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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
!
!!
! Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
Annual December 31, 1998.
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
(State or Other Jurisdiction
of Incorporation or Organization)
77-0430924
(I.R.S. Employer
Identification Number)
2005 Hamilton Avenue, Suite 350, San Jose, CA 95125
(Address of Principal Executive Offices, Including Zip Code)
(408) 558-7400
(Registrant’s Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes #
No "
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’ s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
#
As of March 1, 1999 there were 120,817,222 shares of the Registrant’ s Common Stock, $0.001 par value,
outstanding, which is the only class of common or voting stock of the registrant issued as of that date. The aggregate
market value of the voting stock held by non-affiliates computed by reference to the closing price for the Common
Stock as quoted by the Nasdaq Stock Market as of March 1, 1999 was approximately $2,974,224,000.
DOCUMENTS INCORPORATED BY REFERENCE
None.

Table of contents

  • Page 1
    ...Number 000-24821 eBay Inc. (Exact name of registrant as specified in its charter) Delaware (State or Other Jurisdiction of Incorporation or Organization) 77-0430924 (I.R.S. Employer Identification Number) 2005 Hamilton Avenue, Suite 350, San Jose, CA 95125 (Address of Principal Executive Offices...

  • Page 2
    ... on Accounting and Financial Disclosure ... 18 19 20 42 42 42 PART III Directors and Executive Officers of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management ...Certain Relationships and Related Party Transactions ...43 47 52 54 ITEM 10: ITEM...

  • Page 3
    ... trading. The Company has developed a Web-based community in which buyers and sellers are brought together in an efficient and entertaining auction format to buy and sell items such as antiques, coins, collectibles, computers, memorabilia, stamps and toys. The eBay service permits sellers to list...

  • Page 4
    ... trading community on the Internet. The core eBay service permits sellers to list items for sale, buyers to bid for and purchase items of interest and all eBay users to browse through listed items from any place in the world at any time. eBay offers buyers a large selection of new and used items...

  • Page 5
    ... efficient means of obtaining a maximum price for their products. To date, well over 50% of auctions listed on eBay have been successfully completed. Trust and Safety Programs. The Company has developed a number of programs designed to make users more comfortable with dealing with an unknown trading...

  • Page 6
    ... are outbid. Sellers and successful bidders are automatically notified when an auction is completed. To assist users further, the Company offers customer support via email, staffed on a 24-hour-a-day, seven-day-a-week basis. eBay Strategy The Company' s objective is to build upon its position as...

  • Page 7
    ... the eBay experience. The Company will continue to provide rapid system response and transaction processing time by investing in its infrastructure in order to accommodate additional users, content and auctions. Expand Value-Added Services. In order to offer an "end-to-end" person-to-person trading...

  • Page 8
    ... the eBay service and view the items listed for auction, in order to bid for an item or to list an item for sale, buyers and sellers must first register with eBay. Users register by completing a short online form and thereafter can immediately bid for an item or list an item for sale. Users in...

  • Page 9
    ... from using the eBay service. In the event the buyer and seller are unable to complete the transaction and the seller notifies eBay, eBay credits the seller the amount of the success fee. Invoices for placement fees, additional listing fees and success fees are sent via email to sellers on a monthly...

  • Page 10
    ... five days in order to leave feedback. Users who receive a sufficiently negative net feedback rating have their registrations suspended and are unable to bid on or list items for sale. The Company believes its Feedback Forum is extremely useful in overcoming initial user hesitancy when trading over...

  • Page 11
    ... Me, which offers users the opportunity to create their own personal home page free of charge on eBay using step-by-step instructions provided by the Company. The About Me home page can include personal information, items listed for auction, eBay feedback ratings, images and links to other favorite...

  • Page 12
    ... software. The eBay system handles all aspects of the auction process, including notifying users via email when they initially register for the service, they place a successful bid, they are outbid, they place an item for sale and an auction ends. Furthermore, the system sends daily status updates...

  • Page 13
    ... to offer a lower cost service. Some Web-based applications that direct Internet traffic to certain websites may channel users to trading services that compete with the Company. Although the Company has established Internet traffic arrangements with several large online services and search engine...

  • Page 14
    ...of payment or goods to any user of the eBay service. The Company has received in the past, and anticipates that it will receive in the future, communications from users who did not receive the purchase price or the goods that were to have been exchanged. While the Company can suspend the accounts of...

  • Page 15
    ... Privacy Policy The Company believes that issues relating to privacy and use of personal information relating to Internet users are becoming increasingly important as the Internet and its commercial use grow. The Company has adopted a detailed privacy policy that outlines how eBay uses information...

  • Page 16
    ... the Company' s services are accessible worldwide, and the Company facilitates sales of goods to users worldwide, foreign jurisdictions may claim that the Company is required to comply with their laws. In some jurisdictions, the Company will be required to collect value-added taxes on its fees. The...

  • Page 17
    Item 2: Properties As of March 24, 1999, the Company' s principal administrative, marketing and product development facilities are located in approximately 53,000 square feet of office space in San Jose, California under leases and subleases that expire between December 1999 and November 30, 2004. ...

  • Page 18
    ... Company' s first registration statement, filed on Form S-1 under the Securities Act of 1933 (No. 333-59097) relating to the Company' s initial public offering of its Common Stock, was September 23, 1998. A total of 12,042,825 shares of Company' s Common Stock were sold at a price of $6.00 per share...

  • Page 19
    ...of the Company included elsewhere in this report. Year Ended December 31, 1996(1) 1997 1998 (in thousands, except per share data) Consolidated Statement of Income Data: Net revenues...Cost of net revenues...Gross profit ...Operating expenses: Sales and marketing ...Product development...General and...

  • Page 20
    ...users to browse through listed items. The Company' s 24-hour-a-day, seven-day-a-week service is fully automated, topically arranged, intuitive and easy to use. eBay was formed as a sole proprietorship in September 1995 and operated its online auction service under the name of "Auction Web." In order...

  • Page 21
    ... level of revenue growth. Effective June 30, 1998, eBay acquired all of the outstanding shares of Jump Incorporated, the developer and operator of Up4Sale, an advertising-supported online trading service in an auction format. The acquisition was accounted for using the purchase method of accounting...

  • Page 22
    ...percentage of net revenues: Net revenues...Cost of net revenues ...Gross profit...Operating expenses: Sales and marketing...Product development... income ...Supplemental operating data: Number of registered users at end of period...Gross merchandise sales (1)...$ Number of auctions listed...(1) - - ...

  • Page 23
    ... customer fees paid by credit cards, depreciation of the equipment required for eBay' s website operations, amortization of technology acquired in the Jump acquisition in the second quarter of 1998, and costs associated with revenue sharing agreements. The Company' s cost of net revenues increased...

  • Page 24
    ... Company significantly increased its engineering staff and the use of outside contractors, while the rate of growth of net revenues declined. Increases in engineering staff were level with net revenues growth in the third quarter of 1998 and, accordingly, product development expenses as a percentage...

  • Page 25
    ... to employees in connection with the exercise of their stock options. The increase in the third quarter of 1998 reflected a full quarter of these earnings. The increase in the fourth quarter of 1998 resulted from income from investment of the proceeds from the Company' s initial public offering at...

  • Page 26
    ... number of auction transactions successfully completed. The increase from 1996 to 1997 was, to a lesser extent, the result of small increases in average transaction size and certain increases in the placement fees for various forms of featured placements for listed items. Cost of Net Revenues Cost...

  • Page 27
    ... employees. Increases in personnel-related expenses, the allowance for doubtful accounts, fees for professional services and overhead costs also contributed to the increase from 1997 to 1998. Amortization of Acquired Intangibles During 1998, eBay recognized expenses totaling $150,000 for in-process...

  • Page 28
    ... equipment and $40.4 million was used to purchase short-term investments. Net cash provided by financing activities was $15,000 in 1996, $3.5 million in 1997 and $71.0 million in 1998. Net cash provided by financing activities in 1996 resulted almost entirely from sales of common stock and preferred...

  • Page 29
    ... could result in loss of revenues or unanticipated eBay website outages. The Company' s marketing efforts are also dependent on the continued operation of Internet portals and other Internet sites on which it advertises. Although the Company has developed contingency plans with respect to collecting...

  • Page 30
    ... increase our number of registered users, items listed on our service and completed auctions; maintain and grow our website and customer operations; continue to make trading through our service safer for users; maintain and enhance our brand; successfully execute our business and marketing strategy...

  • Page 31
    ... website and reduce future revenues. Customer Support. We must expand our customer support operations to accommodate the increased number of users and transactions on our website. If we are unable to hire and successfully train sufficient employees or contractors in this area, users of our website...

  • Page 32
    ... website. A continuation of this negative publicity could damage our reputation and diminish the value of our brand name. It also could make users reluctant to continue to use our services. Our business may be harmed by the listing or sale by our users of pirated items. We have received in the past...

  • Page 33
    ... of payment or goods to any user of our service. We have received in the past, and anticipate that we will receive in the future, communications from users who did not receive the purchase price or the goods that were to have been exchanged. While we can suspend the accounts of users who fail...

  • Page 34
    ... of user auctions that are successfully completed and the final prices paid for the items listed. If the volume of traffic on our website or the number of auctions being conducted by customers continues to increase, we will need to expand and upgrade our technology, transaction processing systems...

  • Page 35
    ... three quarters of 1998. Our website has been interrupted for periods ranging from five minutes to three hours. In addition to placing increased burdens on our engineering staff, these outages create a flood of user questions and complaints that must be responded to by our customer support personnel...

  • Page 36
    ... the Internet or online services. These laws and regulations could cover issues such as online contracts, user privacy, freedom of expression, pricing, fraud, content and quality of products and services, taxation, advertising, intellectual property rights and information security. Applicability to...

  • Page 37
    ...law and unique local laws; government-imposed limitations on the public' s access to the Internet; difficulties in staffing and managing foreign operations; longer payment cycles, different accounting practices and problems in collecting accounts receivable; cultural nonacceptance of online auctions...

  • Page 38
    ...cost using commercially available software. We currently or potentially compete with a number of other companies. Our direct competitors include various online person-toperson auction services, including Yahoo! Auctions Powered by Onsale and Excite, Inc., both of which are free to sellers and buyers...

  • Page 39
    ... to offer a lower cost service. Some Web-based applications that direct Internet traffic to certain websites may channel users to trading services that compete with us. Although we have established Internet traffic arrangements with several large online services and search engine companies, these...

  • Page 40
    ... litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches. We must keep pace with rapid technological change to remain competitive. The market in which we compete is characterized by rapidly...

  • Page 41
    ... sellers for listing products for sale on our service and fees received from successfully completed auctions. Our future revenues will depend upon continued demand for the types of goods that are listed by users of our service. The popularity of certain categories of items, such as toys, dolls and...

  • Page 42
    ...if available, this financing may be dilutive. Item 7A: Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk The primary objective of eBay' s investment activities is to preserve the principal while at the same time maximizing yields without significantly increasing risk. To...

  • Page 43
    ... as its Chief Executive Officer, Chief Financial Officer and President from inception to February 1998, November 1997 and August 1996, respectively. Prior to founding eBay, Mr. Omidyar was a developer services engineer at General Magic, a mobile communication platform company from December 1994...

  • Page 44
    ... of WhoWhere?, an Internet directory and Web-based email company. Prior to that time, Mr. Westly was Director of Sales for Netcom, an Internet service provider, from August 1995 to July 1996 and was Deputy Director of Office of Economic Development, City of San Jose, California, from April 1991...

  • Page 45
    ... eBay' s employee benefit plans. Compensation Committee Interlocks and Insider Participation None of the members of the Compensation Committee of the Board was at any time since the formation of the Company an officer or employee of the Company. No executive officer of the Company serves as a member...

  • Page 46
    ... of 600,000 shares of the Company' s Common Stock for issuance thereunder. Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the Directors Plan. The option grants under the Directors Plan are automatic and...

  • Page 47
    ... executive officer who held office at December 31, 1997 received total annual compensation in excess of $100,000 in 1997. Summary Compensation Table Annual Compensation Long-Term and Other Compensation Number of Securities Other Annual Underlying All Other Compensation Compensation(2) Options Name...

  • Page 48
    ... executive officers received grants of options in 1998 pursuant to the 1997 Stock Option Plan (the "1997 Plan"). Option Grants During 1998 Percentage of Total Options Granted to Employees during 1998(2) 41.7% 0.2 0.2 0.2 0.1 Name Margaret C. Whitman ...Steven P. Westly... Number of Securities...

  • Page 49
    ... 1998 and the number of shares of Common Stock subject to exercisable and unexercisable stock options held as of December 31, 1998 by each of the Named Officers. Value at fiscal year end is measured as the difference between the exercise price and the fair market value at close of market on December...

  • Page 50
    ... of 14,687 shares per month from August 24, 1998 through the termination date. Indemnification of Directors and Executive Officers and Limitation of Liability Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation' s board of directors to grant indemnity...

  • Page 51
    ...litigation or proceeding involving a director, officer or employee of the Company regarding which indemnification is sought, nor is the Company aware of any threatened litigation that may result in claims for indemnification. The Company has obtained directors' and officers' liability insurance. 51

  • Page 52
    ... at their original purchase price of $0.0022 per share. See "Certain Transactions" and "Description of Capital Stock." The address for Mr. Omidyar is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125. (3) Mr. Skoll is the Vice President Strategic Planning and Analysis of the Company. As of...

  • Page 53
    ... original purchase price of $0.033 per share. The address for Mr. Bengier is 2005 Hamilton Avenue, Suite 350, San Jose, California 95125. (9) Mr. Wilson is the Senior Vice President Product Development and Site Operations of the Company. As of March 1, 1999, 937,500 shares of the 1,800,000 shares he...

  • Page 54
    ... Stock holdings were increased to 1,676,475 shares. Upon completion of the Company' s initial public offering in September 1998, all of the Series A Preferred Stock was automatically converted to 15,088,275 shares of Common Stock. In December 1996, pursuant to a Restricted Stock Purchase Agreement...

  • Page 55
    ... completion of the Company' s initial public offering in September 1998, all of the Series B Preferred Stock was automatically converted to an aggregate of 12,600,000 shares of Common Stock. See "Principal and Selling Stockholders." Investor Rights Agreement. In June 1997, the Company, the Investors...

  • Page 56
    ...by the Community Foundation Silicon Valley, and donated 321,750 shares of Common Stock to the Community Foundation Silicon Valley on behalf of the eBay Foundation. The Community Foundation Silicon Valley sold 32,175 shares of eBay Common Stock in conjunction with eBay' s initial public offering. 56

  • Page 57
    ...: eBay Inc. Investor Relations 2005 Hamilton Ave., Suite 350 San Jose, CA 95125 (408) 558-7400 In addition, the Securities and Exchange Commission maintains a website that provides access to all filings made electronically by the Company at www.sec.gov. The Company' s website is located at www.ebay...

  • Page 58
    ... Directors Stock Option Plan and related documents.* Registrant' s 1998 Employee Stock Purchase Plan.* Office Lease between Connecticut General Life Insurance Company, a Connecticut corporation, and the Registrant dated September 30, 1996, as amended through March 1998.* Sublease between Information...

  • Page 59
    REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of eBay Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of stockholders' equity and of cash flows present fairly, in all material respects, the financial ...

  • Page 60
    ... A Convertible Preferred Stock, $0.001 par value; 1,676 and no shares authorized, 1,676 and no shares issued and outstanding...Common Stock, $0.001 par value; 180,000 and 195,000 shares authorized, 61,200 and 120,000 shares issued and outstanding ...Additional paid-in capital...Notes receivable from...

  • Page 61
    eBAY INC. CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share amounts) Year Ended December 31, 1996 1997 1998 Net revenues ...Cost of net revenues...Gross profit ...Operating expenses: Sales and marketing ...Product development ...General and administrative ...Amortization of acquired ...

  • Page 62
    ... ...Contribution of Common Stock to charitable foundation ...Issuance of Common Stock for cash in initial public offering, net of offering expenses of $6,168 ...Conversion of Series A and B Preferred Stock to Common Stock in conjunction with initial public offering...Note repayments...Net income...

  • Page 63
    ... with purchases of Common Stock by outside directors ...- - 429 Charitable contribution of Common Stock ...- - 1,215 Series B Preferred Stock issued for services...- - 93 Acquired research and development ...- - 150 Amortization of acquired intangibles...- - 1,030 Changes in assets and liabilities...

  • Page 64
    ... trading by developing a Web-based community in which buyers and sellers are brought together in an auction format to trade personal items such as antiques, coins, collectibles, computers, memorabilia, stamps and toys. The eBay service permits sellers to list items for sale, buyers to bid on items...

  • Page 65
    ...collected upon processing of credit card transactions. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. During the years ended December 31, 1997 and 1998, no customers accounted for more than 10% of net revenues or net...

  • Page 66
    ...Revenue recognition Revenues are derived primarily from placement fees charged for the listing of items for auction and success fees calculated as a percentage of the final sales transaction value. Revenues related to placement fees are recognized at the time the item is listed, while those related...

  • Page 67
    ..., if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Net income per share The Company computes net income per share in accordance with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the...

  • Page 68
    ... cost estimates for acquired research and development and completed technology, a risk-adjusted income approach for the acquired customer list and the amounts paid for covenants not to compete. The total purchase price of approximately $2.3 million consisted of 428,544 shares of the Company...

  • Page 69
    ... 31, 1997 1998 (in thousands) Accounts receivable, net: Accounts receivable ...Less: Allowance for doubtful accounts ...Allowance for authorized credits ... $1,385 $9,491 (308) (2,105) (53) (1,017) $1,024 $6,369 Write-offs against the allowance for doubtful accounts were $0 and $562,000 in the...

  • Page 70
    ... 31, 1997 1998 (in thousands) Intangible assets, net: Purchased technology...$ Covenants not to compete ...Customer list ...Goodwill...Less: Accumulated amortization ...$ Other current liabilities: Accrued compensation and related benefits ...Advertising accruals ...Professional fees...Other...

  • Page 71
    ...year marketing agreement with America Online, Inc. ("AOL"). Under the terms of the agreement the Company will be provided with a specific number of advertising impressions featuring it as the preferred provider of person-to-person auction services on AOL' s service. In consideration, the Company has...

  • Page 72
    ... taxes, (in thousands): Year Ended December 31, 1996 1997 1998 Provision at statutory rate...Permanent differences: Acquisition related expenses ...Stock compensation...Tax exempt interest income...Other...State taxes, net of federal benefit ... $ 87 $ 525 $2,390 - 384 - 1,051 - (175) 12 270...

  • Page 73
    ... 2,909 6,000 1,676 $ 1,000 1,415 6,300 - - 3,091 $ 7,300 $ - 5,093 - $5,093 On September 24, 1998, the Company completed its initial public offering of Common Stock. At that time, all issued and outstanding shares of the Company' s Series A and Series B Convertible Preferred Stock were converted...

  • Page 74
    ... options under the stock option plans and issuance of shares under the employee stock purchase plan, respectively. Note 10-Employee Benefit Plans: 401(k) Savings Plan The Company has a savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (the...

  • Page 75
    ... to Company employees, officers, directors, consultants, independent contractors and advisors of the Company. Options under the Plans may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board...

  • Page 76
    ... number of shares reserved for issuance under the Purchase Plan shall not exceed 4,500,000 shares. The Purchase Plan became effective on September 24, 1998, the first business day on which price quotations for the Company' s Common Stock were available on the Nasdaq National Market. Employees...

  • Page 77
    ... of 600,000 shares of the Company' s Common Stock for issuance thereunder. Members of the Board who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, are eligible to participate in the Directors Plan. The option grants under the Directors Plan are automatic and...

  • Page 78
    ... months at a minimum cost of $525,000. On March 2, 1999, eBay entered into a Co-branding and Advertising Agreement (the "Agreement") with iEscrow, Inc. ("i-Escrow"). Under the terms of the Agreement, i-Escrow will develop co-branded website pages which offer third party escrow services to eBay users...

  • Page 79
    ...In accordance with the requirements of the Securities Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. eBAY INC. Date: March 29, 1999 Principal Executive Officer: By: /S/ MARGARET C. WHITMAN Margaret C. Whitman President...