EXHIBIT 99.1
Report of Independent Accountants
To the Board of Directors and Shareholders
of the Kruse International Group of Companies
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations and shareholder's equity and of cash flows present
fairly, in all material respects, the combined financial position of the Kruse
International Group of Companies at December 31, 1997 and 1998, and the combined
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
Group'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.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 7, 1999
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED BALANCE SHEET
(in thousands, except share amounts)
December 31, March 31,
1997 1998 1999
------------- -------------- --------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 638 $ 493 $ 304
Accounts receivable........................................... 8 20 17
Other current assets.......................................... 390 363 177
Deferred tax asset............................................ 38 38 38
------ ------ ------
Total current assets...................................... 1,074 914 536
Property and equipment, net...................................... 3,975 4,253 4,055
Other assets, net................................................ 249 198 185
------ ------ ------
$5,298 $5,365 $4,776
====== ====== ======
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current........................................ $ 148 $ 257 $ 248
Accounts payable.............................................. 793 822 763
Accrued liabilities........................................... 1,017 981 1,018
Customer advances and unearned revenue........................ 233 246 199
Taxes payable................................................. 1,242 1,380 1,370
------ ------ ------
Total current liabilities................................. 3,433 3,686 3,598
Deferred tax liability........................................... 295 261 261
Notes payable.................................................... 344 250 172
------ ------ ------
4,072 4,197 4,031
------ ------ ------
Commitments and contingencies (Note 5)
Shareholders' equity:
Common Stock, no par value, 23,000 shares authorized;
23,000 shares issued and outstanding.......................... 32 32 32
Retained earnings............................................. 1,194 1,136 713
------ ------ ------
Total shareholders' equity................................ 1,226 1,168 745
------ ------ ------
$5,298 $5,365 $4,776
====== ====== ======
The accompanying notes are an integral part of these combined
financial statements.
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF OPERATIONS
(in thousands)
Year Ended Three Months Ended
December 31, March 31,
------------------------------ ----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- --------
(unaudited)
Net revenues:
Auction fees and services............................... $7,398 $7,276 $ 9,750 $2,198 $2,372
Other................................................... 362 244 515 257 179
------ ------ ------- ------ ------
Net revenues........................................... 7,760 7,520 10,265 2,455 2,551
------ ------ ------- ------ ------
Cost of net revenues:
Auction fees and services............................... 1,335 1,560 2,087 381 576
Other................................................... -- -- -- -- --
------ ------ ------- ------ ------
Cost of net revenues................................... 1,335 1,560 2,087 381 576
------ ------ ------- ------ ------
Gross profit........................................... 6,425 5,960 8,178 2,074 1,975
------ ------ ------- ------ ------
Operating expenses:
Sales and marketing..................................... 3,091 3,071 3,609 1,070 1,244
General and administrative.............................. 2,933 2,824 4,510 817 1,154
------ ------ ------- ------ ------
Total operating expenses............................... 6,024 5,895 8,119 1,887 2,398
------ ------ ------- ------ ------
Income (loss) from operations............................ 401 65 59 187 (423)
------ ------ ------- ------ ------
Other income (expense):
Interest and other income, net.......................... 18 20 30 4 7
Interest expense........................................ (161) (60) (38) (4) (7)
------ ------ ------- ------ ------
Income from combined companies before taxes.............. 258 25 51 187 (423)
Provision for income taxes............................... (327) (262) (109) (75) --
------ ------ ------- ------ ------
Net income (loss)........................................ $ (69) $ (237) $ (58) $ 112 $ (423)
====== ====== ======= ====== ======
The accompanying notes are an integral part of these combined financial
statements.
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Retained Total Shareholders'
Shares Amount Earnings Equity
Balance at December 31, 1995.................. 23 $ 32 $1,362 $1,394
Net income.................................... -- -- 69 69
----- ----- ------ ------
Balance at December 31, 1996.................. 23 32 1,431 1,463
Net loss...................................... -- -- (237) (237)
----- ----- ------ ------
Balance at December 31, 1997.................. 23 32 1,194 1,226
Net loss...................................... -- -- (58) (58)
----- ----- ------ ------
Balance at December 31, 1998.................. 23 32 1,136 1,168
Net loss (unaudited).......................... -- -- (423) (423)
----- ----- ------ ------
Balance at March 31, 1999 (unaudited)......... 23 $ 32 $ 713 $ 745
===== ===== ====== ======
The accompanying notes are an integral part of these combined financial
statements.
KRUSE INTERNATIONAL
GROUP OF COMPANIES
COMBINED STATEMENT OF CASH FLOWS
(in thousands)
Three Months Ended
Year Ended December 31, March 31,
-------------------------- ---------------------
1996 1997 1998 1998 1999
------- ------- ------- -------- --------
(unaudited)
Cash flows from operating activities:
Net income (loss)....................................... $ (69) $(237) $ (58) $ 112 $(423)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................... 167 176 322 33 100
Gain on sale of property and equipment.............. -- -- -- -- (83)
Changes in assets and liabilities:
Accounts receivable............................... 81 66 (12) 5 3
Other current assets.............................. 29 (112) 28 266 186
Other assets...................................... (7) -- -- -- --
Accounts payable.................................. (235) 169 29 (540) (59)
Accrued liabilities............................... 173 230 (36) 200 37
Customer advances and unearned revenue............ 38 56 13 (99) (47)
Taxes payable..................................... 304 244 138 75 (10)
Deferred tax liabilities.......................... -- -- (34) -- --
----- ----- ----- ----- -----
Net cash provided by (used in) operating activities.... 481 592 390 52 (296)
----- ----- ----- ----- -----
Cash flows from investing activities:
Purchases of property and equipment..................... (345) (142) (550) -- (6)
Proceeds from sales of property and equipment........... -- -- -- -- 200
----- ----- ----- ----- -----
Net cash provided by (used in) investing activities.... (345) (142) (550) -- 194
----- ----- ----- ----- -----
Cash flows from financing activities:
Proceeds from (repayment of) note payable............... (202) (63) 15 (123) (87)
----- ----- ----- ----- -----
Net cash provided by (used in) financing activities.... (202) (63) 15 (123) (87)
----- ----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents..... (66) 387 (145) (71) (189)
Cash and cash equivalents, beginning of period........... 317 251 638 638 493
----- ----- ----- ----- -----
Cash and cash equivalents, end of period................. $ 251 $ 638 $ 493 $ 567 $ 304
===== ===== ===== ===== =====
Supplemental disclosures:
Cash paid for interest.................................. $ 161 $ 60 $ 38 $ 4 $ 7
Cash paid for income taxes.............................. $ 23 $ 18 $ 5 $ 13 $ 10
Supplemental non-cash investing and financing activity:
Issuance of note payable for non-compete agreement...... $ -- $ 240 $ -- $ -- $ --
The accompanying notes are an integral part of these combined financial
statements.
KRUSE INTERNATIONAL
GROUP OF COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(in thousands, except share amounts)
1. The Group Companies and Summary of Significant Accounting Policies
The Group Companies and Basis of Presentation
The accompanying combined financial statements include the accounts of Kruse
International, Auburn Cordage Inc., ACD Auto Sales Inc., Classic Advertising
& Promotion Inc. and Reppert Auction School Inc. (collectively the "Group" or
"Group Companies"). The financial statements for the aforementioned companies
have been prepared on a combined basis for all periods presented as the
companies were subject to common control. All intercompany accounts and
transactions have been eliminated in the preparation of these combined
financial statements.
Kruse International - was founded in 1971 and operated as a sole
proprietorship until it was incorporated in the state of Indiana in August
1986. Kruse International conducts auctions and performs appraisal
services for classic car auctions in various locations in the United
States, England, Germany and the Netherlands.
Auburn Cordage Inc. - was incorporated in September 1962 and operates as a
real estate holding company for properties leased by Kruse International
conducting its classic car auctions.
ACD Auto Sales Inc. - was incorporated in March 1992 and operates as a
special purpose entity for the ownership of auto dealer licenses on behalf of
Kruse International.
Classic Advertising & Promotion Inc. - was incorporated in Indiana and
operates as a special purpose entity and provides advertising services on
behalf of Kruse International.
Reppert Auction School Inc. - was incorporated in June 1997 and operates a
training center for auctioneers including those employed by Kruse
International.
Use of estimates
The preparation of 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 financial statements and
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue recognition
Revenues are derived primarily from entry fees on auction items, bidder
registration fees and commission fees calculated as a percentage of the final
auction sales transaction value. Revenues related to these fees are
recognized upon the completion of an auction. Revenues are also derived from
sponsorship fees paid by various corporations. Sponsor fee revenues are
recognized over the term of the sponsorship agreement. Advertising revenues
and auctioneer tuition fees do not represent a significant source of revenues
and are recognized as advertising and auctioneer training services are
provided.
Cash equivalents
The Group Companies consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents consist principally of deposit and money market accounts that are
stated at cost, which approximates fair value. The Group Companies deposit
cash and cash equivalents with financial institutions which management
believes are of high credit quality.
Concentration of credit risk
Financial instruments that potentially subject the Group Companies to a
concentration of credit risk consist of cash, cash equivalents, and accounts
receivable. The Group Companies' accounts receivable are derived from
revenues earned from customers located in the United States, England,
Germany, The Netherlands and Japan and are denominated in U.S. dollars.
Accounts receivable balances are typically settled upon completion of an
auction and as a result, the Companies have minimal outstanding accounts
receivable. During the years ended December 31, 1996, 1997 and 1998 and the
three month periods ended March 31, 1998 and 1999 (unaudited) no customers
accounted for more than 10% of net revenues.
Property and equipment
Property and equipment are stated at historical cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the assets which range from five years for office equipment and vehicles to
31.5 years for buildings and building improvements.
Other assets
Other assets consist primarily of a non-compete agreement with a former
shareholder, which is being amortized on a straight-line basis over the 60
month term of the agreement.
Long-lived assets
The Companies evaluate 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 121"). SFAS 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.
Fair value of financial instruments
The Companies' financial instruments, including cash, cash equivalents,
accounts receivable and accounts payable are carried at cost, which
approximates their fair value because of the short-term maturity of these
instruments.
Advertising expenses
Advertising costs are expensed as incurred and totaled $1,691, $1,413,
$1,787, $358 (unaudited) and $788 (unaudited) during the years ended December
31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999
respectively.
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 Companies' financial statements or
tax returns. The measurement of current and deferred tax liabilities and
assets are based on provisions of the enacted tax law; the effects of future
changes in tax laws or rates are not anticipated. The measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax
benefits that, based on available evidence, are not expected to be realized.
Comprehensive income
Effective January 1, 1998, the Companies 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 Group Companies have not
had any transactions that are required to be reported in comprehensive
income.
Segment information
Effective January 1, 1998, the Group Companies adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Companies' management identify their operating segments
based on business activities, management responsibility and geographic
location. During all periods presented, the Group operated in a single
business segment providing classic car auction services, primarily in the
United States. Through March 31, 1999, foreign operations have not been
significant.
Foreign currency translation
The Group Companies use the U.S. dollar as their functional currency.
Revenues and expenses are translated at average exchange rates in effect
during each period, and balance sheet amounts are translated at historical
exchange rates. Gains or losses from foreign currency transactions are
included in the determination of net income or loss.
Recent accounting pronouncements
In April 1998, the AICPA issued Statement of Position ("SOP") 98-5 "Reporting
on the Costs of Start-Up Activities." Start-up activities are defined broadly
as those one-time activities related to opening a new facility, introducing a
new product or service, commencing some new operation or organizing a new
entity. Under SOP 98-5, the cost of start-up activities should be expensed as
incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do
not expect its adoption to have a material effect on their results of
operations, financial position or cash flows.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivatives and Hedging Activities". SFAS 133 is
effective for all fiscal quarters beginning with the quarter ending June 30,
2000. SFAS 133 establishes accounting and reporting standards of derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Group Companies will adopt SFAS
No. 133 in the quarter ending June 30, 2000 and do not expect such adoption
to have an impact on their results of operations, financial position or cash
flows.
Unaudited interim financial information
The accompanying interim financial statements as of March 31, 1999 and for
the three months ended March 31, 1998 and 1999, are unaudited. The unaudited
interim financial statements have been prepared on the same basis as the
annual financial statements, and in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position at March 31, 1999 and their
results of operations and cash flows for the three months ended March 31,
1998 and 1999. The financial data and other information disclosed in these
notes to the financial statements related to these periods are unaudited. The
results for the three months ended March 31, 1999 are not necessarily
indicative of the results to be expected for the year ending December 31,
1999.
2. Balance Sheet Components
December 31, March 31,
1997 1998 1999
----------- ----------- ------------
(unaudited)
Accounts receivable:
Accounts receivable...................................... $ 8 $ 20 $ 17
------- ------- -------
Less: Allowance for doubtful accounts................... -- -- --
------- ------- -------
$ 8 $ 20 $ 17
======= ======= =======
Property and equipment, net:
Land and buildings....................................... $ 1,453 $ 1,453 $ 1,453
Building improvements.................................... 2,949 3,433 3,317
Office equipment......................................... 473 569 574
Vehicles................................................. 355 325 325
------- ------- -------
5,230 5,780 5,669
Less: Accumulated depreciation and amortization........... (1,255) (1,527) (1,614)
------- ------- -------
$ 3,975 $ 4,253 $ 4,055
======= ======= =======
Accrued liabilities:
Payroll and related expenses............................ $ 39 $ 46 $ 60
Property taxes.......................................... 43 44 55
Unclaimed checks........................................ 242 242 242
Accrued interest and other expenses..................... 621 621 621
Other................................................... 72 28 40
------- ------- -------
$ 1,017 $ 981 $ 1,018
======= ======= =======
3. Income Taxes
The provisions for income taxes consist of the following:
Year Ended December 31,
1996 1997 1998
-------- -------- ---------
Current:
Federal..................................................................... $ 246 $ 217 $ 110
State and local............................................................. 66 59 33
----- ----- -----
Total current............................................................ 312 276 143
----- ----- -----
Deferred:
Federal..................................................................... 12 (11) (25)
State and local............................................................. 3 (3) (9)
----- ----- -----
Total deferred........................................................... 15 (14) (34)
----- ----- -----
$ 327 $ 262 $ 109
===== ===== =====
The effective tax rate differs from the statutory rate as a result of the
following:
Year Ended December 31,
1996 1997 1998
------------ ------------ ------------
Provision at statutory rate............................................. $ 88 $ 8 $ 17
Permanent differences:
Meals and entertainment.............................................. 10 11 15
Life insurance....................................................... 22 30 42
Non-deductible expenses.............................................. 153 169 --
Other................................................................ 11 6 13
State taxes, net of federal benefit..................................... 43 38 22
----- ----- -----
$ 327 $ 262 $ 109
===== ===== =====
Deferred tax assets and liabilities consist of the following:
December 31,
1997 1998
----------- -----------
Deferred tax assets:
Accruals and reserves..................................................... $ 38 $ 38
----- -----
Deferred tax liabilities:
Depreciation and amortization............................................. (295) (261)
----- -----
Net deferred tax liability.................................................... $(257) $(223)
===== =====
4. Borrowings
Notes payable
Notes payable consists of amounts payable to various financial institutions
and a former shareholder and are secured by specified property as follows:
December 31, March 31,
1997 1998 1999
----------- ----------- ------------
(unaudited)
6% note; interest and principal payable at
maturity in May 1999....................................... $ 240 $ 140 $ 140
10% note; $1,200.00 in interest and principal payable
monthly, matures April 2004................................ 77 70 --
8% note; $12,500.00 in interest and principal payable
semiannually; matures September 2003....................... 64 43 43
10.5% note; $2,487.00 in interest and principal payable
monthly; matures December 2002............................. 111 92 87
7.5% note; $47,500.00 in interest and principal payable
annually; matures October 2000............................. -- 97 97
7.75% - 8.5% automobile notes; payable in monthly principal
and interest payments ranging from $300.00 to $1,425.00;
maturing December 1999 through January 2003................ -- 65 53
----- ----- -----
492 507 420
Less: Current portion...................................... (148) (257) (248)
----- ----- -----
$ 344 $ 250 $ 172
===== ===== =====
Principal payments under notes payable are as follows:
Year Ending
December 31,
1999.............................................................................. $257
2000.............................................................................. 112
2001.............................................................................. 45
2002.............................................................................. 46
2003.............................................................................. 13
Thereafter........................................................................ 34
----
Total principal obligations....................................................... $507
====
5. Commitments and Contingencies
Leases
The Group Companies lease office space and equipment under noncancelable
operating leases with various expiration dates through June 2001. Rent
expense for the years ended December 31, 1996, 1997 and 1998 and for the
three months ended March 31, 1998 and 1999 was $0, $57, $73, $4 (unaudited)
and $11 (unaudited), respectively. The terms of the facility lease provide
for rental payments on a graduated scale. The Group Companies recognize
rent expense on a straight-line basis over the lease period, and have
accrued for rent expense incurred but not paid.
Future minimum lease payments under noncancelable operating leases at
December 31, 1998 are as follows:
Year Ending Operating
December 31, Leases
1999............................................................ $33
2000............................................................ 19
2001............................................................ 14
---
Total minimum lease payments.................................... $66
===
Contingencies
On July 1, 1992, the Group Companies were notified by the Internal Revenue
Service that they had failed to make certain required filings of Form 5300,
Report of Cash Payments Over $10,000 Received in a Trade or Business, for the
years 1990, 1991 and 1992. In December 1996, civil penalties were assessed
against the Companies relating to this claim. These allegations are being
vigorously defended by the Group Companies' management. The outcome of these
allegations is unknown, however, management does not expect that resolution
of this matter will have a material adverse impact on the Group Companies'
financial position or results of operations.
From time to time, the Group Companies are involved in other various disputes
which have arisen in the ordinary course of business. Management believes
that the ultimate resolution of these disputes will not have a material
adverse impact on the Companies' financial position or results of operations.
6. Employee Benefit Plans
The Group Companies sponsor a 401(k) defined contribution plan covering all
employees. Contributions made by the Group Companies are determined annually
by the Boards of Directors. Employer contributions under this plan totaled
$0, $15, $0, $0 (unaudited) and $1 (unaudited) for the years ended December
31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999,
respectively.
7. Subsequent Events
On May 20, 1999, eBay Inc. acquired all of the outstanding Common Stock of
each of the combined companies, at which time the Companies became wholly-
owned subsidiaries of eBay Inc.