Ebay, Inc. Form 10-Q Dated 3-31-2002
Table of Contents



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, 2002.

OR

     
o   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)
     
2145 Hamilton Avenue
San Jose, California
(Address of principal executive offices)
 
95125
(Zip Code)

(408) 376-7400
(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 o

     As of April 30, 2002, there were 280,196,376 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.



 


TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION
ITEM 1: Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
CONDENSED CONSOLIDATED STATEMENT OF INCOME
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II: OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
SIGNATURES


Table of Contents

PART I: FINANCIAL INFORMATION

ITEM 1: Financial Statements

eBay Inc.

CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)

                         
            December 31,   March 31,
            2001   2002
           
 
       
ASSETS
               
Current assets:
               
   
Cash and cash equivalents
  $ 523,969     $ 576,851  
   
Short-term investments
    199,450       152,936  
   
Accounts receivable, net
    101,703       120,912  
   
Other current assets
    58,683       59,973  
 
   
     
 
       
Total current assets
    883,805       910,672  
 
Long-term investments
    286,998       343,813  
Restricted cash and investments
    129,614       126,390  
Property and equipment, net
    142,349       142,387  
Goodwill
    187,829       220,969  
Intangible assets, net
    10,810       11,229  
Deferred tax assets
    21,540       23,031  
Other assets
    15,584       10,523  
 
   
     
 
 
  $ 1,678,529     $ 1,789,014  
 
   
     
 
     
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
   
Accounts payable
  $ 33,235     $ 33,619  
   
Accrued expenses and other current liabilities
    94,593       114,360  
   
Deferred revenue and customer advances
    15,583       16,283  
   
Short-term debt
    16,111       15,049  
   
Income taxes payable
    20,617       22,990  
 
   
     
 
       
Total current liabilities
    180,139       202,301  
 
Long-term debt
    12,008       9,774  
Other liabilities
    19,493       19,002  
Minority interests
    37,751       30,332  
 
   
     
 
       
Total liabilities
    249,391       261,409  
 
   
     
 
Stockholders’ equity:
               
Convertible Preferred Stock, $0.001 par value; 10,000 shares authorized; no shares issued or outstanding
           
Common Stock, $0.001 par value; 900,000 shares authorized; 277,259 and 279,890 shares issued and outstanding
    277       280  
Additional paid-in capital
    1,275,240       1,331,829  
Unearned stock-based compensation
    (2,367 )     (1,558 )
Retained earnings
    164,633       212,167  
Accumulated other comprehensive loss
    (8,645 )     (15,113 )
 
   
     
 
 
Total stockholders’ equity
    1,429,138       1,527,605  
 
   
     
 
 
  $ 1,678,529     $ 1,789,014  
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

1


Table of Contents

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(unaudited)

                     
        Three Months Ended
        March 31,
       
        2001   2002
       
 
Net revenues
  $ 154,090     $ 245,106  
Cost of net revenues
    27,002       41,277  
 
   
     
 
   
Gross profit
    127,088       203,829  
 
   
     
 
Operating expenses:
               
 
Sales and marketing
    55,536       73,104  
 
Product development
    15,737       24,307  
 
General and administrative
    21,328       32,493  
 
Payroll expense on employee stock options
    427       1,679  
 
Amortization of acquired intangible assets
    3,355       1,530  
 
   
     
 
   
Total operating expenses
    96,383       133,113  
 
   
     
 
Income from operations
    30,705       70,716  
Interest and other income, net
    14,978       7,387  
Interest expense
    (712 )     (685 )
Impairment of certain equity investments
    (9,921 )     (1,181 )
 
   
     
 
Income before income taxes and minority interests
    35,050       76,237  
Provision for income taxes
    (15,427 )     (29,411 )
Minority interests in consolidated companies
    1,444       758  
 
   
     
 
Net income
  $ 21,067     $ 47,584  
 
   
     
 
Net income per share:
               
 
Basic
  $ 0.08     $ 0.17  
 
   
     
 
 
Diluted
  $ 0.08     $ 0.17  
 
   
     
 
Weighted average shares:
               
 
Basic
    264,279       278,332  
 
   
     
 
 
Diluted
    278,732       284,891  
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

2


Table of Contents

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

                   
      Three Months Ended
      March 31,
     
      2001   2002
     
 
Net income
  $ 21,067     $ 47,584  
 
   
     
 
Other comprehensive income (loss):
               
 
Foreign currency translation
    (5,251 )     (5,101 )
 
Unrealized gains (losses) on investments, net
    2,695       (3,553 )
 
Investment losses included in net income
    2,401        
 
Unrealized gains (losses) on cash flow hedges
    (2,308 )     1,299  
 
Estimated tax benefit (provision)
    (1,194 )     887  
 
   
     
 
Net change in other comprehensive income (loss)
    (3,657 )     (6,468 )
 
   
     
 
Comprehensive income before cumulative effect of change in accounting principle
    17,410       41,116  
Cumulative effect of change in accounting principle, net of tax
    (2,627 )      
 
   
     
 
Comprehensive income
  $ 14,783     $ 41,116  
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Table of Contents

eBay Inc.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)

                       
          Three Months Ended March 31,
         
          2001   2002
         
 
Cash flows from operating activities:
               
 
Net income
  $ 21,067     $ 47,584  
 
Adjustments:
               
   
Provision for doubtful accounts and authorized credits
    6,720       8,148  
   
Depreciation and amortization
    14,237       13,011  
   
Amortization of unearned stock-based compensation
    761       913  
   
Tax benefit on the exercise of employee stock options
    13,385       29,411  
   
Impairment of certain equity investments
    9,921       1,181  
   
Minority interests and other
    (1,952 )     (2,042 )
   
Changes in assets and liabilities, net of effect of acquisitions:
               
     
Accounts receivable
    (7,098 )     (27,832 )
     
Other current assets
    (5,541 )     (1,561 )
     
Intangible and other assets
    (2,495 )     1,218  
     
Deferred tax assets
    2,024       (2,411 )
     
Accounts payable
    (13,546 )     507  
     
Accrued expenses and other liabilities
    1,563       21,041  
     
Deferred revenue and customer advances
    (1,501 )     732  
     
Income taxes payable
    (97 )     2,373  
 
   
     
 
Net cash provided by operating activities
    37,448       92,273  
 
   
     
 
Cash flows from investing activities:
               
   
Purchases of property and equipment
    (10,717 )     (11,494 )
   
Purchases of investments
    (53,223 )     (208,245 )
   
Maturities and sales of investments
    249,710       200,509  
   
Proceeds from sale of property and equipment
    4,500        
   
Acquisitions, net of cash acquired
    (109,212 )     (43,557 )
 
   
     
 
Net cash provided by (used in) investing activities
    81,058       (62,787 )
 
   
     
 
Cash flows from financing activities:
               
   
Proceeds from issuance of common stock, net
    1,731       27,004  
   
Principal payments on long-term debt
    (6,091 )     (3,296 )
 
   
     
 
Net cash (used in) provided by financing activities
    (4,360 )     23,708  
 
   
     
 
Effect of exchange rate changes on cash and cash equivalents
    (1,756 )     (312 )
 
   
     
 
Net increase in cash and cash equivalents
    112,390       52,882  
Cash and cash equivalents at beginning of period
    201,873       523,969  
 
   
     
 
Cash and cash equivalents at end of period
  $ 314,263     $ 576,851  
 
   
     
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(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, 2002, we operated websites directed towards the United States, Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, the Netherlands, New Zealand, Singapore, South Korea, Spain, Sweden, Switzerland and the United Kingdom. We pioneered online 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.

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, 2001 and March 31, 2002, and for the three months ended March 31, 2001 and 2002, are unaudited. The unaudited 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 our financial position, as of March 31, 2002, and our results of operations and cash flows for the three months ended March 31, 2001 and 2002, respectively. These condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and related notes included in our 2001 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 25, 2002. Our balance sheet as of December 31, 2001 was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. Our results for the three months ended March 31, 2002 are not necessarily indicative of the expected results for any other interim period or the year ending December 31, 2002. The accompanying condensed consolidated financial statements include the accounts of 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.

New accounting standards

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 and No. 142, Business Combinations and Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Additionally, the standards require that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirers intent to do so.

5


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     We adopted SFAS 142 in the first quarter of 2002, and no longer amortize goodwill. This accounting change eliminates annual goodwill amortization of approximately $55.3 million, based on anticipated amortization that would have been incurred for fiscal 2002 under the prior accounting standard. At March 31, 2002, unamortized goodwill approximated $221.0 million. We will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from estimated future cash flows. We have completed the first step of the transitional goodwill impairment test required by SFAS 142 and have determined that no potential impairment presently exists. However, no assurances can be given that future goodwill impairment assessments will not result in charges to our operating results.

     In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” that develops one accounting model for long-lived assets that are to be disposed of by sale and expands the scope of discontinued operations. We adopted SFAS No. 144 on January 1, 2002 and the adoption of this Statement did not have a material impact on our financial position, results of operations, or cash flows.

Note 2—Net Income per Share:

     Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of unvested, restricted common stock and incremental common shares issuable upon the exercise of stock options and warrants, are included in diluted net income per share to the extent such shares are dilutive.

     The following table sets forth the computation of basic and diluted net income per share for the periods indicated (in thousands, except per share amounts):

                   
      Three Months Ended
      March 31,
     
      2001   2002
     
 
Numerator:
               
 
Net income available to common stockholders
  $ 21,067     $ 47,584  
 
   
     
 
Denominator:
               
 
Weighted average shares
    268,982       278,755  
 
Weighted average common shares subject to repurchase
    (4,703 )     (423 )
 
   
     
 
 
Denominator for basic calculation
    264,279       278,332  
Weighted average effect of dilutive securities:
               
 
Warrants
    94        
 
Weighted average common shares subject to repurchase
    4,703       423  
 
Incremental shares from employee stock options
    9,656       6,136  
 
   
     
 
 
Denominator for diluted calculation
    278,732       284,891  
 
   
     
 
Net income per share:
               
 
Basic
  $ 0.08     $ 0.17  
 
   
     
 
 
Diluted
  $ 0.08     $ 0.17  
 
   
     
 

6


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 3—Business Combinations, Goodwill and Intangible Assets

Billpoint acquisition

     In January 2002, we purchased the 35% minority interest in Billpoint held by Wells Fargo Bank for approximately $43.5 million in cash, subject to an upward adjustment upon the occurrence of certain specified future events. This acquisition increased our ownership of Billpoint to a 100% interest and was accounted for using the purchase method of accounting. The aggregate purchase price was allocated to tangible and identifiable intangible assets acquired and liabilities assumed based on estimates of fair value.

     Tangible net assets were valued at their respective carrying amounts as we believe that these amounts approximate their current fair values. The valuation of identifiable intangible assets acquired was based on management’s estimates using a preliminary valuation report prepared by an independent third-party valuation consultant and consists of developed technology. Identifiable intangible assets are amortized using an estimated useful life of three years. The excess of the aggregate purchase price over the fair value of the identifiable net assets acquired of approximately $35.8 million has been recognized as goodwill.

     The aggregate purchase price was allocated as follows (in thousands):

         
Net tangible assets
  $ 6,643  
Identifiable intangible assets
    1,750  
Deferred tax liability
    (700 )
Goodwill
    35,848  
 
   
 
Aggregate purchase price
  $ 43,541  
 
   
 

NeoCom Technology Co., Ltd. acquisition

     In February 2002, we signed a definitive agreement to purchase 100% of the outstanding share capital of NeoCom Technology Co., Ltd. for cash totaling $9.5 million, subject to certain working capital adjustments. NeoCom provides an online Chinese language marketplace for the trading of goods and services for both individual and business customers in Taiwan. NeoCom’s corporate office is located in Taipei, Taiwan. The acquisition closed on April 4, 2002, and therefore is not included in our condensed consolidated financial statements as of and for the three months ended March 31, 2002. We are currently evaluating the allocation of the purchase price to net tangible and identifiable intangible assets of NeoCom and do not expect the ultimate allocation of purchase price to have a material impact on our financial position, results of operations, or cash flows.

EachNet, Inc. equity investment

     On March 17, 2002, we purchased a 38% interest in the outstanding common stock of EachNet, Inc., which is a 33% interest on a fully diluted basis, in exchange for $30.0 million in cash. EachNet provides an online marketplace for the trading of goods and services for both individual and business customers in the People’s Republic of China. The aggregate purchase price was allocated to net tangible and identifiable intangible assets acquired on the basis of their estimated fair values on the acquisition date.

     Tangible assets were valued at their respective carrying amounts as we believe that these amounts approximate their current fair values. The valuation of the identifiable intangible assets was based on management’s estimates using a preliminary valuation report prepared by an independent third-party valuation consultant and consists of trade names, developed technology and user base. Identifiable intangible assets are being amortized using estimated useful lives with a weighted average of approximately four years.

     The excess of the purchase price over the fair value of our ownership interest in the identifiable net assets acquired of $25.4 million has been recognized as goodwill.

7


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     The aggregate purchase price was allocated as follows (in thousands):

         
Net tangible assets
  $ 3,263  
Identifiable intangible assets
    2,280  
Deferred tax liability
    (912 )
Goodwill
    25,369  
 
   
 
Aggregate purchase price
  $ 30,000  
 
   
 

     We account for the investment using the equity method of accounting and the total investment, including identifiable intangible assets, deferred tax liabilities and goodwill, is classified on our balance sheet as a long-term investment. In periods subsequent to the acquisition, our consolidated financial results will include 38% of the net income or loss of EachNet together with amortization expense relating to acquired intangible assets.

Goodwill and intangible assets

     Goodwill information for each reportable segment is as follows (in thousands):

                                   
      December 31,   Goodwill           March 31,
      2001   Acquired   Adjustments   2002
     
 
 
 
Segments:
                               
 
Online
  $ 185,208     $ 35,848     $ (2,708 )   $ 218,348  
 
Offline
    2,621                   2,621  
 
   
     
     
     
 
 
  $ 187,829     $ 35,848     $ (2,708 )   $ 220,969  
 
   
     
     
     
 

     During the three months ended March 31, 2002, $35.8 million of goodwill resulted from the acquisition of the minority interest in Billpoint, offset primarily by $2.7 million of foreign currency translation adjustments relating to goodwill associated with prior acquisitions.

     The following table summarizes the pro forma impact of excluding goodwill amortization from our operating results for the three months ended March 31, 2001 (in thousands, except per share amounts):

           
      Three Months Ended,
      March 31, 2001
     
Net income as reported
  $ 21,067  
 
Add back: Goodwill amortization expense
    2,618  
 
   
 
 
Pro forma net income
  $ 23,685  
 
   
 
Basic net income per share:
       
 
As reported
  $ 0.08  
 
Pro forma
  $ 0.09  
Diluted net income per share:
       
 
As reported
  $ 0.08  
 
Pro forma
  $ 0.09  

8


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     The components of intangible assets, excluding goodwill, are as follows (in thousands):

                                                   
      December 31, 2001   March 31, 2002
     
 
      Gross           Net   Gross           Net
      Carrying   Accumulated   Carrying   Carrying   Accumulated   Carrying
      Amount   Amortization   Amount   Amount   Amortization   Amount
     
 
 
 
 
 
Intangible assets:
                                               
 
Developed technologies
  $ 9,076     $ (3,643 )   $ 5,433     $ 10,789     $ (4,453 )   $ 6,336  
 
Customer bases
    6,525       (2,306 )     4,219       6,470       (2,545 )     3,925  
 
Trademarks
    1,390       (350 )     1,040       1,376       (493 )     883  
 
All other
    973       (855 )     118       973       (888 )     85  
 
   
     
     
     
     
     
 
 
  $ 17,964     $ (7,154 )   $ 10,810     $ 19,608     $ (8,379 )   $ 11,229  
 
   
     
     
     
     
     
 

     All of our acquired intangible assets are subject to amortization. Intangible assets are comprised of developed technologies, customer bases, trademarks, and other acquired intangible assets including contractual agreements. Developed technologies are being amortized over a weighted average period of approximately three years. Customer bases are being amortized over a weighted average period of approximately five years. Trademarks are being amortized over a weighted average period of approximately three years. Other acquired intangible assets relate to contractual agreements and are being amortized over a weighted average period of approximately four years. No significant residual value is estimated for the intangible assets. Aggregate amortization expense for intangible assets totaled $735,000 and $1.1 million for the three months ended March 31, 2001 and 2002, respectively.

     Expected future intangible asset amortization expense is as follows (in thousands):

           
Fiscal Years:
       
 
2002 (remaining nine months)
  $ 3,617  
 
2003
    3,315  
 
2004
    2,882  
 
2005
    1,159  
 
2006
    256  
 
Thereafter
     
 
   
 
 
  $ 11,229  
 
   
 

Pro forma results of operations

     On February 15, 2001, we acquired a majority interest in Internet Auction Co., Ltd., a South Korean company (“Internet Auction”), in a $121.9 million transaction accounted for as a purchase business combination. The results of operations of Internet Auction have been included in our consolidated financial statements from February 15, 2001.

     On May 18, 2001, we completed its acquisition of iBazar S.A. (“iBazar”) in a $125.6 million transaction accounted for as a purchase business combination. The results of operations of iBazar have been included in our consolidated financial statements from May 18, 2001.

9


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     The following unaudited pro forma financial information presents the combined results of eBay, Internet Auction and iBazar as if the acquisitions had occurred as of the beginning of 2001, after giving effect to certain adjustments, including amortization of identifiable intangible assets (in thousands except per share amounts):

                 
    Three Months Ended March 31,
   
    2001   2002
   
 
Net revenues
  $ 157,586     $ 245,106  
 
   
     
 
Net income (loss)
  $ 16,854     $ 47,584  
 
   
     
 
Net income (loss) per share:
               
Basic
  $ 0.06     $ 0.17  
 
   
     
 
Diluted
  $ 0.06     $ 0.17  
 
   
     
 

     The pro forma financial information does not necessarily reflect the results of operations that would have occurred had eBay, Internet Auction and iBazar constituted a consolidated entity during such periods.

Note 4—Segment Information:

     We have identified two reporting segments: online services and offline services. The online services segment consists of our online trading platforms in the United States and internationally as well as the various features offered through such platforms, including electronic payments, photo hosting, Buy-It-Now, third-party advertising and end-to-end services. The offline services segment consists of the operations of Butterfields Auctioneers Corporation and Kruse, Inc.

     Segment selection is based upon our 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, minority interest, equity in partnership income, amortization of acquired intangible assets, merger related costs, stock-based costs and expenses and payroll expense on employee stock options. Operating information for the reporting segments is as follows (in thousands):

                                                 
    Three Months Ended March 31,
   
    2001   2002
   
 
    Online   Offline   Consolidated   Online   Offline   Consolidated
   
 
 
 
 
 
Net revenues from external customers
  $ 147,361     $ 6,729     $ 154,090     $ 237,566     $ 7,540     $ 245,106  
 
   
     
     
     
     
     
 
Operating income (loss), as adjusted
  $ 36,425     $ (1,444 )   $ 34,981     $ 76,165     $ (1,326 )   $ 74,839  
Interest and other income (expense), net
    14,578       400       14,978       7,306       81       7,387  
Interest expense
    (207 )     (505 )     (712 )     (3 )     (682 )     (685 )
Impairment of certain equity investments
    (9,921 )           (9,921 )     (1,181 )           (1,181 )
Amortization of certain non-cash items
    (4,196 )     (80 )     (4,276 )     (4,110 )     (13 )     (4,123 )
 
   
     
     
     
     
     
 
Income (loss), as adjusted
  $ 36,679     $ (1,629 )   $ 35,050     $ 78,177     $ (1,940 )   $ 76,237  
 
   
     
     
     
     
     
 
 
    December 31, 2001   March 31, 2002
   
 
    Online   Offline   Consolidated   Online   Offline   Consolidated
   
 
 
 
 
 
Total assets
  $ 1,588,913     $ 89,616     $ 1,678,529     $ 1,700,659     $ 88,355     $ 1,789,014  
 
   
     
     
     
     
     
 

10


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

                   
      Three Months Ended
      March 31,
     
      2001   2002
     
 
Net revenues:
               
 
United States
  $ 136,186     $ 192,555  
 
International
    17,904       52,551  
 
   
     
 
Total
  $ 154,090     $ 245,106  
 
   
     
 
                   
      December 31,   March 31,
      2001   2002
     
 
Assets:
               
 
United States
  $ 1,355,968     $ 1,428,785  
 
International
    322,561       360,229  
 
   
     
 
Total
  $ 1,678,529     $ 1,789,014  
 
   
     
 

Note 5—Investments:

     At December 31, 2001 and March 31, 2002, short and long-term investments were classified as available-for-sale securities, except for restricted cash and investments, and are reported at fair value as follows (in thousands):

                                     
        December 31, 2001
       
        Gross   Gross   Gross   Estimated
        Amortized   Unrealized   Unrealized   Fair
        Cost   Gains   Losses   Value
       
 
 
 
Short-term investments:
                               
 
Municipal bonds and notes
  $ 149,446     $ 724     $ (2 )   $ 150,168  
 
Government securities
    10,700             (2 )     10,698  
 
Time deposits and other
    38,584                   38,584  
 
   
     
     
     
 
   
Total
  $ 198,730     $      724     $      (4 )   $ 199,450  
 
   
     
     
     
 
                                     
        December 31, 2001
       
        Gross   Gross   Gross   Estimated
        Amortized   Unrealized   Unrealized   Fair
        Cost   Gains   Losses   Value
       
 
 
 
Long-term investments:
                               
 
Restricted cash and investments
  $ 129,181     $ 433     $     $ 129,614  
 
Municipal bonds and notes
    8,148       25       (2 )     8,171  
 
Government securities
    251,132       1,258       (268 )     252,122  
 
Equity instruments and other
    26,557       148             26,705  
 
   
     
     
     
 
   
Total
  $ 415,018     $ 1,864     $ (270 )   $ 416,612  
 
   
     
     
     
 

11


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

                                     
        March 31, 2002
       
        Gross   Gross   Gross   Estimated
        Amortized   Unrealized   Unrealized   Fair
        Cost   Gains   Losses   Value
       
 
 
 
Short-term investments:
                               
 
Municipal bonds and notes
  $ 107,479     $ 267     $ (1 )   $ 107,745  
 
Government securities
    10,700             (13 )     10,687  
 
Time deposits and other
    34,536             (32 )     34,504  
 
   
     
     
     
 
   
Total
  $ 152,715     $ 267     $ (46 )   $ 152,936  
 
   
     
     
     
 
Long-term investments:
                               
 
Restricted cash and investments
  $ 126,808     $ 206     $ (624 )   $ 126,390  
 
Municipal bonds and notes
    13,161       7       (31 )     13,137  
 
Government securities
    277,257       414       (1,617 )     276,054  
 
Equity instruments and other
    54,437       185             54,622  
 
   
     
     
     
 
   
Total
  $ 471,663     $ 812     $ (2,272 )   $ 470,203  
 
   
     
     
     
 

     The estimated fair values of short and long-term investments classified by date of contractual maturity at March 31, 2002, are as follows (in thousands):

         
    March 31, 2002
   
Due within one year or less
  $ 152,936  
Due after one year through two years
    236,423  
Due after two years through three years
    52,768  
Due after three years through four years
     
Restricted cash and investments expiring in less than five years
    126,390  
Equity investments
    54,622  
 
   
 
 
  $ 623,139  
 
   
 

     During the three months ended March 31, 2001 and 2002, we recognized charges totaling $9.9 million and $1.2 million, respectively, to reflect the decline in fair value of certain of our equity investments. These impairment losses were identified as part of our normal process of assessing the quality of our investment portfolio and reflect declines in fair value and other market conditions that we believe are other than temporary.

Note 6—Contingencies:

     Legal matters

     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.” The lawsuit seeks class action certification, compensatory damages, a civil penalty of ten times actual damages, interest, costs and fees and injunctive relief. 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 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. The plaintiffs have appealed this ruling. A hearing on the appeal was held on April 10, 2002. We believe we have meritorious defenses and intend to defend ourselves vigorously.

12


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

     On April 25, 2001, our European subsidiaries, eBay GmbH and eBay International AG, were sued by Montres Rolex S.A. and certain Rolex affiliates, or Rolex, in the regional court of Cologne, Germany. The suit has been moved to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries were 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 and intend to defend ourselves vigorously.

     On September 26, 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We have answered this complaint, denying the allegations, and, in April 2002, filed four motions for summary judgment with respect to various aspects of the case. Vigorous discovery is ongoing in the case. Trial is currently scheduled for July 28, 2002. We believe we have meritorious defenses and will defend ourselves vigorously. However, even if successful, our defense against this action will be costly and could divert our management’s time. If the plaintiff were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from practicing a significant part of our U.S. business. Any such results could materially harm our business.

     Other third parties have from time to time claimed, and others may claim in the future that we have infringed their past, current or future intellectual property rights. We have in the past been forced to litigate such claims. We may become more vulnerable to such claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. We also expect that we will increasingly be subject to patent infringement claims as our services expand. We have been notified of several potential disputes. 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.

     The Korean credit card companies providing payment services to our majority-owned Korean subsidiary, Internet Auction, have experienced higher than anticipated delinquency rates on transactions carried out on the Internet Auction platform. Some of these delinquencies are related to fictitious transactions on Internet Auction and other Korean Internet sites to enable users to receive cash advances on their credit cards that would not otherwise be permitted by the credit card companies. As of March 31, 2002, these credit card companies are withholding approximately 2.9 billion Won (about $2.2 million) as “collateral” against certain delinquent accounts, and had threatened to terminate their agreements with Internet Auction if matters were not resolved to their satisfaction. Beginning in the spring of 2001, Internet Auction has been implementing certain user verification and improved site-monitoring processes that it believes have substantially reduced this type of credit card misuse on its system. The credit card companies are requesting that Internet Auction enter into new agreements that could shift the risk of credit card misuse, nonpayment or chargeback by the purchaser to Internet Auction and would formalize the ability of the credit card companies to withhold “collateral” against future delinquencies, and Internet Auction is currently in negotiations with the credit card companies to resolve this situation. If these negotiations are not successful, termination of its agreements with the credit card companies could adversely affect Internet Auction’s business and could adversely impact eBay’s business. Further, any settlement related to past transactions could adversely affect Internet Auction’s results of operations. Certain legislation recently enacted by the Korean National Assembly could make Internet Auction liable for credit card misuses by its users. If Internet Auction becomes liable for credit card misuse or payment delinquency by its users, Internet Auction may have to change its procedures and processes relating to payments, accept higher losses, or both, which could adversely affect its business and could thereby adversely affect our business.

     From time to time, we are involved in other disputes that arise in the ordinary course of business. We believe that the ultimate resolution of these other disputes will not have a material adverse impact on our financial position, results of operations or cash flows.

13


Table of Contents

eBay Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Note 7 — Subsequent Events:

AOL interactive marketing agreement

     In April 2002, we amended our Interactive Marketing Agreement with AOL Time Warner, Inc. Under the terms of the amended agreement, we are obligated to pay AOL $18.75 million for online advertising impressions delivered during the contract year ending March 23, 2003. Prior to this amendment, we were obligated to pay AOL $18.75 million per year in exchange for online advertising services for each of the contract years ending March 23, 2003 and 2004.

     In the event that AOL’s advertising services during the contract year ending March 23, 2003 achieve certain specified performance goals, AOL has the right to extend the term of the amended agreement through March 23, 2004 (the “first renewal year”). Our financial obligation for the first renewal year will amount to a maximum commitment of $15.0 million.

     In the event that AOL’s advertising services during the first renewal year achieve certain specified performance goals, AOL has the right to extend the term of the amended agreement through March 23, 2005 (the “second renewal year”). Our financial obligation for the second renewal year will amount to a maximum commitment of $10.0 million.

AOL advertising representation agreement

     In April 2002, we amended our Advertising Representation Agreement with AOL to adjust the commission structure to reflect changes in the online advertising market and to reduce the term of the arrangement by nine months from December 31, 2003 to March 31, 2003. The amended agreement also gives AOL the right to extend the term through March 31, 2004 if certain specified performance goals are achieved.

14


Table of Contents

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” and “plans” and similar expressions are intended to identify certain of these forward-looking statements. The cautionary statements made in this document should be read as being applicable to all related forward-looking statements wherever they appear in this document. Our actual results could differ materially from those discussed in this document. Factors that could cause or contribute to such differences include those discussed below.

Overview

About eBay

     We pioneered online 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.

Other Significant Matters Impacting the Forecasting of Future Results

     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 believe that our business is seasonal as many of our users reduce their activities on our website during the Thanksgiving (in the U.S.) and Christmas holidays, during national events and with the onset of good weather. We have historically experienced our strongest quarter of online growth in our first fiscal quarter, although our users’ shift to more “practical” items may cause our seasonal patterns to look more like those of 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 spring and fall 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 calendar 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. However, we manage our expenses as fixed, variable and discretionary costs. Costs that are largely fixed include employee compensation, facility and site operations. Costs that are largely variable include provisions for doubtful accounts receivable and authorized customer credits, customer support, and Internet connectivity. Costs that allow significant discretion as to timing and amount include marketing and business development promotions, acquisition related costs and business expansion costs. In general, we expect costs to increase in absolute dollars across all income statement categories throughout the remainder of 2002.

15


Table of Contents

Results of Operations

Net Revenues

                             
        Three Months Ended           Three Months Ended
        March 31, 2001   Change   March 31, 2002
       
 
 
        (in thousands, except percentages)
Online net revenues:
                       
 
Transactions
  $ 129,727       65 %   $ 213,664  
 
Third party advertising
    11,783       62 %     19,033  
 
End-to-end services
    5,851       (17 )%     4,869  
 
   
     
     
 
   
Total online net revenues
    147,361       61 %     237,566  
Offline net revenues
    6,729       12 %     7,540  
 
   
     
     
 
   
Total net revenues
  $ 154,090       59 %   $ 245,106  
 
   
     
     
 
Net revenues:
 
U.S.
  $ 136,186       41 %   $ 192,555  
 
International
    17,904       194 %     52,551  
 
   
     
     
 
   
Total net revenues
  $ 154,090       59 %   $ 245,106  
 
   
     
     
 
                           
      Three Months Ended           Three Months Ended
      March 31, 2001   Change   March 31, 2002
     
 
 
      (in millions, except percentages)
Supplemental Operating Data:
                       
 
Registered users at end of period
    29.7       55 %     46.1  
 
Items listed
    89.0       55 %     138.0  
 
Gross merchandise sales
  $ 1,980       57 %   $ 3,107  

     Our net revenues result from fees associated with our online and offline services. Online transaction revenues are derived primarily from listing, feature and final value fees paid by sellers, final value fees paid by buyers for “premium” priced items, electronic payment processing and photo hosting. In addition, online net revenues include revenues from third-party advertising and end-to-end services. Third-party advertising and end-to-end services revenues are highly concentrated among a few customers and are subject to considerable uncertainty. See “Risk Factors — Our revenues from third-party advertising and end-to-end services is subject to factors beyond our control.” Offline revenues are derived from a variety of sources including seller commissions, buyer premiums, bidder registration fees and auction-related services including appraisal and authentication.

     The growth in net revenues from the three months ended March 31, 2001 to the three months ended March 31, 2002 was primarily the result of increased online auction transaction activity, reflected in the growth in the number of registered users, listings and gross merchandise sales. Fee increases in the U.S. on January 31, 2002, and fee increases in various other international locations during the twelve months ended March 31, 2002, also had a positive impact on revenues for the three months ended March 31, 2002. Overall, we experienced growth across most of our categories, with particularly strong growth in gross merchandise sales in practical categories such as motors, computers and consumer electronics.

     Revenues from third-party advertising during the three months ended March 31, 2002 increased compared to the same period in 2001, primarily as a result of our strategy to increase overall site monetization and through the efforts of AOL, our exclusive advertising sales representative. However, we continue to view our business as primarily transaction driven and we expect third-party advertising revenues in future periods to decrease both in absolute dollars and as a percentage of total net revenues. Revenues from third party advertising totaled $19.0 million during the three months ended March 31, 2002 representing 8% of total net revenues and a decrease from the $28.2 million or 13% of total net revenues reported during the three months ended December 31, 2001. This sequential decrease is primarily attributed to the general softening in the online advertising market.

16


Table of Contents

     Our third-party advertising revenues are derived principally from the sale of online banner and sponsorship advertisements for cash and through barter arrangements. To date, the duration of our banner and sponsorship advertising contracts has ranged from one week to three years, but the term is generally one week to three months. Third-party advertising revenues may be affected by the financial condition of our customers and by the success of online promotions in general. Recently, the industry pricing of online advertisements has deteriorated. Our third-party advertising revenues are dependent in significant part on the performance of AOL’s sales force, over which we do not have control. Reduction in third-party advertising, whether due to softening of the demand for online advertising in general or particular problems facing parties with whom we have contractual arrangements, would adversely affect our operating results.

     Revenues from end-to-end services decreased from 4% of net revenues for the three months ended March 31, 2001, to 2% of net revenues for the same period in 2002, and includes various amounts received from third parties that provide transaction services to eBay users. We expect end-to-end services revenues in future periods to decrease as a percentage of total net revenues and possibly in absolute dollars.

     International net revenues have grown as a percentage of consolidated net revenues for the three months ended March 31, 2002 over the same period in 2001. This growth is primarily the result of strong transaction growth from sellers in Germany, Canada and the United Kingdom. We expect the trend of increasing international net revenues to continue as we continue the development and deployment of our global marketplace.

     During the three months ended March 31, 2002, offline revenues increased in absolute dollars primarily as a result of year over year growth in revenues at Butterfields’ operations. This growth was due to modest improvements in general economic conditions supporting the offline auction and high-end art markets. Offline revenues, however, decreased as a percentage of net revenues, and as we view our business as primarily online transaction driven, despite some seasonal fluctuations, we expect offline revenues as a whole in 2002 to decline as a percentage of revenues over 2001.

     We expect that our online business will continue to represent the majority of revenue growth in the foreseeable future.

Cost of Net Revenues

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Cost of net revenues
  $27,002     53 %   $41,277
As a percentage of net revenues
  18%           17%

     Cost of net revenues for our online business consists primarily of costs associated with customer support, site operations and payment processing. Significant cost components include employee compensation and facilities costs for customer support, site operations compensation, Internet connectivity charges, depreciation of on-site equipment, payment processing fees, amortization of capitalized website development costs, costs to provide end-to-end services and corporate overhead allocations. Cost of net revenues for our offline business consists primarily of employee compensation for auction, appraisal and customer support personnel as well as direct auction costs such as event site rental.

     Cost of net revenues increased in absolute dollars but decreased as a percentage of net revenues. This increase in absolute dollars was due almost entirely to our online business as we continued to develop and expand our customer support and site operations departments. The increases were primarily the result of personnel costs, depreciation of the equipment required for site operations, software licensing fees, Internet connectivity charges and the increased costs associated with acquired businesses. The decrease in cost of net revenues as a percentage of net revenues resulted from cost management initiatives and lower technology costs in site operations and increases in higher gross margin businesses such as autos and third-party advertising. We expect the cost of net revenues to increase in absolute dollars and remain generally consistent with current levels as a percentage of net revenues throughout the remainder of 2002.

17


Table of Contents

Operating Expenses

Sales and Marketing

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Sales and marketing
  $55,536     32 %   $73,104
As a percentage of net revenues
  36%           30%

     Sales and marketing expenses for both the online and offline businesses comprise primarily employee compensation for our category development and marketing staff, advertising, tradeshow and other promotional costs, certain trust and safety programs and corporate overhead allocations.

     The growth in absolute dollars was primarily the result of growth in online and offline advertising, employee compensation costs, costs associated with the use of outside services and consultants, additional costs associated with acquired businesses, and miscellaneous user and promotional costs. Sales and marketing expenses decreased as a percentage of net revenues due to the reduction of sales and marketing costs directed towards Internet Auction and iBazar in 2001, certain synergies created by our acquisition of Half.com in 1999, and benefits resulting from certain Internet advertising contracts in the United States. Sales and marketing expenses are expected to increase in absolute dollars and may increase slightly as a percentage of net revenues throughout the remainder of 2002.

Product Development

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Product development
  $15,737     54 %   $24,307
As a percentage of net revenues
  10%           10%

     Product development expenses consist primarily of employee compensation, payments to outside contractors, depreciation on equipment used for development and corporate overhead allocations. We anticipate that we will continue to devote significant resources to product development in the future as we add new features and functionality to the eBay service.

     Our product development expenses increased in absolute dollars, but remained constant as a percentage of net revenues from the three months ended March 31, 2001 to the same period of 2002. The increase in product development expenses was primarily a result of an increase in employee compensation costs. Expenses related to contractors and consultants employed within product development as well as maintenance and depreciation costs for equipment used in research and development also increased. The increase in these costs results from the development of additional site features and functionality improvements, our “V3” platform architecture development and seller tools development. Product development expenses are expected to increase in absolute dollars throughout the remainder of 2002, as we develop new site features and functionality and continue to improve and expand operations both domestically and internationally. However, we expect product development expenses throughout the remainder of 2002 to remain generally consistent with current levels as a percentage of net revenues.

18


Table of Contents

General and Administrative

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
General and administrative
  $ 21,328       52 %   $ 32,493  
As a percentage of net revenues
    14%             13%

     General and administrative expenses consist primarily of employee compensation, provisions for doubtful accounts, insurance, fees for external professional advisors and corporate overhead allocations.

     Our general and administrative expenses increased in absolute dollars as a result of growth in employee compensation, provisions for doubtful accounts, fees for professional services and facilities costs to meet the demands of our expanding business, including operations in new countries and the integration of new businesses. During the three months ended March 31, 2002, approximately $1.2 million of costs were recognized in connection with the closure of our operations in Japan. We expect that general and administrative expenses will increase in absolute dollars throughout the remainder of 2002, as we continue to invest in the infrastructure that is necessary to support our business. However, we expect general and administrative expenses as a whole to decrease as a percentage of net revenues in 2002.

Payroll Expense on Employee Stock Options

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Payroll tax expense from employee stock options
  $ 427       293%   $ 1,679  
As a percentage of net revenues
    0%             1%

     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 in which such options are exercised and sold based on actual gains realized by employees. Our quarterly results of operations and cash flows could vary significantly depending on the actual period that stock options are exercised by employees and, consequently, the amount of employer payroll taxes assessed.

Amortization of Acquired Intangible Assets

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Amortization of acquired intangible assets
  $ 3,355       (54 )%   $ 1,530  
As a percentage of net revenues
    2%             1%

     From time to time we have purchased, and we expect to continue purchasing, assets or businesses to accelerate geographic expansion, increase the features and functions available to our users and maintain our leading role in online trading. These purchase transactions may result in the creation of intangible assets and lead to a corresponding increase in amortization expense in future periods.

     Amortization of acquired intangible assets during the three months ended March 31, 2002 decreased from the same period in 2001, primarily as a result of the elimination of goodwill amortization in the three months ended March 31, 2002 as part of our adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.”

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141 and No. 142, Business Combinations and Goodwill and Other Intangible Assets. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least

19


Table of Contents

an annual assessment for impairment, applying a fair-value based test. Additionally, SFAS 141 requires that an acquired intangible asset be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirers intent to do so.

     We adopted SFAS 142 in the first quarter of 2002, and, as a result, no longer amortize goodwill. This accounting change eliminates annual goodwill amortization of approximately $55.3 million, based on anticipated amortization that would have been incurred for fiscal 2002 under the prior accounting standard. At March 31, 2002, unamortized goodwill approximated $221.0 million. We will evaluate goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from estimated future cash flows. We have completed the first step of the transitional goodwill impairment test required by SFAS 142 and have determined that no potential impairment presently exists. However, no assurances can be given that future goodwill impairment assessments will not result in charges to our operating results.

     Intangible assets are composed of acquired user bases, developed technologies, trademarks and other intangible assets. Intangible assets, excluding goodwill, are amortized over estimated useful lives ranging from two to five years.

     During the three months ended March 31, 2002, we purchased the 35% interest in Billpoint held by Wells Fargo for an aggregate purchase price of $43.5 million. We also purchased a 38% interest, which is a 33% interest on a fully diluted basis, of EachNet for $30.0 million. See “Note 3 — Business Combinations, Goodwill and Intangible Assets to the Condensed Consolidated Financial Statements.”

Non-Operating Items

Interest and Other Income, Net

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Interest and other income, net
  $ 14,978       (51 )%   $ 7,387  
As a percentage of net revenues
    10 %             3 %

     Interest and other income, net consists of interest earned on cash, cash equivalents, investments and foreign exchange transaction gains and losses. Our interest and other income, net decreased in the three months ended March 31, 2002 from the same period in 2001 as a result of a lower interest rate environment and a decrease in foreign currency exchange transaction gains. The weighted-average interest rate of our investment portfolio was approximately 5.9% in the three months ended March 31, 2001 and 3.1% in the same period in 2002. Although, we maintained higher cash, cash equivalent and investment balances during 2001 as a result of increased operating and financing cash flows, the decrease in interest rates resulted in an overall decline in interest income. Additionally, in the three months ended March 31, 2002, we experienced a significant decrease in foreign currency exchange transaction gains over the same period in 2001. We expect that interest and other income, net will increase as a result of an expected increase in our cash balances generated by positive operating cash flows throughout the remainder of 2002.

20


Table of Contents

Interest Expense

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Interest expense
  $ 712                             (4 )%         $ 685  
As a percentage of net revenues
    0%               0%  

     Interest expense consists of interest charges on mortgage notes and capital leases. Our interest expense in the three months ended March 31, 2002, decreased from the same period in 2001 as a result of a decrease in the average outstanding debt balance and lower interest rates related to the variable interest portion of our mortgage notes payable on property owned by our Butterfields subsidiary. We expect that our future interest expense will fluctuate as a result of the changing interest rate environment.

Impairment of Certain Equity Investments

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Impairment of certain equity investments
          $ 9,921       (88 )%           $ 1,181  
As a percentage of net revenues
    6%               0%  

     During the three months ended March 31, 2002, we recorded impairment charges totaling $1.2 million relating to the impairment in the fair value of certain equity investments. We expect that the fair value of our equity investments will fluctuate from time to time and future impairment assessments may result in additional charges to our operating results.

Provision for Income Taxes

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Provision for income taxes
  $ 15,427        91   $ 29,411  
As a percentage of net revenues
    10%               12%  
Effective tax rate
    42%               38%  

     The provision for income taxes differs from the amount computed by applying the statutory U.S. federal rate principally due to non-deductible expenses related to acquisitions, state taxes, subsidiary losses and other permanent differences that increase the effective tax rate. These amounts are partially offset by decreases resulting from foreign income with lower effective tax rates and tax-exempt interest income.

     We receive tax deductions from the gains realized by employees on the exercise of certain non-qualified stock options for which the benefit is recognized as a component of stockholders’ equity. We have provided a valuation allowance on the deferred tax assets relating to these stock option deductions due to the uncertainties associated with our future stock price and the timing of employee stock option exercises. To the extent that additional stock option deductions are not generated in future years, we will have the ability, subject to carryforward limitations, to reduce a portion of future income tax liabilities. When recognized, the tax benefit of tax deductions related to stock options are accounted for as a credit to additional paid-in capital rather than as a reduction of our income tax provision.

21


Table of Contents

Minority Interests in Consolidated Companies

                         
    Three Months Ended           Three Months Ended
    March 31, 2001   Change   March 31, 2002
   
 
 
    (in thousands, except percentages)
Minority interest in consolidated company
  $ 1,444     (48 %)     $ 758  
As a percentage of net revenues
    1%               0%  

     Minority interests in consolidated companies represents the minority investor’s percentage share of income or losses from consolidated subsidiaries.

     The decrease during the three months ended March 31, 2002 from the same period in 2001 resulted from changes in the level of subsidiary net losses and the impact of acquiring the 35% minority interest in Billpoint previously held by Wells Fargo Bank. We expect that minority interests in consolidated companies, in aggregate, will continue to fluctuate in future periods. If the consolidated subsidiaries continue to be unprofitable, the minority interests adjustment on the statement of income will continue to increase our net income by the minority investor’s share of the subsidiaries’ net losses. If our less than wholly owned consolidated subsidiaries become profitable, the minority interests adjustment will decrease our net income by the minority investor’s share of the subsidiaries’ net income.

Liquidity and Capital Resources

Cash Flows

     Since inception, we have financed operations primarily from net cash generated from operating activities. In addition, 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. During the three months ended March 31, 2002, we were primarily financed by our income from operations and from the proceeds of stock option exercises.

     Net cash provided by operating activities was $37.4 million in the three months ended March 31, 2001 and $92.3 million in the same period of 2002. Net cash provided by operating activities resulted primarily from our net income adjusted for non-cash charges for depreciation and amortization, tax benefits on the exercise of stock options, other non-cash charges and partially offset by changes in assets and liabilities.

     Net cash provided by investing activities was $81.1 million in the three months ended March 31, 2001 and net cash used in investing activities was $62.8 million in the same period of 2002. The primary use for invested cash in the periods presented was for purchases of property and equipment, purchases of investments, net of maturities and acquisitions.

     Net cash used in financing activities was $4.4 million in the three months ended March 31, 2001, and net cash provided by financing activities was $23.7 million in the same period of 2002. The primary use of cash in the periods presented was for principal payments on long-term debt and the primary proceeds of cash were from issuances of common stock.

Commitments and Contingencies

     We had no material commitments for capital expenditures at March 31, 2002, but expect such expenditures to approximate $84 million during the remainder of 2002, without taking into account any acquisitions. Of the $84 million, approximately $20 million has been allocated for capital expenditures relating to hardware and software for the development of our new platform architecture. The remaining balance will be used primarily for computer equipment, furniture and fixtures, leasehold improvements and other corporate assets.

General

     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 flows from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, our business could suffer.

22


Table of Contents

Risk Factors That May Affect Results of Operations and Financial Condition

     The risks and uncertainties described below are not the only ones we face. 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 occurs, our business could be harmed.

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 at a reasonable cost;
 
          the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;
 
          foreign, federal, state or local government regulation, including investigations prompted by items improperly listed or sold by our users;
 
          the success of our geographical and product expansion;
 
          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 willingness to consummate transactions with other users who are not known to them;
 
          consumer confidence in the safety and security of transactions on our websites;
 
          our ability to upgrade and develop our systems, infrastructure and customer service capabilities to accommodate growth at a reasonable cost;
 
          our ability to successfully integrate and manage our acquisitions, including our purchase of a majority interest in Internet Auction and our acquisition of iBazar in the first half of 2001 and our recent acquisition of NeoCom in April 2002;
 
          the cost and demand for advertising on our own websites;
 
          technical difficulties or service interruptions involving our websites or services provided to our users by third parties (such as photo hosting or payments);
 
          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 expand our product offerings involving fixed-price trading successfully;
 
          the costs and results of litigation that involves us;
 
          the results of regulatory decisions that affect us;

23


Table of Contents

          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 items;
 
          the success of our brand building and marketing campaigns;
 
          the continued financial strength 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 those economic conditions specific to the Internet and e-commerce industries.

     Our limited operating history and the increased variety of services offered on our sites, makes 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 a substantial portion 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.

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 contractual 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 newer companies, some 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) 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 acquisitions of Half.com, Internet Auction, iBazar, HomesDirect.com and NeoCom and may in the future acquire businesses, technologies, services or products that we believe are strategic. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include:

24


Table of Contents

          diversion of management time (at both companies) during the period of negotiation through closing and further diversion of such time after closing, as well as a shift of focus from operating the businesses to issues of integration and future products;
 
          declining 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 lacked such controls, procedures and policies; and
 
          in some cases, the need to transition operations onto the existing eBay platform.

     Prior to the four acquisitions we made in the second quarter of 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.

     In 1999, we acquired alando.de.ag, a leading online German trading platform, and began operations in the United Kingdom and, through a joint venture, in Australia. In the first quarter of 2000, we 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 in May 2001, we completed our acquisition of iBazar, a French company with online trading operations in eight countries, primarily in Europe. In April 2002, we completed our acquisition of NeoCom in Taiwan. 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 particular international markets or in generating revenues from foreign operations. For example, in February 2002, we announced that we were withdrawing from the Japanese market. 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, may prohibit certain categories of goods or may limit the transfer of information between our foreign subsidiaries and ourselves;
 
          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;
 
          difficulties in staffing and managing foreign operations;
 
          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;

25


Table of Contents

          stronger local competitors;
 
          more stringent consumer and data 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.

Disputes between our Korean subsidiary, Internet Auction, and credit card companies may harm our operations in Korea.

     The Korean credit card companies providing payment services to our majority-owned Korean subsidiary, Internet Auction, have experienced higher than anticipated delinquency rates on transactions carried out on the Internet Auction platform. Some of these delinquencies are related to fictitious transactions on Internet Auction and other Korean Internet sites to enable users to receive cash advances on their credit cards that would not otherwise be permitted by the credit card companies. As of March 31, 2002, these credit card companies are withholding approximately 2.9 billion Won (about $2.2 million) as “collateral” against certain delinquent accounts, and had threatened to terminate their agreements with Internet Auction if matters were not resolved to their satisfaction. Beginning in the spring of 2001, Internet Auction has been implementing certain user verification and improved site-monitoring processes that it believes have substantially reduced this type of credit card misuse on its system. The credit card companies are requesting that Internet Auction enter into new agreements that could shift the risk of credit card misuse, nonpayment or chargeback by the purchaser to Internet Auction and would formalize the ability of the credit card companies to withhold “collateral” against future delinquencies, and Internet Auction is currently in negotiations with the credit card companies to resolve this situation. If these negotiations are not successful, termination of its agreements with the credit card companies would adversely affect Internet Auction’s business and could adversely impact eBay’s business. Further, any settlement related to past transactions could adversely affect Internet Auction’s results of operations. Certain legislation recently enacted by the Korean National Assembly could make Internet Auction liable for credit card misuses by its users. If Internet Auction becomes liable for credit card misuse or payment delinquency by its users, Internet Auction may have to change its procedures and processes relating to payments, accept higher losses, or both, which could adversely affect its business and could thereby adversely affect our business.

Our revenues from third-party advertising and end-to-end services is subject to factors beyond our control and is expected to decrease.

     We are receiving revenues from end-to-end service providers 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 revenues are dependent in significant part on the performance of AOL’s sales force, over which we do not have control. These revenues have become increasingly important to us. 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, would adversely affect our results. At this time, we expect such revenues to decrease on an absolute basis in 2002 relative to 2001.

Problems with third parties who provide services to our users could harm us.

     A number of third parties provide services to our users which indirectly benefit us. Such services include seller tools that automate and manage listings, merchant tools that manage listings and interface with inventory management software, photo hosting, payment processing and other services. In many cases we have contractual agreements with these companies which may give us a direct financial interest in their success, in other cases we have none. In either circumstance, financial,

26


Table of Contents

regulatory or other problems that prevent these companies from providing services to our users could reduce the number of listings on our websites or make completing transactions on our websites more difficult, and thereby harm our business.

Our failure to manage growth could harm us.

     We currently are experiencing a period of expansion in our headcount, facilities and infrastructure, and we anticipate that further expansion will be required to address potential growth in our customer base and number of listings as well as our expansion into new geographic areas, types of goods and alternative methods of sale. This expansion has placed, and we expect it will continue to place, a significant strain on our management, operational and financial resources. The areas that are put under strain by our growth include the following:

          The Websites. We must constantly add new hardware, update software and add new engineering personnel to accommodate the increased use of our and our subsidiaries’ websites and the new products and features we are regularly introducing. This 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 are commencing a significant multiyear project to enhance our current technical architecture. If this project is not successful, our business could be harmed. 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 and the increased level of trust and safety activity we provide worldwide. If we are unable to provide these operations in a cost-effective manner, users of our websites may have negative experiences, and current and future revenues could suffer, or our operating 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. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing 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 as 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. The additional headcount and capital investments we are adding increases our cost base, which will make it more difficult for us to offset any future revenue shortfalls by offsetting expense reductions in the short term.

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. 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.

27


Table of Contents

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.” The lawsuit seeks class action certification, compensatory damages, a civil penalty of ten times actual damages, interest, costs and fees and injunctive relief. 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 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. The plaintiffs have appealed this ruling. A hearing on the appeal was held on April 10, 2002. 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, or Rolex, in the regional court of Cologne, Germany. The suit has been moved to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries were 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 and intend to defend ourselves vigorously.

     On September 26, 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We have answered this complaint, denying the allegations, and, in April 2002, filed four motions for summary judgment with respect to various aspects of the case. Vigorous discovery is ongoing in the case. Trial is currently scheduled for July 28, 2002. We believe we have meritorious defenses and will defend ourselves vigorously. However, even if successful, our defense against this action will be costly and could divert our management’s time. If the plaintiff were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from practicing a significant part of our U.S. business. Any such results could materially harm our business.

     Other third parties have from time to time claimed, and others may claim in the future that we have infringed their past, current or future intellectual property rights. We have in the past been forced to litigate such claims. We may become more vulnerable to such claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. We also expect that we will increasingly be subject to patent infringement claims as our services expand. We have been notified of several potential disputes. 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.

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 have been active in defending their rights against online companies, including eBay. Allegations of infringement of third-

28


Table of Contents

party intellectual property rights have in the past and may in the future result in litigation against us. Such litigation is 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.

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 buyer protection programs. Other than through these programs, 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 who could take action against us, including imposing fines or seeking injunctions.

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 continued to provide 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 case against certain 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 transfers, especially outside of the U.S. Violation of these laws, which in many cases apply not only to third-party transfers but also to transfers of information between ourselves and our subsidiaries, and between ourselves, our subsidiaries and our

29


Table of Contents

commercial partners could subject us to significant penalties and negative publicity and could adversely affect us.

Third parties or governmental agencies may view our behavior as anti-competitive.

     Third parties have in the past and may in the future allege that actions taken by us violate the antitrust or competition laws of the U.S. or other countries, or otherwise constitute unfair competition. Such claims typically are very expensive to defend, involve negative publicity and diversion of management time and effort and could result in significant judgments against us, all of which would adversely affect us.

     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 a previously settled lawsuit against Bidder’s Edge. Although the Antitrust Division has closed this inquiry, if the Department of Justice or any other antitrust agency were to open other investigations of our activities, 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 specific categories of items (e.g., wine, automobiles, 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, either with respect to our services in general, or in order to sell certain types of goods (e.g., real estate, boats, automobiles). We are currently subject to potential regulation under the Office of Banks and Real Estate, or OBRE, in Illinois concerning the applicability of the Illinois Auction law to our services. We are working with OBRE to determine the scope of its regulatory efforts. Regulatory and licensure 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 for some locations. 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.

Our business may be subject to sales and other taxes.

     We do not collect sales or other similar taxes on goods or services sold by users through our service. One or more states or any foreign country may seek to impose VAT or sales or use tax collection or record-keeping 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, which has been extended through November 1, 2003. This moratorium 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.

30


Table of Contents

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 on behalf of buyers for the items listed by Half.com’s sellers. Internet Auction also has a business model involving the handling of payments on behalf of 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. We recently have received inquiries from Arizona, Oregon, California, Louisiana and Illinois asking us to explain why we are not subject to various money transmitter laws and other laws in those states. We are currently discussing the applicability of these laws with the relevant state authorities. We will register Billpoint if it is determined that such registration is necessary. On October 26, 2001, President Bush signed into law the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001. This Act increases the penalties for failure to register under state payment related laws and imposes new requirements on the entities regulated as financial institutions. The applicability and interpretation of the Act’s provisions to Billpoint is not clear, but should the Act apply to Billpoint, the penalties for noncompliance are severe and, if triggered, would have a material adverse effect on our 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 Billpoint’s backend 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 under a number of these theories have been 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 are 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, 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.

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 project accurately 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

31


Table of Contents

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.

     Our system has been designed around industry standard architectures to reduce downtime in the event of outages or catastrophic occurrences. The eBay service provides 24-hours-a-day, seven-days-a-week availability, subject to a maintenance period during one night each week. Substantially all of our system hardware is hosted at the Exodus facilities in Santa Clara, California, the Qwest Communications facilities in Sunnyvale, California, and/or the Sprint Communications facilities located near Sacramento, California, each of which provide redundant communications lines and emergency power backup. 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 to potential disruption if the operators of these facilities have financial difficulties. In early 2002, Cable and Wireless plc acquired substantially all of Exodus’s data center assets under Exodus’s Chapter 11 bankruptcy proceedings. We expect that these data center assets, now owned by Cable and Wireless plc, will continue to be branded using the Exodus name. 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, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at any of the Exodus, Qwest or Sprint facilities could result in lengthy interruptions in our services. In addition, the failure by Exodus, Qwest or Sprint 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.

     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.

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;

32


Table of Contents

          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 regulation;
 
          announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
 
          unanticipated economic or political events;
 
          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 prices 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. Notwithstanding a sharp decline in the prices of Internet stocks in general, the valuation of our stock remains 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. This trading price and valuation 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 and the European Union’s Directive on Distance Selling, are only beginning to be interpreted by the courts and their applicability and scope are, therefore, uncertain. In addition, numerous states and foreign jurisdictions, including the State of California, where our headquarters is located, have regulations regarding how “auctions” may be conducted and the liability of “auctioneers” in conducting such auctions. No final legal determination has been made with respect to the applicability of the California regulations to 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. We are currently subject to potential regulation under the Office of Banks and Real Estate, or OBRE, in Illinois concerning the applicability of the Illinois Auction law to our services. We are working with OBRE to determine the scope of its

33


Table of Contents

regulatory efforts. In addition, as the nature of the products listed by our users change, we may become subject to new regulatory restrictions, such as licensure as an auto dealer or real estate broker.

     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, including virtually every non-U.S. jurisdiction where we currently have a website. Compliance with these laws, given the tight integration of our systems across different countries and the need to move data to facilitate transactions amongst our users (e.g., to payment companies, shipping companies, etc.), is both necessary and difficult. Failure to comply could subject us to lawsuits, fines, statutory damages, adverse publicity and other losses that could harm our business. 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 than 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 (in the U.S.) 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 online 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 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.

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, we do not maintain any “key person” life insurance policies, and our Chief Executive Officer has fully vested the vast majority of her equity incentives. Our new

34


Table of Contents

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 and other labor problems frequently increase during the period following an acquisition as employees evaluate possible changes in compensation, culture, reporting relationships and the direction of the business. These labor issues may be more severe if employees receive no significant financial return from the acquisition transaction, as has been the case with several of our recent acquisitions. 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.

Terrorist acts.

     The September 11 terrorist attacks adversely affected our revenues and profits, particularly in the U.S. and in the weeks immediately following these attacks. Any further terrorist actions, whether in the U.S. or elsewhere, would likely adversely affect our business. In particular, any action that makes consumers less willing to purchase or receive goods from third parties they do not know could disproportionately and adversely affect our business.

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 these individuals could harm the businesses 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 little experience in managing real property. Ownership of this property subjects us to 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

35


Table of Contents

          possible disputes with tenants, partners or others.

Our market is intensely competitive.

     Depending on the category of product, we currently or potentially compete with a number of companies serving particular categories of goods as well as those serving broader ranges of goods. The Internet provides new, rapidly evolving and intensely competitive channels for the sale of all types of goods. We expect competition to intensify in the future as the barriers to entry into these channels are relatively low, as current offline and new competitors can easily launch online sites at a nominal cost using commercially available software. Our broad-based competitors include the vast majority of traditional department, warehouse, discount and general merchandise stores, emerging online retailers, online classified services, and other shopping channels such as offline and online home shopping networks. These include most prominently: Wal-Mart, Kmart, Target, Sears, Macy’s, JC Penney, Costco, Office Depot, Staples, OfficeMax, Sam’s Club, Amazon.com, Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC and Home Shopping Network/HSN.com.

     In addition, we face competition from local, regional and national specialty retailers and exchanges in each of our categories of products. For example:

     Antiques: Christie’s, eHammer, Sotheby’s, Phillips (LVMH), antique dealers and sellers

     Coins & Stamps: Collectors Universe, Heritage, US Mint, Bowers and Morena

     Collectibles: Franklin Mint, Go Collect, Collectiblestoday.com, wizardworld.com, Russ Cochran Comic Art Auctions, All Star Auctions

     Musical Instruments: Guitar Center, Sam Ash, Mars Music, Gbase.com, Harmony-Central.com, musical instrument retailers

     Sports Memorabilia: Beckett’s, Collectors Universe, Mastro, Leylands, ThePit.com, Superior

     Toys, Bean Bag Plush: Amazon.com, KB Toys, ZanyBrainy.com

     Premium Collectibles: Christies, DuPont Registry, Greg Manning Auctions, iCollector, Lycos/Skinner Auctions, Millionaire.com, Phillips (LVMH), Sotheby’s, other premium collectibles dealers and sellers

     Automotive (used cars): Autobytel.com, AutoVantage.com, AutoWeb.com, Barrett-Jackson, California Classics, CarClub, Cars.com, CarsDirect.com, Collectorcartraderonline.com, Dealix, Dupont Registry, eClassics.com, Edmunds, Hemmings, imotors.com, TraderOnline, Trader Publishing, vehix.com, newspaper classifieds, used car dealers

     Books, Movies, Music: Amazon.com, Barnes & Noble, Barnesandnoble.com, Alibris.com, Blockbuster, BMG, Columbia House, Best Buy, CDNow, Express.com, Emusic.com, Tower Records/Tower Records.com

     Clothing and Accessories: Abercrombie.com, AE.com, Bluefly.com, Coldwater-Creek.com, Delias.com, Dockers.com, Eddie Bauer, FashionMall.com, The Gap, Gap Online, J. Crew, JCrew.com, LandsEnd.com, The Limited, LLBean.com, Macy’s, The Men’s Wearhouse, Payless.com, Ross, Urbanq.com, VictoriasSecret.com

     Computers & Consumer Electronics: Amazon.com, Best Buy, Buy.com, Circuit City, Compaq, CompUSA, Dell, Fry’s Electronics, Gateway, The Good Guys, MicroWarehouse, Radio Shack, Shopping.com, 800.com, Computer Discount Warehouse, PC Connection, computer, consumer electronics and photography retailers

     Home & Garden: IKEA, Crate & Barrel, Home Depot, Pottery Barn, Ethan Allen, Frontgate, Burpee.com

     Jewelry: Ashford.com, Mondera.com, Bluenile.com, Diamond.com, Macy’s

     Pottery & Glass: Just Glass, Pottery Auction, Pottery Barn, Go Collect, Pier 1 Imports, Restoration Hardware

36


Table of Contents

      Sporting Goods/Equipment: dsports.com, FogDog.com, Footlocker, Gear.com, Global Sports, golfclubexchange, MVP.com, PlanetOutdoors.com, Play It Again Sports, REI, Sports Authority, Sportsline.com

     Tickets: Ticketmaster, Tickets.com, ticket brokers

     Tool/Equipment/Hardware: Home Depot, HomeBase, Amazon.com, Ace Hardware, OSH

     Business-to-Business: Ariba, BidFreight.com, Bid4Assets, BizBuyer.com, bLiquid.com, Buyer Zone, CloseOutNow.com, Commerce One, Concur Technologies, DoveBid, FreeMarkets, Iron Planet, labx.com, Oracle, Overstock.com, PurchasePro.com, RicardoBiz.com, Sabre, SurplusBin.com, Ventro, VerticalNet

     Additionally, we face competition from various online commerce sites including: Amazon.com, Surplus Auction, uBid, Yahoo! Auctions and a large number of other regional and national companies engaged in consumer-to-consumer or business-to-consumer sales. Overseas, we face competition from similar channels in most countries and from a large number of regional and national online and offline competitors in each country. Different aspects of our fixed-priced business compete with the major Internet portals (AOL, MSN, Yahoo! and comparable companies outside the U.S.) as well as Amazon.com and others.

     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 a buyer protection 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

37


Table of Contents

a lower cost service. Some Internet-based applications that direct Internet traffic to certain websites may channel users to electronic- commerce 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.

     Although Billpoint’s business is focused primarily on providing a payment solution for eBay users, several new companies also provide their payment services both to our users and to a much broader range of customers, such as online and offline businesses. Some of these competitors compete aggressively by offering free services and significant promotional incentives. These competitors include large companies, including banks and credit card companies, who are beginning to enter this space and have longer operating histories, significantly greater financial, technical, marketing, customer service and other resources, greater name recognition and/or a larger base of customers than we have. These include: c2it offered by Citigroup; Yahoo! PayDirect offered by Yahoo!; PayPal, Inc.; Check Free; ProPay; Amazon.com Payments; Payingfast; SendMoneyOrder.com; and MoneyZap and BidPay offered by Western Union. We also compete with traditional payment methods, which are used by a majority of our customers, such as credit cards, checks, money orders and Automated Clearing House (ACH) transactions.

     Half.com competes directly with online and offline retailers in its product categories such as Amazon.com, which offers a directly competitive service, as well as with traditional offline and online sellers of new and used books, videos and CD’s, consumer electronics, sporting goods and other products.

     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. Further, 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., Butterfields' 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.

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 or by “viruses,” “worms” and similar programs. 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. 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.

38


Table of Contents

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.

     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 trademarks, copyrights, patents, domain names, trade dress and trade secrets as critical to our success. We aggressively protect our intellectual property rights by relying on a combination of trademark, copyright, patent, trade dress and trade secret laws and through the domain name dispute resolution system. We also rely on 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 domain names, trademarks and service marks in the U.S. and internationally. Effective trademark, copyright, patent, trade dress, trade secret and domain name protection is very expensive to maintain and may require litigation. Protection may not be available in every country in which our services are made available online. Furthermore, we must also protect our trademarks, patents and domain names 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

39


Table of Contents

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, IBM, Microsoft, Sun Microsystems, Inc. and Veritas Software. 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.

40


Table of Contents

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

     The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents, short-term and long-term investments in a variety of securities, including 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 (loss), 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, securities with longer maturities are subject to greater interest rate risk than those with shorter maturities. 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, 2002, our fixed income investments had an unrealized loss of $1.4 million with a pretax yield of approximately 3.1% and a weighted average maturity of 7 months. If interest rates were to instantaneously increase (decrease) by 100 basis points, the fair market value of the total investment portfolio could decrease (increase) by approximately $5.5 million. Assuming an average investment balance of $1 billion, if rates were to increase (decrease) by 100 basis points, this would translate to an increase (decrease) in interest income of approximately $10 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 primary office facilities. The interest rate swaps allow us to receive floating rate receipts based on LIBOR in exchange for making fixed rate payments which effectively changes our interest rate exposure on our operating lease from a floating rate to a fixed rate on $95 million of the total $126.4 million notional amount of our operating lease commitment. Of the $126.4 million operating lease commitment for our San Jose facility, 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 third parties, and we are subject to considerable market risk due to their volatility. We typically do not attempt to reduce or eliminate our market exposure in these equity investments. As of March 31, 2002, the reported amount of our equity investments included a net unrealized gain of $111,000, net of tax. In accordance with our policy to assess whether an impairment loss on our investments has occurred due to declines in fair value and other market conditions, we determined that declines in fair value of certain of our marketable and non-marketable equity investments were other than temporary. Accordingly, we recorded impairment charges totaling $1.2 million during the three months ended March 31, 2002, relating to the other-than-temporary impairment in the fair value of certain equity investments.

Foreign Currency Risk

     International net revenues result from transactions in 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. The financial statements of these foreign subsidiaries are typically denominated in the functional currency of the foreign subsidiary in order to centralize foreign exchange risk with the parent company. We are also exposed to foreign exchange rate fluctuations as the financial results of foreign subsidiaries are translated into U.S. dollars in preparing our consolidated financial statements. As exchange rates vary, these results, when translated, may vary from expectations and adversely impact overall profitability. The effect of foreign exchange rate fluctuations on eBay for the three months ended March 31, 2002, was a translation loss of approximately $5.1 million. This loss is recognized as an adjustment to stockholders’ equity through other comprehensive income.

     As of March 31, 2002, we did not have any outstanding forward foreign exchange contracts.

41


Table of Contents

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.” The lawsuit seeks class action certification, compensatory damages, a civil penalty of ten times actual damages, interest, costs and fees and injunctive relief. 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 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. The plaintiffs have appealed this ruling. A hearing on the appeal was held on April 10, 2002. 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, or Rolex, in the regional court of Cologne, Germany. The suit has been moved to the regional court in Dusseldorf, Germany. Rolex alleged that our subsidiaries were 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 and intend to defend ourselves vigorously.

     On September 26, 2001, a complaint was filed by MercExchange LLC against us, our Half.com subsidiary and ReturnBuy, Inc. in the Eastern District of Virginia (No. 2:01-CV-736) alleging infringement of three patents (relating to online auction technology, multiple database searching and electronic consignment systems) and seeking a permanent injunction and damages (including treble damages for willful infringement). We have answered this complaint, denying the allegations, and, in April 2002, filed four motions for summary judgment with respect to various aspects of the case. Vigorous discovery is ongoing in the case. Trial is currently scheduled for July 28, 2002. We believe we have meritorious defenses and will defend ourselves vigorously. However, even if successful, our defense against this action will be costly and could divert our management’s time. If the plaintiff were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from practicing a significant part of our U.S. business. Any such results could materially harm our business.

     Other third parties have from time to time claimed, and others may claim in the future that we have infringed their past, current or future intellectual property rights. We have in the past been forced to litigate such claims. We may become more vulnerable to such claims as laws such as the Digital Millennium Copyright Act are interpreted by the courts and as we expand into jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves is less favorable. We expect that we will increasingly be subject to copyright and trademark infringement claims as the geographical reach of our services expands. We also expect that we will increasingly be subject to patent infringement claims as our services expand. We have been notified of several potential disputes. 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 other disputes that arise in the ordinary course of business. We believe that the ultimate resolution of these other disputes will not have a material adverse impact on our financial position, results of operations or cash flows.

Item 2: Changes in Securities and Use of Proceeds

     Not applicable.

42


Table of Contents

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

        (a)    Exhibits.
 
             None
 
        (b)    Reports on Form 8-K.
 
             None

43


Table of Contents

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 8, 2002

Principal Executive Officer:   Principal Financial Officer:

By:   /s/  MARGARET C. WHITMAN

         Margaret C. Whitman
         President and Chief Executive Officer
  By:   /s/  RAJIV DUTTA
         Rajiv Dutta
         Senior Vice President, Chief Financial Officer

Principal Accounting Officer:    

By:   /s/  MARK J. RUBASH
         Mark J. Rubash
         Vice President, Finance and Chief Accounting Officer
   

44