1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO _______.
COMMISSION FILE NUMBER 000-24821
EBAY INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0430924
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2145 HAMILTON AVENUE
SAN JOSE, CALIFORNIA 95125
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 558-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
As of April 30, 2001, there were 270,164,891 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.
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
EBAY INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
DECEMBER 31, MARCH 31,
2000 2001
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents ............................ $ 201,873 $ 314,263
Short-term investments ............................... 354,166 273,838
Restricted cash ...................................... -- 15,902
Accounts receivable, net ............................. 67,163 75,494
Other current assets ................................. 52,262 59,840
----------- -----------
Total current assets ............................. 675,464 739,337
Long-term investments ................................... 218,197 135,540
Restricted cash and investments ......................... 126,390 126,390
Property and equipment, net ............................. 125,161 133,279
Intangible and other assets, net ........................ 23,299 111,546
Deferred tax assets ..................................... 13,892 10,937
----------- -----------
$ 1,182,403 $ 1,257,029
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ..................................... $ 31,725 $ 21,395
Accrued expenses and other current liabilities ....... 66,697 69,657
Deferred revenue and customer advances ............... 12,656 12,081
Short-term debt ...................................... 15,272 30,254
Income taxes payable ................................. 11,092 10,995
----------- -----------
Total current liabilities ........................ 137,442 144,382
Long-term debt .......................................... 11,404 11,339
Other liabilities ....................................... 6,549 13,717
Minority interests ...................................... 13,248 43,319
----------- -----------
168,643 212,757
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock ......................................... 269 269
Additional paid-in capital ........................... 941,285 960,790
Unearned stock-based compensation .................... (1,423) (5,051)
Retained earnings .................................... 74,504 95,423
Accumulated other comprehensive loss ................. (875) (7,159)
----------- -----------
Total stockholders' equity ....................... 1,013,760 1,044,272
----------- -----------
$ 1,182,403 $ 1,257,029
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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3
EBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 2001
--------- ---------
Net revenues .......................................... $ 85,887 $ 154,090
Cost of net revenues .................................. 23,383 27,002
--------- ---------
Gross profit ..................................... 62,504 127,088
--------- ---------
Operating expenses:
Sales and marketing ................................ 39,498 55,536
Product development ................................ 12,338 15,737
General and administrative ......................... 17,016 21,328
Payroll tax expense on employee stock options ...... 901 427
Amortization of acquired intangible assets ......... 275 3,355
--------- ---------
Total operating expenses ......................... 70,028 96,383
--------- ---------
Income (loss) from operations ......................... (7,524) 30,705
Interest and other income and expense, net ............ 11,122 14,978
Interest expense ...................................... (845) (712)
Impairment of certain equity investments .............. -- (9,921)
--------- ---------
Income before income taxes and minority interests ..... 2,753 35,050
Provision for income taxes ............................ (1,274) (15,427)
Minority interest in consolidated companies ........... 279 1,444
--------- ---------
Net income ............................................ $ 1,758 $ 21,067
========= =========
Net income per share:
Basic .............................................. $ 0.01 $ 0.08
========= =========
Diluted ............................................ $ 0.01 $ 0.08
========= =========
Weighted average shares:
Basic .............................................. 242,658 264,279
========= =========
Diluted ............................................ 281,344 278,732
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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4
EBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
2000 2001
-------- --------
Net income ............................................................................. $ 1,758 $ 21,067
-------- --------
Other comprehensive income (loss):
Foreign currency translation adjustments ........................................ 634 (5,251)
Unrealized gains (losses) on investments, net ................................... (855) 2,695
Realized losses on securities, net .............................................. -- 2,401
Losses on derivative instruments designated as cash flow hedges ................. -- (2,308)
Estimated tax benefit (provision) on other comprehensive income ................. 359 (1,194)
-------- --------
Net change in other comprehensive income (loss) ........................................ 138 (3,657)
-------- --------
Comprehensive income before cumulative effect of a change in accounting principle ...... 1,896 17,410
Cumulative effect of a change in accounting principle, net of tax ...................... -- (2,627)
-------- --------
Comprehensive income ................................................................... $ 1,896 $ 14,783
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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5
EBAY INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 2001
--------- ---------
Cash flows from operating activities:
Net income ............................................................................ $ 1,758 $ 21,067
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for doubtful accounts and authorized credits ............................ 3,742 6,720
Depreciation and amortization ..................................................... 8,332 14,237
Amortization of unearned stock-based compensation ................................. 1,983 761
Tax benefit from employee stock options ........................................... 4,554 13,385
Impairment of certain equity investments .......................................... -- 9,921
Other ............................................................................. 468 (1,952)
Changes in assets and liabilities:
Accounts receivable ........................................................... (2,262) (7,098)
Other current assets .......................................................... (15,886) (5,541)
Intangible and other assets ................................................... (1,311) (2,495)
Deferred tax assets ........................................................... (548) 2,024
Accounts payable .............................................................. (3,995) (13,546)
Accrued expenses and other liabilities ........................................ 13,709 1,563
Deferred revenue and customer advances ........................................ (1,948) (1,501)
Income taxes payable .......................................................... (57) (97)
--------- ---------
Net cash provided by operating activities ............................................... 8,539 37,448
--------- ---------
Cash flows from investing activities:
Purchases of property and equipment ................................................. (22,497) (10,717)
Purchases of investments ............................................................ (81,073) (53,223)
Maturities and sales of investments ................................................. 94,409 249,710
Proceeds from sale of property and equipment ........................................ -- 4,500
Acquisition of majority interest in subsidiary, net of cash acquired ................ -- (109,212)
--------- ---------
Net cash provided by (used in) in investing activities .................................. (9,161) 81,058
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock, net ......................................... 31,913 1,731
Proceeds from issuance of common stock by subsidiaries .............................. 37,736 --
Principal payments on long-term debt ................................................ (262) (6,091)
--------- ---------
Net cash provided by (used in) by financing activities .................................. 69,387 (4,360)
--------- ---------
Effect of exchange rates changes on cash and cash equivalents ........................... -- (1,756)
--------- ---------
Net increase in cash and cash equivalents ............................................... 68,765 112,390
Cash and cash equivalents at beginning of period ........................................ 221,801 201,873
--------- ---------
Cash and cash equivalents at end of period .............................................. $ 290,566 $ 314,263
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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6
EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
eBay Inc. ("eBay") was incorporated in California in May 1996, and
reincorporated in Delaware in April 1998. As of March 31, 2001, eBay had
operations in the United States, Switzerland, the United Kingdom, Germany,
France, Australia, Canada, Italy, South Korea, and Japan. eBay pioneered online
personal trading by developing a Web-based community in which buyers and sellers
are brought together to buy and sell almost anything. The eBay online service
permits sellers to list items for sale, buyers to bid on items of interest and
all eBay users to browse through listed items in a fully-automated,
topically-arranged service that is available online seven days a week. eBay's
acquisition of Half.com, Inc. ("Half.com") enables eBay to offer an online
website to buy and sell using a fixed-price trading platform. eBay also engages
in the traditional auction business through its subsidiaries, Butterfields
Auctioneers Corporation ("Butterfields") and Kruse International ("Kruse") and
in online payment processing through its Billpoint, Inc. ("Billpoint")
subsidiary.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Principles of consolidation and basis of presentation
The accompanying condensed consolidated financial statements as of December
31, 2000 and March 31, 2001, and for the three months ended March 31, 2000 and
2001, are unaudited. The unaudited interim condensed consolidated financial
statements have been prepared on the same basis as the annual consolidated
financial statements and, in the opinion of management, reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
eBay's financial position, as of March 31, 2001, the results of operations for
the three months ended March 31, 2000 and 2001, and cash flows for the three
months ended March 31, 2000 and 2001. These condensed consolidated financial
statements and notes thereto should be read in conjunction with eBay's audited
consolidated financial statements and related notes included in eBay's Annual
Report on Form 10-K as filed with the Securities and Exchange Commission on
March 28, 2001 for the year ended December 31, 2000. The balance sheet as of
December 31, 2000 was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles.
The results for the three months ended March 31, 2001 are not necessarily
indicative of the expected results for any other interim period or the year
ending December 31, 2001. The accompanying condensed financial statements
include eBay and its majority owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Certain prior
period balances have been reclassified to conform to the current period
presentation.
Derivative Instruments
Financial Accounting Standards Board Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS No. 133"), as amended,
requires companies to recognize all of its derivative instruments as either
assets or liabilities at fair value in the statement of financial position. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being
hedged, as either a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.
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EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
For derivative instruments that are designated and qualify as a fair value
hedge (i.e., hedging the exposure to changes in the fair value of an asset or a
liability or an identified portion thereof that is attributable to a particular
risk), the gain or loss on the derivative instrument as well as the offsetting
gain or loss on the hedged item attributable to the hedged risk are recognized
in current earnings during the period of the change in fair values. For
derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on
the derivative instrument is reported as a component of other comprehensive
income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present value of
future cash flows of the hedged item, if any, is recognized in current earnings
during the period of change. For derivative instruments that are designated and
qualify as a hedge of a net investment in a foreign currency, the gain or loss
is reported in other comprehensive income as part of the cumulative translation
adjustment to the extent it is effective. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in current
earnings during the period of change.
Recent accounting pronouncements
In March 2000, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." This
consensus provides guidance on the recognition, measurement, and income
statement classification of sales incentives which are offered voluntarily by a
vendor without charge to customers that can be used in, or that are exercisable
by a customer as a result of, a single exchange transaction. At the April 2001
meeting, the EITF reached a consensus to defer the effective date to quarters
beginning after December 15, 2001. eBay believes that implementation of EITF No.
00-14 will not have a material effect on its consolidated financial statements.
NOTE 2--NET INCOME PER SHARE:
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 exclusive of stock subject to repurchase.
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 are included in the calculation of 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):
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 2001
--------- ---------
Numerator:
Net income available to common stockholders ........................... $ 1,758 $ 21,067
========= =========
Denominator:
Weighted average shares ............................................... 264,992 268,982
Weighted average unvested common shares subject to
repurchase agreements .............................................. (22,334) (4,703)
--------- ---------
Denominator for basic calculation ..................................... 242,658 264,279
Weighted average effect of dilutive securities:
Warrants ........................................................... 94 94
Weighted average common shares subject to repurchase agreements .... 22,334 4,703
Incremental shares from employee stock options ..................... 16,258 9,656
--------- ---------
Denominator for diluted calculation ................................... 281,344 278,732
========= =========
Net income per share:
Basic ................................................................. $ 0.01 $ 0.08
========= =========
Diluted ............................................................... $ 0.01 $ 0.08
========= =========
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EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--ACQUISITIONS:
On February 15, 2001, eBay acquired a majority interest in Internet Auction
Co., Ltd., a South Korean company ("Internet Auction") for $121 million in cash,
including $275,000 of direct acquisition costs. Internet Auction introduced
person-to-person trading in Korea when it launched in April 1998. Internet
Auction is listed on the KOSDAQ and is expected to continue to trade on KOSDAQ.
The transaction was accounted for using the purchase method of accounting and
accordingly, the results of operations of Internet Auction have been included in
eBay's consolidated financial statements from February 15, 2001. An allocation
of the purchase price has been made to net tangible and identifiable intangible
assets of Internet Auction based upon a preliminary valuation report prepared by
an independent third party valuation consultant. The excess of the purchase
price over the fair value of the identifiable net assets acquired of $83.9
million has been recognized as goodwill and is being amortized over five years.
The aggregate preliminary purchase price has been allocated as follows:
(IN THOUSANDS)
Net tangible assets ............................................... $ 63,516
Identifiable intangible assets .................................... 9,000
Goodwill .......................................................... 83,883
Deferred tax liability ............................................ (3,600)
Minority interest ................................................. (31,758)
---------
Aggregate purchase price ..................................... $ 121,041
=========
The following unaudited pro forma financial information presents the
combined results of eBay and Internet Auction as if the acquisition had occurred
as of the beginning of 2000 and 2001 respectively, after giving effect to
certain adjustments, including amortization of goodwill and other acquisition
related entries. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had eBay and Internet
Auction constituted a consolidated entity during such periods.
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 2001
-------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Net revenues ........................................ $ 86,159 $156,344
======== ========
Net income (loss) ................................... $ (4,049) $ 17,986
======== ========
Net income (loss) per share:
Basic .......................................... $ (0.02) $ 0.07
======== ========
Diluted ........................................ $ (0.01) $ 0.06
======== ========
iBazar S.A. acquisition
On February 21, 2001, eBay signed a binding agreement to acquire iBazar
S.A. ("iBazar"). iBazar is based in Paris and introduced online,
person-to-person trading in France when it launched in October 1998. Currently,
iBazar has online websites in Belgium, Brazil, France, Italy, the Netherlands,
Portugal, Spain and Sweden.
As consideration for 100% of the outstanding shares of iBazar, eBay will
issue approximately 2,250,000 shares of eBay's common stock, subject to a
minimum valuation of approximately $66 million and a maximum valuation of
approximately $112 million, based on the value of eBay's common stock at
closing. The acquisition will be accounted for
8
9
EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
as a purchase business combination and is subject to various regulatory
approvals. eBay's acquisition of iBazar is expected to close in the second
quarter of 2001.
NOTE 4--SEGMENT INFORMATION:
Effective January 1, 1998, eBay adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 establishes standards for reporting information about operating segments
in annual financial statements and requires that certain selected information
about operating segments be reported in interim financial reports. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is evaluated regularly by the chief
operating decision-maker in order to allocate resources and in assessing
performance.
eBay has two primary reporting segments: online trading services,
consisting primarily of the eBay web based trading platforms and offline, that
includes the traditional auction services of Butterfields and Kruse.
Segment selection is based upon the internal organization structure, the
manner in which these operations are managed and their performance evaluated by
management, the availability of separate financial information and overall
materiality considerations. Segment performance measurement is based on
operating income before income taxes, amortization of intangible assets,
stock-based cost and expenses and payroll expense on employee stock options.
The operating information for the two identified segments are as follows (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------------
2000 2001
------------------------------------ -------------------------------------
ONLINE OFFLINE CONSOLIDATED ONLINE OFFLINE CONSOLIDATED
-------- -------- ------------ --------- -------- ------------
Net revenues from external
customers .......................... $ 77,396 $ 8,491 $ 85,887 $ 147,361 $ 6,729 $ 154,090
======== ======== ======== ========= ======== =========
Operating income before
amortization of intangible
assets, stock-based cost and
expenses, impairment of certain
investments and payroll tax expense
on employee stock options .......... $ (3,644) $ (720) $ (4,364) $ 36,425 $ (1,444) $ 34,981
Interest and other income and
expense, net ....................... 10,997 125 11,122 14,578 400 14,978
Impairment of certain equity
investments ........................ -- -- -- (9,921) -- (9,921)
Interest expense ..................... (273) (572) (845) (207) (505) (712)
Amortization of intangible assets,
stock-based cost and expenses
and payroll tax expense on employee
stock options ...................... (3,082) (78) (3,160) (4,196) (80) (4,276)
-------- -------- -------- --------- -------- ---------
Income (loss) before income taxes
and minority interests ............. $ 3,998 $ (1,245) $ 2,753 $ 36,679 $ (1,629) $ 35,050
======== ======== ======== ========= ======== =========
DECEMBER 31, 2000 MARCH 31, 2001
-------------------------------------- ---------------------------------------
ONLINE OFFLINE CONSOLIDATED ONLINE OFFLINE CONSOLIDATED
---------- ---------- ------------ ---------- ---------- ------------
Total assets ......................... $1,084,909 $ 97,494 $1,182,403 $1,169,895 $ 87,134 $1,257,029
========== ========== ========== ========== ========== ==========
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10
EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5--INVESTMENTS:
At December 31, 2000 and March 31, 2001, short and long-term investments
were classified as available-for-sale securities and are reported at fair value
as follows (in thousands):
DECEMBER 31, 2000
-------------------------------------------------
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Short-term investments:
Municipal bonds and notes ........ $112,488 $ 15 $ (116) $112,387
Corporate securities ............. 21,193 70 -- 21,263
Government securities ............ 219,674 842 -- 220,516
-------- ------ ------- --------
Total ........................ $353,355 $ 927 $ (116) $354,166
======== ====== ======= ========
Long-term investments:
Municipal bonds and notes ........ $141,861 $ 69 $ (269) $141,661
Government securities ............ 151,732 694 (81) 152,345
Equity instruments and other ..... 54,505 -- (3,924) 50,581
-------- ------ ------- --------
Total ........................ $348,098 $ 763 $(4,274) $344,587
======== ====== ======= ========
MARCH 31, 2001
-------------------------------------------------
GROSS GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Short-term investments:
Municipal bonds and notes ........ $135,205 $ 558 $ (10) $135,753
Corporate securities ............. 16,199 -- (198) 16,001
Government securities ............ 101,337 489 -- 101,826
Time deposits .................... 20,258 -- -- 20,258
-------- ------ ------- --------
Total ........................ $272,999 $1,047 $ (208) $273,838
======== ====== ======= ========
Long-term investments:
Municipal bonds and notes ........ $ 59,518 $ 505 $ (20) $ 60,003
Government securities ............ 178,737 1,074 -- 179,811
Equity instruments and other ..... 22,118 -- (2) 22,116
-------- ------ ------- --------
Total ........................ $260,373 $1,579 $ (22) $261,930
======== ====== ======= ========
As of December 31, 2000 and March 31, 2001, long-term investments include
restricted cash and investments of $126,390.
The estimated fair values of short and long-term investments at March 31,
2001, classified by date of contractual maturity are as follows (in thousands):
MARCH 31,
2001
----------
Due within one year or less............................................. $ 273,838
Due after one year through two years.................................... 110,146
Due after two years through three years................................. 9,097
Restricted cash and investments expiring in less than five years........ 126,390
Equity investments...................................................... 16,297
----------
$ 535,768
==========
10
11
EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
During the three months ended March 31, 2000, eBay recorded an impairment
charge of $9.9 million relating to the other than temporary impairment in the
fair value of certain equity investments.
NOTE 6--DERIVATIVE INSTRUMENTS:
eBay entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for eBay's facilities. The interest
rate swaps allow eBay to receive floating rate receipts based on London
Interbank Offering Rate ("LIBOR") in exchange for making fixed rate payments.
This effectively changes the interest rate exposure on eBay's operating lease
from a floating rate to a fixed rate on $95 million of the total $126.4 million
operating lease exposure. The fair value of the interest rate swaps on March 31,
2001 was a $6.7 million loss based on discounted cash flows.
In addition to derivatives used in the cash flow hedging strategy described
above, eBay owns equity warrants and other similar rights in certain companies
as part of eBay's strategic investment strategy. These equity rights are
accounted for as derivative instruments under SFAS No. 133 and the changes in
fair value of these instruments are reflected in current period earnings.
At March 31, 2001, eBay expects to reclassify $1.5 million of losses, net
of tax, on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months due to the payment of variable interest
associated with the floating rate lease exposure.
eBay adopted SFAS No. 133, as amended, as of January 1, 2001. Upon adoption,
the cumulative effect to net income and other comprehensive income of this
change in accounting method is a gain of approximately $650,000 and a loss of
approximately $2.6 million, respectively, net of tax.
NOTE 7--COMMITMENTS AND CONTINGENCIES:
Legal Matters
On April 25, 2000, eBay was served with a lawsuit, Gentry et.al. v. eBay
Inc. et.al, filed in Superior Court in San Diego, California. The lawsuit was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims eBay was
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims eBay violated California unfair competition law and a section of
the California Civil Code which prohibits "dealers" from selling sports
memorabilia without a "Certificate of Authenticity." On January 26, 2001 the
court issued a ruling dismissing all claims against us in the lawsuit. The court
ruled that eBay's business falls within the safe harbor provisions of 47 USC 30,
which grants internet service providers such as eBay with immunity from state
claims based on the conduct of third parties. The court also noted that eBay was
not a "dealer" under California law and thus not required to provide
certificates of authenticity with autographs sold over our site by third
parties. All counts of the plaintiffs' suit were dismissed with prejudice as to
eBay. The plaintiffs have filed an appeal of this ruling. eBay believes it has
meritorious defenses and intends to defend itself vigorously.
On April 25, 2001, eBay's European subsidiaries, eBay GMBH and eBay
International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates
("Rolex") in the regional court of Cologne, Germany. Rolex alleged that eBay's
subsidiary was infringing Rolex's trademarks as result of users selling
counterfeit Rolex watches through eBay's German website. The suit also alleges
unfair competition. Rolex is seeking an order forbidding the sale of Rolex
watches on the website as well as damages. eBay believes that it has meritorious
defenses against this claim and intends to defend itself vigorously.
From time to time, eBay is involved in disputes which arise in the ordinary
course of business. Management believes that the ultimate resolution of these
disputes will not have a material adverse impact on eBay's consolidated
financial position, results of operations or cash flows.
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EBAY INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Lease arrangement
On March 1, 2000, eBay entered into a five-year lease for general office
facilities located in San Jose, California. Payments under this lease are based
on a spread over the LIBOR applied to the $126.4 million cost of the facility
funded by the lessor. eBay has an option to renew the lease for up to two
five-year extensions subject to specific conditions. Under the terms of the
lease agreement, eBay was required to place $126.4 million of cash and
investment securities as collateral for the term of the lease. The cash and
investment securities are restricted as to their withdrawal from the third party
trustee and are classified as long-term restricted cash and investments in the
accompanying balance sheet.
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This document contains certain forward-looking statements that involve
risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. When used in this document, the words "expects",
"anticipates", "intends", "plans" and similar expressions are intended to
identify certain of these forward-looking statements. The cautionary statements
made in this document should be read as being applicable to all related
forward-looking statements wherever they appear in this document. Our actual
results could differ materially from those discussed in this document. Factors
that could cause or contribute to such differences include those discussed
below.
OVERVIEW
We pioneered online person-to-person trading by developing a global
online trading platform that helps practically anyone buy or sell practically
anything. Our service permits sellers to list items for sale, buyers to bid on
items of interest and all eBay users to browse through listed items in a fully
automated, topically arranged, intuitive and easy-to-use online service that is
available 24 hours a day, seven days a week. We have extended our online
offerings to include regional and international trading, autos, "premium" priced
items, and through our acquisition of Half.com and our "Buy it Now" feature, we
now offer fixed-price functionality. Additionally, Billpoint provides online
billing and payment solutions. We also expanded into the traditional auction
business, also called offline trading, with our acquisitions of Butterfields and
Kruse.
Substantially all of our revenues are derived from fees and commissions
associated with online and offline trading services. Online revenue is primarily
derived from listing fees, feature fees and final value fees paid by the
sellers, and commissions paid by buyers for certain "premium" priced items.
Sellers pay a nominal placement fee, and by paying additional fees, sellers can
have items featured in various ways. Sellers also pay a success fee based on the
final purchase price. In addition, we receive revenues from end-to-end service
providers whose services increase the velocity of transactions to the site,
revenues from commercial alliances designed to build out a category or other
functions and from direct advertising which includes promotional payments from
unrelated third parties. Although we expect these end-to-end, commercial
alliance and direct advertising revenues to increase in the future, they are
subject to considerable uncertainty. See "Risk Factors --Our revenue from
end-to-end service providers, commercial alliances and advertising is subject to
factors beyond our control". To date, online payment solutions provided by
Billpoint and fixed price trading provided by Half.com have not made significant
contributions to net revenues, although we expect Billpoint's and Half.com's
revenues to increase in the future. Offline revenue is derived from a variety of
sources, including sellers' commissions, buyers' premiums, bidder registration
fees and auction-related services, including appraisal and authentication. We
expect that the online business will continue to represent the majority of
revenue growth in the foreseeable future.
ACQUISITIONS
Internet Auction
On February 15, 2001, we acquired a majority interest in Internet Auction
Co., Ltd., a South Korean company ("Internet Auction") for $121 million in cash,
including $275,000 of direct acquisition costs. Internet Auction introduced
person-to-person trading in Korea when it launched in April 1998. Internet
Auction is listed on the KOSDAQ and is expected to continue to trade on KOSDAQ.
The transaction was accounted for using the purchase method of accounting and
accordingly, the results of operations of Internet Auction have been included in
eBay's consolidated financial statements from February 15, 2001. An allocation
of the purchase price has been made to net tangible and identifiable intangible
assets of Internet Auction based upon a preliminary valuation report prepared by
an independent third party valuation consultant. The excess of the purchase
price over the fair value of the identifiable net assets acquired of $83.9
million has been recognized as goodwill and is being amortized over five years.
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iBazar S.A.
On February 21, 2001, we signed a binding agreement to acquire iBazar S.A.
("iBazar"). iBazar is based in Paris and introduced online, person-to-person
trading in France when it launched in October 1998. Currently, iBazar has
auction sites in Belgium, Brazil, France, Italy, the Netherlands, Portugal,
Spain and Sweden.
As consideration for 100% of the outstanding shares of iBazar, we will
issue approximately 2,250,000 shares of our common stock, subject to a minimum
valuation of approximately $66 million and a maximum valuation of approximately
$112 million, based on the value of our common stock at closing. The acquisition
will be accounted for as a purchase business combination and is subject to
various regulatory approvals. Our acquisition is expected to close during the
second quarter of 2001.
RESULTS OF OPERATIONS
It is difficult for us to forecast revenues or earnings accurately, and the
operating results in one or more future quarters may fall below the expectations
of securities analysts or investors. Although accurate revenue forecasts are
difficult, we recognize the seasonal nature of our business because many of our
users reduce their activities on our websites during the Thanksgiving and
Christmas holidays and with the onset of good weather. We have historically
experienced our strongest quarter of online growth in our first fiscal quarter,
although our shift to more "practical" items may cause our seasonal patterns to
look more like a typical retailer. Both Butterfields and Kruse have significant
quarter-to-quarter variations in their results of operations depending on the
timing of auctions and the availability of high quality items from large
collections and estates. Butterfields typically has its best operating results
in the traditional fall and spring auction seasons and has historically incurred
operating losses in the first and third quarters. Kruse typically sees a
seasonal peak in operations in the third quarter. Seasonal or cyclical
variations in our business may become more pronounced over time and may harm our
results of operations in the future.
Due to the inherent difficulty in forecasting net revenues, it is also
difficult to forecast income statement expense categories as a percentage of net
revenues. Quarterly and annual income statement expense categories as a
percentage of net revenues may be significantly different from historical or
projected rates. As a general note, we expect costs to increase in absolute
dollars across all income statement categories.
To a large extent, the changes in the consolidated results of operations
for the periods presented are due to the growth of the online business, which
will be the primary focus of our discussion.
Net Revenues
We derive revenue from a variety of sources including: listing, success and
featured item fees, end-to-end services, commercial alliances, sponsorships and
other advertising. In addition, we derive commissions and rental income from our
traditional offline auction operations. Our net revenues increased from $85.9
million to $154.1 million for the three months ended March 31, 2000 and 2001.
The successive year over year growth from 2000 to 2001 was predominantly the
result of increased use of our websites, reflected in the growth in the number
of registered users, listings and gross merchandise sales as well as increased
sponsorship, alliance and advertising revenues. In addition, fee increases in
the U.S. on January 31, 2001 and fee increases in various other international
locations combined with the consolidation of revenues from Internet Auction had
a positive impact on revenues for the quarter. However, these increases in
revenue were partially offset by a decrease in offline revenue, particularly by
our Butterfields subsidiary. We expect that future revenue growth will be
largely driven by the growth of online services.
Cost of Net Revenues
Cost of net revenues for online operations consists primarily of costs
associated with customer support and site operations and includes employee and
facilities costs for customer support and site operations personnel, ISP
connectivity charges and depreciation on site equipment. Cost of net revenues in
traditional auction operations primarily includes compensation for auction,
appraisal, and customer support personnel and direct auction costs, such as
event site rental. Cost of net revenues increased in absolute dollars but
decreased as a percentage of net revenues from $23.4 million or 27.2% of net
revenues to $27.0 million or 17.5% of net revenues for the three months ended
March 31, 2000 and 2001.
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The increase in absolute dollars in expenditures was due almost entirely to our
online businesses, and resulted from the continued development and expansion of
our customer support and site operations departments, depreciation of the
equipment required for site operations, software licensing fees and ISP
connectivity charges. The decrease in cost of net revenues as a percentage of
net revenues from 2000 to 2001 resulted from cost management in customer support
and site operations and increases in higher gross margin businesses such as
autos and end-to-end trading solutions. As a result of these efficiencies, we
expect the cost of net revenues to increase in absolute dollars but remain
relatively constant as a percentage of net revenues throughout the remainder of
2001.
Sales and Marketing
Our sales and marketing expenses for both the online and traditional
auction businesses are comprised primarily of compensation for our sales and
marketing personnel, advertising, tradeshow and other promotional costs,
employee and facilities costs. Sales and marketing expenses increased in
absolute dollars but decreased as a percentage of sales from $39.5 million or
46.0% of net revenues to $55.5 million or 36.0% of net revenues for the three
months ended March 31, 2000 and 2001. The successive year over year growth from
2000 to 2001, was primarily the result of growth in online and traditional
advertising, including expenses for various marketing agreements, personnel
related costs, costs associated with the use of outside services and consultants
and miscellaneous user and promotional costs.
Online sales and marketing expenses are expected to increase in absolute
dollars for the remainder of 2001. We expect to build our brand further with
continued advertising impressions delivered under the strategic alliances with
America Online ("AOL"), Microsoft and AutoTrader.com, an increase in mass media
advertising and the expansion of international advertising. Sales and marketing
expenses in the traditional auction businesses are expected to remain comparable
with historic levels.
Product Development
Product development expenses consist primarily of compensation for our
product development staff, payments to outside contractors, depreciation on
equipment used for development, employee and facilities costs. Our product
development expenses increased from $12.3 million or 14.4% of net revenues to
$15.7 million or 10.2% of net revenues for the three months ended March 31, 2000
and 2001. The successive year over year growth from 2000 to 2001, was primarily
the result of an increase in personnel-related costs as we increased the size of
our product development staff, expenses related to contractors and consultants
employed within product development departments and maintenance and depreciation
for equipment used in research and development. The year over year increase also
resulted from the growth of product development expenses at Half.com. Product
development expenses are expected to increase in absolute dollars during future
periods primarily from personnel additions, the continued impact of Billpoint
and Half.com product development, additional depreciation costs as we continue
to purchase equipment to improve and expand domestic and international
operations and certain costs associated with the development of our next
generation three-tier architecture.
General and Administrative
General and administrative expenses consist primarily of compensation for
personnel and, to a lesser extent, fees for external professional advisors,
provisions for doubtful accounts, employee and facilities costs. Our general and
administrative expenses increased from $17.0 million or 19.8% of net revenues to
$21.3 million or 13.8% of net revenues for the three months ended March 31, 2000
and 2001. The year-over-year increases resulted from growth in personnel-related
expenses in order to meet the demands of our expanding business, including
operations in new countries and the integration of new businesses, fees for
professional services, employee and facilities costs. We expect that general and
administrative expenses will increase in absolute dollars in future periods as
we continue to invest in the infrastructure that is necessary to manage our
business.
Payroll Tax Expense on Employee Stock Options
We are subject to employer payroll taxes on employee exercises of
non-qualified stock options. These employer payroll taxes are recorded as a
charge to operations in the period such options are exercised and sold based on
actual gains realized by employees. Our quarterly results of operations and cash
flows could vary significantly depending on the actual period in which the stock
options are exercised by employees and, consequently, the amount of employer
payroll taxes assessed.
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Amortization of Acquired Intangible Assets
From time to time we have purchased, and expect to continue purchasing,
assets or businesses in order to support our leadership role in online trading.
These purchases may result in the creation of intangible assets and lead to a
corresponding increase in the amortization expense. Our amortization of acquired
intangible assets increased from $275,000 or 0.3% of net revenues to $3.4
million or 2.2% of net revenues for the three months ended March 31, 2000 and
2001. The increase resulted primarily from our purchase of a majority interest
in Internet Auction. We expect the amortization of intangible assets to continue
to increase in 2001 due to on-going amortization related to Internet Auction and
from the additional amortization related to our agreement to acquire iBazar.
Interest and other income and expense, net
Interest and other income and expense, net consist of interest earned on
cash, cash equivalents, and investments offset by foreign exchange gains or
losses. Our interest and other income and expense, net increased from $11.1
million or 12.9% of net revenues to $15.0 million or 9.7% of net revenues for
the three months ended March 31, 2000 and 2001 respectively. The year-over-year
increases resulted primarily from the increase in the average balance that was
invested. We expect, that interest income will be negatively impacted as a
result of the cash purchase price that we paid to acquire a majority interest in
Internet Auction.
Impairment of certain equity investments
As part of our overall strategic investment strategy, we have invested and
continue to invest in companies that we consider to be of strategic value. Due
to the general downturn in the economy and the financial difficulties that some
of these companies have experienced, we have concluded that the reduction in the
fair value of certain of these investments was other than temporary and recorded
an impairment charge of $9.9 million during the three months ended March 31,
2001.
Interest Expense
Interest and other expense consist of interest paid on short-term and
long-term borrowings. Interest expense decreased slightly from $845,000 or 1.0%
of net revenues to $712,000 or 0.5% of net revenues for the three months ended
March 31, 2000 and 2001 respectively.
Provision for Income Taxes
Our effective income tax rates were 42.0% and 42.3% in the three months
ended March 31, 2000 and 2001, respectively. The increase in the provision for
income taxes for the three months ended March 31, 2001 compared to the same
period last year is primarily due to nondeductible expenses related to
acquisitions and income from operations in foreign jurisdictions with lower tax
rates. The provision for income taxes for both periods differs from the amount
computed by applying the statutory U.S. federal rate principally due to state
taxes, tax exempt interest income and nondeductible expenses. We receive tax
deductions for gains realized by employees on the exercise of non-qualified
stock options for which the benefit is recognized as a component of paid-in
capital. We have provided for a valuation allowance on the deferred tax assets
relating to these stock option deductions.
Stock-Based Compensation
In connection with granting certain stock options from May 1997 through May
1999, we recorded aggregate unearned compensation totaling $13.1 million, which
is being amortized over the four-year vesting period of the related options. In
connection with certain stock options granted by companies that we subsequently
acquired, we recorded unearned compensation totaling $9.3 million. Of the total
unearned stock compensation, approximately $2.0 million was amortized in the
first three months of 2000 and $494,000 for the comparable period in 2001. Of
the amortization in 2000, approximately $900,000 was related to the acquisition
of Half.com.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, eBay has financed operations primarily from net cash
generated from operating activities. We obtained additional financing from the
sale of preferred stock and warrants, proceeds from the exercise of those
warrants, proceeds from the exercise of stock options, and proceeds from our
initial and follow-on public offerings.
Net cash provided by operating activities was $8.5 million and $37.4
million for the three months ended March 31, 2000 and 2001, respectively. Net
cash provided by operating activities resulted primarily from our net income
before non-cash charges for depreciation and amortization, tax benefit from
employee stock options, impairment of certain equity investments and changes in
accrued expenses offset by changes in accounts receivable, accounts payable and
other assets.
Net cash used in investing activities was $9.2 million for the three
months ended March 31, 2000, and net cash provided by investing activities was
$81.1 million for the same period in 2001. In 2000, the primary use for invested
cash in the periods presented was purchases of investments, property and
equipment. In 2001, net cash provided by the maturity of certain short-term
investments was partially offset by the cash paid for the acquisition of a
majority interest in Internet Auction.
Net cash provided by financing activities was $69.4 million for the three
months ended March 31, 2000 while net cash used in financing activities was $4.4
million for the same period in 2001. In 2000, net cash provided by financing
activities primarily resulted from the issuance of common stock to third parties
by our subsidiaries and the sale of common stock under employee benefit plans.
In 2001, the net cash used by financing activities resulted primarily from
principal payments on debt.
We had no material commitments for capital expenditures at March 31, 2001,
but expect such expenditures to approximate $69.5 million throughout the
remainder of 2001, without taking into account any acquisitions. Of the $69.5
million, approximately $20.0 million has been committed for capital expenditures
relating to hardware and software for the development of our new architecture.
The remaining balance will be used primarily for computer equipment, furniture
and fixtures and leasehold improvements. We also have total minimum lease
obligations of $41.3 million under certain noncancellable operating leases and
notes payable obligations of $41.6 million through August 2023. Under our
agreement with AOL, we will pay AOL $75 million over the four-year term of the
contract. To date, we have paid $37.5 million on the contract. In February 2000,
we signed an agreement with GO.com. In consideration for this agreement, we had
expected to pay a minimum of $30 million to GO.com over the four-year term. In
2001, The Walt Disney Company announced that it was dissolving GO.com;
consequently, eBay is currently in the process of renegotiating new contract
terms with The Walt Disney Company.
We believe that existing cash, cash equivalents and investments, and any
cash generated from operations will be sufficient to fund our operating
activities, capital expenditures and other obligations for the foreseeable
future. However, if during that period or thereafter we are not successful in
generating sufficient cash flow from operations or in raising additional capital
when required in sufficient amounts and on terms acceptable to us, our business
could suffer.
Recent accounting pronouncements
In March 2000, the EITF reached a consensus on EITF Issue No. 00-14,
"Accounting for Certain Sales Incentives." This consensus provides guidance on
the recognition, measurement, and income statement classification of sales
incentives which are offered voluntarily by a vendor without charge to customers
that can be used in, or that are exercisable by a customer as a result of, a
single exchange transaction. At the April 2001 meeting, the EITF reached a
consensus to defer the effective date to quarters beginning after December 15,
2001. We believe that implementation of EITF No. 00-14 will not have a material
effect on our consolidated financial statements.
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RISK FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The risks and uncertainties described below are not the only ones facing
eBay. Additional risks and uncertainties not presently known to us or that we
currently deem immaterial also may impair our business operations. If any of the
following risks or such other risks actually occur, our business could be
harmed.
We have a limited operating history
Our company was formed as a sole proprietorship in September 1995 and was
incorporated in California in May 1996 and reincorporated in Delaware in April
1998. We have only a limited operating history on which you can base an
evaluation of our business and prospects. As an online commerce company still
relatively early in our development, we face substantial risks, uncertainties,
expenses and difficulties. To address these risks and uncertainties, we and our
subsidiaries must do the following:
- maintain and increase our number of registered users, items listed on
our service and completed sales;
- expand into new areas;
- maintain and grow our websites and customer support operations at a
reasonable cost;
- continue to make trading through our service safer for users;
- maintain and enhance our brand;
- continue to develop and upgrade our technology and information
processing systems;
- continue to enhance and expand our service to meet the changing
requirements of our users;
- provide superior customer service;
- remain attractive to our commercial partners;
- respond to competitive developments; and
- attract, integrate, retain and motivate qualified personnel.
We may be unable to accomplish one or more of these goals, which could
cause our business to suffer. In addition, accomplishing one or more of these
goals might be very expensive, which could harm our financial results.
Our operating results may fluctuate
Our operating results have varied on a quarterly basis during our operating
history. Our operating results may fluctuate significantly as a result of a
variety of factors, many of which are outside our control. Factors that may
affect our quarterly operating results include the following:
- our ability to retain an active user base, to attract new users who
list items for sale and who purchase items through our service and to
maintain customer satisfaction;
- our ability to keep our websites operational and to manage the number
of items listed on our service;
- the amount and timing of operating costs and capital expenditures
relating to the maintenance and expansion of our business, operations
and infrastructure;
- foreign, federal, state or local government regulation, including
investigations prompted by items improperly listed or sold by our
users;
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- the introduction of new sites, services and products by us or our
competitors;
- volume, size, timing and completion rate of trades on our websites;
- consumer confidence in the security of transactions on our websites;
- our ability to upgrade and develop our systems and infrastructure to
accommodate growth;
- technical difficulties or service interruptions;
- our ability to attract new personnel in a timely and effective manner;
- our ability to retain key employees in both our online businesses and
our acquisitions;
- our ability to integrate and manage our acquisitions successfully;
- our ability to expand our product offerings involving fixed price
trading successfully;
- the ability of our land-based auction businesses to acquire high
quality properties for auction;
- the timing, cost and availability of advertising in traditional media
and on other websites and online services;
- the timing of payments to us and of marketing and other expenses under
existing and future contracts;
- consumer trends and popularity of some categories of collectible items;
- the success of our brand building and marketing campaigns;
- the continued success of our commercial partners and technology
suppliers;
- the level of use of the Internet and online services;
- increasing consumer acceptance of the Internet and other online
services for commerce and, in particular, the trading of products such
as those listed on our websites; and
- general economic conditions and economic conditions specific to the
Internet and e-commerce industries.
Our limited operating history and growing competition make it difficult for
us to forecast the level or source of our revenues or earnings accurately. We
believe that period-to-period comparisons of our operating results may not be
meaningful, and you should not rely upon them as an indication of future
performance. We do not have backlog, and almost all of our net revenues each
quarter come from transactions for items that are listed and sold during that
quarter. Our operating results in one or more future quarters may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
Our failure to manage growth could harm us
We currently are experiencing a period of expansion in our headcount,
facilities and infrastructure, and we anticipate that further expansion will be
required to address potential growth in our customer base and number of listings
as well as our expansion into new geographic areas, types of goods and
alternative methods of sale. This expansion has placed, and we expect it will
continue to place, a significant strain on our management, operational and
financial resources. The areas that are put under strain by our growth include
the following:
- The Websites. We must constantly add new hardware, update software and
add new engineering personnel to accommodate the increased use of our
and our subsidiaries' websites and the new products and features we are
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regularly introducing. This upgrade process is expensive, and the
increased complexity of our websites increases the cost of additional
enhancements. If we are unable to increase the capacity of our systems
at least as fast as the growth in demand for this capacity, our
websites may become unstable and may cease to operate for periods of
time. We have experienced periodic unscheduled downtime. Continued
unscheduled downtime would harm our business and also could anger users
of our websites and reduce future revenues.
- Customer Support. We are expanding our customer support operations to
accommodate the increased number of users and transactions on our
websites. If we are unable to hire and successfully train sufficient
employees or contractors in this area in a cost-effective manner, users
of our websites may have negative experiences, and current and future
revenues could suffer, or our margins may decrease.
- Customer Accounts. Our revenues are dependent on prompt and accurate
billing processes. If we are unable to grow our transaction processing
abilities to accommodate the increasing number of transactions that
must be billed, our ability to collect revenue will be harmed.
We must continue to hire, train and manage new employees at a rapid rate.
The majority of our employees today have been with us less than one year and we
expect that our rate of hiring will continue at a very high pace. If our new
hires perform poorly, or if we are unsuccessful in hiring, training and
integrating these new employees, or if we are not successful in retaining our
existing employees, our business may be harmed. To manage the expected growth of
our operations and personnel, we will need to improve our transaction
processing, operational and financial systems, procedures and controls. This is
a special challenge when we acquire new operations with different systems. Our
current and planned personnel, systems, procedures and controls may not be
adequate to support our future operations. We may be unable to hire, train,
retain and manage required personnel or to identify and take advantage of
existing and potential strategic relationships and market opportunities.
We may not maintain profitability
We believe that our continued profitability will depend in large part on
our ability to do the following:
- maintain sufficient transaction volume to attract buyers and sellers;
- manage the costs of our business, including the costs associated with
maintaining and developing our websites, customer support and
international and product expansion;
- increase our brand name awareness; and
- provide our customers with superior community and trading experiences.
We are investing heavily in marketing and promotion, customer support,
further development of our websites, technology and operating infrastructure
development. The costs of these investments are expected to remain significant
into the future. In addition, many of our acquisitions require continuing
investments in these areas and we have significant ongoing commitments in some
of these areas. As a result, we may be unable to adjust our spending rapidly
enough to compensate for any unexpected revenue shortfall, which may harm our
profitability. The existence of several larger and more established companies
that are enabling online sales as well as new companies, many of whom do not
charge for transactions on their sites and others who are facilitating trading
through other pricing formats (e.g., fixed price, reverse auction, group buying,
etc.) may limit our ability to raise user fees in response to declines in
profitability. In addition, we are spending in advance of anticipated growth,
which may also harm our profitability. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful. You should
not rely upon our historical results as indications of our future performance.
Acquisitions could result in dilution, operating difficulties and other harmful
consequences
We have acquired a number of businesses, including our recently completed
acquisitions of Half.com and Internet Auction and our announced acquisition of
iBazar, and may in the future acquire businesses, technologies, services or
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products that we believe are strategic. The process of integrating any
acquisition may create unforeseen operating difficulties and expenditures and is
itself risky. The areas where we may face difficulties include:
- diversion of management time (at both companies) during the period of
negotiation through closing and further diversion of such time after
closing from focus on operating the businesses to issues of integration
and future products;
- decline in employee morale and retention issues resulting from changes
in compensation, reporting relationships, future prospects or the
direction of the business;
- the need to integrate each company's accounting, management
information, human resource and other administrative systems to permit
effective management, and the lack of control if such integration is
delayed or not implemented;
- the need to implement controls, procedures and policies appropriate for
a larger public company at companies that prior to acquisition had been
smaller, private companies; and
- in some cases, the need to transition operations onto the existing eBay
platform.
Prior to the four large acquisitions we made in 1999, we had almost no
experience in managing this integration process. Many of our acquisitions to
date have involved either family-run companies or very early stage companies,
which may worsen these integration issues. Foreign acquisitions involve special
risks including those related to integration of operations across different
cultures, currency risks and the particular economic and regulatory risks
associated with specific countries. Moreover, the anticipated benefits of any or
all of our acquisitions may not be realized. Future acquisitions or mergers
could result in potentially dilutive issuances of equity securities, the
incurrence of debt, contingent liabilities or amortization expenses related to
goodwill and other intangible assets, any of which could harm our business.
Future acquisitions or mergers may require us to obtain additional equity or
debt financing, which may not be available on favorable terms or at all. Even if
available, this financing may be dilutive.
There are many risks associated with our international operations
We are expanding internationally. In 1999, we acquired alando.de.ag, a
leading online German personal trading platform, and began operations in the
United Kingdom and, through a joint venture, in Australia. In the first quarter
of 2000, we further expanded into Japan and formally launched our localized
Canadian operations. In October 2000, we launched our French site. In January
2001, we launched our Italian site. In February 2001, we completed our
acquisition of a majority interest in Internet Auction and announced our
intended acquisition of iBazar, a French company with online trading operations
in eight countries, primarily in Europe. Expansion into international markets
requires management attention and resources. We have limited experience in
localizing our service to conform to local cultures, standards and policies. In
most countries, we will have to compete with local companies who understand the
local market better than we do. We may not be successful in expanding into
international markets or in generating revenues from foreign operations. Even if
we are successful, the costs of operating new sites are expected to exceed our
net revenues for at least 12 months in most countries. As we continue to expand
internationally, we are subject to risks of doing business internationally,
including the following:
- regulatory requirements, including regulation of "auctions," that may
limit or prevent the offering of our services in local jurisdictions,
may prevent enforceable agreements between sellers and buyers or may
prohibit certain categories of goods;
- legal uncertainty regarding liability for the listings of our users,
including less Internet-friendly legal systems, unique local laws and
lack of clear precedent or applicable law;
- government-imposed limitations on the public's access to the Internet;
- difficulties in staffing and managing foreign operations;
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- longer payment cycles, different accounting practices and problems in
collecting accounts receivable;
- local taxation of transactions on our websites;
- higher telecommunications and Internet service provider costs;
- stronger local competitors;
- more stringent consumer protection laws;
- cultural non-acceptance of online trading;
- seasonal reductions in business activity; and
- potentially adverse tax consequences.
Some of these factors may cause our international costs to exceed our
domestic costs of doing business. To the extent we expand our international
operations and have additional portions of our international revenues
denominated in foreign currencies, we also could become subject to increased
difficulties in collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations.
Our revenue from end-to-end service providers, commercial partners and
advertising is subject to factors beyond our control
We are receiving revenues from end-to-end service providers, commercial
partnerships and direct advertising promotions. These revenues may be affected
by the financial condition of the parties with whom we have these relationships
and by the success of online promotions generally. Recently, the pricing of
online advertisements has deteriorated. Our direct advertising revenue is
dependent in significant part on the performance of AOL's sales force, which we
do not control. Reduction in these revenues, whether due to the softening of the
demand for online advertising in general or particular problems facing parties
with whom we have commercial relationships, could adversely affect our results.
Our business may be harmed by the listing or sale by our users of illegal items
The law relating to the liability of providers of online services for the
activities of their users on their service is currently unsettled. We are aware
that certain goods, such as firearms, other weapons, adult material, tobacco
products, alcohol and other goods that may be subject to regulation by local,
state or federal authorities, have been listed and traded on our service. We may
be unable to prevent the sale of unlawful goods, or the sale of goods in an
unlawful manner, by users of our service, and we may be subject to allegations
of civil or criminal liability for unlawful activities carried out by users
through our service. We have been subject to several lawsuits based upon such
allegations. See "--Government inquiries may lead to charges or penalties,"
"--We are subject to intellectual property and other litigation" and "Legal
Proceedings." In order to reduce our exposure to this liability, we have
prohibited the listing of certain items and increased the number of personnel
reviewing questionable items. In the future, we may implement other protective
measures that could require us to spend substantial resources and/or to reduce
revenues by discontinuing certain service offerings. Any costs incurred as a
result of liability or asserted liability relating to the sale of unlawful goods
or the unlawful sale of goods, could harm our business. In addition, we have
received significant and continuing media attention relating to the listing or
sale of unlawful goods on our websites. 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 or
counterfeit 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 sought to work actively
with the content community to eliminate infringing listings on our websites,
some content owners have expressed the view that our efforts are insufficient.
Content owners
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have been active in defending their rights against online companies, including
eBay. An allegation of infringement of third-party intellectual property rights
may result in litigation against us. Any such litigation could be costly for us,
could result in increased costs of doing business through adverse judgment or
settlement, could require us to change our business practices in expensive ways,
or could otherwise harm our business. Litigation against other online companies
could result in interpretations of the law that could also require us to change
our business practices or otherwise increase our costs. See "--Government
inquiries may lead to charges or penalties," "Legal Proceedings" and "--We are
subject to intellectual property and other litigation."
Our business may be harmed by fraudulent activities on our websites
Our future success will depend largely upon sellers reliably delivering and
accurately representing their listed goods and buyers paying the agreed purchase
price. We have received in the past, and anticipate that we will receive in the
future, communications from users who did not receive the purchase price or the
goods that were to have been exchanged. In some cases individuals have been
arrested and convicted for fraudulent activities using our websites. While we
can suspend the accounts of users who fail to fulfill their delivery obligations
to other users, we do not have the ability to require users to make payments or
deliver goods or otherwise make users whole other than through our limited
insurance program. Other than through this program, we do not compensate users
who believe they have been defrauded by other users. We also periodically
receive complaints from buyers as to the quality of the goods purchased.
Negative publicity generated as a result of fraudulent or deceptive conduct by
users of our service could damage our reputation and diminish the value of our
brand name. We expect to continue to receive requests from users requesting
reimbursement or threatening or commencing legal action against us if no
reimbursement is made. Our liability for these sort of claims is only beginning
to be clarified and may be higher in some non-U.S. jurisdictions than it is in
the U.S. This sort of litigation could be costly for us, divert management
attention, result in increased costs of doing business, lead to adverse
judgments or could otherwise harm our business. In addition, affected users will
likely complain to regulatory agencies. See "--Government inquiries may lead to
charges or penalties."
Government inquiries may lead to charges or penalties
On January 29, 1999, we received initial requests to produce certain
records and information to the federal government relating to an investigation
of possible illegal transactions in connection with our websites. We were
informed that the inquiry includes an examination of our practices with respect
to these transactions. We have provided further information in connection with
this ongoing inquiry. In order to protect the investigation, the court has
ordered that no further public disclosures be made with respect to the matter.
On March 24, 2000, Butterfields received a grand jury subpoena from the
Antitrust Division of the Department of Justice requesting documents relating
to, among other things, changes in Butterfields' seller commissions and buyer
premiums and discussions, agreements or understandings with other auction
houses, in each case since 1992. We believe this request may be related to a
publicly reported criminal investigation of auction houses for price fixing. We
have provided the information requested in the subpoena.
Should these or any other investigations lead to civil or criminal charges
against us, we would likely be harmed by negative publicity, the costs of
litigation, the diversion of management time and other negative effects, even if
we ultimately prevail. Our business would suffer if we were not to prevail in
any actions like these. Even the process of providing records and information
can be expensive, time consuming and result in the diversion of management
attention.
A large number of transactions occur on our websites. 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 foreign, federal, state and local regulatory agencies and been told that
they have questions with respect to the adequacy of the steps we take to protect
our users from fraud. We are likely to receive additional inquiries from
regulatory agencies in the future, which may lead to action against us. We have
responded to all inquiries from regulatory agencies by describing our current
and planned antifraud efforts. If one or more of these agencies is not satisfied
with our response to current or future inquiries, the resultant investigations
and potential fines or other penalties could harm our business.
We are subject to laws relating to the use and transfer of personally
identifiable information about our users and their transactions, both within and
outside of the U.S. Violation of these laws, which in some cases apply even to
transfers of
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information amongst ourselves and our subsidiaries and commercial partners, as
well as to third parties, could subject us to significant penalties and negative
publicity and could adversely affect our company.
We have provided information to the antitrust division of the Department of
Justice in connection with an inquiry into our conduct with respect to "auction
aggregators" including our licensing program and our recently settled lawsuit
against Bidder's Edge. Should the division decide to take action against us, we
would likely be harmed by negative publicity, the costs of the action, possible
private antitrust lawsuits, the diversion of management time and effort and
penalties we might suffer if we ultimately were not to prevail.
Some of our businesses are subject to regulation and others may be in the future
Both Butterfields and Kruse are subject to regulation in some jurisdictions
governing the manner in which live auctions are conducted. Both are required to
obtain licenses in these jurisdictions with respect to their business or to
permit the sale of categories of items (e.g., wine, automobiles and real
estate). These licenses generally must be renewed regularly and are subject to
revocation for violation of law, violation of the regulations governing auctions
in general or the sale of the particular item and other events. If either
company was unable to renew a license or had a license revoked, its business
would be harmed. In addition, changes to the regulations or the licensure
requirements could increase the complexity and the cost of doing auctions,
thereby harming us.
As our activities and the types of goods listed on our site expand, state
regulatory agencies may claim that we are subject to licensure in their
jurisdiction. These claims could result in costly litigation or could require us
to change our manner of doing business in ways that increase our costs or reduce
our revenues or force us to prohibit listings of certain items. We could also be
subject to fines or other penalties. Any of these outcomes could harm our
business.
As we have expanded internationally, we have become subject to additional
regulations, including regulations on the transmission of personal information.
These laws may require costly changes to our business practices. If we are found
to have violated any of these laws, we could be subject to fines or penalties,
and our business could be harmed.
Companies that handle payments, including our subsidiaries Billpoint, Half.com.
and Internet Auction may be subject to additional regulation
The Half.com business model involves the handling of payments by buyers for
the items listed by Half.com's sellers. Internet Auction also has a business
model involving the handling of payments by buyers. Billpoint handles its
customer funds as a provider of Internet payment solutions. Businesses that
handle consumers' funds are subject to numerous regulations, including those
related to banking, credit cards, escrow, fair credit reporting, privacy of
financial records and others. Billpoint is a new business with a relatively
novel approach to facilitating payments. It is not yet known how regulatory
agencies will treat Billpoint. The cost and complexity of Billpoint's business
may increase if certain regulations are deemed to apply to its business. In
addition to the need to comply with these regulations, Billpoint's business is
also subject to risks of fraud, the need to grow systems and processes rapidly
if its products are well received, a high level of competition, including larger
and better financed competitors and the need to coordinate systems and policies
among itself, us and Wells Fargo Bank, which is the provider of payment
services. Similarly, Half.com may be subject to certain regulations regarding
payments and the cost and complexity of its business may increase if these
regulations are deemed to apply to its business.
We are subject to risks associated with information disseminated through our
service
The law relating to the liability of online services companies for
information carried on or disseminated through their services is currently
unsettled. Claims could be made against online services companies under both
U.S. and foreign law for defamation, libel, invasion of privacy, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of the materials disseminated through their services. Several private
lawsuits seeking to impose liability upon us have brought against us. In
addition, federal, state and foreign legislation has been proposed that imposes
liability for or prohibits the transmission over the Internet of certain types
of information. Our service features a Feedback Forum, which includes
information from users regarding other users. Although all such feedback is
generated by users and not by us, it is possible that a claim of defamation or
other injury could be made against us for content posted in the Feedback Forum.
Claims like these become more likely and have a higher probability of success in
jurisdictions outside the U.S. If we become liable for information provided by
our users and carried on our service in any jurisdiction in which we operate,
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we could be directly harmed and we may be forced to implement new measures to
reduce our exposure to this liability. This may require us to expend substantial
resources and/or to discontinue certain service offerings, which would
negatively affect our financial results. In addition, the increased attention
focused upon liability issues as a result of these lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our
business. Any costs incurred as a result of this liability or asserted liability
could harm our business.
We are subject to intellectual property and other litigation
On April 25, 2000, we were served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al., filed in Superior Court in San Diego, California. The lawsuit was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims we were
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims we violated California unfair competition law and a section of
the California Civil Code which prohibits "dealers" from selling sports
memorabilia without a "Certificate of Authenticity." On January 26, 2001, the
court issued a ruling dismissing all claims against us in the lawsuit. The court
ruled that our business falls within the safe harbor provisions of 47 USC 230,
which grants internet service providers such as eBay with immunity from state
claims based on the conduct of third parties. The court also noted that we were
not a "dealer" under California law and thus not required to provide
certificates of authenticity with autographs sold over our site by third
parties. All counts of the plaintiffs' suit were dismissed with prejudice as to
eBay. The plaintiffs have filed an appeal of this ruling. We believe we have
meritorious defenses and intend to defend ourselves vigorously.
On April 25, 2001, our European subsidiaries, eBay GMBH and eBay
International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates
("Rolex") in the regional court of Cologne, Germany. Rolex alleged that our
subsidiary was infringing Rolex's trademarks as result of users selling
counterfeit Rolex watches through our German website. The suit also alleges
unfair competition. Rolex is seeking an order forbidding the sale of Rolex
watches on the website as well as damages. We believe that we have meritorious
defenses against this claim and intend to defend ourselves vigorously.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future intellectual
property rights. We may become more vulnerable to such claims as laws such as
the Digital Millennium Copyright Act are interpreted by the courts. We expect
that we will increasingly be subject to infringement claims as the number of
services and competitors in our segment grow. These claims, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays, require expensive changes in our methods of doing business or
could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.
From time to time, we are involved in disputes that arise in the ordinary
course of business. Management believes that the ultimate resolution of these
disputes will not have a material adverse impact on our financial position or
results of operations.
The inability to expand our systems may limit our growth
We seek to generate a high volume of traffic and transactions on our
service. The satisfactory performance, reliability and availability of our
websites, processing systems and network infrastructure are critical to our
reputation and our ability to attract and retain large numbers of users. Our
revenues depend primarily on the number of items listed by users, the volume of
user transactions that are successfully completed and the final prices paid for
the items listed. We need to expand and upgrade our technology, transaction
processing systems and network infrastructure both to meet increased traffic on
our site and to implement new features and functions, including those required
under our contracts with third parties. We may be unable to accurately project
the rate or timing of increases, if any, in the use of our service or to expand
and upgrade our systems and infrastructure to accommodate any increases in a
timely fashion.
We use internally developed systems to operate our service for transaction
processing, including billing and collections processing. We must continually
improve these systems in order to accommodate the level of use of our websites.
In addition, we may add new features and functionality to our services that
would result in the need to develop or license additional technologies. We
capitalize hardware and software costs associated with this development in
accordance with generally accepted accounting principles and include such
amounts in property and equipment. Our inability to add
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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' experiences of our service
and delays in reporting accurate financial information. Our failure to provide
new features or functionality also could result in these consequences. We may be
unable to effectively upgrade and expand our systems in a timely manner or to
integrate smoothly any newly developed or purchased technologies with our
existing systems. These difficulties could harm or limit our ability to expand
our business.
Unauthorized break-ins or other assaults on our service could harm our business
Our servers are vulnerable to computer viruses, physical or electronic
break-ins and similar disruptions, which could lead to interruptions, delays,
loss of data, public release of confidential data or the inability to complete
customer transactions. In addition, unauthorized persons may improperly access
our data. We have experienced an unauthorized break-in by a "hacker" who has
stated that he could, in the future, damage or change our system or take
confidential information. We have also experienced "denial of service" type
attacks on our system that have made all or portions of our websites unavailable
for periods of time. These and other types of attacks could harm us. Actions of
this sort may be very expensive to remedy and could damage our reputation and
discourage new and existing users from using our service.
System failures could harm our business
We have experienced system failures from time to time. Our primary website
has been interrupted for periods of up to 22 hours. In addition to placing
increased burdens on our engineering staff, these outages create a flood of user
questions and complaints that need to be addressed by our customer support
personnel. Any unscheduled interruption in our service results in an immediate
loss of revenues that can be substantial and may cause some users to switch to
our competitors. If we experience frequent or persistent system failures, our
reputation and brand could be permanently harmed. We have been taking steps to
increase the reliability and redundancy of our system. These steps are
expensive, reduce our margins and may not be successful in reducing the
frequency or duration of unscheduled downtime.
Substantially all of our computer hardware for operating our services
(other than Half.com) currently is located at the facilities of Exodus
Communications, Inc. in Santa Clara, California and AboveNet Communications, Inc
in San Jose, California. The computer hardware for the Half.com service is
located in the facilities of Level 3 Communications, Inc. in Philadelphia,
Pennsylvania. These systems and operations are vulnerable to damage or
interruption from earthquakes, floods, fires, power loss, telecommunication
failures and similar events. They are also subject to break-ins, sabotage,
intentional acts of vandalism and similar misconduct. We do not maintain fully
redundant systems or alternative providers of hosting services, and we do not
carry business interruption insurance sufficient to compensate us for losses
that may occur. Despite any precautions we may take, the occurrence of a natural
disaster or other unanticipated problems at any of the Exodus, AboveNet or Level
3 facilities could result in lengthy interruptions in our services. In addition,
the failure by Exodus, AboveNet or Level 3 to provide our required data
communications capacity could result in interruptions in our service. Any damage
to or failure of our systems could result in interruptions in our service.
Interruptions in our service will reduce our revenues and profits, and our
future revenues and profits will be harmed if our users believe that our system
is unreliable.
Risks relating to possible California power outages
The State of California is currently experiencing a chronic shortage of
power and, as a result, power outages may occur. Although we have emergency
backup power capabilities at the facilities of Exodus, AboveNet and Level 3, and
limited backup power at our headquarters, repeated or lengthy power outages may
adversely affect our business.
Our stock price has been and may continue to be extremely volatile
The trading price of our common stock has been and is likely to be
extremely volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including the following:
- actual or anticipated variations in our quarterly operating results;
- unscheduled system downtime;
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- additions or departures of key personnel;
- announcements of technological innovations or new services by us or our
competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet and online commerce industries;
- changes in the market valuations of other Internet companies;
- developments in Internet regulation;
- announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
- sales of our common stock or other securities in the open market; and
- other events or factors, including these described in this "Risk
Factors" section and others 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
periods. These fluctuations often have been unrelated or disproportionate to the
operating performance of these companies. The valuations of many Internet
stocks, including ours, are extraordinarily high based on conventional valuation
standards such as price-to-earnings and price-to-sales ratios. The trading price
of our common stock has increased enormously from the initial public offering
price. These trading prices and valuations may not be sustained. Negative
changes in the public's perception of the prospects of Internet or e-commerce
companies have in the past and may in future depress our stock price regardless
of our results. Other broad market and industry factors may decrease the market
price of our common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic conditions, such as
recession or interest rate or currency rate fluctuations, also may decrease the
market price of our common stock. In the past, following declines in the market
price of a company's securities, securities class-action litigation often has
been instituted. Litigation of this type, if instituted, could result in
substantial costs and a diversion of management's attention and resources.
New and existing regulations could harm our business
We are subject to the same foreign, federal, state and local laws as other
companies conducting business on the Internet. Today there are relatively few
laws specifically directed towards online services. However, due to the
increasing popularity and use of the Internet and online services, many laws
relating to the Internet are being debated at the state and federal levels (both
in the U.S. and abroad) and it is possible that laws and regulations will be
adopted with respect to the Internet or online services. These laws and
regulations could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services, taxation,
advertising, intellectual property rights and information security.
Applicability to the Internet of existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy is uncertain. The vast majority of these laws was
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Those laws that do reference the Internet, such as the
Digital Millennium Copyright Act, are only beginning to be interpreted by the
courts and their applicability and scope are, therefore, uncertain. In addition,
numerous states, including the State of California, where our headquarters are
located, have regulations regarding how "auctions" may be conducted and the
liability of "auctioneers" in conducting such auctions. No final legal
determination has been made with respect to the applicability of the California
regulations to our business to date and little precedent exists in this area.
Several states are considering imposing these regulations upon us or our users,
which could harm our business. In addition, as the nature of the products listed
by our users change, we may become subject to new regulatory restrictions.
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Several states have proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission also has settled
several proceedings regarding the manner in which personal information is
collected from users and provided to third parties. Specific statutes intended
to protect user privacy have been passed in many non-U.S. jurisdictions. Changes
to existing laws or the passage of new laws intended to address these issues
could directly affect the way we do business or could create uncertainty on the
Internet. This could reduce demand for our services, increase the cost of doing
business as a result of litigation costs or increased service delivery costs, or
otherwise harm our business. In addition, because our services are accessible
worldwide, and we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with their laws. For
example, a French court has recently ruled that a U.S. website must comply with
French laws regarding content. As we have expanded our international activities,
we have become obligated to comply with the laws of the countries in which we
operate. Laws regulating Internet companies outside of the U.S. may be less
favorable then those in the U.S., giving greater rights to consumers, content
owners and users. Compliance may be more costly or may require us to change our
business practices or restrict our service offerings relative to those in the
U.S. Our failure to comply with foreign laws could subject us to penalties
ranging from fines to bans on our ability to offer our services.
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 websites during
the Thanksgiving and Christmas holidays and with the onset of good weather. We
have historically experienced our strongest quarter of online growth in our
first fiscal quarter, although our shift to more "practical" items may cause our
seasonal patterns to look more like a typical retailer. Both Butterfields and
Kruse have significant quarter-to-quarter variations in their results of
operations depending on the timing of auctions and the availability of high
quality items from large collections and estates. Butterfields typically has its
best operating results in the traditional fall and spring auction seasons and
has historically incurred operating losses in the first and third quarters.
Kruse typically sees a seasonal peak in operations in the third quarter.
Seasonal or cyclical variations in our business may become more pronounced over
time and may harm our results of operations in the future.
We are dependent on the continued growth of online commerce
The business of selling goods over the Internet, particularly through
personal trading, is new and dynamic. Our future net revenues and profits will
be substantially dependent upon the widespread acceptance of the Internet and
online services as a medium for commerce by consumers. Rapid growth in the use
of and interest in the Internet and online services is a recent phenomenon. This
acceptance and use may not continue. Even if the Internet is accepted, concerns
about fraud, privacy and other problems may mean that a sufficiently broad base
of consumers will not adopt the Internet as a medium of commerce. In particular,
our websites require users to make publicly available their e-mail addresses and
other personal information that some potential users may be unwilling to
provide. These concerns may increase as additional publicity over privacy issues
on eBay or generally over the Internet increase. Market acceptance for recently
introduced services and products over the Internet is highly uncertain, and
there are few proven services and products. In order to expand our user base, we
must appeal to and acquire consumers who historically have used traditional
means of commerce to purchase goods. If these consumers prove to be less active
than our earlier users, and we are unable to gain efficiencies in our operating
costs, including our cost of acquiring new customers, our business could be
adversely impacted.
Our business may be subject to sales and other taxes
We do not collect sales or other similar taxes on goods sold by users
through our service. One or more states may seek to impose sales tax collection
obligations on companies such as ours that engage in or facilitate online
commerce. Several proposals have been made at the state and local level that
would impose additional taxes on the sale of goods and services through the
Internet. These proposals, if adopted, could substantially impair the growth of
e-commerce, and could diminish our opportunity to derive financial benefit from
our activities. In 1998, the U.S. federal government enacted legislation
prohibiting states or other local authorities from imposing new taxes on
Internet commerce for a period of three years. This tax moratorium is scheduled
to end later in 2001 and does not prohibit states or the Internal Revenue
Service from collecting taxes on our income, if any, or from collecting taxes
that are due under existing tax rules. A successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on the
exchange of merchandise on our system would harm our business.
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We are dependent on key personnel
Our future performance will be substantially dependent on the continued
services of our senior management and other key personnel. Our future
performance also will depend on our ability to retain and motivate our other
officers and key personnel. The loss of the services of any of our executive
officers or other key employees could harm our business. We do not have
long-term employment agreements with any of our key personnel, and we do not
maintain any "key person" life insurance policies. Our new businesses are all
dependent on attracting and retaining key personnel. The land-based auction
businesses are particularly dependent on specialists and senior management
because of the relationships these individuals have established with sellers who
consign property for sale at auction. We have had some turnover of these
personnel, and continued losses of these individuals could result in the loss of
significant future business and would harm us. In addition, employee turnover
frequently increases during the period following an acquisition as employees
evaluate possible changes in compensation, culture, reporting relationships and
the direction of the business. Such increased turnover could increase our costs
and reduce our future revenues. Our future success also will depend on our
ability to attract, train, retain and motivate highly skilled technical,
managerial, marketing and customer support personnel. Competition for these
personnel is intense, especially for engineers and other professionals,
especially in the San Francisco Bay Area, and we may be unable to successfully
attract, integrate or retain sufficiently qualified personnel. In making
employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock options they
are to receive in connection with their employment. Fluctuations in our stock
price may make it more difficult to retain and motivate employees whose stock
option strike prices are substantially above current market prices.
Our offline auction businesses need to continue to acquire auction properties
The businesses of Butterfields and Kruse are dependent on the continued
acquisition of high quality auction properties from sellers. Their future
success will depend in part on their ability to maintain an adequate supply of
high quality auction property, particularly fine and decorative arts and
collectibles and collectible automobiles, respectively. There is intense
competition for these pieces with other auction companies and dealers. In
addition, a small number of key senior management and specialists maintain the
relationships with the primary sources of auction property and the loss of any
of these individuals could harm the business of Butterfields and Kruse.
Our offline auction businesses could suffer losses from price guarantees,
advances or rescissions of sales
In order to secure high quality auction properties from sellers,
Butterfields and Kruse may give a guaranteed minimum price or a cash advance to
a seller, based on the estimated value of the property. If the auction proceeds
are less than the amount guaranteed, or less than the amount advanced and the
seller does not repay the difference, the company involved will suffer a loss.
In addition, under certain circumstances a buyer who believes that an item
purchased at auction does not have good title, provenance or authenticity may
rescind the purchase. Under these circumstances, the company involved will lose
its commissions and fees on the sale even if the seller, in accordance with the
terms and conditions of sale, in turn accepts back the item and returns the
funds he or she received from the sale.
We are subject to the risks of owning real property
In connection with the acquisitions of Kruse and Butterfields we acquired
real property including land, buildings and interests in partnerships holding
land and buildings. We have no experience in managing real property. Ownership
of this property subjects us to new risks, including:
- the possibility of environmental contamination and the costs associated
with fixing any environmental problems;
- adverse changes in the value of these properties, due to interest rate
changes, changes in the neighborhoods in which the properties are
located, or other factors;
- the possible need for structural improvements in order to comply with
zoning, seismic, disability act or other requirements; and
- possible disputes with tenants, partners or others.
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Our market is intensely competitive
Depending on the category of product, we currently or potentially compete
with a number of companies serving particular categories of goods as well as
those serving broader ranges of goods. The Internet is a new, rapidly evolving
and intensely competitive area. We expect competition to intensify in the future
as the barriers to entry are relatively low, and current and new competitors can
launch new sites at a nominal cost using commercially available software. Our
broad-based competitors include the vast majority of traditional department and
general merchandise stores as well as emerging online retailers. These include
most prominently: Wal-Mart, Kmart, Target, Sears, Macy's, JC Penney, Costco,
Sam's Club as well as Amazon.com, Buy.com, AOL.com, Yahoo! shopping and MSN.
In addition, we face competition from specialty retailers and exchanges in
each of its categories of products. For example:
Antiques: Christie's, eHammer, Sotheby's / Sothebys.com
Coins & Stamps: Collectors Universe, Heritage, US Mint
Collectibles: Franklin Mint
Musical Instruments: Guitar Center, Harmony-Central.com, MusicHotBid.com
Sports Memorabilia: Beckett's, Collectors Universe
Toys, Bean Bag Plush: Amazon.com, KB Toys
Premium Collectibles: Christies, DuPont Registry, Greg Manning Auctions,
iCollector, Lycos / Skinner Auctions, Millionaire.com, Phillips (LVMH),
Sotheby's, Sothebys.com
Automotive (used cars): Autobytel.com, AutoVantage.com, AutoWeb.com,
Barrett-Jackson, CarOrder.com, CarPoint, Collectorcartraderonline.com,
eClassics.com, Edmunds, CarsDirect.com, Hemmings, imotors.com, vehix.com,
newspaper classifieds, used car dealers
Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com,
BigStar, Blockbuster, BMG Columbia House, CDNow, DVD Express, Wherehouse,
Alibris.com, Emusic.com, Bookfinders.com
Clothing: Bluefly.com, Dockers.com, FashionMall.com, The Gap, J. Crew,
LandsEnd.com, The Limited, Macy's, The Men's Wearhouse, Ross
Computers & Consumer Electronics: Best Buy, Buy.com, Circuit City, Compaq,
CompUSA, Dell, Egghead, Fry's Electronics, Gateway, The Good Guys, IBM,
MicroWarehouse, The Sharper Image, Shopping.com
Home & Garden: IKEA, Crate & Barrel, Home Depot, Garden.com, Pottery Barn,
Ethan Allen, Frontgate
Jewelry: Ashford.com, Mondera.com
Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com,
golfclubexchange, MVP.com, PlanetOutdoors.com, Play It Again Sports, REI, Sports
Authority, Sportsline.com
Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware,
OSH
Business-to-Business: Ariba, BidFreight.com, BizBuyer.com, bLiquid.com,
CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets,
Oracle, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, UnionStreet.com,
Ventro, VerticalNet
Additionally, we face competition from various online auction sites
including: Amazon.com, the Fairmarket Auction Network (an auction network
including Microsoft's MSN, Excite@Home, Dell Computer, ZD Net, Lycos and more
than
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100 others), First Auction, Surplus Auction, uBid, Yahoo! Auctions and a large
number of other companies using an auction format for consumer-to-consumer or
business-to-consumer sales. Overseas, we face competition from Yahoo! Auctions
in most countries and from a large number of regional and national competitors
in each country.
The principal competitive factors for eBay include the following:
- ability to attract buyers;
- volume of transactions and selection of goods;
- customer service; and
- brand recognition.
With respect to our online competition, additional competitive factors
include:
- community cohesion and interaction;
- system reliability;
- reliability of delivery and payment;
- website convenience and accessibility;
- level of service fees; and
- quality of search tools.
Some current and potential competitors have longer company operating
histories, larger customer bases and greater brand recognition in other business
and Internet spaces than we do. Some of these competitors also have
significantly greater financial, marketing, technical and other resources. Other
online trading services may be acquired by, receive investments from or enter
into other commercial relationships with larger, well-established and
well-financed companies. As a result, some of our competitors with other revenue
sources may be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to website and systems development than we can. Increased competition
may result in reduced operating margins, loss of market share and diminished
value of our brand. Some of our competitors have offered services for free, and
others may do this as well. We may be unable to compete successfully against
current and future competitors.
In order to respond to changes in the competitive environment, we may, from
time to time, make pricing, service or marketing decisions or acquisitions that
could harm our business. For example, we have implemented an insurance program
that generally insures items up to a value of $200, with a $25 deductible, for
users with a non-negative feedback rating at no cost to the user. New
technologies may increase the competitive pressures by enabling our competitors
to offer a lower cost service. Some Internet-based applications that direct
Internet traffic to certain websites may channel users to trading services that
compete with us.
Although we have established Internet traffic arrangements with several
large online services and search engine companies, these arrangements may not be
renewed on commercially reasonable terms. Even if these arrangements are
renewed, they may not result in increased usage of our service. In addition,
companies that control access to transactions through network access or Internet
browsers could promote our competitors or charge us substantial fees for
inclusion.
The offline auction business is intensely competitive. Butterfields
competes with two larger and better known auction companies, Sotheby's Holdings,
Inc. and Christie's International plc, as well as numerous regional auction
companies. To the extent that these companies increase their focus on the middle
market properties that form the core of Butterfields' business or in the western
U.S., its business may suffer. Kruse is subject to competition from numerous
regional competitors. In addition, competition with Internet-based auctions may
harm the land-based auction business. Although
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Billpoint's business is new, several new companies have entered this space,
including competitors who are offering free services and significant promotional
incentives, and large companies, including banks and credit card companies, are
also beginning to enter this space. Half.com competes directly with online
retailers in its product categories such as Amazon.com, which offers a directly
competitive service, as well as with traditional sellers of used books, videos
and CDs, consumer electronics, sporting goods and other products.
Our business is dependent on the development and maintenance of the Internet
infrastructure
The success of our service will depend largely on the development and
maintenance of the Internet infrastructure. This includes maintenance of a
reliable network backbone with the necessary speed, data capacity and security,
as well as timely development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and is likely to
continue to experience, significant growth in the numbers of users and amount of
traffic. If the Internet continues to experience increased numbers of users,
increased frequency of use or increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
the performance of the Internet may be harmed by increased number of users or
bandwidth requirements. The Internet has experienced a variety of outages and
other delays as a result of damage to portions of its infrastructure, and it
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the level of traffic and the
processing transactions on our service.
Our business is subject to online commerce security risks
A significant barrier to online commerce and communications is the secure
transmission of confidential information over public networks. Our security
measures may not prevent security breaches. Our failure to prevent security
breaches could harm our business. Currently, a significant number of our users
authorize us to bill their credit card accounts directly for all transaction
fees charged by us. Billpoint's users routinely provide credit card and other
financial information. We rely on encryption and authentication technology
licensed from third parties to provide the security and authentication
technology to effect secure transmission of confidential information, including
customer credit card numbers. Advances in computer capabilities, new discoveries
in the field of cryptography or other developments may result in a compromise or
breach of the technology used by us to protect customer transaction data. A
number of websites have reported breaches of their security. Any compromise of
our security could harm our reputation and, therefore, our business. In
addition, a party who is able to circumvent our security measures could
misappropriate proprietary information or cause interruptions in our operations.
An individual has claimed to have misappropriated some of our confidential
information by breaking into our computer system. We may need to expend
significant resources to protect against security breaches or to address
problems caused by breaches. These issues are likely to become more difficult as
we expand the number of places where we operate. Security breaches could damage
our reputation and expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits, which may not be
adequate to reimburse us for losses caused by security breaches.
We must keep pace with rapid technological change to remain competitive
Our competitive space is characterized by rapidly changing technology,
evolving industry standards, frequent new service and product introductions and
enhancements and changing customer demands. These characteristics are worsened
by the emerging and changing nature of the Internet. Our future success
therefore will depend on our ability to adapt to rapidly changing technologies,
to adapt our services to evolving industry standards and to improve the
performance, features and reliability of our service. Our failure to adapt to
such changes would harm our business. New technologies, such as the development
of a peer-to-peer personal trading technology, could adversely affect us. In
addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures to modify or adapt our services or infrastructure.
We need to develop new services, features and functions in order to expand
We plan to expand our operations by developing new or complementary
services, products or transaction formats or expanding the breadth and depth of
services. We may be unable to expand our operations in a cost-effective or
timely manner. Even if we do expand, we may not maintain or increase our overall
acceptance. If we launch a new business or service that is not favorably
received by consumers, it could damage our reputation and diminish the value of
our brand. We anticipate that future services will include pre-trade and
post-trade services.
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We are pursuing strategic relationships with third parties to provide many
of these services. Because we use third parties to deliver these services, we
may be unable to control the quality of these services, and our ability to
address problems if any of these third parties fails to perform adequately will
be reduced. Expanding our operations in this manner also will require
significant additional expenses and development, operations and other resources
and will strain our management, financial and operational resources. The lack of
acceptance of any new services could harm our business.
Our growth will depend on our ability to develop our brand
We believe that our historical growth has been largely attributable to word
of mouth. We have benefited from frequent and high visibility media exposure
both nationally and locally. We believe that continuing to strengthen our brand
will be critical to achieving widespread acceptance of our service. Promoting
and positioning our brand will depend largely on the success of our marketing
efforts and our ability to provide high quality services. In order to promote
our brand, we will need to increase our marketing budget and otherwise increase
our financial commitment to creating and maintaining brand loyalty among users.
Brand promotion activities may not yield increased revenues, and even if they
do, any increased revenues may not offset the expenses we incurred in building
our brand. If we do attract new users to our service, they may not conduct
transactions over our service on a regular basis. If we fail to promote and
maintain our brand or incur substantial expenses in an unsuccessful attempt to
promote and maintain our brand, our business would be harmed.
We may be unable to protect or enforce our own intellectual property rights
adequately
We regard the protection of our URLs, copyrights, service marks,
trademarks, trade dress and trade secrets as critical to our success. We rely on
a combination of patent, copyright, trademark, service mark and trade secret
laws and contractual restrictions to protect our proprietary rights in products
and services. We have entered into confidentiality and invention assignment
agreements with our employees and contractors, and nondisclosure agreements with
parties with whom we conduct business in order to limit access to and disclosure
of our proprietary information. These contractual arrangements and the other
steps taken by us to protect our intellectual property may not prevent
misappropriation of our technology or deter independent third-party development
of similar technologies. We pursue the registration of our URLs, trademarks and
service marks in the U.S. and internationally. Effective copyright, service
mark, trademark, trade dress and trade secret protection is very expensive to
maintain, and protection may not be available in every country in which our
services are made available online. Furthermore, we must also protect our URLs
in an increasing number of jurisdictions, a process that is expensive and may
not be successful in every location. We have licensed in the past, and expect to
license in the future, certain of our proprietary rights, such as trademarks or
copyrighted material, to third parties. These licensees may take actions that
might diminish the value of our proprietary rights or harm our reputation. We
also rely on certain technologies that we license from third parties, such as
Oracle Corporation, Microsoft and Sun Microsystems Inc., the suppliers of key
database technologies, the operating system and specific hardware components for
our service. These third-party technology licenses may not continue to be
available to us on commercially reasonable terms. The loss of these technologies
could require us to obtain substitute technologies of lower quality or
performance standards or at greater cost.
Some anti-takeover provisions may affect the price of our common stock
The Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the preferences, rights and privileges of
those shares without any further vote or action by the stockholders. The rights
of the holders of common stock may be harmed by the rights of the holders of any
preferred stock that may be issued in the future. Some provisions of our
certificate of incorporation and bylaws could have the effect of making it more
difficult for a third party to acquire a majority of our outstanding voting
stock. These include provisions that provide for a classified board of
directors, prohibit stockholders from taking action by written consent and
restrict the ability of stockholders to call special meetings. We are also
subject to provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a period of three years
from the date the person became an interested stockholder, unless certain
conditions are met. This restriction could have the effect of delaying or
preventing a change of control.
We are controlled by certain stockholders, executive officers and directors
Our executive officers and directors (and their affiliates) own nearly 50%
of our outstanding common stock. As a result, they have the ability to
effectively control our company and direct our affairs and business, including
the election of directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of
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delaying, deferring or preventing a change in control of our company and may
make some transactions more difficult or even impossible without the support of
these stockholders. Any of these events could decrease the market price of our
common stock.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents, short-term and long-term investments in a variety of securities,
including both government and corporate obligations and money market funds.
These securities are generally classified as available for sale and consequently
are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income, net
of estimated tax.
Investments in both fixed rate and floating rate interest earning
instruments carry varying degrees of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates. In general, longer dated securities are subject to greater interest rate
risk than shorter dated securities. While floating rate securities generally are
subject to less interest rate risk than fixed rate securities, floating rate
securities may produce less income than expected if interest rates decrease. Due
in part to these factors, our investment income may fall short of expectations
or we may suffer losses in principal if securities are sold that have declined
in market value due to changes in interest rates. As of March 31, 2001, our
fixed income investments earned a pretax yield of approximately 5.9% and had a
weighted average maturity of 0.3 years. If interest rates were to
instantaneously increase (decrease) by 100 basis points using a duration
modeling technique, the fair market value of the total investment portfolio
could decrease (increase) by approximately $2.4 million. Assuming an average
investment balance of $750 million, if rates were to increase (decrease) by 100
basis points, this would translate to an increase (decrease) in interest income
of $7.5 million annually.
We entered into two interest rate swaps on June 19 and July 20, 2000
totaling $95 million to reduce the impact of changes in interest rates on a
portion of the floating rate operating lease for our facilities. The interest
rate swaps allow for us to receive floating rate receipts based on LIBOR in
exchange for making fixed rate payments. This effectively changes our interest
rate exposure on our operating lease from a floating rate to a fixed rate on $95
million of the total $126.4 million operating lease. Of the $126.4 million
operating lease, the interest rate is fixed on $95 million, with the balance of
$31.4 million remaining at a floating rate of interest based on the spread over
3-month LIBOR. If the 3-month LIBOR rates were to increase (decrease) by 100
basis points, then our lease payments would increase (decrease) by $78,000 per
quarter.
EQUITY PRICE RISK
We are exposed to equity price risk on the marketable portion of equity
investments we hold, typically as the result of strategic investments in
strategic partners as such investments are subject to considerable market risk
due to their volatility. We typically do not attempt to reduce or eliminate our
market exposure in these equity investments.
FOREIGN CURRENCY RISK
International sales are made mostly from our sales in the respective
countries by our foreign subsidiaries and are typically denominated in the local
currency of each country. These subsidiaries also incur most of their expenses
in the local currency. Accordingly, all foreign subsidiaries use the local
currency as their functional currency. Our international business is subject to
risks typical of an international business, including, but not limited to
differing economic conditions, changes in political climate, differing tax
structures, other regulations and restrictions, and foreign exchange rate
volatility. Accordingly, our future results could be materially adversely
impacted by changes in these or other factors. These financial statements are
typically denominated in the functional currency of the foreign subsidiary in
order to centralize foreign exchange risk with the parent company in the U.S.
We are also exposed to foreign exchange rate fluctuations as the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability.
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PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 25, 2000, we were served with a lawsuit, Gentry et.al. v. eBay,
Inc. et.al., filed in Superior Court in San Diego, California. The lawsuit was
filed on behalf of a purported class of eBay users who purchased allegedly
forged autographed sports memorabilia on eBay. The lawsuit claims we were
negligent in permitting certain named (and other unnamed) defendants to sell
allegedly forged autographed sports memorabilia on eBay. In addition, the
lawsuit claims we violated California unfair competition law and a section of
the California Civil Code which prohibits "dealers" from selling sports
memorabilia without a "Certificate of Authenticity." On January 26, 2001, the
court issued a ruling dismissing all claims against us in the lawsuit. The court
ruled that our business falls within the safe harbor provisions of 47 USC 230,
which grants internet service providers such as eBay with immunity from state
claims based on the conduct of third parties. The court also noted that we were
not a "dealer" under California law and thus not required to provide
certificates of authenticity with autographs sold over our site by third
parties. All counts of the plaintiffs' suit were dismissed with prejudice as to
eBay. Plaintiffs have filed an appeal of this ruling. We believe we have
meritorious defenses and intend to defend ourselves vigorously.
On April 25, 2001, our European subsidiaries, eBay GMBH and eBay
International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates
("Rolex") in the regional court of Cologne, Germany. Rolex alleged that our
subsidiary was infringing Rolex's trademarks as result of users selling
counterfeit Rolex watches through our German website. The suit also alleges
unfair competition. Rolex is seeking an order forbidding the sale of Rolex
watches on the website as well as damages. We believe that we have meritorious
defenses against this claim and intend to defend ourselves vigorously.
Other third parties have from time to time claimed and may claim in the
future that we have infringed their past, current or future intellectual
property rights. We may become more vulnerable to such claims as laws such as
the Digital Millennium Copyright Act are interpreted by the courts. We expect
that we will increasingly be subject to infringement claims as the number of
services and competitors in our segment grow. These claims, whether meritorious
or not, could be time-consuming, result in costly litigation, cause service
upgrade delays, require expensive changes in our methods of doing business or
could require us to enter into costly royalty or licensing agreements, if
available. As a result, these claims could harm our business.
From time to time, we are involved in disputes arise in the ordinary course
of business. Management believes that the ultimate resolution of these disputes
will not have a material adverse impact on our consolidated financial position,
results of operations or cash flows.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits.
None.
(b) Reports on Form 8-K.
On January 16, 2001, eBay filed a report on Form 8-K announcing it had
signed an agreement to acquire a majority interest in Internet Auction Co.,
Ltd., a South Korean auction-style website.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
EBAY INC.
Date: May 14, 2001
PRINCIPAL EXECUTIVE OFFICER: PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER:
By: /s/ MARGARET C. WHITMAN By: /s/ RAJIV DUTTA
--------------------------------- ---------------------------------
Margaret C. Whitman Rajiv Dutta
President and Senior Vice President,
Chief Executive Officer Chief Financial Officer
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