UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
!!!! Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
Annual December 31, 1998.
"""" Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
Transition Period from to .
OR
Commission File Number 000-24821
eBay Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction
of Incorporation or Organization)
77-0430924
(I.R.S. Employer
Identification Number)
2005 Hamilton Avenue, Suite 350, San Jose, CA 95125
(Address of Principal Executive Offices, Including Zip Code)
(408) 558-7400
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes #
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, 1999 there were 120,817,222 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, 1999 was approximately $2,974,224,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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eBAY INC.
FORM 10-K
For the Year Ended December 31, 1998
TABLE OF CONTENTS
PART I
ITEM 1:
ITEM 2:
ITEM 3:
ITEM 4:
PART II
ITEM 5:
ITEM 6:
ITEM 7:
ITEM 7A:
ITEM 8:
ITEM 9:
PART III
Business ................................................................................................................. .
Properties ............................................................................................................... .
Legal Proceedings...................................................................................................................
Submission of Matters to a Vote of Security Holders.............................................................
Market for Registrant’s Common Equity and Related Stockholder Matters ..........................
Selected Consolidated Financial Data.....................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of
Operations...............................................................................................................................
Quantitative and Qualitative Disclosures about Market Risk .................................................
Financial Statements and Supplemental Data .........................................................................
Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure ...............................................................................................................................
ITEM 10:
ITEM 11:
ITEM 12:
ITEM 13:
Directors and Executive Officers of the Registrant ................................................................
Executive Compensation ........................................................................................................
Security Ownership of Certain Beneficial Owners and Management ....................................
Certain Relationships and Related Party Transactions ...........................................................
PART IV
ITEM 14:
Exhibits, Financial Statement Schedules and Reports on Form 8-K ......................................
Signatures:.....................................................................................................................................................
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PART I
Item 1: Business
This Annual Report on Form 10-K contains forward-looking statements based on our current expectations
about our company and our industry. You can identify these forward-looking statements when you see us using
words such as “expect,” “anticipate,” “estimate” and other similar expressions. These forward-looking statements
involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-
looking statements as a result of the factors described in the “Risk Factors” section of Management’s Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere in this report. We undertake no
obligation to publicly update any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
The Company
eBay Inc. (“eBay” or the “Company”) is the world’s largest and most popular person-to-person trading
community on the Internet, based on the number of items listed, number of users and minutes of usage per month.
eBay, which was formed as a sole proprietorship in September 1995, incorporated in California in May 1996, and
reincorporated in Delaware in April 1998, pioneered online person-to-person trading. The Company has developed a
Web-based community in which buyers and sellers are brought together in an efficient and entertaining auction
format to buy and sell items such as antiques, coins, collectibles, computers, memorabilia, stamps and toys. The
eBay service permits sellers to list items for sale, buyers to bid on items of interest and all eBay users to browse
through listed items. The Company’s 24-hour-a-day, seven-day-a-week service is fully automated, topically
arranged, intuitive and easy to use. From December 31, 1997 to December 31 1998, the number of registered eBay
users grew from approximately 340,000 to over 2.1 million. eBay hosted over 13.6 million auctions during the
fourth quarter of 1998, up from 2.0 million auctions in the fourth quarter of 1997. As of December 31, 1998, the
Company had over 1.0 million auctions listed in over 1,000 categories. The Company believes that this critical mass
of buyers, sellers and items listed for sale creates a cycle that helps eBay to continue to grow its user base. Sellers
are attracted to eBay as a result of the large number of potential buyers, and buyers in turn are attracted to eBay by
the broad selection of goods listed on eBay. Browsers and buyers can search auction listings for specific items or
search by category, key word, seller name, recently commenced auctions or auctions about to end. eBay’s auction
format creates a sense of urgency among buyers to bid for goods and creates an entertaining and compelling trading
environment. eBay also provides buyers and sellers a place to socialize and to discuss topics of common interest.
This compelling trading environment fosters a large and growing commerce-oriented online community.
Industry Background
Growth of the Internet and Online Commerce
The Internet has emerged as a global medium enabling millions of people worldwide to share information,
communicate and conduct business electronically. International Data Corporation (“IDC”) estimates that the number
of Web users will grow from approximately 150 million worldwide in 1998 to approximately 500 million worldwide
by the end of 2003.
The growing adoption of the Web represents an enormous opportunity for businesses to conduct commerce
over the Internet. IDC estimates that commerce over the Internet will increase from approximately $40 billion
worldwide in 1998 to approximately $900 billion worldwide in 2003. While companies initially focused on
facilitating and conducting transactions between businesses over the Internet, the business-to-consumer market has
also become a significant market and is rapidly growing. These companies typically use the Internet to offer
standard products and services that can be easily described with graphics and text and do not necessarily require
physical presence for purchase, such as books, CDs, videocassettes, automobiles, home loans, airline tickets and
online banking and stock trading. The Internet gives these companies the opportunity to develop one-to-one
relationships with customers worldwide from a central location without having to make the significant investments
required to build a number of local retail presences or develop the printing and mailing infrastructure associated with
traditional direct marketing activities. While companies have generally focused on applying these benefits in
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business-to-business and business-to-consumer transactions, a significant market opportunity exists to apply these
same advantages to facilitate person-to-person trading over the Internet.
The Person-to-Person Trading Market Opportunity
The exchange of goods among individuals and small dealers—person-to-person trading—traditionally has been
conducted through trading forums such as classified advertisements, collectibles shows, garage sales and flea
markets or through intermediaries, such as auction houses. These markets are highly inefficient for the following
reasons:
•
•
•
•
their fragmented, regional nature makes it difficult and expensive for buyers and sellers to meet, exchange
information and complete transactions;
they offer a limited variety and breadth of goods;
they often have high transaction costs from intermediaries; and
they are information inefficient, as buyers and sellers lack a reliable and convenient means of setting prices
for sales or purchases.
Despite these inefficiencies, the Company believes that the market for traditional person-to-person trading in the
U.S., based upon estimates of the amounts spent through auctions, classified ads and on collectibles, exceeded $100
billion in goods sold in 1998.
The Internet offers for the first time the opportunity to create a compelling global marketplace that overcomes
the inefficiencies associated with traditional person-to-person trading while offering the benefits of Internet-based
commerce to the person-to-person trading market. 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 continually updated
information; and
fosters a sense of community through direct buyer and seller communication, thereby enabling interaction
between individuals with mutual interests.
In addition, this community orientation, facilitation of direct buyer and seller communication and efficient access to
information on a particular buyer or seller’s trading history can help alleviate the risks of anonymous trading. As a
result, there exists a significant market opportunity for an Internet-based centralized trading place that applies the
unique attributes of the Internet to facilitate person-to-person trading.
The eBay Solution
eBay pioneered person-to-person trading of a wide range of goods over the Internet using an efficient and
entertaining auction format and has grown into the largest and most popular person-to-person trading community on
the Internet. The core eBay service permits sellers to list items for sale, buyers to bid for and purchase items of
interest and all eBay users to browse through listed items from any place in the world at any time. eBay offers
buyers a large selection of new and used items that can be difficult and costly to find through traditional means.
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eBay also enables sellers to reach a larger number of buyers more cost-effectively than traditional person-to-person
trading forums.
The eBay service originally was introduced in September 1995 to create an efficient marketplace for
individuals to trade with one another. Begun as a grassroots online trading community, eBay primarily attracted
buyers and sellers through word of mouth and by providing buyers and sellers with a place to socialize, to discuss
topics of common interest and ultimately to trade goods with one another. The number of categories under which
eBay users list goods for auction has grown from 10, when eBay was first introduced, to more than 1,000 as of
December 31, 1998. Categories on eBay currently include antiques, coins, collectibles, computers, memorabilia,
stamps and toys.
The principal reasons for eBay’s success are the following:
Largest Online Trading Market. Unlike traditional person-to-person trading forums, eBay has aggregated a
critical mass of buyers, sellers and items listed for sale. As a result, eBay has become the largest online person-to-
person trading market. As of December 31, 1998, eBay had over 2.1 million registered users and offered more than
1,000 product categories with over 1.0 million items for auction, many of which were unique or otherwise hard to
find. The Company believes that this critical mass of buyers, sellers and items listed for sale creates a cycle that
helps eBay continue to grow its user base. Sellers are attracted to eBay as a result of the large number of potential
buyers and buyers in turn are attracted to eBay by the broad selection of goods listed on eBay.
Compelling Trading Environment. eBay has created a distinctive trading environment by utilizing an
entertaining auction format, establishing procedural rules and promoting community values that are designed to
facilitate trade and communications between buyers and sellers, without the need for eBay to intervene and play a
significant role in the trading process. The auction format creates a sense of urgency among buyers to bid for goods
because of the uncertain future availability of a unique item on the website. Similarly, by accepting multiple bids at
increasing prices, its auction format provides sellers a more efficient means of obtaining a maximum price for their
products. To date, well over 50% of auctions listed on eBay have been successfully completed.
Trust and Safety Programs. The Company has developed a number of programs designed to make users more
comfortable with dealing with an unknown trading partner over the Web. The Company’s Feedback Forum
encourages every eBay user to provide comments and feedback on other eBay users with whom they interact and
offers user profiles that provide feedback ratings and incorporate these comments. In addition, eBay’s recently
expanded SafeHarbor program provides guidelines for trading, helps provide information to resolve user disputes,
responds to reports of misuse of the eBay service and, if necessary, warns or suspends users who violate the terms of
the Company’s user agreement. The Company’s recent trust and safety initiatives, including user verifications,
insurance, integrated escrow and authentications and appraisals, are intended to bolster eBay’s reputation as a safe
place to trade.
Cost-Effective, Convenient Trading. eBay allows its buyers and sellers to bypass traditionally expensive,
regionally fragmented intermediaries and transact business on a 24-hour-a-day, seven-day-a-week basis. Because
eBay carries no inventory, sellers bypass costly traditional intermediaries, thus allowing for lower selling costs and
increasing the sellers’ likelihood of finding buyers willing to pay his or her target price. To list an item on eBay,
sellers pay only a nominal placement fee ranging from $0.25 to $2.00 and then pay an additional success fee that
steps down from 5% to 1.25% of the transaction value only if an auction is concluded with a successful bid. As a
result, sellers for the first time can sell relatively inexpensive items which had previously been prohibitively
expensive to list through most traditional trading forums. By allowing sellers to conveniently reach a broad range of
buyers, eBay also addresses the time-consuming, logistical inconvenience of individual selling. Buyers have access
to a broad selection of items and avoid the need to pay expensive markups or commissions to intermediaries. Buyers
are not charged for trading through eBay. The critical mass of items listed on eBay provides a mutual benefit for
buyers and sellers to more effectively determine an appropriate price for an item.
Strong Community Affinity. The Company believes that fostering direct interaction between buyers and
sellers with similar interests has enabled it to create a loyal, active community of users. eBay has introduced a
variety of features and services designed to strengthen this sense of community among eBay users. The Company
facilitates communications between buyers and sellers by offering chat rooms, bulletin boards and customer support
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assistance from eBay personnel and other eBay users and by providing “About Me” user pages and community
features that are designed to encourage consumer loyalty and repeat usage.
Intuitive User Experience. The eBay service is a fully automated, topically arranged, intuitive and easy-to-use
online service that is available on a 24-hour-a-day, seven-day-a-week basis. Within minutes of completing a simple
online form, a seller can list items for sale on the service, and buyers can submit bids for items quickly and easily.
Buyers can easily search the hundreds of thousands of items listed by category or specific item. During the course of
the auction, bidders are notified by email of the status of their bids on a daily basis and are notified immediately if
they are outbid. Sellers and successful bidders are automatically notified when an auction is completed. To assist
users further, the Company offers customer support via email, staffed on a 24-hour-a-day, seven-day-a-week basis.
eBay Strategy
The Company’s objective is to build upon its position as the world’s leading online person-to-person trading
community. The key elements of eBay’s strategy are:
Expand the eBay Community and Strengthen the eBay Brand. The Company believes that building greater
awareness of the eBay brand within and beyond the eBay community is critical to expanding its user base and to
maintaining the vitality of the eBay community. Although the Company’s historical growth has been largely
attributable to word of mouth, the Company has introduced aggressive marketing efforts to build its user base and its
brand name. In October 1998, the Company launched a substantial ongoing national advertising campaign, both in
traditional media and online, that is designed to attract new eBay users. The campaign has included advertising in
targeted publications, strategic advertising and sponsorship placements on high traffic websites, a major radio
advertising campaign and active participation in other forums such as selected trade shows. The Company has
benefited from frequent and high visibility media exposure both nationally and locally. In August 1998, the
Company entered into a three-year marketing relationship with AOL whereby eBay will be prominently featured in
areas of AOL’s proprietary service and on AOL.com. In March 1999, the Company expanded the scope of its
strategic relationship with AOL. Under this new four-year agreement, eBay will be given a prominent presence
featuring it as the preferred provider of person-to-person trading services on AOL’s proprietary services, AOL.com,
Digital Cities, ICQ, CompuServe and Netscape. The Company is focusing on reinforcing its brand within the
existing eBay community through marketing programs on the eBay website and sales of eBay-branded merchandise.
See “Marketing.”
Broaden the eBay Trading Platform. The Company intends to pursue a multi-pronged strategy for growing
the eBay platform within existing product categories, across new product categories and regionally. The Company
will target key product categories in its user programs and marketing activities. The Company has expanded and
developed existing product categories by introducing category-specific bulletin boards and chat rooms, integrating
category-specific content, advertising its service in targeted publications and participating in targeted trade shows. In
addition, the Company intends to broaden the range of products offered on its trading platform by seeking to attract
new users from the general audience of Internet users and adding product categories, content and other services or
features to meet this new user demand.
Foster eBay Community Affinity. The Company believes that it has developed the largest and one of the most
loyal person-to-person trading communities on the Web and that enhancing the eBay community experience will
help the Company foster further growth and a greater sense of loyalty among eBay users. The Company seeks to
maintain a critical mass of frequent buyers and sellers with a vested interest in the eBay community so that sellers
will continue to be attracted to the service by the large number of potential buyers and buyers will be attracted to
eBay by the large number of items listed by these sellers. The Company’s recent trust and safety initiatives,
including user verifications, insurance, integrated escrow and authentications and appraisal, are intended to bolster
eBay’s reputation as a safe place to trade. Consistent with its desire to foster community, the Company has
organized a charitable fund, known as the eBay Foundation, and intends to involve 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.”
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Enhance Features and Functionality. The Company intends to update and enhance the features and
functionality of eBay frequently in order to continue to improve the user trading experience through eBay. The
Company recently introduced personalization features such as About Me, which offers users the opportunity to
create their own personal home page free of charge on eBay. In January 1999, the Company initiated a proprietary
presentation format in the “Antiques” category, the Gallery, which showcases auction items in a catalog of pictures
rather than text. The Company plans to introduce the Gallery to other eBay categories in 1999. The Company
intends to introduce other features, such as new auction formats, category-specific content, the ability to search for
auction items being sold within driving distance of an identified region and other features designed to enhance the
eBay experience. The Company will continue to provide rapid system response and transaction processing time by
investing in its infrastructure in order to accommodate additional users, content and auctions.
Expand Value-Added Services. In order to offer an “end-to-end” person-to-person trading service, the
Company intends to provide a variety of pre- and post-trade services to enhance the user experience. The Company
intends to introduce new services and expand current ones, such as its SafeHarbor program, to facilitate the
exchange of goods so that buyers and sellers will feel more comfortable sending money or goods to an unknown
trading partner. The Company recently improved its Feedback Forum to distinguish between transaction-specific
feedback and general feedback, provided integrated third-party escrow services and has announced that it intends to
establish a Verified eBay User program to encourage users to provide eBay with additional identity verification.
eBay recently implemented a free insurance program that generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating. The Company anticipates that future services may include
pre-trade services, such as services to facilitate scanning and uploading of photographs of listed items and
authentication and appraisal services, and post-trade services, such as third-party escrow services, arrangements to
facilitate shipment of products and methods to facilitate buyers’ payments to sellers, such as credit card services.
The Company may pursue strategic relationships with third parties to provide many of these value-added services.
Develop International Markets. The Company believes that the Internet provides a significant opportunity for
the creation of a global person-to-person trading market. The Company intends to take advantage of this opportunity
by leveraging the eBay service and brand name internationally by developing eBay for selected international
markets and marketing and promoting these services actively. The Company has introduced country-specific home
pages for Canada and the United Kingdom and has entered into a joint venture with a subsidiary of one of the largest
media companies in Australia and New Zealand. The Company believes that its user base already includes users
located in over 50 countries.
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The eBay Service
The eBay trading platform is a robust, Internet-based, person-to-person centralized trading place 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
auction, 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 and the United Kingdom may instead register through a country-specific home page.
Buying on eBay. Buyers typically enter eBay through its home page, which contains a listing of product
categories that allows for easy exploration of current auctions. Bidders can search for specific items by browsing
through a list of auctions within a category or subcategory and then “click through” to a detailed description for a
particular item. Bidders also can search specific categories or the entire database of auction listings using keywords
to describe the types of products in which they are interested, and eBay’s search engine will generate a list of
relevant auctions with links to the detailed descriptions. Each auction is assigned a unique identifier so that users can
easily search for and track specific auctions. Users also can search for a particular bidder or seller by name in order
to review his or her auction and feedback history. Within each category section, eBay highlights auctions
commenced within the past 24 hours in a “New Today” section; auctions ending on that day in an “Ending Today”
section; and auctions ending within three hours under a “Going, Going, Gone” section. Once a bidder has found an
item of interest and registered with eBay, the bidder enters the maximum amount he or she is willing to pay at that
time. In the event of competitive bids, the eBay service automatically increases bidding in increments based upon
the then current highest bid for the item, up to the bidder’s maximum price. As eBay encourages direct interaction
between buyers and sellers, bidders wishing additional information about a listed item can access the seller’s email
address and contact the seller for additional information. The Company believes that this interaction between
bidders and sellers leverages the personal, one-on-one nature of person-to-person 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 bidders and automatically updates the item’s auction status. During the
course of the auction, eBay notifies bidders of the status of their bids via email on a daily basis and notifies them
immediately after they are outbid. Bidders are not charged for making bids or purchases through eBay.
Selling on eBay. A seller registered with eBay can list a product for auction by completing a short online
form. The seller selects a minimum price for opening bids for the item and chooses whether the auction will last
three, five or seven 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 opening bids. The
reserve price is not disclosed to bidders. A seller can elect to sell items in individual auctions 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
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receive a watch at the same price and all lower bids would be rejected. To be eligible to hold a Dutch auction, a
seller must have a sufficiently high feedback rating and must have been a registered seller for at least 60 days. A
seller may also specify that an auction will be a private auction. With this format, bidders’ e-mail addresses are not
disclosed on the item screen or bidding history screen.
Sellers pay a nominal placement fee to list items for sale—$0.25 for an auction with a minimum starting price
of less than $10.00, $0.50 for a minimum starting price of $10.00 to $24.99, $1.00 for a minimum starting price of
$25.00 to $49.99 and $2.00 for a minimum starting price of $50.00 or more. By paying incremental placement fees,
sellers can have items featured in various ways. The seller can highlight his or her auctions by utilizing a bold font
for the auction heading for an additional fee of $2.00. A seller with a favorable feedback rating can have his or her
auction featured as a “Featured Auction” for $99.95, which allows the seller’s item to be rotated on the eBay home
page, or as a “Category Featured Auction” for $14.95, which allows his or her item to be featured within a particular
eBay category. The seller can choose to place a seasonal icon (such as a shamrock in connection with St. Patrick’s
Day) next to his or her listing for $1.00. A seller can also include a description of the product with links to the
seller’s website. In addition, the seller can include a photograph in the description if the seller posts the photograph
on a website and provides eBay with the appropriate Web address. Items auctioned in the Gallery section of the
“Antiques” category are all showcased in a catalog of pictures rather than text. A seller who uses a photograph in his
or her listing can have this photograph included in the Gallery section for $0.25 or featured in the Gallery section for
$19.95. The Company plans to introduce this proprietary presentation format to other eBay categories in 1999.
During the course of an auction, sellers are notified of the status of their auctions on a daily basis via email.
How Transactions are Completed. At the end of an auction period, if a bid exceeds the minimum price and, if
one is set, the reserve price, eBay automatically notifies the buyer and seller via email and the buyer and seller can
then consummate the transaction independently of eBay. At the time of the email notification, eBay charges the
seller a success fee equal to 5% of the first $25 of the purchase price, 2.5% of that portion of the purchase price from
$25.01 to $1,000, and 1.25% of that portion of the purchase price over $1,000. At no point during the process does
the Company take possession of either the item being sold or the buyer’s payment for the item. Rather, the buyer
and seller must independently arrange for the shipment of and payment for the item, with the buyer typically paying
for shipping. A seller can view the buyer’s feedback rating and then determine the manner of payment, such as
personal check, cashier’s check or credit card, and also whether to ship the item before or after the payment is
received. Under the terms of the Company’s user agreement, if a seller receives one or more bids above the stated
minimum or reserve price, whichever is higher, the seller is obligated to complete a transaction, although the
Company has no power to force the seller or bidder 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. Invoices for placement fees, additional listing fees and
success fees are sent via email to sellers on a monthly basis. Typically, sellers have a credit card account on file with
eBay and that account is charged shortly after the invoice is sent.
Feedback Forum. eBay pioneered this feature to facilitate the establishment of reputations within its
community by encouraging individuals to record comments about their trading partners on each transaction or other
eBay users with whom they have interacted. Every registered eBay user has a feedback profile containing
compliments, criticisms and other comments by users who have conducted business or interacted with the person. A
recent enhancement to the Feedback Forum permits users to differentiate between transaction-specific feedback and
general feedback. 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. Users who have developed positive reputations over time will have a
star symbol displayed next to their user name, which is color coded to indicate the amount of positive feedback as
compared to negative feedback received by the user. eBay users may review a person’s feedback profile to check on
the person’s reputation within the eBay community before deciding to bid on an item listed by that person or in
determining how to complete the payment for and delivery of the item.
The terms of the Company’s user agreement prohibit actions that would undermine the integrity of the
Feedback Forum, such as a person’s leaving positive feedback about himself or herself through other accounts or
leaving multiple negative feedback for others through other accounts. The Feedback Forum system has several
automated features designed to detect and prevent some forms of abuse. For example, feedback posting from the
same account, positive or negative, cannot affect a user’s net feedback rating (i.e., the number of positive postings,
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less the number of negative postings) by more than one point, no matter how many comments an individual makes.
Furthermore, in order to discourage users from registering for the purpose of leaving excessive positive or negative
feedback, a user must be registered with eBay for at least five days in order to leave feedback. Users who receive a
sufficiently negative net feedback rating have their registrations suspended and are unable to bid on or list items for
sale. The Company believes its Feedback Forum is extremely useful in overcoming initial user hesitancy when
trading over the Web as it reduces the anonymity and uncertainty of dealing with an unknown trading partner. See
“Risk Factors—We are subject to risks associated with information disseminated through our service.”
Trust and Safety Initiatives. The Company has developed a number of programs designed to make users more
comfortable with dealing with an unknown trading partner over the Web. In addition to the Feedback Forum, the
Company offers the SafeHarbor program, which provides guidelines for trading, helps provide information to
resolve user disputes and responds to reports of misuses of the eBay service. The Company’s SafeHarbor staff of 28
persons, including regular employees and contractors, investigates users’ complaints of possible misuse of eBay and
takes appropriate action, including issuing warnings to users or suspending users from bidding on or listing items for
sale. Some of the complaints the SafeHarbor staff investigates include various forms of bid manipulation, malicious
posting of negative feedback and posting illegal items for sale. The SafeHarbor staff also provides information to
assist users with disputes over the quality of the goods sold or other fraudulent activity and, upon receipt of an
officially filed, written claim of fraud from a user, will generally suspend the offending user from eBay. Also, upon
receipt of a written claim of intellectual property infringement by the owner of the intellectual property, the
Company will remove the offending item from eBay. Users who infringe intellectual property rights more than once
are suspended. To assist intellectual property owners, the Company is developing numerous tools, including an
automated daily key word search that will enable owners to locate quickly potentially infringing auction items and
dedicated email accounts established solely for owners to more easily contact eBay with regard to questionable
items. In addition, the Company has increased the number of personnel reviewing potentially illegal items. The
Company’s trust and safety initiatives, including user verifications, insurance, integrated escrow and authentications
and appraisals, are intended to bolster eBay’s reputation as a safe place to trade. See “Risk Factors—Our business
may be harmed by fraudulent activities on our website.”
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 1,000 categories as of December 31, 1998. As
the number of product categories has grown, the Company periodically organizes the categories under different
headings to reflect the major types of items currently listed. As of December 31, 1998, these product categories were
organized under the following headings:
Antiques
Books, Movies, Music
Coins & Stamps
Collectibles
Computers
Dolls, Figures
Jewelry, Gemstones
Photo & Electronics
Pottery & Glass
Sports Memorabilia
Toys & Beanie Babies
Miscellaneous
Each category has numerous subcategories. As of December 31, 1998, eBay offered a selection of over 1.0
million items, with the most popular items sold on eBay being those that are relatively standardized or are well-
represented with a photo (and therefore can be evaluated to some degree without a physical inspection), are small
and easily shippable, and are relatively inexpensive. As the eBay community grows and additional items are listed,
the Company will continue to organize auctions 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 person-to-person trading community, which the Company believes is one of the
strongest on the Web. Key components of the Company’s community philosophy are maintaining an honest and
open marketplace and treating individual users with respect. The Company offers a variety of community and
support features that are designed to solidify the growth of the eBay community and to build eBay user affinity and
loyalty. eBay facilitates email communications between buyers and sellers by offering:
•
category-specific chat rooms;
10
•
•
•
•
•
the eBay Café (a chat room for the entire eBay community);
a bulletin board devoted to user feedback on new features;
an announcements section that covers new features on eBay or other eBay news;
customer support boards; and
“items wanted” listings where users can post notices seeking specific items.
eBay also offers My eBay, which permits users to receive a report of their recent activity on eBay, including
bidding activity, selling activity, account balances, favorite categories and recent feedback. Users with their own
Web pages also can post link buttons from the user’s page to eBay and to a list of items the user is selling on eBay.
The Company recently introduced About Me, which offers users the opportunity to create their own personal home
page free of charge on eBay using step-by-step instructions provided by the Company. The About Me home page
can include personal information, items listed for auction, eBay feedback ratings, images and links to other favorite
sites.
In addition, in June 1998, the Company donated 321,750 shares of Common Stock to the Community
Foundation Silicon Valley, a tax-exempt donor-advised public charity and established a fund, known as the “eBay
Foundation.” Through the Community Foundation Silicon Valley, the eBay programs abroad and share their
experiences with their students. The Company solicits user suggestions for worthwhile charities through the website.
Customer Support. The Company devotes significant resources to providing personalized, timely customer
service and support. eBay offers customer support on a 24-hour-a-day, 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. The Company offers an online tutorial for new eBay users. In addition, the Company offers the
SafeHarbor program and has recently introduced or is developing a number of trust and safety initiatives. See “—
Trust and Safety Initiatives” above.
Marketing
eBay’s marketing strategy is to promote its brand and attract buyers and sellers to the eBay service. To attract
users to its website, eBay historically has relied primarily on word of mouth and, to a lesser extent, on distribution or
sponsorship relationships with high traffic websites. Today, the Company employs a variety of methods to promote
its brand and attract potential buyers and sellers. Currently, eBay uses strategic purchases of online advertising to
place advertisements in areas in which it believes it can reach its target audience. The Company also engages in a
number of marketing activities in traditional media such as advertising in print media and at trade shows and other
events. eBay also advertises in a number of targeted publications. In October 1998, the Company launched a
substantial national advertising campaign, both in traditional media and online, that is designed to attract new eBay
users. This campaign has included print, a major radio advertising campaign, strategic advertising and sponsorship
placements on high traffic websites and advertising in other media. The Company has benefited from frequent and
high visibility media exposure both nationally and locally. While the Company does not expect the frequency or
quality of this type of publicity to continue, the Company does promote public relations through initiatives such as
online eBay/special event tie-ins and executive speaking engagements. In August 1998, eBay and AOL entered into
a three-year marketing agreement whereby eBay is featured as the preferred provider of person-to-person auction
services in the “Classifieds” and “Interest” areas of AOL’s proprietary service. In addition, eBay receives placement
and promotions on AOL.com, AOL’s website. Over the term of this agreement, the Company will pay AOL $12.0
million. In March 1999, the Company expanded the scope of its strategic relationshop with AOL. Under the
amended agreement, eBay will be given 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. eBay will pay $75 million over the four-year
term of the contract. eBay 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.
11
eBay also engages in a number of on-site marketing programs, including offering a variety of eBay-branded
merchandise through the online “eBay Store.”
Operations and Technology
eBay has built a robust, scalable user interface and transaction processing system that is based on internally-
developed proprietary software. The eBay system handles all aspects of the auction process, including notifying
users via email when they initially register for the service, they place a successful bid, they are outbid, they place an
item for sale and an auction ends. Furthermore, the system sends daily status updates to any active sellers and
bidders regarding the state of their current auctions. The system maintains user registration information, billing
accounts, current auctions and historical listings. All information is regularly archived to a data warehouse.
Complete listings of all items for sale are generated every hour. The system updates a text-based search engine
hourly 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. In addition to these
features, the eBay service also supports a number of community bulletin board and chat areas where users and eBay
support personnel can interact.
The Company’s system has been designed around industry standard architectures and has been designed to
reduce downtime in the event of outages or catastrophic occurrences. The eBay service provides 24-hour-a-day,
seven-day-a-week availability, subject to a short maintenance period for a few hours during one night per week.
eBay’s system hardware is hosted at the Exodus facility in Santa Clara, California, which provides redundant
communications lines and emergency power backup. The Company’s system consists of Sun database servers
running Oracle relational database management systems and a suite of Pentium-based Internet servers running on
the Windows NT operating system. The Company uses Resonate Inc.’s load balancing systems and its own
redundant servers to provide for fault tolerance. The Company has experienced periodic system interruptions, which
it believes will continue to occur from time to time. These outages have stemmed from a variety of causes, including
third-party hardware and software problems and human error. The volume of traffic on the Company’s website and
in the number of auctions being conducted by users has been increasing continually and exponentially, requiring the
Company to expand and upgrade its technology, transaction processing systems and network infrastructure and add
new engineering personnel. The Company may be unable to accurately project the rate or timing of increases, if any,
in the use of the eBay service or timely expand and upgrade its systems and infrastructure to accommodate such
increases in a timely manner. Any failure to expand or upgrade its systems at least as fast as the growth in demand
for capacity could cause the website to become unstable and possibly cease to operate for periods of time.
Unscheduled downtime could harm the Company’s business.
The Company uses internally developed systems to operate its service and for transaction processing, including
billing and collections processing. The Company must continually improve these systems to accommodate the level
of use of its website. In addition, the Company may add new features and functionality to its services that would
result in the need to develop or license additional technologies. The Company’s inability to add additional software
and hardware or to upgrade its technology, transaction processing systems or network infrastructure to accommodate
increased traffic or transaction volume could have adverse consequences. These consequences include unanticipated
system disruptions, slower response times, degradation in levels of customer support, impaired quality of the users’
experience on its service and delays in reporting accurate financial information. The Company’s failure to provide
new features or functionality also could result in these consequences. The Company may not be able to effectively
upgrade and expand its systems in a timely manner or to integrate smoothly any newly developed or purchased
technologies with its existing systems. These difficulties could harm or limit its ability to expand its business. See
“Risk Factors—The inability to expand our systems may limit our growth” and “—System failures could harm our
business.”
The Company incurred $28,000, $831,000 and $4.6 million in product development expenses in 1996, 1997
and 1998, respectively. The Company anticipates that it will continue to devote significant resources to product
development in the future as it adds new features and functionality to the eBay service. The market in which the
12
Company competes is characterized by rapidly changing technology, evolving industry standards, frequent new
service and product announcements, introductions and enhancements and changing customer demands. Accordingly,
the Company’s future success will depend on its ability to adapt to rapidly changing technologies, to adapt its
services to evolving industry standards and to continually improve the performance, features and reliability of its
service in response to competitive service and product offerings and evolving demands of the marketplace. The
failure of the Company to adapt to such changes would harm the Company’s business. In addition, the widespread
adoption of new Internet, networking or telecommunications technologies or other technological changes could
require substantial expenditures by the Company to modify or adapt its 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
The market for person-to-person trading over the Internet is new, rapidly evolving and intensely competitive,
and the Company expects competition to intensify in the future. Barriers to entry are relatively low, and current and
new competitors can launch new sites at a relatively low cost using commercially available software. The Company
currently or potentially competes with a number of other companies. Its direct competitors include various online
person-to-person auction services, including Yahoo! Auctions Powered by Onsale and Excite, Inc., both of which
are free to sellers and buyers, Auction Universe and a number of other small services, including those that serve
specialty or regional markets such as CityAuction. The Company also competes indirectly with business-to-
consumer online auction services such as Onsale, First Auction, Surplus Auction and uBid. A number of traditional
auction companies, including Butterfield & Butterfield and Sotheby’s, are offering or have announced plans to
create Internet auction sites. The Company potentially faces competition from a number of large online communities
and services that have expertise in developing online commerce and in facilitating online person-to-person
interaction. Some of these potential competitors, including Amazon.com, AOL, Lycos, Inc. and Microsoft
Corporation, currently offer business-to-consumer trading services and classified ad services. Some of these
companies also may introduce person-to-person trading to their large user populations. Other large companies with
strong brand recognition and experience in online commerce, such as Cendant Corporation, QVC, USA Network
and large newspaper or media companies, also may seek to compete in the online auction market.
In order to respond to changes in the competitive environment, the Company may, from time to time, make
pricing, service or marketing decisions or acquisitions that could harm its business. For example, the Company
recently implemented a free insurance program that generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating. The financial impact of this insurance program is not yet
known. New technologies may increase competitive pressures on the Company by enabling its competitors to offer a
lower cost service. Some Web-based applications that direct Internet traffic to certain websites may channel users to
trading services that compete with the Company.
Although the Company has established Internet traffic arrangements with several large online services and
search engine companies, these arrangements may not be renewed on commercially reasonable terms. Even if these
arrangements are renewed, they may not result in increased usage of the Company’s service. In addition, companies
that control access to transactions through network access or Web browsers could promote competitors of the
Company or charge it substantial fees for inclusion. See “Risk Factors—Our market is intensely competitive.”
Intellectual Property
The Company regards the protection of its copyrights, service marks, trademarks, trade dress and trade secrets
as critical to its success. The Company relies on a combination of patent, copyright, trademark, service mark and
trade secret laws and contractual restrictions to protect its proprietary rights in products and services. The Company
has entered into confidentiality and invention assignment agreements with its employees and contractors, and
nondisclosure agreements with parties with which its conducts business to limit access to and disclosure of its
proprietary information. These contractual arrangements and the other steps taken by the Company to protect its
intellectual property may not prevent misappropriation of its technology or deter independent third-party
development of similar technologies.
13
The Company has received in the past, and anticipates that it will receive in the future, communications
alleging that certain items listed or sold sold on eBay by its users infringe third-party copyrights, trademarks and
tradenames or other intellectual property rights. To assist the owners of such intellectual property rights in policing
and protecting their intellectual property, the Company developed the Legal Buddy Program. The Legal Buddy
Program provides tools to content owners to detect and respond to infringement. These tools include a soon to be
introduced automated daily key word search that will enable content owners to quickly locate potentially infringing
auction items and dedicated email accounts established solely for owners to more easily contact eBay with regard to
questionable items. Upon receipt of a written claim of intellectual property infringement by a user, the Company
removes the offending item from the eBay website, credits the user with the listing fee and, if not the first offense,
suspends the user. Although the Company has actively sought to work with the content community to eliminate
infringing listings on eBay, some content owners have expressed the view that the Company’s efforts are
insufficient. An allegation of infringement of third-party intellectual property rights may result in litigation against
the Company. Any such litigation could be costly for the Company, could result in increased costs of doing business
through adverse judgment or settlement, could require the Company to change its business practices in expensive
ways, or could otherwise harm the Company’s business. See Legal Proceedings and “Risk Factors—We may not be
able to adequately protect or enforce our intellectual property rights.”
Issues Related to the Listing or Sale by Users of Unlawful Items
The law relating to the liability of providers of online services for the activities of their users on their service is
currently unsettled. The Company is aware that certain goods, such as firearms, other weapons, adult material,
tobacco products, alcohol and other goods that may be subject to regulation by local, state or federal authorities,
have been listed and traded on its service. The Company may be unable to prevent the sale of unlawful goods, or the
sale of goods in an unlawful manner, by users of its service, and the Company may be subject to civil or criminal
liability for unlawful activities carried out by users through its service. In order to reduce its exposure to this
liability, the Company has increased the number of personnel reviewing potentially illegal items and may in the
future implement other protective measures that could require it 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 the Company’s business. In addition,
the Company has received significant media attention relating to the listing or sale of unlawful goods on its website.
A continuation of this negative publicity could damage the Company’s reputation and diminish the value of the
eBay brand name. It could also make users reluctant to continue to use its services. See “Risk Factors—Our business
may be harmed by the listing or sale by our users of illegal items.”
Fraudulent Activities on the eBay Website
The Company’s future success will depend largely upon sellers reliably delivering and accurately representing
their listed goods and buyers paying the agreed purchase price. The Company does not take responsibility for
delivery of payment or goods to any user of the eBay service. The Company has received in the past, and anticipates
that it will receive in the future, communications from users who did not receive the purchase price or the goods that
were to have been exchanged. While the Company can suspend the accounts of users who fail to fulfill their delivery
obligations to other users, the Company does not have the ability to otherwise require users to make payments or
deliver goods or otherwise make users whole other than through the Company’s limited insurance program. Other
than through this program, the Company does not compensate users who believe they have been defrauded by other
users. The Company also periodically receives complaints from buyers as to the quality of the goods purchased. Any
negative publicity generated as a result of fraudulent or deceptive conduct by users of the Company’s service could
damage its reputation and diminish the value of its brand name. The Company may in the future receive additional
requests from users requesting reimbursement or threatening legal action against the Company if no reimbursement
is made. Any resulting litigation could be costly for the Company, divert management attention, result in increased
costs of doing business, lead to adverse judgments or could otherwise harm its business. See “Risk Factors—Our
business may be harmed by fraudulent activities on our website.”
14
Government Inquiries
On January 29, 1999, the Company received requests to produce certain records and information to the federal
government relating to an investigation of possible illegal transactions in connection with the Company’s website.
The Company has been informed that the inquiry includes an examination of the Company’s practices with respect
to these transactions. The Company is fully cooperating with the inquiry. In order to protect the investigation, the
court has ordered that no further public disclosures be made with respect to the matter at this time. Should this or
any other investigation lead to civil or criminal charges against the Company, the Company would likely be harmed
by negative publicity, the costs of litigation, the diversion of management time and other negative effects, even if it
ultimately prevails. The Company’s business would certainly suffer if it were not to prevail in any action like this.
A large number of transactions occur on the eBay website. As a result, the Company believes that government
regulators have received a substantial number of consumer complaints about the eBay website which, while small as
a percentage of the Company’s total transactions, are large in aggregate numbers. As a result, the Company has from
time to time been contacted by various federal, state and local regulatory agencies and been told that they have
questions with respect to the adequacy of the steps the Company takes to protect its users from fraud. For example,
the City of New York-Department of Consumer Affairs received complaints from users about transactions on the
Company’s website. In investigating these complaints, the Department of Consumer Affairs requested information
about the Company and these transactions. The Company has provided the requested information. The Company is
likely to receive additional inquiries from regulatory agencies in the future, which may lead to action against it. The
Company has responded to all inquiries from regulatory agencies by describing its current and planned antifraud
efforts. If one or more of these agencies is not satisfied with its response to current or future inquiries, the resultant
investigations and potential fines or other penalties could harm its business. See “Risk Factors—Government
inquiries may lead to charges or penalties.”
Privacy Policy
The Company believes that issues relating to privacy and use of personal information relating to Internet users
are becoming increasingly important as the Internet and its commercial use grow. The Company has adopted a
detailed privacy policy that outlines how eBay uses information concerning its users and the extent to which other
registered eBay users may have access to this information. Users must acknowledge and agree to this policy when
registering for the eBay service. The Company does not sell or rent any personally identifiable information about its
users to any third party; however, the Company does disclose information to sellers and winning bidders that
contains the seller’s and winning bidder’s name, email address and telephone number. The Company also will
disclose all customer information in its possession (other than credit card information) to a law enforcement agency
or member of the Legal Buddy Program which requests this information in connection with a civil, criminal or
regulatory investigation. The Company also uses information about its users for internal purposes only in order to
improve marketing and promotional efforts, to analyze website usage statistically, and to improve content, product
offerings and website layout. eBay is a member of the TRUSTe program, a non-profit independent organization that
audits websites’ privacy statements and audits their adherence thereto.
New and Existing Regulation of the Internet
The Company is subject to the same federal, state and local laws as other companies conducting business on the
Internet. Today there are relatively few laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and regulations could cover issues such as online
contracts, user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. In addition, numerous states, including the State of California, in which
the Company’s headquarters are located, have regulations regarding the manner in which “auctions” may be
conducted and the liability of “auctioneers” in conducting such auctions. No legal determination has been made with
respect to the applicability of the California regulations to the Company’s business to date and little precedent exists
15
in this area. One or more states may attempt to impose these regulations upon the Company in the future, which
could harm the Company’s business.
Several states have proposed legislation that would limit the uses of personal user information gathered online
or require online services to establish privacy policies. The Federal Trade Commission also has recently started a
proceeding with one online service regarding the manner in which personal information is collected from users and
provided to third parties. Changes to existing laws or the passage of new laws intended to address these issues could
directly affect the way the Company does business or could create uncertainty in the marketplace. This could reduce
demand for the services of the Company or increase the cost of doing business as a result of litigation costs or
increased service delivery costs, or could otherwise harm the Company’s business. In addition, because the
Company’s services are accessible worldwide, and the Company facilitates sales of goods to users worldwide,
foreign jurisdictions may claim that the Company is required to comply with their laws. In some jurisdictions, the
Company will be required to collect value-added taxes on its fees. The Company’s failure to comply with foreign
laws could subject it to penalties ranging from fines to bans on the Company’s ability to offer its services.
16
Item 2: Properties
As of March 24, 1999, the Company’s principal administrative, marketing and product development facilities
are located in approximately 53,000 square feet of office space in San Jose, California under leases and subleases
that expire between December 1999 and November 30, 2004. In addition, the Company recently entered into a lease
covering approximately 103,000 square feet in two buildings in the same office complex as its existing space. This
lease expires on November 30, 2004, with a five-year renewal option. As a result of the Company’s acquisition of
Jump, the Company also has facilities in Cincinnati, Ohio. The Company believes that its existing facilities are
adequate to meet its needs for the immediate future and that future growth can be accommodated by leasing
additional or alternative space near its current facilities.
Item 3: Legal Proceedings
On March 24, 1999 the Company was sued by Network Engineering Software, Inc. in the U.S. District Court
for the Northern District of California for the Company’s alleged willful and deliberate violation of a patent held.
The suit seeks unspecified monetary damages as well as an injunction against the Company’s operations. It also
seeks treble damages and attorneys’ fees and costs. The Company believes that it has meritorious defenses against
this suit and intends to vigorously defend itself. The Company could be forced to incur material expenses during this
defense, and in the event it were to lose this suit its business would be harmed. eBay is also subject to certain
investigations. See “Risk Factors—Government inquiries may lead to charges or penalties.”
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 quarter ended December 31,
1998.
17
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 MarketSM under the symbol “EBAY” since
September 24, 1998. The following table sets forth the high and low sales prices of the Company’s Common Stock
for the periods indicated and are as reported on The Nasdaq Stock MarketSM:
Year Ended December 31, 1998
Third Quarter (from September 24, 1998) ..................................................................................
Fourth Quarter.............................................................................................................................
$ 18.08 $13.71
8.42
103.75
High
Low
As of March 1, 1998, there were approximately 500 stockholders of record of the Company’s Common Stock,
although the Company believes that there is a significantly larger number of beneficial owners of its Common
Stock.
Dividend Policy
The Company has never paid cash dividends on its stock, and anticipates that it will continue to retain its
earnings, if any, to finance the growth of its business.
Use of Proceeds of Initial Public Offering
The effective date of the Company’s first registration statement, filed on Form S-1 under the Securities Act of
1933 (No. 333-59097) relating to the Company’s initial public offering of its Common Stock, was September 23,
1998. A total of 12,042,825 shares of Company’s Common Stock were sold at a price of $6.00 per share to an
underwriting syndicate led by Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation,
BancBoston Robertson Stephens Inc. and BT Alex. Brown Incorporated. The offering commenced on September 24,
1998 and closed on September 29, 1998. An additional 32,175 shares of Common stock were sold on behalf of a
selling stockholder as part of the same offering. The initial public offering resulted in gross proceeds of $72.5
million, $5.1 million of which was applied toward the underwriting discount. Expenses related to the offering totaled
approximately $1.2 million. Net proceeds to the Company and selling stockholder were $66.1 million and $180,000,
respectively. From the time of receipt through December 31, 1998, the proceeds were applied toward:
•
Purchases and installation of machinery and equipment, $2,959,000;
• Repayment of indebtedness, $410,000; and
•
Temporary investments in municipal bonds and notes, $28,114,000.
The remaining proceeds are being used as working capital or are included within cash, cash equivalents and
short-term investments.
18
Item 6: Selected Consolidated Financial Data
The following selected consolidated financial data should be read in conjunction with, and are qualified by
reference to, the Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” appearing elsewhere in this report. The consolidated statement of
income data for the years ended December 31, 1996, 1997 and 1998 and the consolidated balance sheet data at
December 31, 1997 and 1998, are derived from, and are qualified by reference to, the audited consolidated financial
statements of the Company included elsewhere in this report.
Consolidated Statement of Income Data:
Net revenues.........................................................................................................................
Cost of net revenues............................................................................................................ .
Gross profit ................................................................................................................. .
Operating expenses:
Year Ended December 31,
1996(1)
1998
1997
(in thousands, except per share data)
$ 47,352
6,859
40,493
$ 372
14
358
$ 5,744
746
4,998
Sales and marketing .................................................................................................... .
Product development................................................................................................... .
General and administrative.......................................................................................... .
Amortization of acquired intangibles .......................................................................... .
Total operating expenses ..................................................................................... .
Income from operations ...................................................................................................... .
Interest and other income, net ............................................................................................. .
Income before income taxes................................................................................................ .
Provision for income taxes.................................................................................................. .
Net income ...........................................................................................................................
Net income per share(2): .....................................................................................................
Basic.............................................................................................................................
Weighted average shares—basic................................................................................. .
Diluted .........................................................................................................................
Weighted average shares—diluted .............................................................................. .
32
28
45
—
105
253
1
254
(106)
$ 148
1,730
831
950
—
3,511
1,487
56
1,543
(669)
$ 874
19,841
4,606
9,080
805
34,332
6,161
869
7,030
(4,632)
$ 2,398
$ 0.02
6,375
$ 0.00
42,945
$ 0.04
22,313
$ 0.01
82,660
$ 0.05
49,895
$ 0.02
114,590
Supplemental Operating Data:
Number of registered users at end of period ....................................................................... .
Gross merchandise sales(3)................................................................................................. .
Number of auctions listed ................................................................................................... .
41
2,181
$ 7,279 $ 95,271 $ 745,395
33,668
4,394
289
341
Consolidated Balance Sheet Data:
Cash and cash equivalents...............................................................................................................................
Short-term investments ...................................................................................................................................
Working capital...............................................................................................................................................
Total assets......................................................................................................................................................
Debt and leases, long-term portion .................................................................................................................
Series B Mandatorily Redeemable Convertible Preferred Stock and Series B warrants .................................
Total stockholders’ equity...............................................................................................................................
December 31,
1998
1997
(in thousands)
$ 3,723 $ 31,790
— 40,401
75,347
92,483
—
—
84,445
3,843
5,619
305
3,018
1,015
(1)
Includes the results of operations for the Company’s predecessor sole proprietorship from September 1995 to December 1995. The sole
proprietorship had no revenues and immaterial expenses prior to January 1, 1996.
(2) See Note 1 of Notes to Consolidated Financial Statements for a description of the method used to compute basic and diluted net income per
share, respectively.
(3) Represents the aggregate sales prices of all goods for which an auction was successfully concluded (i.e., there was at least one bid above
the seller’s specified minimum price or reserve price, whichever is higher).
19
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
eBay is the world’s largest and most popular person-to-person trading community on the Internet, based on the
number of items listed, number of users and minutes of usage per month. eBay pioneered online person-to-person
trading by developing a Web-based community in which buyers and sellers are brought together in an efficient and
entertaining auction format to buy and sell personal items such as antiques, coins, collectibles, computers,
memorabilia, stamps and toys. The eBay service permits sellers to list items for sale, buyers to bid on items of
interest and all eBay users to browse through listed items. The Company’s 24-hour-a-day, seven-day-a-week service
is fully automated, topically arranged, intuitive and easy to use.
eBay was formed as a sole proprietorship in September 1995 and operated its online auction service under the
name of “Auction Web.” In order to build a critical mass of customers, the Company offered this service without
charge until February 1996. The Company was incorporated in May 1996, but had no employees other than the
founder until July 1996 and, at December 31, 1996, had only six employees. During its first two years, the Company
attracted buyers and sellers almost exclusively through word of mouth. In September 1997, the Company began to
target potential customers and to build and promote its brand through online banner ads and promotions and
advertisements in targeted publications. Also in September 1997, the Company renamed its auction service “eBay”
and launched a second generation of this service with a substantially redesigned user interface and a new robust,
scalable “backend” transaction processing architecture. The Company’s total number of employees increased to 41
by December 31, 1997 and to 138 by December 31, 1998. From December 31, 1997 to December 31, 1998, the
number of registered eBay users grew from approximately 340,000 to over 2.1 million and the number of
simultaneous auctions being conducted through eBay increased from approximately 200,000 to over 1.0 million.
Total gross merchandise sales (the aggregate sales prices of all goods for which an auction was successfully
concluded) grew from approximately $100 million in 1997 to over $740 million in 1998.
Substantially all of the Company’s revenues are derived from placement and success fees paid by sellers. The
Company does not charge fees to buyers and, to date, has chosen to sell almost no advertising on its website. Sellers
pay a nominal placement fee to list items for sale as follows:
•
•
•
•
$0.25 for an auction with a minimum starting price of less than $10.00;
$0.50 for a minimum starting price of $10.00 to $24.99;
$1.00 for a minimum starting price of $25.00 to $49.99; and
$2.00 for a minimum starting price of $50.00 or more.
By paying additional placement fees, sellers can have items featured in various ways. Sellers can highlight their
auctions by utilizing a bold font for the auction heading for an additional fee of $2.00. Sellers with a favorable
feedback rating can have their auctions featured as “Featured Auctions” for $99.95, which allows their items to be
rotated on the eBay home page, or as “Category Featured Auctions” for $14.95, which allows their items to be
featured within a particular eBay product category. Additionally, sellers can add seasonal “icons” (such as a
shamrock in connection with St. Patrick’s Day) next to their listing for $1.00, include a photograph of their item in
the Gallery section for $0.25 or feature their item in the Gallery section for $19.95.
Sellers for whom a three-, five- or seven-day auction is successfully concluded (i.e., there is at least one bid
above the seller’s specified minimum or reserve price, whichever is higher) also pay a success fee for each item sold
that is 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.
20
Revenues from placement fees are recognized at the time that the item is listed; revenues related to success fees
are recognized at the time that the auction is successfully concluded. At no point during the auction process does
eBay take possession of either the item being sold or the buyer’s payment for the item. Fees to sellers are aggregated
and billed on a monthly basis. A substantial majority of customer accounts are settled by directly charging credit
card numbers provided by sellers. Provisions for estimated uncollectible accounts and authorized credits are
recorded as percentages of revenues and are provided for at the time of revenue recognition. In certain instances,
customers will deposit funds with the Company in anticipation of future transactions; these prepayments appear on
the Company’s balance sheet as customer advances.
eBay’s business model is significantly different from many existing online auction and other electronic
commerce businesses. Because individual sellers, rather than eBay, sell the items listed, the Company has no cost of
goods sold, no procurement, carrying or shipping costs and no inventory risk. The Company’s rate of expense
growth is primarily driven by increases in personnel and expenditures for advertising and promotion. The Company
intends to increase its expenses significantly, and in particular its advertising, promotion and personnel expenses, in
an effort to maintain a high level of revenue growth.
Effective June 30, 1998, eBay acquired all of the outstanding shares of Jump Incorporated, the developer and
operator of Up4Sale, an advertising-supported online trading service in an auction format. The acquisition was
accounted for using the purchase method of accounting, and accordingly the purchase price was allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition
date. The fair value of intangible assets was determined using a combination of methods, including replacement cost
estimates for acquired research and development and completed technology, a risk-adjusted income approach for the
acquired customer list and the amounts paid for covenants not to compete. The total purchase price of approximately
$2.3 million consisted of 428,544 shares of 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 as the technology had not reached technological feasibility as of 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), the 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, which range from eight to 24 months.
The Company has operated profitably since the first quarter of 1996, when it began charging fees for its auction
service. The Company has only a limited operating history on which to base an evaluation of its business and
prospects. eBay’s prospects must be considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development, particularly companies in new and
rapidly evolving markets such as online commerce.
It is difficult for the Company to forecast its revenues or earnings accurately. The Company believes that
period-to-period comparisons of its operating results may not be meaningful and should not be relied upon as an
indication of future performance. The Company does not have backlog, and almost all of its net revenues each
quarter are derived from auctions that are listed and completed during that quarter. In order to respond to
competitive developments, the Company may from time to time make pricing, service or marketing decisions that
could harm its business. The Company’s 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 its common stock would almost
certainly decline.
21
Quarterly Results of Operations
The following table sets forth, for the periods presented, certain data from eBay’s consolidated statement of
income, such data as a percentage of net revenues and certain supplemental operating data. The consolidated
statement of income data has been derived from eBay’s unaudited consolidated financial statements, which, in
management’s opinion, have been prepared on substantially the same basis as the audited consolidated financial
statements and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial information for the periods presented. This information should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included elsewhere in this report. The operating
results in any quarter are not necessarily indicative of the results that may be expected for any future period.
Mar. 31,
1997
Three Months Ended
Sep. 30,
June 30,
1998
1997
Mar. 31,
1998
June 30,
1998
Dec. 31,
1997
Sep. 30,
1997
Dec. 31,
1998
(in thousands, except percentages; unaudited)
Net revenues ...................................................
Cost of net revenues .......................................
Gross profit.............................................
$ 604
33
571
$ 1,054 $ 1,459 $ 2,627 $ 5,981 $ 8,941 $ 12,935 $ 19,495
2,103 3,020
127
630
253 333
10,832 16,475
927 1,206 2,294 5,351
1,106
7,835
Operating expenses:
Sales and marketing................................
Product development ..............................
General and administrative .....................
83
58
95
129
151
138
369
257
260
1,149
365
457
2,106
518
1,028
2,504
1,030
3,159
5,476
1,514
2,115
9,755
1,544
2,778
Amortization of acquired intangibles......
Total operating expenses.................
Income from operations..................................
Interest and other income, net.........................
Income before income taxes ...........................
Provision for income taxes .............................
Net income .....................................................
As a percentage of net revenues:
Net revenues. ..................................................
Cost of net revenues .......................................
Gross profit.............................................
Operating expenses:
Sales and marketing................................
Product development ..............................
General and administrative .....................
Amortization of acquired intangibles......
Total operating expenses.................
Income from operations..................................
Interest and other income, net.........................
Income before income taxes ...........................
Provision for income taxes .............................
Net income .....................................................
Supplemental operating data:
Number of registered users at end of
period........................................................ .
Gross merchandise sales (1). ..........................
Number of auctions listed...............................
—
236
335
2
337
(144)
$ 193
—
—
—
1,971 3,652
418
1,699
509
22
2
1,721
511
(218)
(160) (1,573)
$ 293 $ 199 $ 189 $ 148
—
886
320
26
346
(147)
323
26
349
150
6,843
992
54
1,046
(979)
$ 67
327
328
9,432 14,405
2,070
682
2,752
(848) (1,232)
$ 663 $ 1,520
1,400
111
1,511
100.0%
5.5
94.5
100.0% 100.0% 100.0%
12.7
87.3
12.0 17.3
88.0 82.7
100.0%
10.5
89.5
100.0%
12.4
87.6
100.0%
16.3
83.7
100.0%
15.5
84.5
50.1
13.7
7.9
9.6
14.2
15.7
1.7
—
73.9
39.0
10.6
55.5
3.5
0.3
14.1
55.8
(23.8)
(6.3)
32.0% 27.8% 13.6% 7.2% 2.5% 0.7% 5.1% 7.8%
12.3
14.3
13.1
—
39.7
48.3
0.2
48.5
(20.7)
35.2
8.7
17.2
—
61.1
28.4
0.4
28.8
(26.3)
25.3
17.6
17.9
—
60.8
21.9
1.8
23.7
(10.1)
28.0
11.5
35.3
1.7
76.5
11.1
0.6
11.7
(11.0)
42.3
11.7
16.4
2.5
72.9
10.8
0.9
11.7
(6.6)
43.7
13.9
17.4
—
75.0
12.3
1.0
13.3
(6.1)
88
2,181
$ 9,337 $ 17,630 $ 24,281 $ 44,023 $ 104,113 $ 139,633 $ 195,046 $ 306,603
13,639
1,265
1,178
4,209
6,584
9,236
1,979
150
223
341
851
580
443
794
(1) 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).
22
Net Revenues
eBay’s net revenues increased sequentially during each of the past eight quarters. Substantially all of these
increases resulted from growth in the number of items of merchandise listed by sellers for auction on the Company’s
website and growth in the number of auction transactions successfully concluded. The Company did not increase the
amounts of its basic placement fees or success fees in any of the past eight quarters. Increases in fees for specific
featured placements and in average transaction size did not have a material impact on net revenue growth. The
Company’s growth rates are not sustainable and it expects growth rates will decline in the future.
Cost of Net Revenues
Cost of net revenues primarily consists of costs for customer support and website operations, including fees for
independent contractors, compensation for customer support and website operations personnel, ISP connectivity
charges, bank processing charges for customer fees paid by credit cards, depreciation of the equipment required for
eBay’s website operations, amortization of technology acquired in the Jump acquisition in the second quarter of
1998, and costs associated with revenue sharing agreements. The Company’s cost of net revenues increased
substantially in absolute dollars, and generally increased as a percentage of net revenues, in each of the past eight
quarters. The increases in the 1997 quarters were due primarily to increased personnel expenses and, to a lesser
extent, additional ISP connectivity charges and increased bank processing charges.
Rapid growth in net revenues and the fixed nature of certain components of cost of net revenues caused cost of
net revenues to decline to 10.5% of net revenues in the first quarter of 1998 from 12.7% in the fourth quarter of
1997. In the third quarter of 1998, the Company significantly increased its customer support personnel, website
operations personnel, its use of outside contractors, and accordingly experienced an increase in personnel-related
costs. Also in the third quarter of 1998, the Company began a significant build up of its computer network in order
to handle the increasing volume of transactions on the eBay service resulting in increased depreciation expense as
well as increased ISP connectivity charges. All of these factors, combined with a slowing growth rate of net
revenues beginning in the second quarter of 1998, resulted in increases in cost of net revenues as a percentage of net
revenues from 10.5% in the first quarter of 1998 and 12.4% in the second quarter of 1998, to 16.3% in the third
quarter of 1998. The slight increase in the revenue growth rate in the fourth quarter of 1998 resulted in the decrease
of cost of net revenues to 15.5% in the fourth quarter of 1998. Amortization of technology acquired in the Jump
acquisition also contributed to the absolute dollar increase in the third and fourth quarters of 1998. The Company
anticipates that its costs of net revenues will vary, and may increase, as a percentage of net revenues in future
quarters as it expands its website operations group, website facilities and pays royalties for software licenses to
enhance the eBay website.
Sales and Marketing
eBay’s sales and marketing expenses primarily consist of compensation for sales and marketing personnel,
advertising, trade show and other promotional costs, expenses for creative design of the eBay website and overhead
costs. Sales and marketing expenses increased substantially in absolute dollars and generally increased as a
percentage of net revenues in each of the past eight quarters, primarily due to increases in compensation associated
with additional personnel and, in the last two quarters of 1997 and each quarter of 1998, increases in advertising and
promotional expenses.
A slower expansion of advertising and promotional expenses and an increase in net revenues from the first
quarter of 1998 to the second quarter of 1998 caused sales and marketing expenses to decrease to 28.0% of net
revenues in the second quarter of 1998. Substantial increases in advertising expenses, including expenses associated
with a marketing agreement with AOL, caused sales and marketing expenses to increase to 42.3% of net revenues in
the third quarter of 1998. These increased expenses, as well as expenses associated with a national print, broadcast
and online advertising campaign, caused sales and marketing expenses to increase to 50.1% of net revenues in the
fourth quarter of 1998. The Company expects to increase its sales and marketing expenses substantially in future
quarters, particularly for advertising and promotion, and, as a result, expects that its sales and marketing expenses
will increase in absolute dollars and will vary as a percentage of net revenues for at least the next several quarters. In
addition, the Company is obligated to make aggregate payments to AOL of $12.0 million over the three-year term of
the marketing agreement it entered into with AOL in August 1998, of which $4.0 million was paid and $1.7 million
23
was expensed during 1998. In March 1999, eBay and AOL expanded the scope of their strategic relationship. Under
this new agreement, eBay will pay AOL $75 million over the four-year term of the contract. Under this agreement,
the Company’s remaining payment obligations to AOL were cancelled. See Notes 6 and 11 of Notes to Consolidated
Financial Statements.
Product Development
eBay’s product development expenses consist primarily of compensation for product development staff and
payments to outside contractors and, to a lesser extent, of depreciation on equipment used for development and
overhead costs. The Company expenses product development costs as they are incurred. Product development
expenses increased substantially in absolute dollars in each quarter throughout the past eight quarters. Compensation
and other personnel-related expenses grew most rapidly on a percentage basis between the first quarter of 1997 and
the second quarter of 1997. Product development expenses increased to 11.5% of net revenues in the second quarter
of 1998 from 8.7% in the first quarter of 1998 as the Company significantly increased its engineering staff and the
use of outside contractors, while the rate of growth of net revenues declined. Increases in engineering staff were
level with net revenues growth in the third quarter of 1998 and, accordingly, product development expenses as a
percentage of net revenues remained relatively constant. In the fourth quarter of 1998, product development
expenses remained relatively unchanged from the prior quarter, while net revenues grew. This resulted in a decline
in product development expenses to 7.9% of net revenues in the fourth quarter of 1998 from 11.7% in the third
quarter of 1998. The Company expects that product development expenses will continue to increase in absolute
dollars and will vary as a percentage of net revenues in future quarters primarily due to the addition of headcount
relative to the rate of net revenues growth.
General and Administrative
eBay’s general and administrative expenses consist primarily of compensation for personnel and, to a lesser
extent, fees for outside professional advisors and overhead costs. General and administrative expenses increased as a
percentage of net revenues in the third quarter of 1997 as personnel-related costs increased. General and
administrative expenses increased as a percentage of net revenues to 35.3% in the second quarter of 1998 because,
in that quarter, the Company donated 321,750 shares of its common stock, with an estimated fair value of $1.2
million, to a charitable foundation, recorded compensation expense of $429,000 associated with purchases of
restricted common stock by its outside directors and recorded compensation expense of $403,000 associated with
the grant of stock options to employees. General and administrative expenses decreased as a percentage of net
revenues to 16.4% in the third quarter of 1998 and 14.2% in the fourth quarter of 1998 as increases in personnel
related costs and professional fees were more than offset by increases in net revenues. The Company expects that
general and administrative expenses will continue to increase in absolute dollars in future quarters as the Company
continues to build its administrative staff and infrastructure, but may eventually decline as a percentage of net
revenues, and fluctuate from quarter to quarter depending on the rate of net revenue growth.
Amortization of Acquired Intangibles
During the second quarter of 1998, eBay recognized expenses totaling $150,000 for in-process technology
assumed in the acquisition of Jump and charged it to operations because the technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative future use. The Company recognized
amortization expense of approximately $328,000 in each of the third and fourth quarters of 1998 associated with the
covenants not to compete, customer list and goodwill assumed in the Jump acquisition. Amortization associated with
these intangible assets is anticipated to be approximately $328,000 in each of the first three quarters of 1999, and
approximately $26,000 in each of the fourth quarter of 1999 and the first and second quarters of 2000, assuming no
additional acquisitions and no impairment of value resulting in an acceleration of amortization. See Note 2 of Notes
to Consolidated Financial Statements.
24
Interest and Other Income, Net
Interest and other income, net, consists of interest earned on cash, cash equivalents and short-term investments
offset by interest expense. Interest and other income, net, increased in absolute dollars in the third quarter of 1997,
due primarily to interest earned on the proceeds from the June 1997 sale of Series B Preferred Stock and warrants
and remained relatively constant until the second quarter of 1998. The increase in the second quarter of 1998 was a
result of interest earned on proceeds from the May 1998 exercise of these warrants and interest earned from loans
made to employees in connection with the exercise of their stock options. The increase in the third quarter of 1998
reflected a full quarter of these earnings. The increase in the fourth quarter of 1998 resulted from income from
investment of the proceeds from the Company’s initial public offering at the end of the third quarter of 1998. In
addition, the Company repaid all borrowings under its line of credit in the fourth quarter of 1998.
Provision for Income Taxes
eBay’s effective federal and state income tax rate was approximately 43.0% in each quarter of 1997, 92.2% in
the first two quarters of 1998 and 48.7% in the last two quarters of 1998. The 1998 effective tax rate differed from
the combined federal and state statutory rate of approximately 41.8% as a result of the non-deductibility of charges
for stock based compensation and expenses related to the acquisition of Jump. The variations in the quarterly 1998
effective tax rates resulted from quarterly adjustments to the estimated annual effective tax rate based on the
difference between estimated earnings and actual earnings reported. See Note 7 of Notes to Consolidated Financial
Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through June 30, 1998, the Company
recorded aggregate unearned compensation totaling $6.8 million, which amount is being amortized over the four-
year vesting period of such options. Of the total unearned compensation, approximately $25,000, $421,000,
$650,000, $818,000 and $773,000 was amortized in the quarters ended December 31, 1997 and March 31, June 30,
September 30 and December 31, 1998, respectively. The Company expects quarterly amortization of between
approximately $700,000 and $440,000 during 1999, between approximately $400,000 and $270,000 during 2000
and annual amortization of approximately $720,000 during 2001 and approximately $80,000 during 2002 related to
these options. These amortization amounts were allocated among the operational expense categories based upon the
primary activity of the related employees. See Note 10 of Notes to Consolidated Financial Statements.
25
Years Ended December 31, 1996, 1997 and 1998
The following table sets forth, for the periods presented, certain data from eBay’s consolidated statement of
income as a percentage of net revenues. This information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this report.
Net revenues ............................................................................................................. .
Cost of net revenues....................................................................................................
Gross profit .............................................................................................................
Operating expenses:
1996
Year Ended December 31,
1997
100.0% 100.0% 100.0%
3.8
14.5
13.0
85.5
87.0
96.2
1998
Sales and marketing ................................................................................................
Product development ..............................................................................................
General and administrative .....................................................................................
Amortization of acquired intangibles......................................................................
Total operating expenses....................................................................................
Income from operations ..............................................................................................
Interest and other income, net .....................................................................................
Income before income taxes .......................................................................................
Provision for income taxes..........................................................................................
Net income..................................................................................................................
8.6
7.5
12.1
41.9
30.1
9.7
14.5
19.2
16.5
— —
1.7
72.5
61.1
28.2
13.0
25.9
68.0
0.3
1.9
1.0
14.9
26.9
68.3
(9.8)
(11.7)
(28.5)
39.8% 15.2% 5.1%
Net Revenues
eBay’s net revenues increased from $372,000 in 1996 to $5.7 million in 1997 and to $47.4 million in 1998,
primarily as a result of growth in the number of items of merchandise listed by sellers for auction on the eBay
website and growth in the number of auction transactions successfully completed. The increase from 1996 to 1997
was, to a lesser extent, the result of small increases in average transaction size and certain increases in the placement
fees for various forms of featured placements for listed items.
Cost of Net Revenues
Cost of net revenues increased from $14,000, or 3.8% of net revenues, in 1996 to $746,000, or 13.0% of net
revenues, in 1997, and to $6.9 million, or 14.5% of net revenues, in 1998. The increases primarily resulted from the
Company’s expansion of its customer support organization, increases in bank processing charges for customer fees
paid by credit cards, depreciation of the equipment required for the eBay website operations and ISP connectivity
charges.
Sales and Marketing
eBay’s sales and marketing expenses increased from $32,000, or 8.6% of net revenues, in 1996 to $1.7 million,
or 30.1% of net revenues, in 1997, and to $19.8 million, or 41.9% of net revenues, in 1998. The increases from 1996
to 1997 primarily resulted from the building of a sales and marketing organization, which began late in the fourth
quarter of 1996, and the commencement of significant advertising and promotional activities, which began in the
third quarter of 1997. The increases from 1997 to 1998 primarily resulted from substantial increases in advertising
and promotional expenses, including costs associated with a national print, broadcast and online advertising
campaign and expenses associated with a marketing agreement with AOL, both of which commenced in the second
half of 1998, as well as from continued growth in the number of sales and marketing personnel.
26
Product Development
eBay’s product development expenses increased from $28,000, or 7.5% of net revenues, in 1996 to $831,000,
or 14.5% of net revenues, in 1997, and to $4.6 million, or 9.7% of net revenues, in 1998. The increases in absolute
dollars primarily resulted from increases in salaries, benefits and other personnel-related expenses as the Company
significantly increased the size of its research and development staff, as well as expenses related to contractors and
consultants used to increase the product development department. These increases were more than offset by
increases in net revenues in 1998, resulting in the decline in development expenses as a percentage of net revenues
from 14.5% in 1997 to 9.7% in 1998.
General and Administrative
eBay’s general and administrative expenses increased from $45,000, or 12.1% of net revenues, in 1996 to
$950,000, or 16.5% of net revenues, in 1997, and to $9.1 million, or 19.2% of net revenues, in 1998. The increase
from 1996 to 1997 primarily resulted from increases in salaries, benefits and other personnel-related expenses and,
to a lesser extent, from increases in the allowance for doubtful accounts, fees for professional services and overhead
costs. The increase from 1997 to 1998 primarily resulted from the Company’s contribution in June 1998 of 321,750
shares of common stock with an estimated fair value of $1.2 million to a charitable foundation. In June 1998, the
Company also recorded compensation expense of $429,000 associated with purchases of restricted shares of
common stock by the Company’s outside directors. The increase from 1997 to 1998 also resulted from the Company
recording a compensation expense of approximately $1.7 million associated with stock options granted to
employees. Increases in personnel-related expenses, the allowance for doubtful accounts, fees for professional
services and overhead costs also contributed to the increase from 1997 to 1998.
Amortization of Acquired Intangibles
During 1998, eBay recognized expenses totaling $150,000 for in-process technology assumed in the acquisition
of Jump and charged this amount to operations because the technology had not reached the stage of technological
feasibility at the acquisition date and had no alternative future use. The Company also recognized amortization
expense of approximately $655,000 in 1998 associated with the covenants not to compete, the customer list and
goodwill assumed in the Jump acquisition. See Note 2 of Notes to Consolidated Financial Statements.
Interest and Other Income, Net
eBay’s interest and other income, net increased from $1,000 in 1996 to $56,000 in 1997 and to $869,000 in
1998. The increase from 1996 to 1997 was a result of interest earned on increased cash, cash equivalents and short-
term investments, from the net proceeds of the Company’s sales of preferred stock and warrants in June 1997. The
increase in 1998 from 1997 resulted from interest earned on the net proceeds from the Company’s initial public
offering in September 1998 and, to a lesser extent, interest earned on proceeds from the exercise of warrants in May
1998 and interest earned from loans made to employees in connection with the exercise of their stock options.
Provision for Income Taxes
eBay’s effective federal and state income tax rate was 41.7% in 1996, 43.4% in 1997 and 65.9% in 1998. The
1998 effective tax rate differed from the combined federal and state statutory rate of approximately 41.8% as a result
of the non-deductibility of charges for stock based compensation and expenses related to the acquisition of Jump.
The variation in the effective tax rates for 1996 and 1997 reflects differences in the deductibility of certain expenses.
See Note 7 of Notes to the Consolidated Financial Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through June 30, 1998, eBay recorded
aggregate unearned compensation totaling $6.8 million, which amount is being amortized over the four-year vesting
27
period of such options. Of the total unearned compensation, approximately $25,000 was amortized in 1997 and $2.7
million was amortized in 1998. These amortization amounts were allocated among the operational expense
categories based upon the primary activity of the related employees. See Note 10 of Notes to Consolidated Financial
Statements.
Liquidity and Capital Resources
Since eBay’s inception, the Company has financed its operations primarily from net cash generated from
operating activities. The Company has acquired 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 in September 1998,
net proceeds of $66.1 million from its initial public offering.
Net cash provided by operating activities was $113,000 in 1996, $789,000 in 1997 and $6.3 million in 1998.
Net cash provided by operating activities resulted primarily from the Company’s net income before non-cash
charges for amortization of unearned compensation, the provision for doubtful accounts and depreciation and
amortization, as well as increases in various liability categories, offset in part by increases in accounts receivable.
Net cash used in investing activities was $25,000 in 1996, $680,000 in 1997 and $49.3 million in 1998. Net
cash used in investing activities in each of 1996 and 1997 was the result of purchases of property and equipment,
primarily computer equipment and furniture and fixtures. During 1998, $8.9 million in cash was used to purchase
property and equipment and $40.4 million was used to purchase short-term investments.
Net cash provided by financing activities was $15,000 in 1996, $3.5 million in 1997 and $71.0 million in 1998.
Net cash provided by financing activities in 1996 resulted almost entirely from sales of common stock and preferred
stock. Net cash provided by financing activities in 1997 resulted primarily from the sale of $3.0 million of preferred
stock and warrants and borrowings of $545,000 against a bank line of credit. See Notes 5 and 8 of Notes to
Consolidated Financial Statements. Net cash provided by financing activities in 1998 resulted primarily from net
proceeds of $66.1 million from the Company’s initial public offering in September 1998, the exercise of warrants
for $2.0 million and proceeds from sales of restricted common stock in the aggregate amount of $3.5 million. These
proceeds were offset in part by principal payments of $598,000 on a bank line of credit and equipment leases. At
December 31, 1998, the principal source of liquidity for the Company was $72.2 million of cash, cash equivalents
and short-term investments.
eBay had no material commitments for capital expenditures at December 31, 1998 but expects such
expenditures to be at least $14.0 million in 1999. Such expenditures will primarily be for computer equipment,
furniture and fixtures and leasehold improvements. eBay also has total minimum lease obligations of $25.1 million
through November 2004 under certain noncancellable operating leases. As a result of eBay’s August 1998
marketing agreement with AOL, the Company is obligated to make aggregate payments to AOL of $12.0 million
over the three-year term of the agreement. Of this amount, $4.0 million was paid in 1998, and $1.7 million was
expensed, resulting in a prepaid balance of $2.3 million and remaining obligation of $8.0 million at December 31,
1998. In March 1999, eBay and AOL expanded the scope of their strategic relationship. Under this new agreement,
eBay will pay AOL $75 million over the four-year term of the contract. Under this agreement, the Company’s
remaining payment obligations to AOL under the previous agreement were cancelled. See Notes 6 and 11 of Notes
to Consolidated Financial Statements.
The Company believes that its existing cash, cash equivalents and short-term investments and any cash
generated from operations together with the expected proceeds from its public offering filed with the Securities and
Exchange Commission on March 25, 1999 will be sufficient to fund its operating activities, capital expenditures and
other obligations for the foreseeable future. However, if during that period or thereafter the Company is not
successful in generating sufficient cash flow from operations or in raising additional capital when required in
sufficient amounts and on terms acceptable to the Company, the Company’s business could suffer. If additional
funds are raised through the issuance of equity securities, the percentage ownership of the Company’s then-current
stockholders would be reduced.
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Year 2000 Issues
Many currently installed computer systems and software products are coded to accept only two-digit entries in
the date code field and cannot reliably distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies’ software and computer systems may need to be upgraded or replaced in order to correctly
process dates beginning in 2000 and to comply with the “Year 2000” requirements. The Company has reviewed its
internal programs and has determined that there are no significant Year 2000 issues within the Company’s systems
or services. The Company has completed modifications to its internal systems to attempt to ensure Year 2000
compliance. The costs of these modifications have not been material and have involved a reallocation of internal
resources rather than incremental expenditures. Although the Company believes that its software is Year 2000
compliant, the Company may be wrong. If the Company is wrong, it could face unexpected expenses to fix the
problem or unanticipated webside outages, either of which could harm its business. The Company uses third-party
equipment and software that may not be Year 2000 compliant. For example, the Company relies on credit card
companies to collect the majority of its revenues from users. Due to the nature of the credit card system, some
industry analysts have questioned the effect of the year 2000 on credit card processing and billing. Failure of the
Company’s credit card vendors or other third-party equipment or software vendors to properly process dates for the
year 2000 and thereafter could require the Company to incur unanticipated expenses in seeking alternative means of
payment or hardware or software replacements. It also could result in loss of revenues or unanticipated eBay website
outages. The Company’s marketing efforts are also dependent on the continued operation of Internet portals and
other Internet sites on which it advertises.
Although the Company has developed contingency plans with respect to collecting payment under these
circumstances, the Company is unable to make contingency plans if any significant number of the computers
constituting the Internet fail to process dates properly for the year 2000 and there is a systemwide slowdown or
breakdown. The Company’s business is dependent on the continued successful operation of the Internet. Any
interruption or significant degradation of Internet operations due to Year 2000 problems could harm the Company’s
business.
Recent Accounting Pronouncements
The American Institute of Certified Public Accountants issued Statement of Position (“SOP”) No. 98-1,
“Software for Internal Use,” which provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP No. 98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998. The Company does not expect that the adoption of SOP No. 98-1 will have a material impact
on its financial statements.
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Risk Factors
The following risks should be carefully considered. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any of the following risks actually occur, our business
could be harmed.
We have a limited operating history.
Our company was formed as a sole proprietorship in September 1995 and we incorporated in May 1996. We
have only a limited operating history on which you can base an evaluation of our business and prospects. As an
online commerce company in the early stage of development, we face increased risks, uncertainties, expenses and
difficulties. You should consider an investment in our company in light of these risks, uncertainties, expenses and
difficulties. To address these risks and uncertainties, we must do the following:
• maintain and increase our number of registered users, items listed on our service and completed auctions;
• maintain and grow our website and customer operations;
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continue to make trading through our service safer for users;
• maintain and enhance our brand;
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successfully execute our business and marketing strategy;
continue to develop and upgrade our technology and information processing systems;
continue to enhance our service to meet the needs of a changing market;
provide superior customer service;
respond to competitive developments; and
attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these things, which could cause our business to suffer. In
addition, accomplishing one or more of these things might be very expensive, which could harm our financial
results.
Our operating results may fluctuate.
Our operating results have varied on a quarterly basis during our short operating history. Our operating results
may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
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our ability to retain an active user base, to attract new users who list items for sale and who complete
transactions 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;
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;
the success of our brand building and marketing campaigns;
the level of use of the Internet and online services;
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increasing consumer acceptance of the Internet and other online services for commerce and, in particular,
the trading of products such as those listed on our website;
consumer confidence in the security of transactions on our website;
our ability to upgrade and develop our systems and infrastructure to accommodate growth;
our ability to attract new personnel in a timely and effective manner;
the volume of items listed on our website;
the timing, cost and availability of advertising in traditional media and on other websites and online
services;
the timing of marketing expenses under existing contracts;
technical difficulties or service interruptions;
the amount and timing of operating costs and capital expenditures relating to expansion of our business,
operations and infrastructure;
consumer trends and popularity of some categories of collectible items;
volume, size, timing and completion rate of trades on our website; and
general economic conditions and economic conditions specific to the Internet and electronic commerce
industries.
Our limited operating history and the emerging nature of the markets in which we compete make it difficult for
us to forecast our revenues or earnings accurately. We believe that period-to-period comparisons of our operating
results may not be meaningful and you should not rely upon them as an indication of future performance. We do not
have backlog, and almost all of our net revenues each quarter come from auctions that are listed and completed
during that quarter. Our operating results in one or more future quarters may fall below the expectations of securities
analysts and investors. In that event, the trading price of our common stock would almost certainly decline.
Our failure to manage growth could harm us.
We currently are experiencing a period of significant expansion in our headcount, facilities and infrastructure
and we anticipate that further expansion will be required to address potential growth in our customer base and
market opportunities. This expansion has placed, and we expect it will continue to place, a significant strain on our
management, operational and financial resources. The areas that are put under severe strain by our rate of growth
include the following:
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The Website. We must constantly add new hardware, update software and add new engineering personnel
to accommodate the increased use of our website. If we are unable to increase the capacity of our systems
at least as fast as the growth in demand for this capacity, our website may become unstable and may cease
to operate for periods of time. We have experienced periodic unscheduled downtime. Continued
unscheduled downtime could harm our business and also could discourage users of our website and reduce
future revenues.
• Customer Support. We must expand our customer support operations to accommodate the increased
number of users and transactions on our website. If we are unable to hire and successfully train sufficient
employees or contractors in this area, users of our website may have negative experiences and current and
future revenues could suffer.
• Customer Accounts. Our revenues are dependent on prompt and accurate billing processes. If we are
unable to grow our transaction processing abilities to accommodate the increasing number of transactions
that must be billed, our ability to collect revenue will be harmed.
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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. To
manage the expected growth of our operations and personnel, we will need to improve our transaction processing,
operational and financial systems, procedures and controls. Our current and planned personnel, systems, procedures
and controls may not be adequate to support our future operations. We may be unable to hire, train, retain and
manage required personnel or to identify and take advantage of existing and potential strategic relationships and
market opportunities.
We may not maintain profitability.
We believe that our continued profitability and growth will depend in large part on our ability to do the
following:
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increase our brand name awareness;
provide our customers with superior community and trading experiences; and
• maintain sufficient transaction volume to attract buyers and sellers.
We are investing heavily in marketing and promotion, further development of our website, technology and
operating infrastructure development. 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 emergence of competitors, many of whom are offering free auctions to users, may
limit our ability to raise user fees in response to declines in profitability or require us to reduce our fees. In addition,
we are spending in advance of anticipated growth, which may also harm our profitability. Our growth rates are not
sustainable and we expect growth rates will decrease in the future. 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.
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 civil or criminal liability for unlawful activities
carried out by users through our service. In order to reduce our exposure to this liability, we have increased the
number of personnel reviewing potentially illegal items and 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 media attention relating
to the listing or sale of unlawful goods on our website. A continuation of this negative publicity could damage our
reputation and diminish the value of our brand name. It also could make users reluctant to continue to use our
services.
Our business may be harmed by the listing or sale by our users of pirated items.
We have received in the past, and we anticipate we will receive in the future, communications alleging that
certain items listed or sold through our service by our users infringe third-party copyrights, trademarks and
tradenames or other intellectual property rights. Although we have actively sought to work with the content
community to eliminate infringing listings on our website, some content owners have expressed the view that our
efforts are insufficient. An allegation of infringement of third-party intellectual property rights may result in
litigation against us. Any such litigation could be costly for us, could result in increased costs of doing business
through adverse judgment or settlement, could require us to change our business practices in expensive ways or
could otherwise harm our business.
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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 do not take responsibility for delivery of payment or goods
to any user of our service. We have received in the past, and anticipate that we will receive in the future,
communications from users who did not receive the purchase price or the goods that were to have been exchanged.
While we can suspend the accounts of users who fail to fulfill their delivery obligations to other users, we do not
have the ability to require users to make payments or deliver goods or otherwise make users whole other than
through our limited insurance program. Other than through this program, we do not compensate users who believe
they have been defrauded by other users. We also periodically receive complaints from buyers as to the quality of
the goods purchased. Any 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 may in the future receive
additional requests from users requesting reimbursement or threatening legal action against us if no reimbursement
is made. Any resulting litigation could be costly for us, divert management attention, result in increased costs of
doing business, lead to adverse judgments or could otherwise harm our business.
Government inquiries may lead to charges or penalties.
On January 29, 1999, we received requests to produce certain records and information to the federal
government relating to an investigation of possible illegal transactions in connection with our website. We have
been informed that the inquiry includes an examination of our practices with respect to these transactions. We are
fully cooperating with the inquiry. In order to protect the investigation, the court has ordered that no further public
disclosures be made with respect to the matter at this time. Should this or any other investigation lead to civil or
criminal charges against us, we would likely be harmed by negative publicity, the costs of litigation, the diversion of
management time and other negative effects, even if we ultimately prevail. Our business would certainly suffer if we
were not to prevail in any action like this.
A large number of transactions occur on our website. As a result, we believe that government regulators have
received a substantial number of consumer complaints about us which, while small as a percentage of our total
transactions, are large in aggregate numbers. As a result, we have from time to time been contacted by various
federal, state and local regulatory agencies and been told that they have questions with respect to the adequacy of the
steps we take to protect our users from fraud. For example, the City of New York—Department of Consumer
Affairs received complaints from users about transactions on our website. In investigating these complaints, the
Department of Consumer Affairs requested information about us and these transactions. We have provided the
requested information. We are likely to receive additional inquiries from regulatory agencies in the future, which
may lead to action against us. We have responded to all inquiries from regulatory agencies by describing our current
and planned antifraud efforts. If one or more of these agencies is not satisfied with our response to current or future
inquiries, the resultant investigations and potential fines or other penalties could harm our business.
We 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 other online services companies currently are pending. In
addition, federal, state and foreign legislation has been proposed that imposes liability for or prohibits the
transmission over the Internet of certain types of information. Our service features a Feedback Forum, which
includes information from users regarding other users. Although all such feedback is generated by users and not by
us, it is possible that a claim of defamation or other injury could be made against us for content posted in the
Feedback Forum. If we become liable for information provided by our users and carried on our service, we could be
directly harmed and we may be forced to implement new measures to reduce our exposure to this liability. This may
require us to expend substantial resources and/or to discontinue certain service offerings. In addition, the increased
attention focused upon liability issues as a result of these lawsuits and legislative proposals could harm our
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reputation or otherwise impact the growth of our business. We carry liability insurance, but it may not be adequate
to fully compensate us if we become liable for information carried on or through our service. Any costs incurred as a
result of this liability or asserted liability could harm our business.
We are subject to intellectual property litigation.
On March 24, 1999 we were sued by Network Engineering Software, Inc. in the U.S. District Court for the
Northern District of California for our alleged willful and deliberate violation of a patent. The suit seeks unspecified
monetary damages as well as an injunction against our operations. It also seeks treble damages and attorneys’ fees
and costs. We believe that we have meritorious defenses against this suit and intend to vigorously defend ourselves.
We could be forced to incur material expenses during this defense, and in the event we were to lose this suit our
business would be harmed.
Other third parties have from time to time claimed and may claim in the future that we have infringed their
past, current or future technologies. We expect that participants in our markets increasingly will be subject to
infringement claims as the number of services and competitors in our industry segment grows. Any claim like this,
whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. These royalty or licensing agreements might not be available
on acceptable terms or at all. As a result, any claim like this could harm our business.
The inability to expand our systems may limit our growth.
We seek to generate a high volume of traffic and transactions on our service. The satisfactory performance,
reliability and availability of our website, processing systems and network infrastructure are critical to our reputation
and our ability to attract and retain large numbers of users. Our revenues depend on the number of items listed by
users, the volume of user auctions that are successfully completed and the final prices paid for the items listed. If the
volume of traffic on our website or the number of auctions being conducted by customers continues to increase, we
will need to expand and upgrade our technology, transaction processing systems and network infrastructure. We
may not be able to accurately project the rate or timing of increases, if any, in the use of our service or to timely
expand and upgrade our systems and infrastructure to accommodate any increases.
We use internally developed systems to operate our service and for transaction processing, including billing
and collections processing. We must continually improve these systems in order to accommodate the level of use of
our website. In addition, we may add new features and functionality to our services that would result in the need to
develop or license additional technologies. Our inability to add additional software and hardware or to upgrade our
technology, transaction processing systems or network infrastructure to accommodate increased traffic or transaction
volume could have adverse consequences. These consequences include unanticipated system disruptions, slower
response times, degradation in levels of customer support, impaired quality of the users’ experience on our service
and delays in reporting accurate financial information. Our failure to provide new features or functionality also
could result in these consequences. We may be unable to effectively upgrade and expand our systems in a timely
manner or to integrate smoothly any newly developed or purchased technologies with our existing systems. These
difficulties could harm or limit our ability to expand our business.
System failures could harm our business.
Our future success, and in particular our ability to facilitate trades successfully and provide high quality
customer service, will depend on the efficient and uninterrupted operation of our computer and communications
hardware and software systems. Substantially all of our computer hardware for operating our service currently is
located at the facilities of Exodus Communications, Inc. (“Exodus”) in Santa Clara, California. These systems and
operations are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage, intentional acts of vandalism and similar
misconduct. We do not have fully redundant systems, a formal disaster recovery plan or alternative providers of
hosting services, and we do not carry sufficient business interruption insurance to compensate us for losses that may
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occur. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems at
the Exodus facility could result in interruptions in our services. In addition, the failure by Exodus 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. Such interruptions will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system is unreliable.
In the quarter ended December 31, 1998, we experienced longer and more frequent system interruptions than in
the first three quarters of 1998. Our website has been interrupted for periods ranging from five minutes to three
hours. In addition to placing increased burdens on our engineering staff, these outages create a flood of user
questions and complaints that must be responded to by our customer support personnel. If we experience frequent or
persistent system failures, our reputation and brand could be permanently harmed.
Unauthorized break-ins to our service could harm our business.
Our servers are vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which
could lead to interruptions, delays, loss of data or the inability to complete customer auctions. In addition,
unauthorized persons may improperly access our data. We recently 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. Any
such actions by this or any other individual could harm us. Such actions may be very expensive to remedy and could
damage our reputation and discourage new and existing users from using our service.
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:
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actual or anticipated variations in our quarterly operating results;
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;
the emergence of online securities trading;
changes in the market valuations of other Internet or online service companies;
developments in Internet regulations;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures
or capital commitments;
unscheduled system downtime;
additions or departures of key personnel;
sales of our common stock or other securities in the open market; and
other events or factors that may be beyond our control.
In addition, the trading price of Internet stocks in general, and ours in particular, have experienced extreme
price and volume fluctuations in recent months. These fluctuations often have been unrelated or disproportionate to
the operating performance of these companies. The valuations of many Internet stocks, including ours, are
extraordinarily high based on conventional valuation standards such as price to earnings and price to sales ratios.
The trading price of our common stock has increased enormously from the initial public offering price. These
trading prices and valuations may not be sustained. Any negative change in the public’s perception of the prospects
of Internet or e-commerce companies could depress our stock price regardless of our results. Other broad market and
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industry factors may decrease the market price of our common stock, regardless of our operating performance.
Market fluctuations, as well as general political and economic conditions such as recession or interest rate or
currency rate fluctuations, also may decrease the market price of our common stock. In the past, following declines
in the market price of a company’s securities, securities class-action litigation often has been instituted against the
company. Litigation of this type, if instituted, could result in substantial costs and a diversion of management’s
attention and resources.
New and existing regulation of the Internet 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, it is possible that laws and regulations will be adopted with
respect to the Internet or online services. These laws and regulations could cover issues such as online contracts,
user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation,
advertising, intellectual property rights and information security. Applicability to the Internet of existing laws
governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of these laws were adopted prior to the advent of the
Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and
related technologies. Those laws that do reference the Internet, such as the recently passed Digital Millennium
Copyright Act, have not yet been interpreted by the courts and their applicability and reach are therefore uncertain.
In addition, numerous states, including the State of California, where our headquarters are located, have regulations
regarding how “auctions” may be conducted and the liability of “auctioneers” in conducting such auctions. No legal
determination has been made with respect to the applicability of the California regulations to our business to date
and little precedent exists in this area. One or more states may attempt to impose these regulations upon us in the
future, which could harm our business.
Several states have proposed legislation that would limit the uses of personal user information gathered online
or require online services to establish privacy policies. The Federal Trade Commission also has recently settled a
proceeding with one online service regarding the manner in which personal information is collected from users and
provided to third parties. Changes to existing laws or the passage of new laws intended to address these issues could
directly affect the way we do business or could create uncertainty in the marketplace. This could reduce demand for
our services, increase the cost of doing business as a result of litigation costs or increased service delivery costs, or
otherwise harm our business. In addition, because our services are accessible worldwide, and we facilitate sales of
goods to users worldwide, foreign jurisdictions may claim that we are required to comply with their laws. Our
failure to comply with foreign laws could subject us to penalties ranging from fines to bans on our ability to offer
our services.
In the United States, companies are required to qualify as foreign corporations in states where they are
conducting business. As an Internet company, it is unclear in which states we are actually conducting business. We
currently are qualified to do business only in California and Ohio. Our failure to qualify as a foreign corporation in a
jurisdiction where we are required to do so could subject us to taxes and penalties for the failure to qualify and could
result in our inability to enforce contracts in those jurisdictions. Any new legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to our business, could harm our
business.
Our business has been seasonal.
Our results of operations historically have been somewhat seasonal in nature because many of our users reduce
their activities on our website during the Thanksgiving and Christmas holidays and with the onset of good weather.
Our limited operating history makes it difficult to assess the impact of these seasonal factors or whether or not our
business is susceptible to cyclical fluctuations in the U.S. economy. In addition, our rapid growth may have
overshadowed whatever seasonal or cyclical factors might have influenced our business to date. Seasonal or cyclical
variations in our business may become more pronounced over time and may harm our results of operations in the
future.
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We are dependent on the continued growth of the online person-to-person commerce market.
The market for the sale of goods over the Internet, particularly through person-to-person trading, is a new and
emerging market. Our future 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 Web, the Internet and online services is a recent phenomenon. This acceptance and use may not continue. Even
if the Internet is accepted, concerns about fraud, privacy and other problems may mean that a sufficiently broad base
of consumers will not adopt the Internet as a medium of commerce. In particular, our website requires users to make
publicly available their e-mail addresses and other personal information that some potential users may be unwilling
to provide. These concerns may increase as additional publicity over privacy issues on eBay or generally over the
Internet increase. Market acceptance for recently introduced services and products over the Internet is highly
uncertain, and there are few proven services and products. In order to expand our user base, we must appeal to and
acquire consumers who historically have used traditional means of commerce to purchase goods.
There are many risks associated with international operations.
We are expanding internationally and recently launched separate home pages dedicated to Canada and the
United Kingdom. Expansion into international markets will require management attention and resources. We have
limited experience in localizing our service to conform to local cultures, standards and policies. We may have to
compete with local companies who understand the local market better than we do. We may not be successful in
expanding into international markets or in generating revenues from foreign operations. As we continue to expand
internationally, we are subject to risks of doing business internationally, including the following:
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regulatory requirements that may limit or prevent the offering of our services in local jurisdictions;
legal uncertainty regarding liability for the listings of our users, including less Internet friendly basic law
and unique local laws;
government-imposed limitations on the public’s access to the Internet;
difficulties in staffing and managing foreign operations;
longer payment cycles, different accounting practices and problems in collecting accounts receivable;
cultural nonacceptance of online auctions;
political instability;
seasonal reductions in business activity;
potentially adverse tax consequences; and
administrative burdens in collecting local taxes, including value-added taxes.
To the extent we expand our international operations and have additional portions of our international revenues
denominated in foreign currencies, we also could become subject to increased difficulties in collecting accounts
receivable and risks relating to foreign currency exchange rate fluctuations.
Our business may be subject to sales and other taxes.
We do not collect sales or other similar taxes on goods sold by users through our service. One or more states
may seek to impose sales tax collection obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that would impose additional taxes on the
sale of goods and services through the Internet. These proposals, if adopted, could substantially impair the growth of
electronic commerce, and could diminish our opportunity to derive financial benefit from our activities. The U.S.
federal government recently 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
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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 could harm our business.
We are dependent on key personnel.
Our future performance will be substantially dependent on the continued services of our senior management
and other key personnel. Our future performance also will depend on our ability to retain and motivate our other
officers and key employees. We have only eight executive officers, and the loss of the services of any of them 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 future success also will depend
on our ability to attract, train, retain and motivate other highly skilled technical, managerial, marketing and customer
support personnel. Competition for these personnel is intense, especially for engineers and especially in the San
Francisco/Bay Area, and we may be unable to successfully attract, integrate or retain sufficiently qualified
personnel. In making employment decisions, particularly in the Internet and high-technology industries, job
candidates often consider the value of the stock options they are to receive in connection with their employment. As
a result of the recent appreciation in our stock price, we believe that we may be disadvantaged in competing for
these employees with other companies whose stocks have not similarly appreciated or who have not yet gone public.
Our market is intensely competitive.
The market for person-to-person trading over the Internet is new, rapidly evolving and intensely competitive,
and we expect competition to intensify in the future. Barriers to entry are relatively low, and current and new
competitors can launch new sites at a relatively low cost using commercially available software. We currently or
potentially compete with a number of other companies. Our direct competitors include various online person-to-
person auction services, including Yahoo! Auctions Powered by Onsale and Excite, Inc., both of which are free to
sellers and buyers, Auction Universe and a number of other small services, including those that serve specialty or
regional markets such as CityAuction. We also compete indirectly with business-to-consumer online auction
services such as Onsale, First Auction, Surplus Auction and uBid. A number of traditional auction companies,
including Butterfield & Butterfield and Sotheby’s, are offering or have announced plans to create Internet auction
sites. We potentially face competition from a number of large online communities and services that have expertise in
developing online commerce and in facilitating online person-to-person interaction. Some of these potential
competitors, including Amazon.com, America Online, Inc. (“AOL”), Lycos, Inc. and Microsoft Corporation,
currently offer business-to-consumer trading services and classified ad services. Some of these companies also may
introduce person-to-person trading to their large user populations. Other large companies with strong brand
recognition and experience in online commerce, such as Cendant Corporation, QVC, USA Network and large
newspaper or media companies, also may seek to compete in the online auction market. The principal competitive
factors in our market include the following:
•
•
•
•
•
•
volume of transactions and selection of goods;
community cohesion and interaction;
system reliability;
customer service;
reliability of delivery and payment by users;
brand recognition;
• website convenience and accessibility;
•
level of service fees; and
•
quality of search tools.
38
Some current and many potential competitors have longer company operating histories, larger customer bases
and greater brand recognition in other business and Internet markets than we do. Some of these competitors also
have significantly greater financial, marketing, technical and other resources. Other online trading services may be
acquired by, receive investments from or enter into other commercial relationships with larger, well established and
well financed companies. As a result, some of our competitors with other revenue sources may be able to devote
more resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development than we are able to. Increased competition may
result in reduced operating margins, loss of market share and diminished value of our brand. Some of our
competitors have offered services for free and others may do this as well. We may be unable to compete
successfully against current and future competitors.
In order to respond to changes in the competitive environment, we may, from time to time, make pricing,
service or marketing decisions or acquisitions that could harm our business. For example, we recently 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. The financial impact of this insurance program is not yet known.
New technologies may increase the competitive pressures by enabling our competitors to offer a lower cost service.
Some Web-based applications that direct Internet traffic to certain websites may channel users to trading services
that compete with us.
Although we have established Internet traffic arrangements with several large online services and search engine
companies, these arrangements may not be renewed on commercially reasonable terms. Even if these arrangements
are renewed, they may not result in increased usage of our service. In addition, companies that control access to
transactions through network access or Web browsers could promote our competitors or charge us substantial fees
for inclusion.
Our business is dependent on the development and maintenance of the web infrastructure.
The success of our service will depend largely on the development and maintenance of the Web infrastructure.
This includes maintenance of a reliable network backbone with the necessary speed, data capacity and security, as
well timely development of complementary products such as high speed modems, for providing reliable Web access
and services. Because global commerce and the online exchange of information is new and evolving, we cannot
predict whether the Web will prove to be a viable commercial marketplace in the long term. The Web has
experienced, and is likely to continue to experience, significant growth in the numbers of users and amount of
traffic. If the Web continues to experience increased numbers of users, increased frequency of use or increased
bandwidth requirements, the Web infrastructure may be unable to support the demands placed on it. In addition, the
performance of the Web may be harmed by increased users or bandwidth requirements.
The Web has experienced a variety of outages and other delays as a result of damage to portions of its
infrastructure, and it could face outages and delays in the future. This might include outages and delays resulting
from the “Year 2000” problem. See “—Our business could be harmed by Year 2000 compliance issues.” These
outages and delays could reduce the level of Web usage as well as the level of traffic and the processing of auctions
on our service. In addition, the Web could lose its viability due to delays in the development or adoption of new
standards and protocols to handle increased levels of activity or due to increased governmental regulation. The
infrastructure and complementary products or services necessary to make the Web a viable commercial marketplace
for the long term may not be developed successfully or in a timely manner. Even if these products or services are
developed, the Web may not become a viable commercial marketplace for services such as those that we offer.
Our business is subject to online commerce security risks.
A significant barrier to online commerce and communications is the secure transmission of confidential
information over public networks. Our security measures may not prevent security breaches. Our failure to prevent
security breaches could harm our business. Currently, a significant number of our users authorize us to bill their
credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication
39
technology licensed from third parties to provide the security and authentication technology to effect secure
transmission of confidential information, including customer credit card numbers. Advances in computer
capabilities, new discoveries in the field of cryptography, or other developments may result in a compromise or
breach of the technology used by us to protect customer transaction data. Any such compromise of our security
could harm our reputation and, therefore, our business. In addition, a party who is able to circumvent our security
measures could misappropriate proprietary information or cause interruptions in our operations. An individual
recently claimed to have misappropriated some of our confidential information by breaking into our computer
system. We may need to expend significant resources to protect against security breaches or to address problems
caused by breaches. Security breaches like the recent one could damage our reputation and expose us to a risk of
loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate
to reimburse us for losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive.
The market in which we compete is characterized by rapidly changing technology, evolving industry standards,
frequent new service and product introductions and enhancements and changing customer demands. These market
characteristics are worsened by the emerging nature of the Internet and the apparent need of companies from a
multitude of industries to offer Web-based products and services. Our future success therefore will depend on our
ability to adapt to rapidly changing technologies, to adapt our services to evolving industry standards and to
continually improve the performance, features and reliability of our service. Our failure to adapt to such changes
would harm our business. In addition, the widespread adoption of new Internet, networking or telecommunications
technologies or other technological changes could require substantial expenditures to modify or adapt our services or
infrastructure.
We need to develop new services, features and functions in order to expand.
We plan to expand our operations by developing new or complementary services, products or transaction
formats or expanding the breadth and depth of services. We may be unable to expand our operations in a cost-
effective or timely manner. Even if we do expand, we may not maintain or increase our overall market acceptance.
If we launch a new business or service that is not favorably received by consumers, it could damage our reputation
and diminish the value of our brand. We anticipate that future services may include pre- and post-trade services,
including the following:
•
•
•
the scanning and uploading of photographs of listed items;
authentication and appraisal;
arrangements to facilitate shipment of products; and
• methods to facilitate buyers’ payments to sellers, such as credit card services.
We may pursue strategic relationships with third parties to provide many of these services. By using third
parties to deliver these services, we may be unable to control the quality of these services and our ability to address
problems if any of these third parties fails to perform adequately will be reduced. Expanding our operations in this
manner also will require significant additional expenses and development, operations and other resources and will
strain our management, financial and operational resources. The lack of market acceptance of any new services
could harm our business.
Our growth will depend on our ability to develop our brand.
We believe that our historical growth has been largely attributable to word of mouth. We have benefited from
frequent and high visibility media exposure both nationally and locally. We do not expect the frequency or quality of
this media exposure to continue. However, we believe that continuing to strengthen our brand will be critical to
achieving widespread acceptance of our service. Promoting and positioning our brand will depend largely on the
success of our marketing efforts and our ability to provide high quality services. In order to promote our brand, we
40
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 adequately protect or enforce our intellectual property rights.
We regard the protection of our copyrights, service marks, trademarks, trade dress and trade secrets as critical
to our success. We rely on a combination of patent, copyright, trademark, service mark and trade secret laws and
contractual restrictions to protect our proprietary rights in products and services. We have entered into
confidentiality and invention assignment agreements with our employees and contractors, and nondisclosure
agreements with parties with which we conduct business in order to limit access to and disclosure of our proprietary
information. These contractual arrangements and the other steps taken by us to protect our intellectual property may
not prevent misappropriation of our technology or deter independent third-party development of similar
technologies. We pursue the registration of our trademarks and service marks in the U.S. and internationally.
Effective trademark, service mark, copyright and trade secret protection may not be available in every country in
which our services are made available online. We have licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees may
take actions that might diminish the value of our proprietary rights or harm our reputation. We also rely on certain
technologies that we license from third parties, such as Oracle Corporation, Microsoft and Sun Microsystems Inc.,
the suppliers of key database technology, the operating system and specific hardware components for our service.
These third-party technology licenses may not continue to be available to us on commercially reasonable terms. The
loss of this technology could require us to obtain substitute technology of lower quality or performance standards or
at greater cost.
Our business is subject to consumer trends.
We derive substantially all of our revenues from fees received from sellers for listing products for sale on our
service and fees received from successfully completed auctions. 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. For example, during the three months ended December 31, 1998,
we had, at times, approximately 7% of our listings involved in “Beanie Babies.” 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 significant fluctuations in our operating results from one quarter to
the next. Any decline in demand for the goods offered through our service as a result of changes in consumer trends
could harm our business.
Acquisitions could result in dilution, operating difficulties and other harmful consequences.
If appropriate opportunities present themselves, we intend to acquire businesses, technologies, services or
products that we believe are strategic. For example, in June 1998, we acquired Jump Incorporated (“Jump”), the
developer and operator of Up4Sale, an advertising-supported online trading service. Although the integration of
Jump is largely complete, the process of integrating an acquired business, technology, service or product into our
business and operations may result in unforeseen operating difficulties and expenditures. Integration of an acquired
company also may require significant management resources that would otherwise be available for ongoing
development of our business. Moreover, the anticipated benefits of any acquisition, including Jump, may not be
realized. We currently do not have any understandings, commitments or agreements with respect to any other
material acquisition and no other material acquisition currently is being pursued. We may be unable to identify,
41
negotiate or finance future acquisitions successfully, or to integrate successfully any acquisitions with our current
business. Future acquisitions 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 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.
Item 7A: Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
The primary objective of eBay’s investment activities is to preserve the principal while at the same time
maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its
portfolio of cash equivalents and short-term investments in a variety of securities, including both government and
corporate obligations and money market funds. As of December 31, 1998, approximately 55% of the Companys
total portfolio matures in one year or less, with the remainder maturing in less than two years. See Note 1 of Notes
to Consolidated Financial Statements.
The following table presents the amounts of the Company’s cash equivalents and short-term investments that
are subject to interest rate risk by year of expected maturity and average interest rates as of December 31, 1998:
Cash equivalents and short-term investments .................................... .
Average interest rates......................................................................... .
1999
2000
Total Fair Value
(Dollars in thousands)
$34,852 $28,114 $62,966 $ 62,966
3.8%
3.5%
eBay did not hold derivative financial instruments as of December 31, 1998, and has never held such
instruments in the past. In addition, eBay had no outstanding debt as of December 31, 1998.
Foreign Currency Risk
Currently the majority of eBay’s sales and expenses are denominated in U.S. dollars and as a result the
Company has experienced no significant foreign exchange gains and losses to date. While the Company does expect
to effect some transactions in foreign currencies during 1999, it does not anticipate that foreign exchange gains or
losses will be significant. The Company has not engaged in foreign currency hedging activities to date.
Item 8: Financial Statements and Supplementary Data
Annual Financial Statements: See Part IV, Item 14 of this Form 10-K.
Selected Quarterly Data: See Part II, Item 7 of this Form 10-K.
Item 9: Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
42
PART III
Item 10: Directors and Executive Officers of the Registrant
Executive Officers and Directors
The following table sets forth certain information regarding the executive officers and directors of the
Company as of March 1, 1999:
Name
Pierre M. Omidyar ................................. .
Margaret C. Whitman ............................ .
Gary F. Bengier...................................... .
Michael R. Jacobson .............................. .
Jeffrey S. Skoll....................................... .
Brian T. Swette ...................................... .
Steven P. Westly .................................... .
Michael K. Wilson ................................. .
Scott D. Cook (1) ................................... .
Robert C. Kagle (1)(2) ........................... .
Howard D. Schultz (2) ........................... .
Position
Age
31 Founder, Chairman of the Board and a director
42 President, Chief Executive Officer and a director
44 Chief Financial Officer and Vice President Operations
44 Vice President, Legal Affairs, General Counsel and Secretary
34 Vice President Strategic Planning and Analysis
45 Senior Vice President of Marketing and International
42 Vice President Marketing and Business Development
41 Senior Vice President Product Development and Site Operations
46 Director
43 Director
45 Director
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Pierre M. Omidyar founded eBay as a sole proprietorship in September 1995. He has been a director and
Chairman of the Board since eBay’s incorporation in May 1996 and also served as its Chief Executive Officer, Chief
Financial Officer and President from inception to February 1998, November 1997 and August 1996, respectively.
Prior to founding eBay, Mr. Omidyar was a developer services engineer at General Magic, a mobile communication
platform company from December 1994 to July 1996. Mr. Omidyar co-founded Ink Development Corp. (“Ink”)
(later renamed eShop) in May 1991 and served as a software engineer there from May 1991 to September 1994.
Prior to co-founding Ink, Mr. Omidyar was a developer for Claris, a subsidiary of Apple Computer, and for other
Macintosh-oriented software development companies. Mr. Omidyar holds a B.S. degree in Computer Science from
Tufts University.
Margaret C. Whitman has served as President and Chief Executive Officer of eBay since February 1998 and a
director since March 1998. From January 1997 to February 1998, she was General Manager of the Preschool
Division of Hasbro Inc., a toy company. From February 1995 to December 1996, Ms. Whitman was employed by
FTD, Inc., a floral products company, most recently as President, Chief Executive Officer and a director. From
October 1992 to February 1995, Ms. Whitman was employed by The Stride Rite Corporation, in various capacities,
including President, Stride Rite Children’s Group and Executive Vice President, Product Development, Marketing
& Merchandising, Keds Division. From May 1989 to October 1992, Ms. Whitman was employed by The Walt
Disney Company (“Disney”), an entertainment company, most recently as Senior Vice President, Marketing, Disney
Consumer Products. Before joining Disney, Ms. Whitman was at Bain & Co., a consulting firm, most recently as a
Vice President. Ms. Whitman currently serves on the board of directors of Staples, Inc. Ms. Whitman holds an A.B.
degree in Economics from Princeton University and an M.B.A. degree from the Harvard Business School.
Gary F. Bengier has served as Chief Financial Officer and Vice President Operations of eBay since November
1997. From February 1997 to October 1997, Mr. Bengier was Vice President and Chief Financial Officer of
VXtreme, Inc. a developer of Internet video streaming products. Prior to that time, Mr. Bengier was Corporate
Controller at Compass Design Automation, a publisher of electronic circuit design software, from February 1993 to
February 1997. Mr. Bengier has also held senior financial positions at Kenetech Corp., an energy services company,
and Qume Corp., a computer peripherals company, where he participated in numerous debt and equity financing
transactions. Prior to joining Qume in 1989, Mr. Bengier spent six years at Bio-Rad Laboratories and held varied
financial management roles. Mr. Bengier also spent several years as a management consultant for Touche Ross &
43
Co. Mr. Bengier holds a B.B.A. degree in Computer Science and Operations Research from Kent State University
and an M.B.A. degree from the Harvard Business School.
Michael R. Jacobson has served as eBay’s Vice President, General Counsel and Secretary since August 1998.
From 1986 to August 1998, Mr. Jacobson was a partner with the law firm of Cooley Godward LLP, specializing in
securities law, mergers and acquisitions and other transactions. Mr. Jacobson holds an A.B. degree in Economics
from Harvard College and a J.D. degree from Stanford Law School.
Jeffrey S. Skoll has served as eBay’s Vice President Strategic Planning and Analysis since February 1998, its
President from August 1996 to February 1998 and as a director from December 1996 to March 1998. From July
1995 to July 1996, Mr. Skoll served as Channel Marketing Manager for Knight-Ridder Information Inc., an online
information services company and from September 1993 to July 1995 was a student at the Stanford Graduate School
of Business. Prior to that time, Mr. Skoll was President of Skoll Engineering, a systems consulting firm that he
founded, from September 1987 to August 1993. Mr. Skoll also co-founded Micros on the Move Ltd., a computer
rentals company, as an adjunct to Skoll Engineering in 1990. Mr. Skoll holds a B.a.S.C. degree in Electrical
Engineering from the University of Toronto and an M.B.A. degree from the Stanford Graduate School of Business.
Brian T. Swette has served as eBay’s Senior Vice President of Marketing and International since August 1998.
From 1981 to June 1998, Mr. Swette was employed by Pepsi-Cola Beverages, a global beverage company, in
various capacities including Executive Vice President and Chief Marketing Officer—Global Beverages from March
1996 to June 1998, Executive Vice President Marketing—North America from September 1994 to March 1996,
Senior Vice President and General Manager of New Business from February 1992 to September 1994, Senior Vice
President Marketing and Strategy—North America from 1990 to 1991, Vice President North Latin America—
General Manager from 1986 to 1989, Director of Marketing Planning and Development—Pepsi International from
1984 to 1986 and Country Manager—Brazil from 1981 to 1984. Before joining Pepsi-Cola Beverages, Mr. Swette
worked in various capacities for Procter & Gamble from 1977 to 1981. Mr. Swette currently serves on the board of
directors of J. Crew Apparel. Mr. Swette holds a B.S. degree in Economics from Arizona State University.
Steven P. Westly has served as eBay’s Vice President Marketing and Business Development since August
1997. From July 1996 to August 1997, Mr. Westly was Vice President, Business Development of WhoWhere?, an
Internet directory and Web-based email company. Prior to that time, Mr. Westly was Director of Sales for Netcom,
an Internet service provider, from August 1995 to July 1996 and was Deputy Director of Office of Economic
Development, City of San Jose, California, from April 1991 to August 1995. Before joining the Office of Economic
Development, Mr. Westly served as President of Codd and Date International, a relational database consulting firm,
from January 1990 to March 1992 and was the Managing Director of Bridgemere Capital, an investment banking
firm, from 1987 to 1990. Mr. Westly holds a B.A. degree in History from Stanford University and an M.B.A. degree
from the Stanford Graduate School of Business.
Michael K. Wilson has served as eBay’s Senior Vice President Product Development and Site Operations since
February 1999, and Vice President Product Development and Site Operations from January 1997 through January
1999. From October 1995 to January 1997, Mr. Wilson was Vice President of WELL Engaged, L.L.C., a wholly-
owned subsidiary of The Well, a software company. Prior to that time, Mr. Wilson was an engineer for daVinci
Time and Space, a television company, from February 1995 to October 1995, an engineer for eShop, a software
company, from February 1992 to August 1994 and a Director of Mainframe Engineering for Neuron Data, an
engineering company, from 1987 to 1991. Before joining Neuron Data, Mr. Wilson worked in several capacities at
Oracle Corporation from 1983 to 1987, Chevron from 1979 to 1983, and Macy’s from 1975 to 1979.
Scott D. Cook has served as a director of eBay since June 1998. Mr. Cook is the founder of Intuit Inc. (“Intuit”)
and has been a director of Intuit, a financial software developer, since March 1984 and its Chairman of the Board
since March 1993. From March 1984 to April 1994, Mr. Cook served as President and Chief Executive Officer of
Intuit. Mr. Cook also serves on the board of directors of Amazon.com and Broderbund Software, Inc. Mr. Cook
holds a B.A. degree in Economics and Mathematics from the University of Southern California and an M.B.A.
degree from the Harvard Business School.
Robert C. Kagle has served as a director of eBay since June 1997. Mr. Kagle has been a Member of Benchmark
Capital Management Co., L.L.C. (“Benchmark”), the General Partner of Benchmark Capital Partners, L.P. and
Benchmark Founders’ Fund, L.P., since its founding in May 1995. Mr. Kagle also has been a General Partner of
Technology Venture Investors since January 1984. Mr. Kagle holds a B.S. degree in Electrical and Mechanical
44
Engineering from the General Motors Institute (renamed Kettering University in January 1998) and an M.B.A.
degree from the Stanford Graduate School of Business.
Howard D. Schultz has served as a director of eBay since June 1998. Mr. Schultz is the founder of Starbucks
Corporation (“Starbucks”), a provider of gourmet coffee, and has been its Chairman of the Board and Chief
Executive Officer since its inception in 1985. From 1985 to June 1994, Mr. Schultz was also President of Starbucks.
Mr. Schultz was the director of Retail Operations and Marketing for Starbucks Coffee Company, a predecessor to
Starbucks from September 1982 to December 1985 and was the Chairman of the Board, Chief Executive Officer and
President of Il Giornale Coffee Company, a predecessor to Starbucks, from January 1986 to July 1987. Mr. Schultz
is also one of two founding members of Maveron LLC, a company providing advisory services to consumer-based
businesses, and is one of two members of a limited liability company that serves as a general partner of its affiliated
venture capital fund, Maveron Equity Partners, L.P. (together, “Maveron”).
Board Composition
eBay’s Board of Directors (the “Board”) is divided into three classes, Class I, Class II and Class III, with each
class serving staggered three-year terms. The Class I directors, currently Messrs. Cook and Kagle, will stand for re-
election or election at the 1999 annual meeting of stockholders. The Class II directors, currently Messrs. Omidyar
and Schultz, will stand for re-election or election at the 2000 annual meeting of stockholders and the Class III
director, currently Ms. Whitman, will stand for re-election or election at the 2001 annual meeting of stockholders.
Board Committees
The Audit Committee of the Board consists of Robert C. Kagle and Scott D. Cook. The Audit Committee
reviews eBay’s financial statements and accounting practices, makes recommendations to the Board regarding the
selection of independent auditors and reviews the results and scope of the audit and other services provided by
eBay’s independent auditors. The Compensation Committee of the Board consists of Robert C. Kagle and Howard
D. Schultz. The Compensation Committee makes recommendations to the Board concerning salaries and incentive
compensation for eBay’s officers and employees and administers eBay’s employee benefit plans.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee of the Board was at any time since the formation of the
Company an officer or employee of the Company. No executive officer of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more executive officers serving on the
Company’s Board or Compensation Committee.
Director Compensation
Directors of the Company do not receive cash compensation for their services as directors but are reimbursed
for their reasonable expenses for attending Board and Board committee meetings. In June 1998, Mr. Cook and Mr.
Schultz were each granted an option to purchase 450,000 shares of Common Stock of the Company at an exercise
price of $3.11 per share in connection with their service on the Board. Such options were immediately exercisable.
Prior to exercise, Mr. Schultz assigned the beneficial interest in his option to acquire 337,500 of these shares to his
affiliate, Maveron (see Mr. Schultz’s biography above). Mr. Schultz thereafter exercised his option to acquire
112,500 shares in exchange for a full recourse fifty-five month promissory note for $350,000 at an interest rate of
8% per year. Interest on the note is payable annually and the principal is due on December 1, 2002. In addition, in
June 1998, Mr. Schultz exercised, on behalf of Maveron, the assigned portion of the option to acquire the remaining
337,500 shares in exchange for $1.05 million in cash. The shares of Common Stock received are subject to the
Company’s right of repurchase at termination of service at a repurchase price equal to the exercise price of the
option that lapses as to 25% of the shares on the first anniversary of the date of grant and 2.08% each full succeeding
month thereafter. Also in June 1998, Mr. Cook and Maveron each purchased an additional 321,750 shares of
Common Stock at a price of $3.11 per share for cash. The Company subsequently concluded that the fair market
value of the Company’s Common Stock on the date that the Company agreed to make the sale was $3.78 and
45
consequently recognized $0.67 per share, or an aggregate $429,000, as general and administrative expense in the
year ended December 31, 1998.
In July 1998, the Board adopted, and in August 1998 the Company’s stockholders approved, the Directors Plan
and reserved a total of 600,000 shares of the Company’s Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to
participate in the Directors Plan. The option grants under the Directors Plan are automatic and nondiscretionary, and
the exercise price of the options must be 100% of the fair market value of the Common Stock on the date of grant.
Each eligible director will initially be granted an option to purchase 90,000 shares (an “Initial Grant”) on the date
such director first becomes a director (the “Effective Date”). At each Annual Meeting of the Company, each eligible
director will automatically be granted an additional option to purchase 15,000 shares if such director has served
continuously as a member of the Board since the date of such director’s Initial Grant or, if such director was
ineligible to receive an Initial Grant, since the Effective Date. In March 1999, the Board amended the Directors Plan
to provide that no such grants would be made to eligible directors at the 1999 Annual Meeting. The Board is
considering other changes to the Directors Plan in light of the proposed changes in the accounting for this type of
plan. The term of such options is ten years, provided that they will terminate seven months following the date on
which the director ceases to be a director of or a consultant to the Company (12 months if the termination is due to
death or disability). All options granted under the Directors Plan will vest as to 25% of the shares on the first
anniversary of the date of grant and as to 2.08% of the shares each month thereafter, provided the optionee continues
as a member of the Board or as a consultant to the Company.
46
Item 11: Executive Compensation
The following table shows compensation earned during fiscal 1997 and 1998 by eBay’s Chairman of the Board,
Chief Executive Officer and eBay’s four most highly-compensated executive officers for fiscal 1998. These people
are referred to as the “Named Officers.” Mr. Omidyar was the Chief Executive Officer of the Company at December
31, 1997. In February 1998, Margaret C. Whitman was hired as the Company’s Chief Executive Officer. Titles
shown in the table are titles held as of December 31, 1998. The information in the table includes salaries, bonuses,
stock options granted and other miscellaneous compensation. eBay has not granted stock appreciation rights or
restricted stock awards and has no long-term compensation benefits other than stock options. No executive officer
who held office at December 31, 1997 received total annual compensation in excess of $100,000 in 1997.
Summary Compensation Table
Annual Compensation
Long-Term and Other
Compensation
All Other
Compensation
$34,894(3)
Name and 1998 Principal Positions
Margaret C. Whitman .......................... .
President and Chief Executive Officer
Pierre Omidyar..................................... .
Founder and Chairman of the Board
Steven P. Westly .................................. .
Vice President Marketing and
Business Development
Gary F. Bengier.................................... .
Chief Financial Officer and Vice
President Operations
Michael K. Wilson ............................... .
Vice President Product Development
and Site Operations
Jeffrey S. Skoll..................................... .
Vice President, Strategic Planning
and Analysis
Fiscal
Year
1998
1997
1998
1997
1998
1997
1998
1997
1998
1997
1998
1997
Salary
$145,833
—
96,000
65,446
120,000
N/A
125,000
N/A
120,000
N/A
96,000
N/A
Bonus(1)
$100,000
—
25,000
—
51,000
—
Other Annual
Compensation(2)
$ 1,500
—
—
—
1,500
—
Number of
Securities
Underlying
Options
7,200,000
—
—
—
108,000
2,376,000
25,000
—
30,000
—
25,000
—
1,500
—
—
1,575,000
—
—
—
2,700,000
1,500
—
—
—
(1) All bonuses represent amounts paid in 1999 for services rendered in 1998, except for $26,000 of the $51,000
paid to Steven P. Westly which was paid in 1998 for services rendered in 1998.
(2) Represents matching contributions by the Company under its 401(k) Plan.
(3) Represents a reimbursement for relocation expenses paid to Margaret C. Whitman in 1998.
47
The following executive officers received grants of options in 1998 pursuant to the 1997 Stock Option Plan
(the “1997 Plan”).
Option Grants During 1998
Name
Margaret C. Whitman .... .
Steven P. Westly............ .
Percentage
of Total
Options
Granted to
Employees
during
1998(2)
41.7%
0.2
0.2
0.2
0.1
Number of
Securities
Underlying
Options
Granted(1)
7,200,000
27,000
36,000
27,000
18,000
Exercise
Price Per Expiration
Share(3)
$ 0.07
0.07
0.22
0.67
3.11
Date
1/20/2008
1/20/2008
3/4/2008
4/13/2008
6/8/2008
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Appreciation for Option Term(4)
10%
5%
0%
$ 42,720,000 $ 69,888,248 $ 111,569,674
418,386
552,248
402,186
224,124
160,200
208,000
144,000
52,000
262,081
343,841
245,881
119,921
(1) Options granted in 1998 were granted under the 1997 Plan. All options granted were immediately exercisable
and were either incentive stock options or nonqualified stock options. These options were granted by the Board
and generally vest over four years at the rate of 25% of the shares subject to the option on the first vesting date
specified in the Stock Option Agreement and 2.08% per month thereafter. Upon certain changes in control of
the Company, this vesting schedule will accelerate as to all shares that are then unvested. Unvested shares are
subject to the Company’s right of repurchase upon termination of employment. Options expire ten years from
the date of grant. In determining the fair market value of the Company’s Common Stock on each grant date, the
Board considered, among other things, the price of arms’-length sales of the Company’s Common Stock and
Series B Preferred Stock, the Company’s absolute and relative levels of revenues and other operating results,
the state of the Company’s website development, the entry into the Company’s market of certain potentially
significant competitors and the appreciation of stock values of a number of generally comparable Internet
companies. See and “—Compensation Arrangements” below and Note 10 of Notes to Consolidated Financial
Statements for a description of the material terms of these options.
(2) Based on options granted to purchase 17,286,756 shares of Common Stock of the Company during 1998.
(3) Options were granted at an exercise price equal to the fair market value of the Company’s Common Stock, as
determined by the Board of Directors on the date of grant.
(4) Potential realizable values are computed by multiplying the number of shares of Common Stock subject to a
given option by the initial public offering price of $6.00 per share, assuming that the aggregate stock value
derived from that calculation compounds at the annual 0%, 5% or 10% rate shown in the table for the entire
ten-year term of the option and subtracting from that result the aggregate option exercise price. The 5% and
10% assumed annual rates of stock price appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company’s estimate or projection of future Common Stock prices.
48
The following table sets forth the number of shares acquired and the value realized upon exercise of stock
options during 1998 and the number of shares of Common Stock subject to exercisable and unexercisable stock
options held as of December 31, 1998 by each of the Named Officers. Value at fiscal year end is measured as the
difference between the exercise price and the fair market value at close of market on December 31, 1998, which was
$80.42.
Aggregate Option Exercises in 1998 and Values at December 31, 1998
Name
Margaret C. Whitman ...................... .
Steven P. Westly .............................. .
Gary F. Bengier................................ .
Michael K. Wilson ........................... .
Jeffrey S. Skoll................................. .
Number of
Shares
Acquired on
Value
Exercise(1)
Realized(2)
7,200,000(3) $ 42,720,000
14,741,000
2,484,000(4)
9,397,500
1,575,000(5)
10,788,000
1,800,000(6)
—
—
Number of Securities Underlying
Unexercised Options at
December 31, 1998
Value of Unexercised
In-the-Money Options at
December 31, 1998
Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
— $ — $ —
—
—
—
—
—
—
51,261,375
21,107,625
637,500
—
—
—
—
—
—
262,500
—
(1) Except as otherwise noted, all of the shares acquired were unvested as of December 31, 1998 and subject to the
Company’s right of repurchase upon termination of employment at a price equal to the exercise price of the
option pursuant to which the shares were acquired.
(2) Based on the initial public offering price per share of $6.00, minus the per share exercise price, multiplied by
the number of shares issued upon exercise of the option.
(3) As of December 31, 1998, 90,000 shares of the 7,200,000 shares acquired were vested and 7,110,000 shares
were unvested and subject to the Company’s right of repurchase upon termination of employment.
(4) As of December 31, 1998, 792,000 shares of the 2,484,000 shares acquired were vested and 1,692,000 shares
were unvested and subject to the Company’s right of repurchase upon termination of employment.
(5) As of December 31, 1998, 426,563 shares of the 1,575,000 shares acquired were vested and 1,148,437 shares
were unvested and subject to the Company’s right of repurchase upon termination of employment.
(6) As of December 31, 1998, 862,500 shares of the 1,800,000 shares acquired were vested and 937,500 shares
were unvested and subject to the Company’s right of repurchase upon termination of employment.
Compensation Arrangements
Ms. Whitman’s employment offer letter of January 16, 1998 provides for an initial annual base salary of
$175,000 and an initial bonus of up to $100,000. It also provides that, in the event Ms. Whitman’s employment is
terminated for any reason other than cause, she will continue to receive her salary compensation for six months and,
if at the end of such period Ms. Whitman remains unemployed, she will be eligible to receive additional salary
compensation for the lesser of six months or until she becomes employed. Ms. Whitman was also granted an
immediately exercisable option to purchase 7,200,000 shares of Common Stock. As described under “Certain
Transactions,” in February 1998 Ms. Whitman exercised this option. The shares issued to her remain subject to the
Company’s right to repurchase “unvested” shares upon the termination of her employment. This right to repurchase
lapsed with respect to 1,800,000 shares as of March 1, 1999 and will lapse with respect to 150,000 shares at the end
of each month thereafter.
Mr. Bengier’s employment offer letter of September 15, 1997 provides for an initial annual base salary of
$125,000. Mr. Bengier was also granted an immediately exercisable option to purchase 1,575,000 shares of
Common Stock at an exercise price of $0.03, which he exercised in full in January 1998. The shares are subject to
the Company’s right to repurchase unvested shares upon termination of employment, which right lapsed as to
393,750 shares in September 1998 and will lapse with respect to 32,813 shares at the end of each month thereafter.
Mr. Westly’s employment offer letter of August 8, 1997 provides for an initial annual base salary of $120,000
and a $25,000 signing bonus. Mr. Westly was also granted immediately exercisable options to purchase 2,484,000
49
shares (2,376,000 shares on employment and an additional 108,000 shares during his first year of employment) of
Common Stock at a weighted average exercise price of $0.07 per share which he exercised in full in January, May
and June 1998 subject to the Company’s right to repurchase unvested shares upon termination of employment,
which lapses at a rate of 25% of the shares originally subject to the option on the first anniversary of his employment
or the date of grant, depending on the option, and one forty-eighth of the shares at the end of each month thereafter.
During his first year of employment, Mr. Westly received an additional $30,000 bonus.
Mr. Wilson’s employment offer letter of December 9, 1996 provides for an initial annual base salary of
$78,000. Mr. Wilson was also granted an immediately exercisable option to purchase 1,800,000 shares of Common
Stock at an exercise price of $0.01 per share which he exercised in full in January 1998 subject to the Company’s
right to repurchase unvested shares upon termination of employment, which lapsed as to 450,000 shares in
December 1997 and will lapse with respect to 37,500 shares at the end of each month thereafter. During his first
year of employment, Mr. Wilson received an additional option to purchase 900,000 shares of Common Stock at an
exercise price of $0.03 per share.
Mr. Skoll’s employment offer letter of October 16, 1996 provides for an initial annual salary of $30,000 and a
30-day right to purchase the 30,600,000 shares of Common Stock that he currently owns subject to the Company’s
right of repurchase through June 30, 2000. The right of repurchase lapsed with respect to seven forty-eighths of the
total shares purchased on February 1, 1997 and will lapse with respect to an additional one forty-eighth of the shares
on the first day of each month thereafter. In the event of an acquisition of the Company or other similar transaction,
the right of repurchase will expire with respect to all of the shares subject to the Company’s right of repurchase.
Mr. Swette’s employment offer letter of August 14, 1998 provides for an initial annual base salary of $150,000
and a $25,000 signing bonus. Mr. Swette was also granted an option to purchase 1,800,000 shares of Common Stock
outside of the 1997 Plan at an exercise price of $5 per share. These options vest with respect to 450,000 shares in
August 1999 and with respect to 37,500 shares at the end of each month thereafter. In the event Mr. Swette’s
employment is terminated without cause prior to August 14, 1999, such option will vest at a rate of 37,500 shares
per month from August 14, 1998 through the termination date.
Mr. Jacobson’s employment offer letter of August 20, 1998 provides for an initial annual base salary of
$150,000 and a $50,000 signing bonus. Mr. Jacobson was also granted options to purchase an aggregate of 750,006
shares of Common Stock under the Company’s 1997 Plan at an exercise price of $5 per share. The first option for
45,000 shares vested in full on January 24, 1999. The second option for 705,006 shares vests with respect to 176,252
shares on August 24, 1999 and with respect to 14,687 shares at the end of each month thereafter (14,565 shares for
September through December 1999), provided, however, that in the event Mr. Jacobson’s employment is terminated
without cause prior to August 24, 1999, such option will vest at a rate of 14,687 shares per month from August 24,
1998 through the termination date.
Indemnification of Directors and Executive Officers and Limitation of Liability
Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of
directors to grant indemnity to directors and officers in terms sufficiently broad to permit such indemnification
under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the
Securities Act.
As permitted by the Delaware General Corporation Law, the Company’s Amended and Restated Certificate of
Incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach of the director’s duty of loyalty to the
Company or its stockholders, (2) for acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (3) under section 174 of the Delaware General Corporation Law (regarding unlawful
dividends and stock purchases) or (4) for any transaction from which the director derived an improper personal
benefit.
As permitted by the Delaware General Corporation Law, the Company’s Amended and Restated Bylaws
provide that (1) the Company is required to indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law, subject to certain very limited exceptions, (2) the Company is required to
indemnify its other employees to the extent that it indemnifies its officers and directors, unless otherwise required by
50
law, its Amended and Restated Certificate of Incorporation, its Amended and Restated Bylaws or agreements, (3)
the Company is required to advance expenses, as incurred, to its directors and officers in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited
exceptions, and (4) the rights conferred in the Amended and Restated Bylaws are not exclusive.
The Company has entered into Indemnity Agreements with each of its current directors and officers to give
such directors and officers additional contractual assurances regarding the scope of the indemnification set forth in
the Company’s Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws and to
provide additional procedural protections. At present, there is no pending litigation or proceeding involving a
director, officer or employee of the Company regarding which indemnification is sought, nor is the Company aware
of any threatened litigation that may result in claims for indemnification.
The Company has obtained directors’ and officers’ liability insurance.
51
Item 12: Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information known to the Company with respect to beneficial ownership
of the Company’s Common Stock as of March 1, 1999 by (1) each stockholder known by the Company to be the
beneficial owner of more than 5% of the Company’s Common Stock, (2) each director of the Company, (3) the
Named Executive Officers and (4) all executive officers and directors as a group.
Name
Pierre M. Omidyar(2) ...............................................................................................................
Jeffrey S. Skoll(3) .....................................................................................................................
Robert C. Kagle(4)....................................................................................................................
Benchmark Funds(5).................................................................................................................
Margaret C. Whitman(6)...........................................................................................................
Steven P. Westly(7) ..................................................................................................................
Gary F. Bengier(8)....................................................................................................................
Michael K. Wilson(9) ...............................................................................................................
Scott D. Cook(10) .....................................................................................................................
Howard D. Schultz(11) .............................................................................................................
All directors and executive officers as a group (11 persons)(12)..............................................
Shares Beneficially
Owned(1)
Number Percent
31.2%
37,600,521
18.9
22,782,246
14.8
17,862,447
14.4
17,375,508
5.9
7,137,000
2.1
2,484,000
1.3
1,575,000
1.8
2,137,500
*
771,750
*
816,750
77.1
93,212,214
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission
and generally includes voting or investment power with respect to securities. Unless otherwise indicated
below, the persons and entities named in the table have sole voting and sole investment power with respect to
all shares beneficially owned, subject to community property laws where applicable. Shares of Common
Stock subject to options that are currently exercisable or exercisable within 60 days of March 1, 1999 are
deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of
computing the percentage ownership of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. The percentage of beneficial ownership is based on
120,817,222 shares of Common Stock outstanding as of March 1, 1999.
(2) Mr. Omidyar is the Founder and Chairman of the Board of the Company. As of March 1, 1999, 33,775,521
shares of the 37,600,521 shares he beneficially owned were vested and 3,825,000 were unvested and subject
to the Company’s right of repurchase at their original purchase price of $0.0022 per share. See “Certain
Transactions” and “Description of Capital Stock.” The address for Mr. Omidyar is 2005 Hamilton Avenue,
Suite 350, San Jose, California 95125.
(3) Mr. Skoll is the Vice President Strategic Planning and Analysis of the Company. As of March 1, 1999,
12,582,246 shares of the 22,782,246 shares he beneficially owned were vested and 10,200,000 were unvested
and subject to the Company’s right of repurchase at their original purchase price of $0.0022 per share. See
“Certain Transactions” and “Description of Capital Stock.” The address for Mr. Skoll is 2005 Hamilton
Avenue, Suite 350, San Jose, California 95125.
(4)
Includes 15,244,821 shares held by Benchmark Capital Partners, L.P. (“Benchmark Capital”) and 2,130,687
shares held by Benchmark Founders’ Fund, L.P. (“Benchmark Founders’ Fund” collectively, the “Benchmark
Funds”). Mr. Kagle, a director of the Company, is a member of Benchmark Capital Management Co., L.L.C.,
(“Benchmark Management”) which is the General Partner of Benchmark Capital and Benchmark Founders’
Fund. Mr. Kagle disclaims beneficial ownership of shares held by such entities except for his proportional
interest therein. The address for Mr. Kagle and these entities is c/o Benchmark Capital Management Co.,
L.L.C., 2480 Sand Hill Road, Suite 200, Menlo Park, California 94025.
52
(5) Consists of 15,244,821 shares held by Benchmark Capital and 2,130,687 shares held by Benchmark Founders’
Fund. In addition to Mr. Kagle, David M. Beirne, Bruce W. Dunlevie, Kevin R. Harvey and Andrew S.
Rachleff are members of Benchmark management and would be deemed to beneficially own 17,620,548
(14.6%), 17,837,154 (14.8%), 17,862,447 (14.8%), and 17,837,154 (14.8%) shares respectively, of the
Company’s common stock if such shares are included with the other shares they beneficially own. Each of
Mssrs. Beirne, Dunlevie, Harvey, and Rachleff disclaims beneficial ownership of shares held by such entities
except for his proportional interest therein. The address for theses stockholders is c/o Benchmark Capital
Management Co., L.L.C., 2480 Sand Hill Road, Suite 200, Menlo Park California, 94025.
(6) Ms. Whitman is the President and Chief Executive Officer of the Company. As of March 1, 1999, 1,710,000
shares of the 7,110,000 shares she beneficially owned were vested and 5,400,000 shares were unvested and
subject to the Company’s right of repurchase at their original purchase price of $0.067 per share. Includes
27,000 shares held by Ms. Whitman’s husband as custodian for her two children. The address for Ms.
Whitman is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(7) Mr. Westly is the Vice President Marketing and Business Development of the Company. As of March 1,
1999, 898,312 shares of the 2,484,000 shares he beneficially owned were vested and 1,585,688 shares were
unvested and subject to the Company’s right of repurchase at their original purchase price. The original
purchase prices of Mr. Westly’s unvested shares are: $0.033 (1,485,000 shares); $0.067 (19,688 shares); $0.22
(36,000 shares); $0.67 (27,000 shares); and $3.11 (18,000 shares). The address for Mr. Westly is 2005
Hamilton Avenue, Suite 350, San Jose, California 95125.
(8) Mr. Bengier is the Chief Financial Officer and Vice President Operations of the Company. As of March 1,
1999, 492,187 shares of the 1,575,000 shares he beneficially owned were vested and 1,082,813 shares were
unvested and subject to the Company’s right of repurchase at their original purchase price of $0.033 per share.
The address for Mr. Bengier is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(9) Mr. Wilson is the Senior Vice President Product Development and Site Operations of the Company. As of
March 1, 1999, 937,500 shares of the 1,800,000 shares he beneficially owned were vested and 862,500 shares
were unvested and subject to the Company’s right of repurchase at their original purchase price of $0.0057 per
share. Also includes 337,500 shares subject to options vesting within 60 days of March 1, 1999. The address
for Mr. Wilson is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125.
(10)
Includes 450,000 shares subject to an immediately exercisable option outstanding at March 1, 1999. See “Item
11—Executive Compensation.” The address for Mr. Cook is 2550 Garcia Avenue, M.S. 2475, Mountain
View, California 94043.
(11) Mr. Schultz’s shares include 450,000 shares issued to him upon exercise of an option that were unvested as of
March 1, 1999 and subject to the Company’s right of repurchase at their original purchase price of $3.11 per
share. Of these 450,000 unvested shares, Mr. Schultz has transferred 337,500 shares to Maveron. An
additional 321,750 shares held by Maveron or purchased by Maveron in June 1998 will be distributed to the
partners of Maveron in a pro rata partnership distribution. The address for Mr. Schultz is 2401 Utah Ave.
South, Seattle, Washington, 98134. The address for Maveron is 800 Fifth Avenue, Suite 4100, Seattle,
Washington 98104.
(12)
Includes the shares described in footnotes (2)-(4) and (6)-(11).
53
Item 13: Certain Relationships and Related Party Transactions
Since inception (May 13, 1996), there has not been, nor is there currently proposed, any transaction or series of
similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of the Common Stock of the Company had
or will have a direct or indirect interest other than (1) compensation arrangements, which are described where
required under “Management,” and (2) the transactions described below.
Common Stock at Formation. Pursuant to a Stock Purchase and Restriction Agreement dated May 20, 1996,
the Company sold an aggregate of 44,100,000 shares of Common Stock to Pierre M. Omidyar, the Company’s
founder. Mr. Omidyar has served as a director of the Company since its inception and was the Company’s Chief
Executive Officer from its inception until February 1998. In consideration for the shares issued, Mr. Omidyar
transferred to the Company cash of $10,167 and accounts receivable valued at $4,095. Of the 44,100,000 shares,
13,500,000 were subsequently exchanged for shares of the Company’s Series A Preferred Stock as discussed below.
All of Mr. Omidyar’s remaining 30,600,000 shares of Common Stock are subject to a Stock Restriction
Agreement dated December 12, 1996 between Mr. Omidyar and the Company (the “Stock Restriction Agreement”)
and a Stock Restriction and Co-Sale Agreement dated as of June 20, 1997 among Benchmark Capital Partners, L.P.
and Benchmark Founders’ Fund, L.P. (collectively, the “Investors”), Pierre Omidyar and Jeffrey Skoll (collectively,
the “Founders”) and the Company (the “Co-Sale Agreement”). Under the Stock Restriction Agreement, all of the
30,600,000 shares of Common Stock are subject to the Company’s right to repurchase unvested shares if Mr.
Omidyar’s employment terminates. The 30,600,000 shares vested as to 10,837,503 shares on February 1, 1997 and
vest as to 637,500 shares on the first day of each month thereafter through the close of business on September 1,
1999, at which time all of the shares will be vested. The vesting of shares accelerates such that any unvested shares
become fully vested in the event of a sale of the Company, which includes a sale, lease or disposition of
substantially all of the Company’s assets, any merger or consolidation of the Company into another entity, or any
other corporate reorganization where the stockholders immediately prior to such event do not retain at least 50% of
the voting power of and interest in the successor entity or any transaction or series of related transactions in which
more than 50% of the Company’s voting power is transferred (“Sale of the Company”). In addition to the foregoing,
under the Co-Sale Agreement, the vesting of shares will accelerate upon termination of employment, such that
immediately prior to such termination an additional 3,825,000 shares will become vested and not subject to
repurchase by the Company. See “Principal and Selling Stockholders.”
Series A Preferred Stock and Recapitalization. In December 1996, the Company created a class of Preferred
Stock and designated 1,500,000 shares of such Preferred Stock as Series A Preferred Stock, all of which stock the
Company issued to Mr. Omidyar in exchange for 13,500,000 shares of his Common Stock. In June 1997, pursuant to
an Anti-Dilution Agreement dated December 30, 1996 between the Company, Pierre Omidyar and Jeffrey Skoll, Mr.
Omidyar’s Series A Preferred Stock holdings were increased to 1,676,475 shares. Upon completion of the
Company’s initial public offering in September 1998, all of the Series A Preferred Stock was automatically
converted to 15,088,275 shares of Common Stock.
In December 1996, pursuant to a Restricted Stock Purchase Agreement dated December 12, 1996 between the
Company and Mr. Skoll (“Restricted Stock Agreement”), the Company sold 30,600,000 shares of its Common Stock
to Mr. Skoll at a purchase price of $0.0022 per share or an aggregate of $68,000, which price was determined by the
Board to be the fair market value of the Common Stock. Mr. Skoll, the first full-time employee of the Company and
its President from August 1996 to February 1998, has served as the Company’s Vice President Strategic Planning
and Analysis since February 1998. Mr. Skoll acquired the shares of Common Stock with the proceeds from a full
recourse loan governed by a Loan and Pledge Agreement between Mr. Skoll and the Company. Under such
agreement, Mr. Skoll must repay the entire principal of the loan by December 31, 2002 and pay interest, which
accrues at the rate of 6% per year, simple interest, on the first anniversary of the exercise date and on each
subsequent anniversary until all principal and accrued interest are paid in full. Mr. Skoll paid off the full principal
and accrued interest on the loan, $75,411, on November 2, 1998.
All of Mr. Skoll’s shares of Common Stock are subject to the Restricted Stock Agreement. Under the
Restricted Stock Agreement, Mr. Skoll’s shares of Common Stock are subject to the Company’s right to repurchase
54
unvested shares if his employment terminates. His shares vested as to 4,462,497 shares on February 1, 1997 and vest
as to 637,500 shares on the first day of each month thereafter through the close of business on June 30, 2000, at
which time all of the shares will be vested. The vesting of shares accelerates such that any unvested shares become
fully vested in the event of a Sale of the Company. In addition to the foregoing, under the Co-Sale Agreement, the
vesting of shares will accelerate upon termination of employment, such that immediately prior to such termination
an additional 3,825,000 shares will become vested and not subject to repurchase by the Company. See “Principal
and Selling Stockholders.”
Series B Preferred Stock. In June 1997, the Company sold an aggregate of 877,374 and 122,626 shares of
Series B Preferred Stock at a purchase price of $3.00 per share and issued warrants to purchase 350,950 and 49,050
shares of Series B Preferred Stock at an exercise price of $5.00 per share to Benchmark Capital Partners, L.P. and
Benchmark Founders’ Fund, L.P., respectively, for an aggregate purchase price of $3,000,000, which amount was
paid in cash. Benchmark Capital Partners, L.P. and Benchmark Founders’ Fund, L.P. each exercised all of their
warrants in May 1998 for an aggregate purchase price of $2,000,000, which amount was paid in cash. Upon
completion of the Company’s initial public offering in September 1998, all of the Series B Preferred Stock was
automatically converted to an aggregate of 12,600,000 shares of Common Stock. See “Principal and Selling
Stockholders.”
Investor Rights Agreement. In June 1997, the Company, the Investors and the Founders entered into an
Investor Rights Agreement under which the Investors and Founders have certain registration rights with respect to
their shares of Common Stock. See “Description of Capital Stock—Registration Rights.”
Officer Loans. In December 1996, as discussed above, Mr. Skoll purchased 30,600,000 shares of the
Company’s Common Stock for $68,000 under the terms of a Loan and Pledge Agreement effective as of December
1996 between Mr. Skoll and the Company. From January 1998 through June 1998, in connection with the exercise
of stock options granted under the 1996 Plan and the 1997 Plan, the Company permitted Margaret C. Whitman, the
Company’s President and Chief Executive Officer since February 1998, to purchase 7,200,000 shares of Common
Stock in exchange for a $60,000 cash payment, a $180,000 Secured Full Recourse Promissory Note dated February
3, 1998 and a $240,000 Secured Non-Recourse Promissory Note dated February 3, 1998; Steven P. Westly, the
Company’s Vice President Marketing and Business Development since August 1997, to purchase 2,484,000 shares
of Common Stock in exchange for cash payments totaling $17,920 and Secured Full Recourse Promissory Notes
dated January 27, 1998, May 21, 1998, May 26, 1998 and June 26, 1998 in the amounts of $71,280, $16,200, $7,200
and $50,400, respectively; Michael K. Wilson, the Company’s Vice President Product Development and Site
Operations since January 1997, to purchase 1,800,000 shares of Common Stock in exchange for a $1,000 cash
payment and a Secured Full Recourse Promissory Note dated January 28, 1998 in the amount of $9,000 and Gary F.
Bengier, the Company’s Chief Financial Officer and Vice President Operations since November 1997, to purchase
1,575,000 shares of Common Stock in exchange for a $5,250 cash payment and a Secured Full Recourse Promissory
Note dated January 26, 1998 in the amount of $47,250. Each note is secured by the Common Stock purchased with
the note except for Ms. Whitman’s notes which are each secured by all the shares purchased with both the full
recourse and the non-recourse notes. Each note bears interest at the rate of 8%, compounded semi-annually. Interest
on the unpaid principal is due on December 1 of each year and the principal balance is due in full on December 1,
2002. The maximum amount of indebtedness during 1998 for Ms. Whitman, Mr. Westly and Mr. Wilson was
$447,501, $152,629 and $9,488 respectively. Ms. Whitman, Mr. Westly, Mr. Bengier and Mr. Wilson have paid off
the full principal and accrued interest on his or her respective notes on, respectively, January 27, 1999, December 1,
1998, December 23, 1998 and March 15, 1999. See “Principal and Selling Stockholders.”
Stock to Service Provider. In connection with the recruiting of its Chief Executive Officer, the Company
engaged the services of Ramsey Beirne Associates, Inc., an executive search firm affiliated with Benchmark Capital
Partners, L.P. and Benchmark Founders’ Fund, L.P. As partial payment for its services, on March 13, 1998 the
Company issued to this firm 15,416 shares of Series B Preferred Stock, which was valued at $6.00 per share. This
stock converted at the Company’s initial public offering into 138,744 shares of Common Stock.
55
eBay Foundation. In June 1998, the Company established a fund known as the eBay Foundation, which is
administered by the Community Foundation Silicon Valley, and donated 321,750 shares of Common Stock to the
Community Foundation Silicon Valley on behalf of the eBay Foundation. The Community Foundation Silicon
Valley sold 32,175 shares of eBay Common Stock in conjunction with eBay’s initial public offering.
56
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
Upon written request, the Company will provide, without charge, a copy of this Report on Form 10-K,
including the consolidated financial statements, financial statement schedules and any exhibits for the Company’s
most recent fiscal year. All requests should be sent to:
eBay Inc.
Investor Relations
2005 Hamilton Ave., Suite 350
San Jose, CA 95125
(408) 558-7400
In addition, the Securities and Exchange Commission maintains a website that provides access to all filings
made electronically by the Company at www.sec.gov. The Company’s website is located at www.ebay.com.
Information contained on the Company’s website is not a part of this Annual Report on Form 10-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements:
Report of Independent Accountants .........................................................................
Consolidated Balance Sheet .....................................................................................
Consolidated Statement of Income...........................................................................
Consolidated Statement of Stockholders’ Equity.....................................................
Consolidated Statement of Cash Flows....................................................................
Notes to Consolidated Financial Statements ............................................................
Page
Number
59
60
61
62
63
64
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 files as part of, or incorporated by reference into, this Form 10-K:
Exhibit
Number
Exhibit Title
2.01 Agreement and Plan of Merger by and between eBay Inc., a California corporation, and Registrant.*
2.02 Agreement and Plan of Merger and Reorganization among Registrant, Jump Acquisition Sub, Inc.,
Jump Incorporated and certain shareholders of Jump Incorporated dated as of June 30, 1998.*
3.01 Registrant’s Amended and Restated Certificate of Incorporation.**
3.02 Registrant’s Amended and Restated Bylaws.**
4.01 Form of Specimen Certificate for Registrant’s Common Stock.*
4.02 Investor Rights Agreement, dated June 20, 1997, between the Registrant and certain stockholders
named therein.*
10.01 Form of Indemnity Agreement entered into by Registrant with each of its directors and executive
officers.*
57
Exhibit
Number
Exhibit Title
10.02 Registrant’s 1996 Stock Option Plan and related documents.*
10.03 Registrant’s 1997 Stock Option Plan and related documents.*
10.04 Registrant’s 1998 Equity Incentive Plan and related documents.*
10.05 Registrant’s 1998 Directors Stock Option Plan and related documents.*
10.06 Registrant’s 1998 Employee Stock Purchase Plan.*
10.07 Office Lease between Connecticut General Life Insurance Company, a Connecticut corporation, and
the Registrant dated September 30, 1996, as amended through March 1998.*
10.08 Sublease between Information Storage Devices, Inc., a California corporation, and Registrant dated
August 4, 1997.*
10.09 Office Lease between Connecticut General Life Insurance Company, a Connecticut corporation, and
the Registrant dated April 10, 1998, as amended June 9, 1998.*
10.10 Imperial Bank Starter Kit Loan and Security Agreement dated July 20, 1997 between Imperial Bank
and Registrant.*
10.11 Intellectual Property Security Agreement dated July 20, 1997 between Imperial Bank and Registrant.*
10.12 Exodus Communications, Inc. Internet Services and Products Agreement and Co-Location Addendum
effective as of May 1, 1997.*
10.13 License Agreement between Thunderstone Software and Registrant.*
10.14 Employment Letter Agreement dated October 16, 1996 between Jeffrey Skoll and Registrant.*
10.15 Employment Letter Agreement dated December 9, 1996 between Michael Wilson and Registrant.*
10.16 Employment Letter Agreement dated August 8, 1997 between Steven Westly and Registrant.*
10.17 Employment Letter Agreement dated September 15, 1997 between Gary Bengier and Registrant.*
10.18 Employment Letter Agreement dated January 16, 1998 between Margaret C. Whitman and
Registrant.*
10.19 Employment Letter Agreement dated August 14, 1998 between Brian T. Swette and Registrant.*
10.20 Employment Letter Agreement dated August 20, 1998 between Michael R. Jacobson and Registrant.*
10.21 Office Lease between Greylands Business Park, Phase 2, a California General Partnership, and the
Registrant, dated January 29, 1999.***
10.22 Amendment No. 1 to Registrant’s 1998 Directors Stock Option Plan.
21.01 List of Subsidiaries.*
27.01 Financial Data Schedule.
* Previously filed as an Exhibit to the Form S-1 (No. 33-59097) filed in connection with the Company’s initial
public offering.
** Previously filed as an Exhibit to the Form 10-Q filed on November 13, 1998.
*** Previously filed as an Exhibit to the Form S-1 filed on March 25, 1999.
58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
eBay Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of
income, of stockholders’ equity and of cash flows present fairly, in all material respects, the financial position of
eBay Inc. and its subsidiary at December 31, 1997 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the 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 generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion
expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 22, 1999,
except for Note 11, which
is as of March 25, 1999.
59
eBAY INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except per share amounts)
Current assets:
ASSETS
Cash and cash equivalents.................................................................................................
Short-term investments .....................................................................................................
Accounts receivable, net ...................................................................................................
Other current assets...........................................................................................................
Total current assets ......................................................................................................
Property and equipment, net .................................................................................................
Intangible and other assets, net .............................................................................................
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ..............................................................................................................
Customer advances ...........................................................................................................
Income taxes payable........................................................................................................
Debt and leases, current ....................................................................................................
Deferred tax liabilities, current .........................................................................................
Other current liabilities .....................................................................................................
Total current liabilities .................................................................................................
Debt and leases, long-term....................................................................................................
Deferred tax liabilities, long-term.........................................................................................
Series B Mandatorily Redeemable Convertible Preferred Stock and Series B warrants ......
Commitments and Contingencies (Notes 6 and 11)
Stockholders’ equity:
Preferred Stock, $0.001 par value; no shares and 5,000 shares authorized, no shares issued
or outstanding ...............................................................................................................
Series A Convertible Preferred Stock, $0.001 par value; 1,676 and no shares
authorized, 1,676 and no shares issued and outstanding................................................
Common Stock, $0.001 par value; 180,000 and 195,000 shares authorized, 61,200 and
120,000 shares issued and outstanding ..........................................................................
Additional paid-in capital..................................................................................................
Notes receivable from stockholders ..................................................................................
Unearned compensation....................................................................................................
Retained earnings..............................................................................................................
Total stockholders’ equity............................................................................................
December 31,
1998
1997
$ 3,723 $31,790
40,401
—
6,369
1,024
220
4,825
83,385
4,967
7,831
652
—
1,267
$ 5,619 $92,483
128
169
258
—
317
1,124
305
$ 252 $ 1,385
727
—
—
1,682
4,244
8,038
—
157 —
8,038
1,586
3,018 —
—
4
—
—
121
61
86,265
1,441
(1,130)
(68)
(4,139)
(1,399)
976
3,328
1,015
84,445
$ 5,619 $92,483
The accompanying notes are an integral part of these consolidated financial statements.
60
eBAY INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
Net revenues .............................................................................................................
Cost of net revenues..................................................................................................
Gross profit ...........................................................................................................
Operating expenses:
Year Ended December 31,
1997
1996
$ 372 $5,744 $47,352
14
6,859
746
40,493
4,998
358
1998
Sales and marketing ..............................................................................................
Product development ............................................................................................
General and administrative ...................................................................................
Amortization of acquired intangibles....................................................................
Total operating expenses..................................................................................
Income from operations ............................................................................................
Interest and other income, net ...................................................................................
Interest expense.........................................................................................................
Income before income taxes .....................................................................................
Provision for income taxes........................................................................................
Net income................................................................................................................
Net income per share:
32
28
45
19,841
1,730
4,606
831
9,080
950
— —
805
34,332
3,511
105
6,161
1,487
253
908
59
1
—
(39)
(3)
7,030
1,543
254
(106)
(4,632)
(669)
$ 148 $ 874 $ 2,398
Basic .....................................................................................................................
Weighted average shares—basic ..........................................................................
Diluted ..................................................................................................................
Weighted average shares—diluted........................................................................
$ 0.02 $ 0.04
6,375
22,313
$ 0.00 $ 0.01
82,660
42,945
$ 0.05
49,895
$ 0.02
114,590
The accompanying notes are an integral part of these consolidated financial statements.
61
eBAY INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
Issuance of Common Stock for cash and
notes .....................................................
Issuance of Preferred Stock .................. .
Net income ........................................... .
Balance at December 31, 1996 ............. .
Accretion of Series B Mandatorily
Redeemable Convertible Preferred
Stock to redemption value ................ .
Unearned compensation ....................... .
Amortization of unearned
compensation.................................... .
Net income ....................................... .
Balance at December 31, 1997 ............. .
Accretion of Series B Mandatorily
Redeemable Convertible Preferred
Stock to redemption value ................ .
Unearned compensation ....................... .
Amortization of unearned
compensation.................................... .
Issuance of Common Stock for cash and
notes ................................................. .
Issuance of Common Stock for
acquisition of Jump Incorporated ..... .
Contribution of Common Stock to
charitable foundation ........................ .
Issuance of Common Stock for cash in
initial public offering, net of offering
expenses of $6,168 ........................... .
Conversion of Series A and B Preferred
Stock to Common Stock in conjunction
with initial public offering................ .
Note repayments................................... .
Net income ........................................... .
Balance at December 31, 1998 ............. .
Series A
Convertible
Preferred Stock
Shares Amount
— $ —
4
—
4
1,676
—
1,676
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Notes
Receivable
from
Retained
Stockholders Compensation Earnings
Unearned
—
61,200 $ 61 $ 17
—
$ (68)
—
— — — —
(68)
61,200
17
61
—
$ — $ —
—
148
148
—
—
—
Total
Stock-
holders’
Equity
$ 10
4
148
162
—
—
—
—
—
—
—
—
—
1,424
—
—
—
(1,424)
(46)
—
(46)
—
—
—
1,676
—
—
4
—
—
— — — —
(68)
61,200
1,441
61
—
—
25
—
(1,399)
—
874
976
25
874
1,015
—
—
—
—
—
—
—
—
—
—
—
—
—
18,940
—
—
428
322
—
—
—
20
—
—
—
5,831
—
—
—
—
4,569
(1,378)
2,000
1,215
—
‘97
—
(5,831)
3,091
(cid:31)7
—
—
(46)
—
—
—
(46)
—
3,091
3,211
—
2,000
—
1,215
—
—
12,043
12
66,076
—
—
—
66,088
(4)
(1,676)
—
—
—
—
— $ — 120,760
—
316
— — — —
$ (1,130)
$ 121 $ 86,265
27,827
—
5,133
—
28
—
—
—
—
$ (4,139)
—
—
2,398
$ 3,328
5,157
316
2,398
$ 84,445
The accompanying notes are an integral part of these consolidated financial statements.
62
eBAY INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
Year Ended December 31,
1996
1997
1998
Cash flows from operating activities:
Net income..............................................................................................................
Adjustments to reconcile net income to net cash
$ 148
$ 874
$ 2,398
provided by operating activities:
Provision for doubtful accounts and authorized credits .....................................
Depreciation and amortization ...........................................................................
Amortization of unearned compensation ...........................................................
Compensation expense associated with purchases of Common Stock by
outside directors .............................................................................................
Charitable contribution of Common Stock ........................................................
Series B Preferred Stock issued for services......................................................
Acquired research and development ..................................................................
Amortization of acquired intangibles.................................................................
Changes in assets and liabilities:
18
2
—
—
—
—
—
—
343
74
25
—
—
—
—
—
3,323
1,688
2,662
429
1,215
93
150
1,030
Accounts receivable .......................................................................................
Other current assets ........................................................................................
Accounts payable ...........................................................................................
Customer advances.........................................................................................
Income taxes payable .....................................................................................
Other current liabilities...................................................................................
Deferred tax liabilities ....................................................................................
Net cash provided by operating activities....................................................
(184)
(16)
23
—
50
17
55
113
(1,201)
(204)
229
128
119
300
102
789
(8,656)
(4,605)
1,118
599
(169)
3,587
1,447
6,309
Cash flows from investing activities:
Purchases of property and equipment .....................................................................
Purchases of short-term investments.......................................................................
Net cash used in investing activities ............................................................
(25)
—
(25)
(680)
—
(680)
(8,858)
(40,401)
(49,259)
Cash flows from financing activities:
Proceeds from Series A Preferred Stock.................................................................
Proceeds from Series B Preferred Stock and Series B warrants .............................
Proceeds from Common Stock, net.........................................................................
Repayment of stockholder loans .............................................................................
Proceeds from debt issuance ...................................................................................
Principal payments on debt and leases....................................................................
Net cash provided by financing activities .....................................................
Net increase in cash and cash equivalents...................................................................
Cash and cash equivalents at beginning of year..........................................................
Cash and cash equivalents at end of year....................................................................
Supplemental cash flow disclosures:
4
—
10
—
1
—
15
103
—
$ 103
—
2,972
—
—
545
(6)
3,511
3,620
103
$3,723
—
2,000
69,299
316
—
(598)
71,017
28,067
3,723
$31,790
Cash paid for interest .............................................................................................. $ —
$ 1
Cash paid for income taxes .....................................................................................
$ 3
$ 452
$ 39
$ 4,882
Non-cash investing and financing activities:
Property and equipment leases................................................................................ $ —
Common Stock issued for notes receivable ............................................................
$ 68 $ —
Common Stock issued for acquisition ........................................................................ $ — $ —
$ 23 $ —
$ 1,378
$ 2,000
The accompanying notes are an integral part of these consolidated financial statements.
63
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—The Company and Summary of Significant Accounting Policies:
The Company
eBay Inc. (the “Company”) was incorporated in California in May 1996 and reincorporated in the state of
Delaware in April 1998. The Company operates an online person-to-person trading community. eBay pioneered
online person-to-person trading by developing a Web-based community in which buyers and sellers are brought
together in an auction format to trade personal items such as antiques, coins, collectibles, computers, memorabilia,
stamps and toys. The eBay service permits sellers to list items for sale, buyers to bid on items of interest and all
eBay users to browse through listed items in a fully-automated, topically-arranged service that is available online
24-hours-a-day, seven-days-a-week.
Reincorporation
As a result of the reincorporation in April 1998, the Company was authorized to issue 180,000,000 shares of
$0.001 par value Common Stock and 6,000,000 shares of $0.001 par value Preferred Stock. The Board of Directors
and the stockholders subsequently amended the number of authorized shares such that the Company was authorized
to issue 195,000,000 shares of $0.001 Common Stock and 5,000,000 shares of $0.001 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.
Initial public offering
On September 24, 1998, the Company completed its initial public offering of 4,025,000 shares of its Common
Stock, the net proceeds of which aggregated approximately $66.1 million. At the closing of the offering, all issued
and outstanding shares of the Company’s Convertible Preferred Stock and Mandatorily Redeemable Convertible
Preferred Stock were converted into an aggregate of 27,827,019 shares of Common Stock.
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, 1998 and for the year then ended are consolidated and include the
accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions
have been eliminated in consolidation. From September 1995 (“Inception”) through May 1996, eBay operated as a
sole proprietorship. The sole proprietorship recognized no revenues and incurred no expenses during the period from
Inception to December 31, 1995. The sole proprietorship recognized net revenues totaling $30,000 and incurred
expenses totaling $14,000 during the period from January 1, 1996 until incorporation in May 1996. The results of
operations for this period have been included in the 1996 financial statements to facilitate presentation.
Cash, cash equivalents and short-term investments
The Company considers all highly liquid investments purchased with a maturity of three months or less at the
date of acquisition to be cash equivalents. Both cash equivalents and short-term investments are considered
64
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available-for-sale securities and are carried at amortized cost, which approximates fair value. The following
schedule summarizes the estimated fair value of the Company’s cash, cash equivalents and short-term investments,
(in thousands):
Cash and cash equivalents:
Cash...........................................................................................................................
Money market funds..................................................................................................
Municipal bonds and notes........................................................................................
Corporate securities...................................................................................................
December 31,
1998
1997
3,047
$ 676 $ 6,397
2,828
— 19,555
— 3,010
$ 3,723 $31,790
Short-term investments:
Municipal bonds and notes........................................................................................
$ — $40,401
The estimated fair value of short-term investments classified by date of contractual maturity is as follows, (in
thousands):
Due within one year or less ................................................................................................ $ — $12,287
— 28,114
Due after one year through two years.................................................................................
$ — $40,401
December 31,
1998
1997
Concentration of credit risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash
equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments are
deposited with high credit, quality financial institutions. The Company’s accounts receivable are derived from
revenue earned from customers located in the U.S. and throughout the world and are denominated in U.S. dollars.
Accounts receivable balances are typically settled through customer credit cards and, as a result, the majority of
accounts receivable are collected upon processing of credit card transactions. The Company maintains an allowance
for doubtful accounts receivable based upon the expected collectibility of accounts receivable. During the years
ended December 31, 1997 and 1998, no customers accounted for more than 10% of net revenues or net accounts
receivable.
Fair value of financial instruments
The Company’s financial instruments, including cash, cash equivalents, short-term investments, accounts
receivable, accounts payable and capital lease obligations are carried at cost, which approximates their fair value
because of the short-term maturity of these instruments.
Property and equipment
Property and equipment are stated at historical cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets, generally five years or less, or the shorter of the
lease term or the estimated useful lives of the assets, if applicable.
Intangible assets
Goodwill and other intangible assets resulting from the acquisition of Jump Incorporated (“Jump”) were
estimated by management to be primarily associated with the acquired customer list, workforce and technological
know how. As a result of the rapid technological changes occurring in the Internet industry and the intense
65
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
competition for qualified Internet professionals, goodwill and other intangible assets are amortized on a straight-line
basis over the estimated periods of benefit, which range from eight to 24 months. See Note 2—Acquisition.
Impairment of long-lived assets
The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial
Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of” (“SFAS”). SFAS No. 121 requires recognition of impairment of long-lived assets in the event the
net book value of such assets exceeds the future undiscounted cash flows attributable to such assets.
Revenue recognition
Revenues are derived primarily from placement fees charged for the listing of items for auction and success
fees calculated as a percentage of the final sales transaction value. Revenues related to placement fees are
recognized at the time the item is listed, while those related to success fees are recognized at the time that the
auction is successfully concluded. An auction is considered successfully concluded when there is at least one bid
above the seller’s specified minimum price or reserve price, whichever is higher, at the end of the auction term,
which is generally three to seven days. Provisions for doubtful accounts and authorized credits to sellers are
provided at the time of revenue recognition based upon the Company’s historical experience.
Product development costs
Product development costs include expenses incurred by the Company to develop, enhance, manage, monitor
and operate the Company’s website. Product development costs are expensed as incurred.
Advertising expense
The Company recognizes advertising expenses in accordance with Statement of Position (“SOP”) 93-7
“Reporting on Advertising Costs.” As such, the Company expenses the costs of producing advertisements at the
time production occurs, and expenses the cost of communicating advertising in the period in which the advertising
space or airtime is used. Internet advertising expenses are recognized based on the terms of the individual
agreements, but generally over the greater of the ratio of the number of impressions delivered over the total number
of contracted impressions, or a straight-line basis over the term of the contract. Advertising expenses totaled $0,
$478,000, and $12.3 million during the years ended Decemer 31, 1996, 1997 and 1998, respectively.
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions of
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and complies
with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.” Under APB No. 25,
compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the
Company’s stock and the exercise price. The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus in Issue No. 96-18.
Income taxes
Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes
payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company’s financial statements or tax returns. The measurement of current
66
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and deferred tax liabilities and assets are based on the provisions of 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.
Net income per share
The Company computes net income per share in accordance with SFAS No. 128, “Earnings per Share” and
SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98, 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,
1997
1998
1996
Numerator:
Net income............................................................................................................
Accretion of Series B Mandatorily Redeemable Convertible Preferred
$ 148
$ 874
$ 2,398
Stock to redemption value .................................................................................
Net income available to common stockholders.....................................................
— (46)
$ 828
$ 148
(46)
$ 2,352
Denominator:
Weighted average shares.......................................................................................
Weighted average unvested common shares subject to repurchase
agreements .........................................................................................................
Denominator for basic calculation ........................................................................
Weighted average effect of dilutive securities:
Series A Preferred Stock…………………………………………………..
Series B Preferred Stock.............................................................................
Series B Preferred Stock warrants………………………………………...
Unvested common shares subject to
repurchase agreements ............................................................................
Employee stock options..............................................................................
Denominator for diluted calculation .....................................................................
Net income per share:
30,600
61,200
89,473
(24,225)
6,375
(38,887)
22,313
(39,578)
49,895
12,345
—
—
15,088
6,372
—
11,037
8,054
1,098
24,225
38,887
— —
82,660
42,945
39,578
4,928
114,590
Basic .....................................................................................................................
Diluted ..................................................................................................................
$ 0.02
$ 0.00
$ 0.04
$ 0.01
$ 0.05
$ 0.02
67
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive income
Effective January 1, 1998 the Company adopted the provisions of SFAS No. 130, “Reporting Comprehensive
Income.” SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial
statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-
owner sources. To date, the Company has not had any transactions that are required to be reported in comprehensive
income.
Segment information
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information.” The Company identifies its operating segments based on
business activities, management responsibility and geographical location. During the years ended December 31,
1996, 1997 and 1998, the Company operated in a single business segment operating an online person-to-person
trading community in an auction format, primarily in the United States. Through December 31, 1998, foreign
operations have not been significant in either revenue or investment in long-lived assets.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current period
presentation.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants issued SOP No. 98-1, “Software for
Internal Use,” which provides guidance on accounting for the cost of computer software developed or obtained for
internal use. SOP No. 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998.
The Company does not expect that the adoption of SOP No. 98-1 will have a material impact on its consolidated
financial statements.
Note 2—Acquisition:
Effective June 30, 1998, the Company acquired all the outstanding shares of Jump, which provides a forum
where Internet users can buy and sell items in an online auction format. The acquisition has been accounted for
using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date.
The fair value of intangible assets was determined using a combination of methods, including replacement cost
estimates for acquired research and development and completed technology, a risk-adjusted income approach for the
acquired customer list and the amounts paid for covenants not to compete.
The total purchase price of approximately $2.3 million consisted of 428,544 shares of the Company’s Common
Stock with an estimated fair value of approximately $2.0 million and other acquisition related expenses of
approximately $335,000, consisting primarily of payments for non-compete agreements totaling approximately
$208,000 and legal and other professional fees. Of the total purchase price, approximately $150,000 was allocated to
in-process technology and was immediately charged to operations because such in-process technology had not
reached the stage of technological feasibility at the acquisition date and had no alternative future use. The remainder
of the purchase price was allocated to net tangible liabilities assumed ($31,000) and intangible assets, including
completed technology ($500,000), customer list ($1.5 million), covenants not to compete ($208,000) and goodwill
($24,000). The intangible assets are being amortized over their estimated useful lives of eight to 24 months.
68
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition has been structured as a tax free exchange of stock, therefore, the differences between the
recognized fair values of the acquired assets, including tangible assets, and their historical tax bases are not
deductible for tax purposes.
The following unaudited pro forma consolidated financial information reflects the results of operations for the
years ended December 31, 1997 and 1998, as if the acquisition had occurred on January 1, 1997 and 1998,
respectively, and after giving effect to purchase accounting adjustments. These pro forma results have been prepared
for comparative purposes only and do not purport to be indicative of what operating results would have been had the
acquisitions actually taken place on January 1, 1997 or 1998, and may not be indicative of future operating results,
(in thousands, except per share amounts).
Year Ended
December 31,
Net revenues......................................................................................................................
Income (loss) from operations...........................................................................................
Net income (loss) ..............................................................................................................
Net income (loss) per share:
1998
1997
$5,755 $47,364
5,361
1,597
(655)
(1,199)
Basic..........................................................................................................................
Diluted.......................................................................................................................
$ (0.05)
$ (0.05)
$ 0.02
$ 0.01
Weighted average shares:
Basic..........................................................................................................................
Diluted.......................................................................................................................
22,743
88,787
22,743 129,491
Note 3—Balance Sheet Components:
Accounts receivable, net:
Accounts receivable ....................................................................................................
Less: Allowance for doubtful accounts .......................................................................
Allowance for authorized credits .....................................................................
December 31,
1998
1997
(in thousands)
$1,385 $9,491
(2,105)
(308)
(53)
(1,017)
$1,024 $6,369
Write-offs against the allowance for doubtful accounts were $0 and $562,000 in the years ended December
31, 1997 and 1998, respectively.
Property and equipment, net:
Computer equipment ...................................................................................................
Furniture and fixtures ..................................................................................................
Leasehold improvements.............................................................................................
Less: Accumulated depreciation and amortization..............................................................
December 31,
1998
1997
(in thousands)
$ 608 $8,897
585
115
5
113
9,595
728
(76)
(1,764)
$ 652 $7,831
69
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment includes $23,000 and $0 of equipment under capital leases at December 31, 1997 and
1998, respectively. Accumulated depreciation of assets under capital leases totaled $7,000 and $0 at December 31,
1997 and 1998, respectively.
Intangible assets, net:
Purchased technology.................................................................................................. $ — $ 500
208
—
Covenants not to compete ...........................................................................................
— 1,484
Customer list ...............................................................................................................
— 24
Goodwill......................................................................................................................
— 2,216
— (1,030)
$ — $1,186
Less: Accumulated amortization .................................................................................
December 31,
1998
1997
(in thousands)
Other current liabilities:
Accrued compensation and related benefits ................................................................
Advertising accruals ....................................................................................................
Professional fees..........................................................................................................
Other accruals..............................................................................................................
$ 68
$ 978
— 1,274
451
—
249 1,541
$4,244
$ 317
Note 4—Related Party Transactions:
Notes receivable from stockholders
At December 31, 1997 the Company held a note receivable from an officer of the Company totaling $68,000.
The note was full recourse, was secured by Common Stock and bore simple interest at 6% per annum. The principal
and interest on the note was repaid in November 1998. At December 31, 1998, the Company held notes receivable
from employees, officers and a director totaling $1.1 million, representing amounts owed to the Company from the
exercise of stock options. These full recourse notes are secured by Common Stock and bear interest at a rate of 8%
per annum. Interest is due and payable on December 1st of each year, and the principal is due on or before
December 1, 2002.
Professional services
In connection with the recruitment of its Chief Executive Officer, the Company engaged the services of an
executive search firm affiliated with a holder of the Company’s Series B Mandatorily Redeemable Convertible
Preferred Stock. During 1998, the Company paid fees for services performed of $93,000 and issued 46,248 shares of
Series B Mandatorily Redeemable Convertible Preferred Stock with a fair value on the date earned of $93,000. The
amount paid for the services and the fair value of the shares are included in general and administrative expenses in
the consolidated statement of income for the year ended December 31, 1998.
Note 5—Debt:
Line of credit
At December 31, 1997 and 1998, the Company had $545,000 and $0, respectively, outstanding under a line of credit
with a financial institution. The line of credit provides for a revolving line, including an equipment sub-
limit facility, of up to $750,000 and expired on January 5, 1999. Under the line of credit, the Company was required
to comply with certain financial covenants. The Company was in compliance with all such covenants at December
31, 1997 and 1998.
70
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6—Commitments:
Leases
The Company leases office space and equipment under noncancelable operating leases with various expiration
dates through the year 2004. Rent expense for the years ended December 31, 1996, 1997, and 1998 totaled $9,000,
$223,000 and $672,000, respectively.
Future minimum lease payments under non-cancelable operating leases, including lease commitments entered
into subsequent to December 31, 1998, are as follows, (in thousands):
Year ending
December 31,
1999.......................................................................................................................................
2000.......................................................................................................................................
2001.......................................................................................................................................
2002.......................................................................................................................................
2003.......................................................................................................................................
Thereafter ..............................................................................................................................
Total minimum lease payments.....................................................................................
Operating
Leases
$ 2,978
4,605
4,675
4,782
4,681
3,330
$25,051
Advertising
During 1998, the Company entered into a three-year marketing agreement with America Online, Inc. (“AOL”).
Under the terms of the agreement the Company will be provided with a specific number of advertising impressions
featuring it as the preferred provider of person-to-person auction services on AOL’s service. In consideration, the
Company has committed to pay $12.0 million over the three-year term of the agreement. The Company is
recognizing these fees as sales and marketing expenses over the greater of the ratio of the number of impressions
delivered over the total number of contracted impressions, or a straight-line basis over the term of the contract. At
December 31, 1998, the Company had paid $4.0 million to AOL, of which $1.7 million was recognized as sales and
marketing expense. In March 1999, the Company expanded the scope of its strategic relationship with AOL. Under
the amended agreement, eBay will be given 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. eBay will pay $75 million over the four-year
term of the contract and the remaining obligations under the previous contract were cancelled. eBay 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.
71
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7—Income Taxes:
Income before income taxes was generated entirely by domestic operations during 1996, 1997 and 1998. The
provision for income taxes consists of the following, (in thousands):
Year Ended
December 31,
1997
1998
1996
Current:
Federal...........................................................................................................
State and local ...............................................................................................
Deferred:
Federal...........................................................................................................
State and local ...............................................................................................
$ 40
11
51
47
8
55
$ 106
$ 450 $2,309
117 877
567 3,186
87
1,245
15 201
102 1,446
$ 669 $4,632
The following is a reconciliation of the difference between the actual provision for income taxes and theprovision
computed by applying the federal statutory rate of 34% to income before income taxes, (in thousands):
Year Ended
December 31,
1997
$ 525 $2,390
1998
1996
$ 87
—
—
—
—
19
$ 106
384
—
— 1,051
— (175)
270
12
132 712
$ 669 $4,632
Provision at statutory rate........................................................................................
Permanent differences:
Acquisition related expenses ...........................................................................
Stock compensation.........................................................................................
Tax exempt interest income.............................................................................
Other................................................................................................................
State taxes, net of federal benefit ............................................................................
72
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
1997
1996
1998
Deferred tax assets:
Depreciation ..........................................................................................................
State income taxes .................................................................................................
Amortization..........................................................................................................
Deferred tax liabilities:
Accruals and reserves not currently deductible .....................................................
Depreciation ..........................................................................................................
Valuation allowance ......................................................................................................
Net deferred tax liabilities .............................................................................................
Note 8—Preferred Stock and Convertible Preferred Stock:
Preferred Stock
—
$ — $ — $ 61
43
— — 17
— — 121
—
54
1
55
1,724
154
3 —
157 1,724
— — —
$157 $1,603
$55
The Company is authorized, subject to limitations prescribed by Delaware law, to provide for the issuance of
Preferred Stock in one or more series, to establish from time to time the number of shares included within each
series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series
(but not below the number of shares of such series then outstanding) without any further vote or action by the
stockholders. At December 31, 1998, there were 5,000,000 shares of Preferred Stock authorized for issuance, and no
shares issued or outstanding.
Convertible Preferred Stock
Convertible Preferred Stock prior to the initial public offering at September 24, 1998 was composed of the
following, (in thousands):
Shares
Liquidation Redemption
Series A ...................................................................................... .
Series B ...................................................................................... .
Undesignated.............................................................................. .
1,676
1,415
Authorized Outstanding Amount
Amount
$ —
5,093
2,909 — — —
$5,093
3,091 $ 7,300
6,000
1,676 $ 1,000
6,300
1,415
On September 24, 1998, the Company completed its initial public offering of Common Stock. At that time, all
issued and outstanding shares of the Company’s Series A and Series B Convertible Preferred Stock were converted
into an aggregate of 27,827,019 shares of Common Stock.
73
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Warrants for Series B Mandatorily Redeemable Convertible Preferred Stock
In connection with the issuance of Series B, the Company issued warrants to purchase 400,000 additional
shares of Series B with an exercise price of $5.00 per share. In May 1998, these warrants were exercised, resulting
in the issuance of 400,000 shares of Series B in exchange for cash proceeds totaling $2.0 million.
Note 9—Common Stock:
The Company’s Certificate of Incorporation, as amended, authorizes the Company to issue 195,000,000 shares
of Common Stock. A portion of the shares outstanding are subject to repurchase by the Company over a four-year
period from the earlier of the issuance date or employee hire date, as applicable. At December 31, 1997 and 1998,
there were 33,150,000 and 32,212,617 shares, respectively, subject to repurchase rights at an average price of $0.01
and $0.04, respectively, per share.
In June 1998, in connection with the appointment of two outside directors, the Company sold an aggregate of
643,500 shares of Common Stock to two directors and realized net proceeds of $2.0 million. The Company
recognized the $429,000 excess of the estimated fair value of the stock over the price paid by the two directors as
general and administrative expense in 1998.
At December 31, 1998, the Company had reserved 23,497,986 and 900,000 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 10—Employee Benefit Plans:
401(k) Savings Plan
The Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the
Internal Revenue Code (the “401(k) Plan”). Under the Savings Plan, participating employees may defer a percentage
(not to exceed 25%) of their eligible pretax earnings up to the Internal Revenue Service’s annual contribution limit.
All employees on the United States payroll of the Company age 21 years or older are eligible to participate in the
401(k) Plan. The Company is not required to contribute to the 401(k) Plan but in 1998 elected to match
contributions up to a maximum of $1,500 per employee. As a result, the Company contributed $97,479, which was
expensed in 1998. In 1998, the Company also committed to matching future employee contributions to a maximum
of $1,500 per employee per year.
Stock option plans
In December 1996, the Company’s Board of Directors adopted the 1996 Stock Option Plan (the “1996 Plan”),
and in June 1997, adopted the 1997 Stock Option Plan (the “1997 Plan”) (collectively, the “Plans”). The Plans
provide for the granting of stock options to employees and consultants of the Company. Options granted under the
Plans may be either incentive stock options (“ISO”) or nonqualified stock options (“NSO”). ISOs may be granted
only to Company employees (including officers and directors who are also employees). NSOs may be granted to
Company employees and consultants.
In July 1998, the Board adopted, and in August 1998 the Company’s stockholders approved, the 1998 Equity
Incentive Plan (the “1998 Plan”) and reserved 13,500,000 shares of Common Stock for issuance thereunder. The
1998 Plan authorized the award of options, restricted stock awards and stock bonuses (each an “Award”). No person
will be eligible to receive more than 3,000,000 shares in any calendar year pursuant to Awards under the 1998 Plan
other than a new employee of the Company who will be eligible to receive no more than 6,000,000 shares in the
calendar year in which such employee commences employment. Options granted under the 1998 Plan may be either
ISOs or NSOs. ISOs may be granted only to Company employees (including officers and directors who are also
74
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
employees). NSOs may be granted to Company employees, officers, directors, consultants, independent contractors
and advisors of the Company.
Options under the Plans may be granted for periods of up to ten years and at prices no less than 85% of the
estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however,
that (i) the exercise price of an ISO may not be less than 100% of the estimated fair value of the shares on the date of
grant, and (ii) the exercise price of an ISO granted to a 10% shareholder may not be less than 110% of the estimated
fair value of the shares on the date of grant. Options under the 1996 and 1997 Plans were exercisable immediately
through June 30, 1998, subject to repurchase rights held by the Company, which lapse over the vesting period,
which is generally four years. Options under the 1998 Plan are not immediately exercisable and generally vest over a
period of four years.
The following table summarizes activity under the Company’s stock option plans for the years ended December
31, 1996, 1997 and 1998, (shares in thousands):
Year Ended December 31,
1996
1997
1998
Outstanding at beginning of period.................................. .
Granted ........................................................................ .
Exercised...................................................................... .
Cancelled ..................................................................... .
Outstanding at end of period............................................ .
Options exercisable at end of period................................ .
Weighted average fair value of
options granted during period. .................................... .
Shares
Weighted
Average
Exercise
Price
— $ —
675
—
—
675
675
0.01 11,592
—
—
— (477)
0.01 11,790
11,790
Weighted
Average
Exercise
Price
Shares
Shares
Weighted
Average
Exercise
Price
675 $ 0.01
0.02
11,790 $ 0.02
2.15
17,287
0.14
— (19,477)
1.67
0.01
(354)
3.68
0.02 9,246
0.03
370
0.02
0.01
0.10
2.80
The following table summarizes information about fixed stock options outstanding at December 31, 1998,
(shares in thousands):
Range of
Exercise Prices
$ 0.01 – $ 0.22
0.67 – 1.00
3.11 – 3.11
4.67 – 5.00
16.85
Options Outstanding at
December 31, 1998
Weighted
Average
Remaining
Contractual Life
8.8 years
9.3
9.4
9.6
9.8
9.5
Number of
Shares
Outstanding
1,302
943
821
6,165
15
9,246
Weighted
Average
Exercise
Price
$ 0.04
0.75
3.11
4.91
32.52
3.68
Options Exercisable at
December 31, 1998
Number of
Shares
Exercisable
370
—
—
—
—
370
Weighted
Average
Exercise Price
$ 0.03
—
—
—
—
0.03
75
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair value disclosures
The Company calculated the minimum 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:
Risk-free interest rates.............................................................................................
Expected lives (in years) .........................................................................................
Dividend yield .........................................................................................................
Expected volatility...................................................................................................
Year Ended December 31,
1998
1996
1997
6.0% 5.9% 4.9%
3.0
5.0
5.0
0%
0%
0%
0% 80%
0%
Prior to the Company’s initial public offering, the fair value of each option grant was determined using the
minimum value method. Subsequent to the offering, the fair value was determined using the Black-Scholes model.
The compensation cost associated with the Company’s stock-based compensation plans, determined using the
minimum value method prescribed by SFAS No. 123, did not result in a material difference from the reported net
income for the years ended December 31, 1996 and 1997. The effect of compensation cost on net income and
earnings per share for the year ended December 31, 1998 is as follows, (in thousands, except per share amounts):
Net income:
As reported ..................................................................................................................................
Pro forma.....................................................................................................................................
$2,398
$1,622
Net income per share—basic:
As reported ..................................................................................................................................
Pro forma.....................................................................................................................................
$ 0.05
$ 0.03
Net income per share—diluted:
As reported ..................................................................................................................................
Pro forma.....................................................................................................................................
$ 0.02
$ 0.01
1998
1998 Employee Stock Purchase Plan
In July 1998, the Board adopted, and in August 1998 the Company’s stockholders approved, the 1998 Employee
Stock Purchase Plan (the “Purchase Plan”) and reserved 900,000 shares of Common Stock for issuance thereunder.
On each January 1, the aggregate number of shares reserved for issuance under the Purchase Plan will be increased
automatically by the number of shares purchased under the Purchase Plan in the preceding calendar year. The
aggregate number of shares reserved for issuance under the Purchase Plan shall not exceed 4,500,000 shares. The
Purchase Plan became effective on September 24, 1998, the first business day on which price quotations for the
Company’s Common Stock were available on the Nasdaq National Market. Employees are generally eligible to
participate in the Purchase Plan if they are customarily employed by the Company for more than 20 hours per week
and more than five months in a calendar year and are not (and would not become as a result of being granted an
option under the Purchase Plan) 5% stockholders of the Company. Under the Purchase Plan, eligible employees may
select a rate of payroll deduction between 2% and 10% of their W-2 cash compensation subject to certain maximum
purchase limitations. Each Offering Period has a maximum duration of two years (the “Offering Period”) and
consists of four six-month Purchase Periods (each, a “Purchase Period”), with the exception of the first Offering
Period, which began on September 24, 1998 and will end on April 30, 1999. Offering Periods and Purchase Periods
thereafter will begin on April 1 and November 1. The price at which the Common Stock is purchased under the
Purchase Plan is 85% of the lesser of the fair market value of the Company’s Common Stock on the first day of the
applicable offering period or on the last day of that purchase period. The Purchase Plan will terminate after a period
of ten years unless terminated earlier as permitted by the Purchase Plan.
76
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 Directors Stock Option Plan
In July 1998, the Board adopted, and in August 1998 the Company’s stockholders approved, the Directors Plan
and reserved a total of 600,000 shares of the Company’s Common Stock for issuance thereunder. Members of the
Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to
participate in the Directors Plan. The option grants under the Directors Plan are automatic and nondiscretionary, and
the exercise price of the options must be 100% of the fair market value of the Common Stock on the date of grant.
Each eligible director who first becomes a member of the Board on or after the effective date of the Registration
Statement of which this Prospectus forms a part (the “Effective Date”) will initially be granted an option to purchase
90,000 shares (an “Initial Grant”) on the date such director first becomes a director. Immediately following each
Annual Meeting of the Company, each eligible director will automatically be granted an additional option to
purchase 15,000 shares if such director has served continuously as a member of the Board since the date of such
director’s Initial Grant or, if such director was ineligible to receive an Initial Grant, since the Effective Date. In
March 1999, the Board amended the Directors Plan to provide that no such grants would be made to eligible
directors at the 1999 Annual Meeting. The Board is considering other changes to the Directors Plan in light of the
proposed changes in the accounting for this type of plan. The term of such options is ten years, provided that they
will terminate seven months following the date the director ceases to be a director or a consultant of the Company
(twelve months if the termination is due to death or disability). All options granted under the Directors Plan will vest
as to 25% of the shares on the first anniversary of the date of grant and as to 2.08% of the shares each month
thereafter, provided the optionee continues as a member of the Board or as a consultant to the Company.
Unearned stock-based compensation
In connection with certain stock option grants during the years ended December 31, 1997 and 1998, the
Company recognized unearned compensation totaling $1.4 million and $5.4 million, respectively, which is being
amortized over the four-year vesting periods of the related options. Amortization expense recognized during the
years ended December 31, 1997 and 1998 totaled approximately $25,000 and $2.6 million, respectively.
Note 11—Subsequent Events:
Stock split
During January 1999, the Company’s Board of Directors approved a three-for-one Common Stock split.
Shareholders of record on February 9, 1999 received two additional shares on March 1, 1999. All share and per
share amounts in these consolidated financial statements and notes thereto for all periods presented have been
retroactively adjusted to reflect the stock splits.
Australian joint venture
On February 17, 1999, eBay entered into a joint venture agreement with an Australian company, PBL Online PTY
Limited (PBLO), for the formation of a company which will provide on-line trading services to Internet users based
primarily in Australia and New Zealand (combined, the “Territory”). PBLO is part of the Publishing & Broadcasting
Limited group of companies which provide a wide range of media services in the Territory, including magazine
publishing, television broadcasting, on-line services, broadcast programs and electronic commerce services. The
joint venture company will be based in Australia and will combine technical and software experience, market
knowledge and reputation with PBLO’s publishing, distribution, advertising and marketing channels. Operations of
the joint venture company are expected to commence during 1999.
77
eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contractual arrangements
On March 1, 1999, eBay commenced an insurance program for eBay users. The program provides coverage on
qualified transactions involving fraud that occurs when a winning bidder of an auction sends money to a seller, in
good faith, and does not receive the item or does not receive the item as described in the eBay auction. To qualify
for benefits under the program, the winning bidder must be an eBay buyer in “good standing” and the seller must be
“registered” with a Feedback Rating of zero (0) or above. eBay has entered into a contract with Lloyd’s of London
to underwrite the program for an initial period of six months at a minimum cost of $525,000.
On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement (the “Agreement”) with i-
Escrow, Inc. (“i-Escrow”). Under the terms of the Agreement, i-Escrow will develop co-branded website pages
which offer third party escrow services to eBay users. Upon request by an eBay user, i-Escrow will escrow a buyer’s
money until the buyer confirms that the applicable item was physically delivered, at which time the buyer’s money
will be released to the seller. eBay is committed to actively promoting these services to sellers and high bidders
upon successful completion of the auction, but does not have control over, or ownership of, the escrowed funds. The
co-branded website pages are expected to be launched in 1999.
In March 1999, the Company expanded the scope of its strategic relationship with AOL. Under their amended
agreement, eBay will be given 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. eBay will pay $75 million over the four-year term of
the contract. eBay 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.
Contingencies
On March 23, 1999, the Company was sued by Network Engineering Software, Inc. in the U.S. District Court
for the Northern District of California for the Company’s alleged willful and deliberate violation of a patent. The
suit seeks unspecified monetary damages as well as an injunction against the Company’s operations. It also seeks
treble damages and attorneys’ fees and costs. The Company believes that it has meritorious defenses against this suit
and intends to vigorously defend itself. The Company could be forced to incur material expenses during this defense
and in the event it were to lose this suit, its business would be harmed.
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eBAY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1999
eBAY INC.
Principal Executive Officer:
By: /S/ MARGARET C. WHITMAN
Margaret C. Whitman
President and Chief Executive Officer
Principal Financial Officer and Principal Accounting
Officer:
By: /S/ GARY F. BENIGIER
Gary F. Benigier
Chief Financial Officer and
Vice President of Operations
Additional Directors:
By: /S/ PIERRE M. OMIDYAR
Pierre M. Omidyar
Founder, Chairman of the Board and Director
By: /S/ SCOTT D. COOK
Scott D. Cook
Director
By: /S/ ROBERT C. KAGLE
Robert C. Kagle
Director
By: /S/ HOWARD D. SCHULTZ
Howard D. Schultz
Director
79