase Plan in the preceding calendar year. The aggregate number of
shares reserved for issuance under the Purchase Plan shall not exceed 9,000,000
shares. The Purchase Plan became effective on September 24, 1998, the first
business day on which price quotations for eBay's common stock were available on
the Nasdaq National Market. Employees are generally eligible to participate in
the Purchase Plan if they are customarily employed by eBay for more than 20
hours per week and more than five months in a calendar year and are not (and
would not become as a result of being granted an option under the Purchase Plan)
5% stockholders of eBay. Under the Purchase Plan, eligible employees may select
a rate of payroll deduction between 2% and 10% of their W-2 cash compensation
subject to certain maximum purchase limitations. Each Offering Period has a
maximum duration of two years (the "Offering Period") and consists of four
six-month Purchase Periods (each, a "Purchase Period"), with the exception of
the first Purchasing Period, which began on September 24, 1998 and ended on
April 30, 1999 and two supplemental purchasing period to accommodate merged
employees which began on July 1, 1999 and August 1, 2000 ended on October 31,
1999 and October 31, 2000, respectively. Offering Periods and Purchase Periods
generally begin on May 1 and November 1. The price at which the common stock is
purchased under the Purchase Plan is 85% of the lesser of the fair market value
of eBay's common stock on the first day of the applicable offering period or on
the last day of that purchase
79
81
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
period. The Purchase Plan will terminate after a period of ten years unless
terminated earlier as permitted by the Purchase Plan.
In July 2000, the Board of Directors of Billpoint, eBay's majority-owned
subsidiary, adopted Billpoint's 2000 Stock Option and Incentive Plan (the
"Billpoint Plan") and reserved 4,444,444 shares of Billpoint's common stock for
issuance thereunder. The Billpoint Plan authorized the award of options,
restricted stock, and other stock-based awards. Options granted under the
Billpoint Plan may be either be ISOs or NSOs and may be granted to Billpoint's
employees, directors and consultants.
1998 Directors Stock Option Plan
In July 1998, the Board adopted, and in August 1998 eBay's stockholders
approved, the 1998 Directors Stock Option Plan ("Directors Plan") and reserved a
total of 1,200,000 shares of eBay's common stock for issuance thereunder.
Members of the Board who are not employees of eBay, or any parent, subsidiary or
affiliate of eBay, are eligible to participate in the Directors Plan. The option
grants under the Directors Plan are automatic and nondiscretionary, and the
exercise price of the options must be 100% of the fair market value of the
common stock on the date of grant. Each eligible director who first becomes a
member of the Board on or after September 24, 1998 will initially be granted an
option to purchase 180,000 shares (an "Initial Grant") on the date such director
first becomes a director. Immediately following each Annual Meeting of eBay,
each eligible director will automatically be granted an additional option to
purchase 30,000 shares if such director has served continuously as a member of
the Board since the date of such director's Initial Grant or, if such director
was ineligible to receive an Initial Grant, since the Effective Date. In 1999,
the Board amended the Directors Plan to provide that no such grants would be
made to eligible directors at the 1999 Annual Meeting. The term of such options
is ten years, provided that they will terminate seven months following the date
the director ceases to be a director or a consultant of eBay (twelve months if
the termination is due to death or disability). All options granted under the
Directors Plan will vest as to 25% of the shares on the first anniversary of the
date of grant and as to 2.08% of the shares each month thereafter, provided the
optionee continues as a member of the Board or as a consultant to eBay.
Unearned stock-based compensation
In connection with certain stock option and stock warrant grants during the
years ended December 31, 1998, 1999 and 2000, eBay recognized unearned
compensation totaling $5.8 million, $10.7 million, and $187,000, respectively.
The unearned compensation for 1998 and 1999 is being amortized over the
four-year vesting periods of the options and the one year vesting period of the
warrant as applicable. The unearned compensation for 2000 is related to the
Half.com acquisition and was amortized fully in 2000. Amortization expense
recognized during the years ended December 31, 1998, 1999 and 2000 totaled
approximately $3.1 million, $4.8 million and $7.1 million, respectively.
NOTE 15 -- INCOME TAXES:
The components of income (loss) including minority interest and equity
interest in partnership income before income taxes, for the years ended December
31, 1998, 1999 and 2000 are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
United States................................. $12,062 $23,013 $80,872
Foreign....................................... -- (4,974) 147
------- ------- -------
$12,062 $18,039 $81,019
======= ======= =======
80
82
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes is composed of the following (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------- -------
Current:
Federal...................................... $2,419 $10,951 $31,420
State and local.............................. 963 2,683 8,498
Foreign...................................... -- -- 280
------ ------- -------
3,382 13,634 40,198
------ ------- -------
Deferred:
Federal...................................... 1,211 (4,108) (5,887)
State and local.............................. 196 (1,054) (1,586)
------ ------- -------
1,407 (5,162) (7,473)
------ ------- -------
$4,789 $ 8,472 $32,725
====== ======= =======
The following is a reconciliation of the difference between the actual
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% for 1998 and 35% for 1999 and 2000 to income before income
taxes (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Provision at statutory rate................... $ 4,255 $ 6,314 $28,357
Permanent differences:
Foreign income.............................. -- 1,741 229
S Corporation (income) loss................. (1,848) 978 --
Merger related expenses..................... 384 329 175
Stock-based compensation.................... 1,051 (379) 125
Nonconsolidated subsidiary loss............. -- -- 665
Tax-exempt interest income.................. (175) (4,223) (4,241)
Other......................................... 328 2,706 2,922
State taxes, net of federal benefit........... 794 1,006 4,493
------- ------- -------
$ 4,789 $ 8,472 $32,725
======= ======= =======
81
83
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Under SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences of differences between the carrying amounts of
assets and liabilities and their respective tax bases using enacted tax rates in
effect for the year in which the differences are expected to reverse.
Significant deferred tax assets and liabilities consist of the following (in
thousands):
DECEMBER 31,
---------------------
1999 2000
-------- ---------
Deferred tax assets:
Net operating loss.................................. $ 84,807 $ 103,628
Accruals and reserves............................... 4,990 9,819
Depreciation and amortization....................... 8,798 10,313
Net unrealized loss on marketable securities........ -- 1,080
-------- ---------
Net deferred tax assets............................. 98,595 124,840
Valuation allowance................................... (83,894) (101,586)
-------- ---------
14,701 23,254
-------- ---------
Deferred tax liabilities:
Net unrealized gains on marketable securities....... (3,731) --
-------- ---------
$ 10,970 $ 23,254
======== =========
As of December 31, 2000, eBay's federal and state net operating loss
carryforwards for income tax purposes were approximately $274.9 million and
$128.0 million, respectively. If not utilized, the federal net operating loss
carryforwards will begin to expire in 2019, and the state net operating loss
carryforwards will begin to expire in 2004. Deferred tax assets of approximately
$101.6 million at December 31, 2000 pertain to certain net operating loss
carryforwards resulting from the exercise of employee stock options. When
recognized, the tax benefit of these losses are accounted for as a credit to
additional paid-in capital rather than a reduction of the income tax provision.
In connection with the acquisition of Butterfields by eBay, Butterfields'
status as an S Corporation was terminated and became subject to federal and
state income taxes. The supplemental pro forma information below includes an
increase to the provisions for income taxes based upon a combined federal and
state tax rate of 42%. This amount approximates the statutory tax rates that
would have been applied if Butterfields had been taxed as a C Corporation during
the periods prior to its acquisition. Because the acquisition of the
Butterfields companies has been accounted for as a pooling of interests, there
has been no adjustment to the historical carrying values of the real estate
holdings. However, these properties are subject to increases in tax basis which
will result in a higher depreciable basis for income and property tax purposes.
As a result, a deferred tax asset and a corresponding increase to stockholder's
equity of approximately $8.8 million was recorded in the second quarter of 1999
for the difference between the financial statement carrying amounts and the tax
basis of the related net assets upon the closing of the transaction.
82
84
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The pro forma provision for income taxes is composed of the following (in
thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------- -------
Current:
Federal...................................... $4,303 $10,267 $31,420
State and local.............................. 1,243 2,505 8,498
Foreign...................................... -- -- 280
------ ------- -------
5,546 12,772 40,198
------ ------- -------
Deferred:
Federal...................................... 1,138 (4,327) (5,887)
State and local.............................. 176 (1,091) (1,586)
------ ------- -------
1,314 (5,418) (7,473)
------ ------- -------
$6,860 $ 7,354 $32,725
====== ======= =======
The following is a reconciliation of the difference between the proforma
provision for income taxes and the provision computed by applying the federal
statutory rate of 34% 1998 and 35% for 1999 and 2000 to income before income
taxes (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------
1998 1999 2000
------ ------- -------
Provision at statutory rate.................... $4,255 $ 6,314 $28,357
Permanent differences:
Foreign income............................... -- 1,741 229
Merger related expenses...................... 384 329 175
Nonconsolidated subsidiary loss.............. -- -- 665
Stock based compensation..................... 1,051 (379) 125
Tax exempt interest income................... (175) (4,223) (4,241)
Other........................................ 316 2,706 2,922
State taxes, net of federal benefit............ 1,029 866 4,493
------ ------- -------
$6,860 $ 7,354 $32,725
====== ======= =======
NOTE 16 -- SUBSEQUENT EVENTS-UNAUDITED:
Litigation
On January 26, 2001, the Court issued a ruling dismissing all claims
against eBay in the Gentry et.al lawsuit. The Court ruled that eBay's business
falls within the safe harbor provisions of 47 USC 230, which grants internet
service providers such as eBay with immunity from state claims based on the
conduct of third parties. The Court also noted that eBay was not a "dealer"
under California law and thus not required to provide certificates of
authenticity with autographs sold over its site by third parties. All counts of
the plaintiffs' suit were dismissed with prejudice as to eBay. Plaintiffs
appealed this ruling. eBay believes it has meritorious defenses and intends to
defend itself vigorously.
In February 2001, the parties settled the Bidder's Edge lawsuit. All claims
by both parties were dismissed, and Bidder's Edge paid eBay an undisclosed
amount.
GO.com
In January 2001, Disney announced that it was dissolving GO.com;
consequently, eBay is currently in the process of renegotiating new contract
terms with Disney.
83
85
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Internet Auction
On February 15, 2001, eBay acquired a majority interest in Internet Auction
Co., Ltd., a South Korean company ("Internet Auction"). Internet Auction
introduced person-to-person trading in Korea when it launched in April 1998.
Internet Auction is listed on the KOSDAQ and is expected to continue to trade on
KOSDAQ.
In connection with the acquisition of the majority interest in Internet
Auction, eBay acquired 6,274,795 of the outstanding shares, slightly more than
50%, at a fixed price of 24,000 Korean won per share or approximately $120
million in the aggregate. The transaction will be accounted for using the
purchase method of accounting and accordingly, the purchase price will be
allocated to the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values on the acquisition date.
iBazar S.A.
On February 21, 2001, eBay signed an agreement to acquire iBazar S.A.
(iBazar). iBazar is based in Paris and introduced online, person-to-person
trading in France when it launched in October 1998. Currently, iBazar has
websites in Belgium, Brazil, France, Italy, the Netherlands, Portugal, Spain,
and Sweden.
As consideration for 100% of the outstanding shares of iBazar, eBay will
issue approximately 2,250,000 shares of eBay's common stock, subject to a
minimum valuation of approximately $66 million and a maximum valuation of
approximately $112 million, based on the value of eBay's stock at closing. The
acquisition will be accounted for as a purchase business combination and is
subject to various regulatory approvals.
Sale of property
In March 2001, Butterfields sold its Chicago property for approximately
$4.5 million in cash.
NOTE 17 -- QUARTERLY FINANCIAL DATA-UNAUDITED
The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters ended December 31, 2000. In
the opinion of eBay's management, this quarterly information has been prepared
on the same basis as the consolidated financial statements and includes all
adjustments necessary to present fairly the information for the periods
presented. The results of operations for any quarter are not necessarily
indicative of results for the full year or for any future period. The quarterly
financial data
84
86
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
for the quarters presented below have been restated to reflect the acquisitions
of Billpoint, Butterfields, Kruse, alando.de.ag and Half.com which were
accounted for as poolings of interest.
QUARTERLY FINANCIAL DATA
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
2000
Net revenues as previously reported.......... $ 85,753 $ 97,399 $113,377 $134,008
Adjustment as a result of pooled entities.... 134 753 -- --
-------- -------- -------- --------
Net revenues................................. $ 85,887 $ 98,152 $113,377 $134,008
======== ======== ======== ========
Gross profit as previously reported.......... $ 62,481 $ 73,756 $ 89,465 $110,054
Adjustment as a result of pooled entities.... 23 192 -- --
-------- -------- -------- --------
Gross profit................................. $ 62,504 $ 73,948 $ 89,465 $110,054
======== ======== ======== ========
Net income as previously reported............ $ 6,288 $ 11,590 $ 15,211 $ 23,865
Adjustment as a result of pooled entities.... (4,530) (4,131) -- --
-------- -------- -------- --------
Net income................................... $ 1,758 $ 7,459 $ 15,211 $ 23,865
======== ======== ======== ========
Net income per share-basic as previously
reported................................... $ 0.02 $ 0.05 $ 0.06 $ 0.09
Adjustment as a result of pooled entities.... (0.01) (0.02) -- --
-------- -------- -------- --------
Net income per share-basic*.................. $ 0.01 $ 0.03 $ 0.06 $ 0.09
======== ======== ======== ========
Net income per share-diluted as previously
reported................................... $ 0.02 $ 0.04 $ 0.05 $ 0.09
Adjustment as a result of pooled entities.... (0.01) (0.01) -- --
-------- -------- -------- --------
Net income per share-diluted*................ $ 0.01 $ 0.03 $ 0.05 $ 0.09
======== ======== ======== ========
Shares used in per share
calculation-basic*......................... 242,658 249,828 255,741 259,789
Shares used in per share
calculation-diluted*....................... 281,344 280,483 280,297 279,822
85
87
EBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1999
Net revenues as previously reported.......... $ 34,010 $ 49,479 $ 58,525 $ 73,919
Adjustment as a result of pooled entities.... 8,791 -- -- --
-------- -------- -------- --------
Net revenues................................. $ 42,801 $ 49,479 $ 58,525 $ 73,919
======== ======== ======== ========
Gross profit as previously reported.......... $ 28,889 $ 38,534 $ 41,444 $ 52,334
Adjustment as a result of pooled entities.... 5,935 -- -- --
-------- -------- -------- --------
Gross profit................................. $ 34,824 $ 38,534 $ 41,444 $ 52,334
======== ======== ======== ========
Net income as previously reported............ $ 5,896 $ 816 $ 1,352 $ 4,895
Adjustment as a result of pooled entities.... (2,131) -- (166) (1,095)
-------- -------- -------- --------
Net income................................... $ 3,765 $ 816 $ 1,186 $ 3,800
======== ======== ======== ========
Net income per share-basic as previously
reported................................... $ 0.03 $ 0.00 $ 0.01 $ 0.02
Adjustment as a result of pooled entities.... (0.01) -- -- --
-------- -------- -------- --------
Net income per share-basic*.................. $ 0.02 $ 0.00 $ 0.01 $ 0.02
======== ======== ======== ========
Net income per share-diluted as previously
reported................................... $ 0.02 $ 0.00 $ 0.00 $ 0.02
Adjustment as a result of pooled entities.... (0.01) -- -- (0.01)
-------- -------- -------- --------
Net income per share-diluted*................ $ 0.01 $ 0.00 $ 0.00 $ 0.01
======== ======== ======== ========
Shares used in per share
calculation-basic*......................... 195,363 214,062 227,975 233,125
Shares used in per share
calculation-diluted*....................... 264,654 273,580 276,179 277,844
86
88
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EBAY INC.
Date: March 28, 2001
PRINCIPAL EXECUTIVE OFFICER: PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL
ACCOUNTING OFFICER:
By: /s/ MARGARET C. WHITMAN By: /s/ RAJIV DUTTA
- -------------------------------------------- --------------------------------------------
Margaret C. Whitman Rajiv Dutta
President and Chief Executive Officer Senior Vice President, Chief Financial
Officer
ADDITIONAL DIRECTORS:
By: /s/ PIERRE M. OMIDYAR By: /s/ PHILIPPE BOURGUIGNON
- -------------------------------------------- --------------------------------------------
Pierre M. Omidyar Philippe Bourguignon
Founder, Chairman of the Board and Director Director
By: /s/ SCOTT D. COOK By: /s/ ROBERT C. KAGLE
- -------------------------------------------- --------------------------------------------
Scott D. Cook Robert C. Kagle
Director Director
By: /s/ DAWN G. LEPORE By: /s/ HOWARD D. SCHULTZ
- -------------------------------------------- --------------------------------------------
Dawn G. Lepore Howard D. Schultz
Director Director
87
89
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
2.01 Agreement and Plan of Merger and Reorganization among
Registrant, Margarine Acquisition Sub Corp., Butterfield &
Butterfield Auctioneers Corp, HBJ Partners, LLC and 111
Potrero LLC.(6)
2.04 Agreement and Plan of Merger and Reorganization among
Registrant and Kruse, Inc.(5)
2.05 Agreement and Plan of Merger and Reorganization among
Registrant and Billpoint, Inc.(6)
3.01 Registrant's Amended and Restated Certificate of
Incorporation.(2)
3.02 Registrant's Certificate of Amendment of Certificate of
Incorporation.
3.03 Registrant's Corrected Certificate of Certificate of
Amendment of Certificate of Incorporation of Registrant.
3.04 Registrant's Amended and Restated Bylaws.(2)
4.01 Form of Specimen Certificate for Registrant's Common
Stock.(1)
4.02 Investor Rights Agreement, dated June 20, 1997, between the
Registrant and certain stockholders named therein.(1)
10.01 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers.(1)
10.02 Registrant's 1996 Stock Option Plan and related
documents.(1)
10.03 Registrant's 1997 Stock Option Plan and related
documents.(1)
10.04 Registrant's 1998 Equity Incentive Plan and related
documents.(1)
10.05 Registrant's 1998 Directors Stock Option Plan and related
documents.(1)
10.06 Amendment No. 1 to Registrant's 1998 Directors Stock Option
Plan.(3)
10.07 Registrant's 1998 Employee Stock Purchase Plan.(1)
10.08 Registrant's 1999 Global Equity Incentive Plan and related
documents.(10)
10.09 Employment Letter Agreement dated October 16, 1996 between
Jeff Skoll and Registrant.(1)
10.10 Employment Letter Agreement dated September 15, 1997 between
Gary Bengier and Registrant.(1)
10.11 Employment Letter Agreement dated January 16, 1998 between
Margaret C. Whitman and Registrant.(1)
10.12 Employment Letter Agreement dated August 14, 1998 between
Brian T. Swette and Registrant.(1)
10.13 Employment Letter Agreement dated August 20, 1998 between
Michael R. Jacobson and Registrant.(1)
10.14 Offer Letter to Maynard Webb.(8)
10.15 Retention Bonus Plan between Registrant and Maynard Webb,
dated January 10, 2001.
10.16 Offer Letter to Jeffrey D. Jordan.(8)
10.17 Retention Bonus Plan between Registrant and Jeffrey D.
Jordan, dated May 16, 2000.
10.18 Lease between eBay Realty Trust and Registrant, dated March
1, 2000.(9)
10.19 Cash Collateral Agreement between Registrant and Chase
Manhattan Bank as Agent, Dated March 1, 2000.(9)
21.01 List of Subsidiaries.
23.01 PricewaterhouseCoopers LLP consent.
- ---------------
(1) Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 (No. 33-59097) filed in connection with eBay's initial public
offering and incorporated by reference herein.
(2) Previously filed as an Exhibit to the Registrant's Form 10-Q filed on
November 13, 1998 and incorporated by reference herein.
(3) Previously filed as an Exhibit to Registrant's Registration Statement on
Form S-1 (No. 33-75009) filed on March 25, 1999 and incorporated by
reference herein.
90
(4) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1998 and incorporated by reference herein.
(5) Previously filed as an Exhibit to the Registrant's Form 8-K filed on May 8,
1999 and incorporated by reference herein.
(6) Previously filed as an Exhibit to the Registrant's Form 8-K filed on June
7, 1999 and incorporated by reference herein.
(7) Previously filed as an Exhibit to the Registrant's Form 10-Q filed on
November 15, 1999 and incorporated by reference herein.
(8) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-3 (No. 333-88205) filed on September 30, 1999 and incorporated by
reference herein.
(9) Previously filed as an Exhibit to the Registrant's Form 10-K for the fiscal
year ended December 31, 1999 and incorporated by reference herein.
(10) Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-8 (No. 333-41944) filed on July 21, 2000 and incorporated by
reference herein.