-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UzgkIDCsoJnFM56pZDcC0FzwjnBYBjNiHF6Jik0794W0j2i+jL9kpB6/zGRGZJbp NJPy6uWbz8PkxAS70sn1ew== 0001012870-99-002508.txt : 19990727 0001012870-99-002508.hdr.sgml : 19990727 ACCESSION NUMBER: 0001012870-99-002508 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990518 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990726 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EBAY INC CENTRAL INDEX KEY: 0001065088 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 770430924 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-24821 FILM NUMBER: 99669985 BUSINESS ADDRESS: STREET 1: 2125 HAMILTON AVENUE CITY: SAN JOSE STATE: CA ZIP: 95125 BUSINESS PHONE: 4085587400 MAIL ADDRESS: STREET 1: 2125 HAMILTON AVENUE CITY: SAN JOSE STATE: CA ZIP: 95125 8-K/A 1 FORM 8-K/A =============================================================================== U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: July 26, 1999 Date of earliest event reported: May 18, 1999 eBAY INC. - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware ---------------------------------------------- (State or other jurisdiction of incorporation) 000-24821 77-0430924 - ---------------- ----------------- (Commission (IRS Employer File Number) Identification No.) 2125 Hamilton Ave., San Jose, California 95125 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 408-558-7400 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 2005 Hamilton Ave., Suite 350, San Jose, CA 95125 - ------------------------------------------------------------------------------- (Former name or former address, if changed since last report) =============================================================================== Item 2: Acquisition or Disposition of Assets. The undersigned registrant hereby amends the following items, financial statements, exhibits or other portions of the following Current Reports on Form 8-K, as set forth below and in the pages attached hereto: . Form 8-K filed on May 28, 1999, related to the Registrant's acquisition of Kruse, Inc. (d.b.a. Kruse International), Auburn Cordage, Inc., ACD Auto Sales, Inc., Reppert School of Auctioneering, Inc. and Classic Advertising & Promotions, Inc., (collectively, "Kruse" or the "Kruse International Group of Companies") on May 18, 1999, by means of a merger among eBay Inc. ("eBay"), each of the Kruse companies, five merger subsidiaries wholly-owned by eBay, Dean V. Kruse and Mitchell Kruse. . Form 8-K filed on June 7, 1999, related to the Registrant's acquisition of Billpoint, Inc. ("Billpoint") on May 25, 1999, by means of a merger among eBay, Billpoint and Brazil Acquisition Corp., a wholly-owned subsidiary of eBay. . Form 8-K filed on June 7, 1999, related to the Registrant's acquisition of Butterfield & Butterfield Auctioneers on May 28, 1999 by means of a merger among eBay, Butterfield & Butterfield Auctioneers, a merger subsidiary wholly-owned by eBay, the stockholders of Butterfield & Butterfield Auctioneers, 111 Potrero Partners, LLC, HBJ Partners, LLC and the members of the 111 Potrero Partners, LLC and HBJ Partners, LLC (collectively, "B&B" or the "Butterfield & Butterfield Group of Companies"). Item 5: Other Events. Risk Factors that may Affect Results of Operations and Financial Condition of the Acquired Companies. The acquisition itself may adversely affect the Acquired Companies. The process of integrating any acquisition may create unforeseen operating difficulties and expenditures and is itself risky. The areas where we may face difficulties include: . diversion of management time (both ours and at the acquired companies) during the period of negotiation through closing and further diversion of such time after closing from focus on operating the businesses to issues of integration and future products; . decline in employee morale and retention issues resulting from changes in compensation, reporting relationships, future prospects, or the direction of the business; . the need to integrate each company's accounting, management information, human resource and other administrative systems to permit effective management and the lack of control if such integration is delayed or not implemented; . the need to implement controls, procedures and policies appropriate for a larger public company at companies that prior to acquisition had been smaller, private companies; and . we have almost no experience in managing this integration process. Our new land-based auction businesses need to continue to acquire properties. The businesses of B&B and Kruse are both dependent on the continued acquisition of high quality auction properties from sellers. Their future success will depend in part on their ability to maintain an adequate supply of high quality auction property, particularly fine and decorative arts and collectibles and collectible automobiles, respectively. There is intense competition for these pieces with other auction companies and dealers. In addition, a small number of key senior management and specialists maintain the relationships with the primary sources of auction property and the loss of any of these individuals could adversely affect the business of B&B and Kruse. See "The acquired businesses are dependent on a small number of key employees." Our new land-based auction businesses could suffer losses from price guarantees, advances or rescissions of sales. -2- In order to secure high quality auction properties from sellers, B&B 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 such 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. Our new land-based auction businesses are dependent on discretionary consumer spending. A decline in consumer spending would harm our new land-based auction businesses. Sales of fine and decorative art, collectable cars and other collectibles would be adversely affected by a decline in discretionary consumer spending, especially for luxury items. Changes in buyer's tastes, economic conditions or consumer trends could cause declines in the number or dollar volume of items auctioned and thereby harm the business of these companies. Our new businesses are dependent on a small number of key employees. Our new businesses are all dependent on attracting and retaining key employees. 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. Dean Kruse is particularly important to Kruse. The loss of any of these individuals could result in the loss of significant future business and would harm us. Such personnel are in great demand by other auction companies. In addition, employee turnover frequently increases during the period following an acquisition as employees evaluate possible changes in compensation, culture, reporting relationships, and the direction of the business. Such increased turnover could increase our costs and reduce our future revenues. Our new land-based businesses are subject to regulation. Both B&B and Kruse are subject to regulation in some jurisdictions governing the manner in which auctions are conducted. Both are required to obtain licensure in certain jurisdictions with respect to their business or to permit the sale of certain properties (e.g. wine, automobiles, real estate). Such licenses must generally be regularly renewed 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 it 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. Our new payments business may be subject to regulation. Businesses that handle consumers' funds are potentially subject to numerous regulations, including those related to banking, credit cards, escrow, fair credit reporting and others. Billpoint is a new business with a relatively novel approach to facilitating payments. It is not yet known how regulatory agencies will treat Billpoint. The cost and complexity of Billpoint's business may increase if certain regulations are deemed to apply to its business. We acquired real property with some of our new businesses. In connection with the acquisition of Kruse and B&B we acquired real property including land, buildings and interests in partnerships holding land and buildings. We have no experience in managing real property. Ownership of this property subjects us to new risks, including: . the possibility of environmental contamination and the costs associated with fixing any environmental problems; . the possible need for structural improvements in order to comply with zoning, seismic, disability act or other requirements; . possible disputes with tenants, partners or others. Our new land-based auction businesses are seasonal and are subject to significant quarterly fluctuations. -3- Both B&B and Kruse have significant quarter to quarter variations in their results depending on the timing of auctions and the availability of high quality items from large collections and estates. B&B 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. This seasonal effect may be partially offset by Kruse, which typically sees a seasonal peak in operations with its Auburn, Indiana auction around Labor Day. Our new businesses could be harmed by Year 2000 compliance problems. Our new businesses are heavily dependent upon the functioning of their computer systems. Any failure or malfunction of their information, business, finance, accounting, or other systems could harm these businesses in a manner that is impossible to currently quantify or anticipate. We are currently reviewing the Y2K status of these businesses. If necessary upgrades or changes are not properly identified, or if they cannot be successfully and timely implemented even if properly identified, these businesses could be harmed. Our new businesses are subject to intense competition. The land-based auction business is intensely competitive. B&B competes with two larger and better known auction companies, Sotheby's Holdings, Inc. and Christie's International plc, as well as numerous regional auction companies. To the extent that these companies increase their focus on the middle market properties that form the core of B&B's business, its business may suffer. Kruse is subject to competition from numerous regional competitors. In addition, competition with Internet based auctions may harm the land-based auction business. Although Billpoint's business is new, several companies are beginning to enter this market and large competitors, including banks and credit card companies, may become competitors. Item 7: Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Businesses Acquired See Exhibit 99.1 for the audited combined financial statements of the Kruse Group of Companies, Exhibit 99.2 for the audited financial statements of Billpoint and Exhibit 99.3 for the audited combined financial statements of the Butterfield & Butterfield Group of Companies. (b) Pro Forma Financial Information Pro Forma Condensed Financial Information (Unaudited) The following unaudited pro forma combined financial statements give effect to the mergers of eBay with Kruse, Billpoint and B&B (the "Acquired Entities"), which were accounted for as poolings of interests. The unaudited pro forma condensed balance sheet presents the combined financial position of eBay and the Acquired Entities as of March 31, 1999, assuming that each of the mergers had occurred as of March 31, 1999. Such pro forma information is based upon the historical balance sheet data of eBay and the Acquired Entities as of that date. The unaudited pro forma condensed statement of income gives effect to the mergers of eBay and the Acquired Entities by combining the results of operations of eBay and the Acquired Entities for the three years ended December 31, 1998 and the three months ended March 31, 1998 and 1999, on a pooling of interests basis, with the exception of Billpoint, which is included from its date of inception of September 1, 1998. These unaudited pro forma financial statements should be read in conjunction with the historical financial statements and notes thereto of eBay included in its Annual Report on Form 10-K for the year ended December 31, 1998 and the historical financial statements and notes thereto of the Acquired Entities included as exhibits herein. The unaudited pro forma information is presented for illustrative purposes only and is not necessarily indicative of the operating results or financial position that would have occurred if the mergers had been consummated at the beginning of the periods presented, nor is it necessarily indicative of future operating results or financial position. In addition, the unaudited pro forma condensed combined financial statements do not incorporate increases in property taxes that the combined company will be subject to as a result of increases in the tax basis of certain real estate holdings of B&B -4- which, because the acquisitions have been accounted for as poolings of interests, remain at historical cost for book purposes. eBay and the Acquired Entities incurred direct transaction costs of approximately $4.3 million associated with the mergers which were charged to operations during the three months ended June 30, 1999. There can be no assurance that eBay will not incur additional charges in subsequent periods to reflect costs associated with the mergers or that management will be successful in its efforts to integrate the operations of the companies. This charge is reflected in the unaudited pro forma condensed combined balance sheet, but is not reflected in the unaudited pro forma condensed combined statements of operations. This charge is based upon an estimate and is subject to change. -5- eBay Inc. Unaudited Pro Forma Condensed Combined Balance Sheet (in thousands)
March 31, 1999 ------------------------------------------------------------------------------------------------- - --- Acquired Pro Forma eBay Entities Adjustments Combined ---------------- ---------------- ---------------- ----------------- Assets Current assets: Cash and cash equivalents......... $ 24,850 $ 4,300 $ -- $ 29,150 Short-term investments............ 32,121 -- -- 32,121 Accounts receivable, net.......... 12,104 6,028 -- 18,132 Deferred tax assets............... -- 38 -- 38 Other current assets.............. 23,588 1,439 (202) (A) 24,825 ------------- ------------- ------------- ------------- Total current assets............. 92,663 11,805 (202) 104,266 Property and equipment, net........ 16,235 36,979 -- 53,214 Intangible assets, net............. 733 2,515 -- 3,248 Note receivable.................... -- 1,919 -- 1,919 Deferred tax assets................ -- -- 11,231 (B)(C) 11,231 Other assets....................... 81 2,080 -- 2,161 ------------- ------------- ------------- ------------- $ 109,712 $ 55,298 $ 11,029 $ 176,039 ============= ============= ============= ============= Liabilities and Stockholders' Equity Current liabilities: Notes payable..................... $ -- $ 3,644 $ -- $ 3,644 Accounts payable.................. 3,748 7,360 -- 11,108 Accrued expenses.................. 8,947 2,039 4,024 (A) 15,010 Customer advances and deferred revenue.......................... 1,022 199 -- 1,221 Income taxes payable.............. 2,713 1,370 2,478 (C) 6,561 Deferred tax liabilities.......... 1,682 -- -- 1,682 ------------- ------------- ------------- ------------- Total current liabilities........ 18,112 14,612 6,502 39,226 Notes payable...................... -- 18,060 -- 18,060 Environmental and seismic accruals. -- 5,900 -- 5,900 Deferred tax liability............. -- 261 -- 261 Minority interest.................. -- (102) -- (102) ------------- ------------- ------------- ------------- 18,112 38,731 6,502 63,345 ------------- ------------- ------------- ------------- Stockholders' equity: Common stock...................... 121 3 -- 124 Additional paid-in capital........ 86,089 6,724 8,753 (B) 101,566 Notes receivable from stockholders (510) -- -- (510) Unearned compensation............. (3,324) (1,396) -- (4,720) Retained earnings................. 9,224 11,236 (4,226) (A) 16,234 ------------- ------------- ------------- ------------- Total stockholders' equity....... 91,600 16,567 4,527 112,694 ------------- ------------- ------------- ------------- $ 109,712 $ 55,298 $ 11,029 $ 176,039 ============= ============= ============= =============
See accompanying notes to pro forma condensed combined financial information. -6- eBay Inc. Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except per share amounts)
Three Months Ended March 31, 1999 ----------------------------------------------------------------- Acquired Pro Forma eBay Entities Combined ----------------- ----------------- ----------------- Net revenues: Fees and services........................................ $ 34,010 $ 7,734 $ 41,744 Real estate rentals...................................... -- 1,057 1,057 -------- ------- -------- Total net revenues...................................... 34,010 8,791 42,801 -------- ------- -------- Cost of net revenues: Fees and services........................................ 5,121 2,345 7,466 Real estate rentals...................................... -- 478 478 -------- ------- -------- Total cost of revenues.................................. 5,121 2,823 7,944 -------- ------- -------- Gross profit........................................... 28,889 5,968 34,857 -------- ------- -------- Operating expenses: Sales and marketing...................................... 12,067 4,819 16,886 Product development...................................... 1,924 239 2,163 General and administrative............................... 5,043 2,562 7,605 Amortization of acquired intangibles..................... 328 -- 328 -------- ------- -------- Total operating expenses................................ 19,362 7,620 26,982 -------- ------- -------- Income (loss) from operations............................. 9,527 (1,652) 7,875 Interest and other income, net............................ 639 173 812 Interest expense.......................................... -- (519) (519) -------- ------- -------- Income (loss) before income taxes, minority interest and equity in partnership income............................. 10,166 (1,998) 8,168 Provision for income taxes................................ (4,270) (1) (4,271) Minority interest in combined company..................... -- (78) (78) Equity interest in partnership income..................... -- 59 59 -------- ------- -------- Net income (loss)......................................... $ 5,896 $(2,018) $ 3,878 ======== ======= ======== Net income (loss) per share: Basic.................................................... $ 0.06 $ (0.81) $ 0.04 ======== ======= ======== Diluted.................................................. $ 0.05 $ (0.81) $ 0.03 ======== ======= ======== Weighted average shares: Basic.................................................... 95,047 2,494 97,541 ======== ======= ======== Diluted.................................................. 127,979 2,494 130,473 ======== ======= ======== Supplemental Pro Forma Information: Income before income taxes, minority interest and equity in partnership income as reported........................ $ 8,168 Provision for income taxes as reported.................... (4,271) Pro forma adjustment to provision for income taxes (Note 3)............................................... 136 Minority interest in combined company as reported......... (78) Equity interest in partnership income as reported......... 59 -------- Pro forma net income...................................... $ 4,014 ======== Pro forma net income per share: Basic.................................................... $ 0.04 ======== Diluted.................................................. $ 0.03 ========
See accompanying notes to pro forma condensed combined financial information. -7- eBay Inc. Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except per share amounts)
Three Months Ended March 31, 1998 ----------------------------------------------------------- Acquired Pro Forma eBay Entities Combined ---------- ------------ ------------ Net revenues: Fees and services........................................ $ 5,981 $ 6,852 $ 12,833 Real estate rentals...................................... -- 1,155 1,155 -------- -------- -------- Total net revenues...................................... 5,981 8,007 13,988 -------- -------- -------- Cost of net revenues: Fees and services........................................ 630 1,180 1,810 Real estate rentals...................................... -- 681 681 -------- -------- -------- Total cost of revenues.................................. 630 1,861 2,491 -------- -------- -------- Gross profit........................................... 5,351 6,146 11,497 -------- -------- -------- Operating expenses: Sales and marketing...................................... 2,106 3,473 5,579 Product development...................................... 518 -- 518 General and administrative............................... 1,028 1,280 2,308 Amortization of acquired intangibles..................... -- -- -- -------- -------- -------- Total operating expenses................................ 3,652 4,753 8,405 -------- -------- -------- Income from operations.................................... 1,699 1,393 3,092 Interest and other income, net............................ 36 366 402 Interest expense.......................................... (14) (466) (480) -------- -------- -------- Income before income taxes, minority interest and equity in partnership income.................................... 1,721 1,293 3,014 Provision for income taxes................................ (1,573) (75) (1,648) Minority interest in combined company..................... -- (95) (95) Equity interest in partnership income..................... -- 173 173 -------- -------- -------- Net income................................................ $ 148 $ 1,296 $ 1,444 ======== ======== ======== Net income per share: Basic.................................................... $ 0.00 $ 0.61 $ 0.05 ======== ======== ======== Diluted.................................................. $ 0.00 $ 0.61 $ 0.01 ======== ======== ======== Weighted average shares: Basic.................................................... 26,936 2,115 29,051 ======== ======== ======== Diluted.................................................. 97,614 2,115 99,729 ======== ======== ======== Supplemental Pro Forma Information: Income before income taxes, minority interest and equity $ 3,014 in partnership income as reported........................ Provision for income taxes as reported.................... (1,648) Pro forma adjustment to provision for income taxes (Note 3)............................................... (470) Minority interest in combined company as reported......... (95) Equity interest in partnership income as reported......... 173 -------- Pro forma net income...................................... $ 974 Pro forma net income per share: ======== Basic.................................................... $ 0.03 ======== Diluted.................................................. $ 0.01 ========
See accompanying notes to pro forma condensed combined financial information. -8- eBay Inc. Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except per share amounts)
Year Ended December 31, 1998 ----------------------------------------------------------------- Acquired Pro Forma eBay Entities Combined ----------------- ----------------- ----------------- Net revenues: Fees and services........................................ $ 47,352 $ 34,291 $ 81,643 Real estate rentals...................................... -- 4,486 4,486 --------- --------- --------- Total net revenues...................................... 47,352 38,777 86,129 --------- --------- --------- Cost of net revenues: Fees and services........................................ 6,859 7,089 13,948 Real estate rentals...................................... -- 2,146 2,146 --------- --------- --------- Total cost of revenues.................................. 6,859 9,235 16,094 --------- --------- --------- Gross profit........................................... 40,493 29,542 70,035 --------- --------- --------- Operating expenses: Sales and marketing...................................... 19,841 16,135 35,976 Product development...................................... 4,606 34 4,640 General and administrative............................... 9,080 6,769 15,849 Amortization of acquired intangibles..................... 805 -- 805 --------- --------- --------- Total operating expenses................................ 34,332 22,938 57,270 --------- --------- --------- Income from operations.................................... 6,161 6,604 12,765 Interest and other income, net............................ 908 891 1,799 Interest expense.......................................... (39) (2,152) (2,191) --------- --------- --------- Income before income taxes, minority interest and equity in partnership income.................................... 7,030 5,343 12,373 Provision for income taxes................................ (4,632) (157) (4,789) Minority interest in combined company..................... -- (381) (381) Equity interest in partnership income..................... -- 70 70 --------- --------- --------- Net income................................................ $ 2,398 $ 4,875 $ 7,273 ========= ========= ========= Net income per share: Basic.................................................... $ 0.05 $ 2.25 $ 0.14 ========= ========= ========= Diluted.................................................. $ 0.02 $ 2.25 $ 0.06 ========= ========= ========= Weighted average shares: Basic.................................................... 49,896 2,169 52,065 ========= ========= ========= Diluted.................................................. 114,588 2,169 116,757 ========= ========= ========= Supplemental Pro Forma Information: Income before income taxes, minority interest and equity in partnership income as reported........................ $ 12,373 Provision for income taxes as reported.................... (4,789) Pro forma adjustment to provision for income taxes income (Note 3)................................................. (2,071) Minority interest in combined company as reported......... (381) Equity interest in partnership income as reported......... 70 --------- Pro forma net income...................................... $ 5,202 ========= Pro forma net income per share: Basic................................................... $ 0.10 ========= Diluted................................................. $ 0.04 =========
See accompanying notes to pro forma condensed combined financial information. -9- eBay Inc. Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except per share amounts)
Year Ended December 31, 1997 ------------------------------------------------------------ Acquired Pro Forma eBay Entities Combined --------- ------------ ------------- Net revenues: Fees and services........................................ $ 5,744 $ 31,326 $ 37,070 Real estate rentals...................................... -- 4,300 4,300 -------- -------- -------- Total net revenues...................................... 5,744 35,626 41,370 -------- -------- -------- Cost of net revenues: Fees and services........................................ 746 5,885 6,631 Real estate rentals...................................... -- 1,773 1,773 -------- -------- -------- Total cost of revenues.................................. 746 7,658 8,404 -------- -------- -------- Gross profit........................................... 4,998 27,968 32,966 -------- -------- -------- Operating expenses: Sales and marketing...................................... 1,730 13,888 15,618 Product development...................................... 831 -- 831 General and administrative............................... 950 5,584 6,534 -------- -------- -------- Total operating expenses................................ 3,511 19,472 22,983 -------- -------- -------- Income from operations.................................... 1,487 8,496 9,983 Interest and other income, net............................ 59 995 1,054 Interest expense.......................................... (3) (2,368) (2,371) -------- -------- -------- Income before income taxes, minority interest and equity 1,543 7,123 8,666 in partnership income.................................... Provision for income taxes................................ (669) (302) (971) Minority interest in combined company..................... -- (320) (320) Equity interest in partnership loss....................... -- (314) (314) -------- -------- -------- Net income................................................ $ 874 $ 6,187 $ 7,061 ======== ======== ======== Net income per share: Basic.................................................... $ 0.04 $ 2.93 $ 0.29 ======== ======== ======== Diluted.................................................. $ 0.01 $ 2.93 $ 0.08 ======== ======== ======== Weighted average shares: Basic.................................................... 22,313 2,115 24,428 ======== ======== ======== Diluted.................................................. 82,660 2,115 84,775 ======== ======== ======== Supplemental Pro Forma Information: Income before income taxes, minority interest and equity in partnership income as reported........................ $ 8,666 Provision for income taxes as reported.................... (971) Pro forma adjustment to provision for income taxes (Note 3)................................................. (2,576) Minority interest in combined company as reported......... (320) Equity interest in partnership loss as reported........... (314) -------- Pro forma net income...................................... $ 4,485 ======== Pro forma net income per share: Basic.................................................... $ 0.18 ======== Diluted.................................................. $ 0.05 ========
See accompanying notes to pro forma condensed combined financial information. -10- eBay Inc. Unaudited Pro Forma Condensed Combined Statement of Operations (in thousands, except per share amounts)
Year Ended December 31, 1996 ------------------------------------------------ Acquired Pro Forma eBay Entities Combined -------- ------------ -------------- Net revenues: Fees and services........................................ $ 372 $27,787 $28,159 Real estate rentals...................................... -- 3,892 3,892 ------- ------- ------- Total net revenues...................................... 372 31,679 32,051 ------- ------- ------- Cost of net revenues: Fees and services........................................ 14 5,167 5,181 Real estate rentals...................................... -- 1,622 1,622 ------- ------- ------- Total cost of revenues.................................. 14 6,789 6,803 ------- ------- ------- Gross profit........................................... 358 24,890 25,248 ------- ------- ------- Operating expenses: Sales and marketing...................................... 32 13,107 13,139 Product development...................................... 28 -- 28 General and administrative............................... 45 5,616 5,661 ------- ------- ------- Total operating expenses................................ 105 18,723 18,828 ------- ------- ------- Income from operations.................................... 253 6,167 6,420 Interest and other income, net............................ 1 376 377 Interest expense.......................................... -- (2,322) (2,322) ------- ------- ------- Income before income taxes, minority interest and equity in partnership income.............................. 254 4,221 4,475 Provision for income taxes................................ (106) (369) (475) Minority interest in combined company..................... -- (86) (86) Equity interest in partnership loss....................... -- (576) (576) ------- ------- ------- Net income................................................ $ 148 $ 3,190 $ 3,338 ======= ======= ======= Net income per share: Basic.................................................... $ 0.02 $ 1.51 $ 0.39 ======= ======= ======= Diluted.................................................. $ 0.00 $ 1.51 $ 0.07 ======= ======= ======= Weighted average shares: Basic.................................................... 6,375 2,115 8,490 ======= ======= ======= Diluted.................................................. 42,945 2,115 45,060 ======= ======= ======= Supplemental Pro Forma Information: Income before income taxes, minority interest and equity in partnership loss as reported................... $ 4,475 Provision for income taxes as reported.................... (475) Pro forma adjustment to provision for income taxes (Note 3)................................................. (1,362) Minority interest in combined company as reported......... (86) Equity interest in partnership loss as reported........... (576) ------- Pro forma net income...................................... $ 1,976 ======= Pro forma net income per share: Basic................................................... $ 0.23 ======= Diluted................................................. $ 0.04 =======
See accompanying notes to pro forma condensed combined financial information. -11- eBay Inc. Notes to Pro Forma Condensed Combined Financial Statements (unaudited) 1. Basis of Presentation Pro Forma Basis of Presentation The unaudited pro forma condensed combined financial statements of eBay, Kruse, Billpoint and B&B give retroactive effect to the mergers, which are being accounted for as poolings of interests and, as a result, the unaudited pro forma condensed combined balance sheets and statements of operations are presented as if eBay and the Acquired Entities had been combined for all periods presented. The pro forma condensed combined financial statements reflect the issuance of a total of approximately 2,638,800 shares of eBay common stock for all of the outstanding shares of Kruse, Billpoint and B&B outstanding as of the dates of the respective mergers. This total consists of approximately 787,300 shares of eBay common stock issued for all of the outstanding shares of Kruse, 524,100 shares of eBay common stock issued for all of the outstanding shares of Billpoint, and 1,327,400 shares of eBay common stock issued for all of the outstanding shares of B&B in connection with the mergers, which resulted in exchange ratios of approximately 339.35862, 0.05912 and 0.27931 shares of eBay common stock for each share of Kruse, Billpoint and B&B, respectively. In addition, options and warrants representing 2,233,181 shares of Billpoint common stock were assumed by eBay and converted into options and warrants representing approximately 132,000 shares of eBay common stock. Acquired Entities The components of pro forma net revenues, operating expenses and net income (loss) during the three months ended March 31, 1999 and 1998 and the years ended December 31, 1998, 1997 and 1996 are as follows:
Operating Net Income Net Revenues Expenses (Loss) -------------- ------------- ------------- Three Months Ended March 31, 1999 Kruse............................................. $ 2,551 $ 2,398 $ (423) Billpoint......................................... - 758 (746) B&B............................................... 6,240 4,464 (849) ------- ------- ------- $ 8,791 $ 7,620 $(2,018) ======= ======= ======= Three Months Ended March 31, 1998 Kruse............................................. $ 2,455 $ 1,887 $ 112 B&B............................................... 5,552 2,866 1,184 ------- ------- ------- $ 8,007 $ 4,753 $ 1,296 ======= ======= ======= Year Ended December 31, 1998 Kruse............................................. $10,265 $ 8,119 $ (58) Billpoint......................................... - 74 (74) B&B............................................... 28,512 14,745 5,007 ------- ------- ------- $38,777 $22,938 $ 4,875 ======= ======= ======= Year Ended December 31, 1997 Kruse............................................. $ 7,520 $ 5,895 $ (237) B&B............................................... 28,106 13,577 6,424 ------- ------- ------- $35,626 $19,472 $ 6,187 ======= ======= ======= Year Ended December 31, 1996 Kruse............................................. $ 7,760 $ 6,024 $ (69) B&B............................................... 23,919 12,699 3,259 ------- ------- ------- $31,679 $18,723 $ 3,190 ======= ======= =======
-12- 2. Merger Transaction Costs eBay and the Acquired Entities incurred direct transaction costs of approximately $4.3 million associated with the mergers, including $1.5 million for legal and other professional consulting fees and $2.8 million for various fees including those associated with the termination of B&B's initial public offering, which will be charged to operations during the quarter ended June 30, 1999, the period in which the transactions were consummated. There can be no assurance that eBay will not incur additional charges in subsequent quarters to reflect costs associated with the mergers or that management will be successful in their efforts to integrate the operations of the respective companies. This charge is an estimate and is subject to change. 3. Income Taxes The provision for income taxes does not reflect the benefit of Billpoint's net operating losses due to certain limitations and uncertainty surrounding the realization of the tax benefits associated with such losses. Because the acquisition of the B&B entities has been accounted for as a pooling of interests, there has been no adjustment to the historical carrying values of real estate holdings. However, these properties are subject to increases in tax basis, which will result in a higher depreciable basis for income and property tax purposes. In connection with the acquisition of B&B by eBay, B&B's status as an S Corporation was terminated, and B&B became subject to federal and state income taxes. The supplemental pro forma information includes an increase to the provisions for income taxes based upon a combined federal and state tax rate of 42%, which approximates the statutory tax rates that would have applied if B&B had been taxed as a C corporation during the periods prior to its acquisition by eBay. 4. Pro Forma Adjustments The following pro forma adjustments have been made to the historical financial statements of eBay and the Acquired Entities based upon preliminary estimates and assumptions made by management for the purpose of preparing the unaudited pro forma combined condensed financial statements. There have been no significant intercompany transactions. (A) To record the accrual of estimated costs resulting from the mergers. See Note 2 above. (B) A portion of the B&B acquisition was a taxable transaction, accordingly, a deferred tax asset and a corresponding increase in stockholders equity of approximately $8,753,000 was recorded for the difference between the financial statement carrying amounts and tax basis of the related net assets upon the closing of the transaction. (C) To record the deferred tax asset relating to temporary differences within the B&B Group Companies upon the change in status from an S Corporation to a C Corporation for federal income tax purposes. 5. Pro Forma Net Income (Loss) Per Share The pro forma combined basic and diluted net income (loss) per share is based on the combined weighted average number of common shares of eBay Common Stock and the Acquired Entities' Common Stock outstanding for each period using the relevant exchange ratios based on the issuance of approximately 2,638,800 shares of eBay Common Stock for all of the outstanding shares of the Acquired Entities as of their respective acquisition dates. All convertible preferred stock, warrants and employee stock options have been included in the computation of pro forma combined diluted net income per share using the treasury stock method to the extent such instruments are dilutive for the periods presented. -13- (c) Exhibits. The following exhibits are filed herewith: 2.1* Agreement and Plan of Merger and Reorganization, dated as of May 17, 1999, among eBay Inc., Sesame Corporation No. 1, Sesame Corporation No. 2, Sesame Corporation No. 3, Sesame Corporation No. 4, Sesame Corporation No. 5, Kruse, Inc. (d/b/a Kruse International), Auburn Cordage, Inc., ACD Auto Sales, Inc., Reppert School of Auctioneering, Inc., Classic Advertising & Promotions, Inc., Dean V. Kruse and Mitchell Kruse. 2.2* Agreement and Plan of Merger and Reorganization, dated as of April 23, 1999, among eBay Inc., Margarine Acquisition Sub Corp., Butterfield & Butterfield Auctioneers Corporation, the stockholders of Butterfield & Butterfield Auctioneers Corporation, 111 Potrero Partners, LLC, HBJ Partners, LLC and the members of 111 Potrero Partners, LLC and HBJ Partners, LLC. 2.3* Agreement and Plan of Merger and Reorganization, dated as of May 18, 1999, among eBay Inc., Brazil Acquisition Corp. and Billpoint, Inc. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants. 99.1 Kruse International Group of Companies Audited Combined Financial Statements. 99.2 Billpoint, Inc. Audited Financial Statements. 99.3 Butterfield & Butterfield Group of Companies Audited Combined Financial Statements. ____________ * - Previously filed. -14- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant has duly caused this amendment to be signed on its behalf by the undersigned thereunto duly authorized. eBAY INC. Date: July 26, 1999 By: /s/ Gary F. Bengier ------------------- Gary F. Bengier Chief Financial Officer and Vice President of Operations -15- EX-23.1 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP Exhibit 23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8, File No. 333-64179, of eBay Inc. of our report dated July 7, 1999 with respect to the combined financial statements of the Kruse International Group of Companies which appears in exhibit 99.1 in this Form 8- K/A, of our report dated July 20, 1999 with respect to the financial statements of Billpoint, Inc. which appears in exhibit 99.2 in this Form 8-K/A, and of our report dated July 23, 1999 with respect to the combined financial statements of the Butterfield & Butterfield Group of Companies which appears in exhibit 99.3 in this Form 8-K/A. /s/ PRICEWATERHOUSECOOPERS LLP San Jose, California July 23, 1999 EX-99.1 3 KRUSE INT'L GROUP OF COMPANIES AUDITED FINANCIAL STATEMENTS EXHIBIT 99.1 Report of Independent Accountants To the Board of Directors and Shareholders of the Kruse International Group of Companies In our opinion, the accompanying combined balance sheet and the related combined statements of operations and shareholder's equity and of cash flows present fairly, in all material respects, the combined financial position of the Kruse International Group of Companies at December 31, 1997 and 1998, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California July 7, 1999 KRUSE INTERNATIONAL GROUP OF COMPANIES COMBINED BALANCE SHEET (in thousands, except share amounts)
December 31, March 31, 1997 1998 1999 ------------- -------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents..................................... $ 638 $ 493 $ 304 Accounts receivable........................................... 8 20 17 Other current assets.......................................... 390 363 177 Deferred tax asset............................................ 38 38 38 ------ ------ ------ Total current assets...................................... 1,074 914 536 Property and equipment, net...................................... 3,975 4,253 4,055 Other assets, net................................................ 249 198 185 ------ ------ ------ $5,298 $5,365 $4,776 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable, current........................................ $ 148 $ 257 $ 248 Accounts payable.............................................. 793 822 763 Accrued liabilities........................................... 1,017 981 1,018 Customer advances and unearned revenue........................ 233 246 199 Taxes payable................................................. 1,242 1,380 1,370 ------ ------ ------ Total current liabilities................................. 3,433 3,686 3,598 Deferred tax liability........................................... 295 261 261 Notes payable.................................................... 344 250 172 ------ ------ ------ 4,072 4,197 4,031 ------ ------ ------ Commitments and contingencies (Note 5) Shareholders' equity: Common Stock, no par value, 23,000 shares authorized; 23,000 shares issued and outstanding.......................... 32 32 32 Retained earnings............................................. 1,194 1,136 713 ------ ------ ------ Total shareholders' equity................................ 1,226 1,168 745 ------ ------ ------ $5,298 $5,365 $4,776 ====== ====== ======
The accompanying notes are an integral part of these combined financial statements. KRUSE INTERNATIONAL GROUP OF COMPANIES COMBINED STATEMENT OF OPERATIONS (in thousands)
Year Ended Three Months Ended December 31, March 31, ------------------------------ ---------------------- 1996 1997 1998 1998 1999 -------- -------- -------- ----------- -------- (unaudited) Net revenues: Auction fees and services............................... $7,398 $7,276 $ 9,750 $2,198 $2,372 Other................................................... 362 244 515 257 179 ------ ------ ------- ------ ------ Net revenues........................................... 7,760 7,520 10,265 2,455 2,551 ------ ------ ------- ------ ------ Cost of net revenues: Auction fees and services............................... 1,335 1,560 2,087 381 576 Other................................................... -- -- -- -- -- ------ ------ ------- ------ ------ Cost of net revenues................................... 1,335 1,560 2,087 381 576 ------ ------ ------- ------ ------ Gross profit........................................... 6,425 5,960 8,178 2,074 1,975 ------ ------ ------- ------ ------ Operating expenses: Sales and marketing..................................... 3,091 3,071 3,609 1,070 1,244 General and administrative.............................. 2,933 2,824 4,510 817 1,154 ------ ------ ------- ------ ------ Total operating expenses............................... 6,024 5,895 8,119 1,887 2,398 ------ ------ ------- ------ ------ Income (loss) from operations............................ 401 65 59 187 (423) ------ ------ ------- ------ ------ Other income (expense): Interest and other income, net.......................... 18 20 30 4 7 Interest expense........................................ (161) (60) (38) (4) (7) ------ ------ ------- ------ ------ Income from combined companies before taxes.............. 258 25 51 187 (423) Provision for income taxes............................... (327) (262) (109) (75) -- ------ ------ ------- ------ ------ Net income (loss)........................................ $ (69) $ (237) $ (58) $ 112 $ (423) ====== ====== ======= ====== ======
The accompanying notes are an integral part of these combined financial statements. KRUSE INTERNATIONAL GROUP OF COMPANIES COMBINED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands)
Common Stock Retained Total Shareholders' Shares Amount Earnings Equity Balance at December 31, 1995.................. 23 $ 32 $1,362 $1,394 Net income.................................... -- -- 69 69 ----- ----- ------ ------ Balance at December 31, 1996.................. 23 32 1,431 1,463 Net loss...................................... -- -- (237) (237) ----- ----- ------ ------ Balance at December 31, 1997.................. 23 32 1,194 1,226 Net loss...................................... -- -- (58) (58) ----- ----- ------ ------ Balance at December 31, 1998.................. 23 32 1,136 1,168 Net loss (unaudited).......................... -- -- (423) (423) ----- ----- ------ ------ Balance at March 31, 1999 (unaudited)......... 23 $ 32 $ 713 $ 745 ===== ===== ====== ======
The accompanying notes are an integral part of these combined financial statements. KRUSE INTERNATIONAL GROUP OF COMPANIES COMBINED STATEMENT OF CASH FLOWS (in thousands)
Three Months Ended Year Ended December 31, March 31, -------------------------- --------------------- 1996 1997 1998 1998 1999 ------- ------- ------- -------- -------- (unaudited) Cash flows from operating activities: Net income (loss)....................................... $ (69) $(237) $ (58) $ 112 $(423) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization....................... 167 176 322 33 100 Gain on sale of property and equipment.............. -- -- -- -- (83) Changes in assets and liabilities: Accounts receivable............................... 81 66 (12) 5 3 Other current assets.............................. 29 (112) 28 266 186 Other assets...................................... (7) -- -- -- -- Accounts payable.................................. (235) 169 29 (540) (59) Accrued liabilities............................... 173 230 (36) 200 37 Customer advances and unearned revenue............ 38 56 13 (99) (47) Taxes payable..................................... 304 244 138 75 (10) Deferred tax liabilities.......................... -- -- (34) -- -- ----- ----- ----- ----- ----- Net cash provided by (used in) operating activities.... 481 592 390 52 (296) ----- ----- ----- ----- ----- Cash flows from investing activities: Purchases of property and equipment..................... (345) (142) (550) -- (6) Proceeds from sales of property and equipment........... -- -- -- -- 200 ----- ----- ----- ----- ----- Net cash provided by (used in) investing activities.... (345) (142) (550) -- 194 ----- ----- ----- ----- ----- Cash flows from financing activities: Proceeds from (repayment of) note payable............... (202) (63) 15 (123) (87) ----- ----- ----- ----- ----- Net cash provided by (used in) financing activities.... (202) (63) 15 (123) (87) ----- ----- ----- ----- ----- Net increase (decrease) in cash and cash equivalents..... (66) 387 (145) (71) (189) Cash and cash equivalents, beginning of period........... 317 251 638 638 493 ----- ----- ----- ----- ----- Cash and cash equivalents, end of period................. $ 251 $ 638 $ 493 $ 567 $ 304 ===== ===== ===== ===== ===== Supplemental disclosures: Cash paid for interest.................................. $ 161 $ 60 $ 38 $ 4 $ 7 Cash paid for income taxes.............................. $ 23 $ 18 $ 5 $ 13 $ 10 Supplemental non-cash investing and financing activity: Issuance of note payable for non-compete agreement...... $ -- $ 240 $ -- $ -- $ --
The accompanying notes are an integral part of these combined financial statements. KRUSE INTERNATIONAL GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands, except share amounts) 1. The Group Companies and Summary of Significant Accounting Policies The Group Companies and Basis of Presentation The accompanying combined financial statements include the accounts of Kruse International, Auburn Cordage Inc., ACD Auto Sales Inc., Classic Advertising & Promotion Inc. and Reppert Auction School Inc. (collectively the "Group" or "Group Companies"). The financial statements for the aforementioned companies have been prepared on a combined basis for all periods presented as the companies were subject to common control. All intercompany accounts and transactions have been eliminated in the preparation of these combined financial statements. Kruse International - was founded in 1971 and operated as a sole proprietorship until it was incorporated in the state of Indiana in August 1986. Kruse International conducts auctions and performs appraisal services for classic car auctions in various locations in the United States, England, Germany and the Netherlands. Auburn Cordage Inc. - was incorporated in September 1962 and operates as a real estate holding company for properties leased by Kruse International conducting its classic car auctions. ACD Auto Sales Inc. - was incorporated in March 1992 and operates as a special purpose entity for the ownership of auto dealer licenses on behalf of Kruse International. Classic Advertising & Promotion Inc. - was incorporated in Indiana and operates as a special purpose entity and provides advertising services on behalf of Kruse International. Reppert Auction School Inc. - was incorporated in June 1997 and operates a training center for auctioneers including those employed by Kruse International. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue recognition Revenues are derived primarily from entry fees on auction items, bidder registration fees and commission fees calculated as a percentage of the final auction sales transaction value. Revenues related to these fees are recognized upon the completion of an auction. Revenues are also derived from sponsorship fees paid by various corporations. Sponsor fee revenues are recognized over the term of the sponsorship agreement. Advertising revenues and auctioneer tuition fees do not represent a significant source of revenues and are recognized as advertising and auctioneer training services are provided. Cash equivalents The Group Companies consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents consist principally of deposit and money market accounts that are stated at cost, which approximates fair value. The Group Companies deposit cash and cash equivalents with financial institutions which management believes are of high credit quality. Concentration of credit risk Financial instruments that potentially subject the Group Companies to a concentration of credit risk consist of cash, cash equivalents, and accounts receivable. The Group Companies' accounts receivable are derived from revenues earned from customers located in the United States, England, Germany, The Netherlands and Japan and are denominated in U.S. dollars. Accounts receivable balances are typically settled upon completion of an auction and as a result, the Companies have minimal outstanding accounts receivable. During the years ended December 31, 1996, 1997 and 1998 and the three month periods ended March 31, 1998 and 1999 (unaudited) no customers accounted for more than 10% of net revenues. Property and equipment Property and equipment are stated at historical cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets which range from five years for office equipment and vehicles to 31.5 years for buildings and building improvements. Other assets Other assets consist primarily of a non-compete agreement with a former shareholder, which is being amortized on a straight-line basis over the 60 month term of the agreement. Long-lived assets The Companies evaluate the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Fair value of financial instruments The Companies' financial instruments, including cash, cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Advertising expenses Advertising costs are expensed as incurred and totaled $1,691, $1,413, $1,787, $358 (unaudited) and $788 (unaudited) during the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999 respectively. Income taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Companies' financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Comprehensive income Effective January 1, 1998, the Companies adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. To date, the Group Companies have not had any transactions that are required to be reported in comprehensive income. Segment information Effective January 1, 1998, the Group Companies adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Companies' management identify their operating segments based on business activities, management responsibility and geographic location. During all periods presented, the Group operated in a single business segment providing classic car auction services, primarily in the United States. Through March 31, 1999, foreign operations have not been significant. Foreign currency translation The Group Companies use the U.S. dollar as their functional currency. Revenues and expenses are translated at average exchange rates in effect during each period, and balance sheet amounts are translated at historical exchange rates. Gains or losses from foreign currency transactions are included in the determination of net income or loss. Recent accounting pronouncements In April 1998, the AICPA issued Statement of Position ("SOP") 98-5 "Reporting on the Costs of Start-Up Activities." Start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, commencing some new operation or organizing a new entity. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do not expect its adoption to have a material effect on their results of operations, financial position or cash flows. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities". SFAS 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Group Companies will adopt SFAS No. 133 in the quarter ending June 30, 2000 and do not expect such adoption to have an impact on their results of operations, financial position or cash flows. Unaudited interim financial information The accompanying interim financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and 1999, are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position at March 31, 1999 and their results of operations and cash flows for the three months ended March 31, 1998 and 1999. The financial data and other information disclosed in these notes to the financial statements related to these periods are unaudited. The results for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. 2. Balance Sheet Components
December 31, March 31, 1997 1998 1999 ----------- ----------- ------------ (unaudited) Accounts receivable: Accounts receivable...................................... $ 8 $ 20 $ 17 ------- ------- ------- Less: Allowance for doubtful accounts................... -- -- -- ------- ------- ------- $ 8 $ 20 $ 17 ======= ======= ======= Property and equipment, net: Land and buildings....................................... $ 1,453 $ 1,453 $ 1,453 Building improvements.................................... 2,949 3,433 3,317 Office equipment......................................... 473 569 574 Vehicles................................................. 355 325 325 ------- ------- ------- 5,230 5,780 5,669 Less: Accumulated depreciation and amortization........... (1,255) (1,527) (1,614) ------- ------- ------- $ 3,975 $ 4,253 $ 4,055 ======= ======= ======= Accrued liabilities: Payroll and related expenses............................ $ 39 $ 46 $ 60 Property taxes.......................................... 43 44 55 Unclaimed checks........................................ 242 242 242 Accrued interest and other expenses..................... 621 621 621 Other................................................... 72 28 40 ------- ------- ------- $ 1,017 $ 981 $ 1,018 ======= ======= =======
3. Income Taxes The provisions for income taxes consist of the following:
Year Ended December 31, 1996 1997 1998 -------- -------- --------- Current: Federal..................................................................... $ 246 $ 217 $ 110 State and local............................................................. 66 59 33 ----- ----- ----- Total current............................................................ 312 276 143 ----- ----- ----- Deferred: Federal..................................................................... 12 (11) (25) State and local............................................................. 3 (3) (9) ----- ----- ----- Total deferred........................................................... 15 (14) (34) ----- ----- ----- $ 327 $ 262 $ 109 ===== ===== =====
The effective tax rate differs from the statutory rate as a result of the following:
Year Ended December 31, 1996 1997 1998 ------------ ------------ ------------ Provision at statutory rate............................................. $ 88 $ 8 $ 17 Permanent differences: Meals and entertainment.............................................. 10 11 15 Life insurance....................................................... 22 30 42 Non-deductible expenses.............................................. 153 169 -- Other................................................................ 11 6 13 State taxes, net of federal benefit..................................... 43 38 22 ----- ----- ----- $ 327 $ 262 $ 109 ===== ===== =====
Deferred tax assets and liabilities consist of the following:
December 31, 1997 1998 ----------- ----------- Deferred tax assets: Accruals and reserves..................................................... $ 38 $ 38 ----- ----- Deferred tax liabilities: Depreciation and amortization............................................. (295) (261) ----- ----- Net deferred tax liability.................................................... $(257) $(223) ===== =====
4. Borrowings Notes payable Notes payable consists of amounts payable to various financial institutions and a former shareholder and are secured by specified property as follows:
December 31, March 31, 1997 1998 1999 ----------- ----------- ------------ (unaudited) 6% note; interest and principal payable at maturity in May 1999....................................... $ 240 $ 140 $ 140 10% note; $1,200.00 in interest and principal payable monthly, matures April 2004................................ 77 70 -- 8% note; $12,500.00 in interest and principal payable semiannually; matures September 2003....................... 64 43 43 10.5% note; $2,487.00 in interest and principal payable monthly; matures December 2002............................. 111 92 87 7.5% note; $47,500.00 in interest and principal payable annually; matures October 2000............................. -- 97 97 7.75% - 8.5% automobile notes; payable in monthly principal and interest payments ranging from $300.00 to $1,425.00; maturing December 1999 through January 2003................ -- 65 53 ----- ----- ----- 492 507 420 Less: Current portion...................................... (148) (257) (248) ----- ----- ----- $ 344 $ 250 $ 172 ===== ===== =====
Principal payments under notes payable are as follows: Year Ending December 31, 1999.............................................................................. $257 2000.............................................................................. 112 2001.............................................................................. 45 2002.............................................................................. 46 2003.............................................................................. 13 Thereafter........................................................................ 34 ---- Total principal obligations....................................................... $507 ====
5. Commitments and Contingencies Leases The Group Companies lease office space and equipment under noncancelable operating leases with various expiration dates through June 2001. Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 was $0, $57, $73, $4 (unaudited) and $11 (unaudited), respectively. The terms of the facility lease provide for rental payments on a graduated scale. The Group Companies recognize rent expense on a straight-line basis over the lease period, and have accrued for rent expense incurred but not paid. Future minimum lease payments under noncancelable operating leases at December 31, 1998 are as follows:
Year Ending Operating December 31, Leases 1999............................................................ $33 2000............................................................ 19 2001............................................................ 14 --- Total minimum lease payments.................................... $66 ===
Contingencies On July 1, 1992, the Group Companies were notified by the Internal Revenue Service that they had failed to make certain required filings of Form 5300, Report of Cash Payments Over $10,000 Received in a Trade or Business, for the years 1990, 1991 and 1992. In December 1996, civil penalties were assessed against the Companies relating to this claim. These allegations are being vigorously defended by the Group Companies' management. The outcome of these allegations is unknown, however, management does not expect that resolution of this matter will have a material adverse impact on the Group Companies' financial position or results of operations. From time to time, the Group Companies are involved in other various disputes which have arisen in the ordinary course of business. Management believes that the ultimate resolution of these disputes will not have a material adverse impact on the Companies' financial position or results of operations. 6. Employee Benefit Plans The Group Companies sponsor a 401(k) defined contribution plan covering all employees. Contributions made by the Group Companies are determined annually by the Boards of Directors. Employer contributions under this plan totaled $0, $15, $0, $0 (unaudited) and $1 (unaudited) for the years ended December 31, 1996, 1997, 1998 and the three months ended March 31, 1998 and 1999, respectively. 7. Subsequent Events On May 20, 1999, eBay Inc. acquired all of the outstanding Common Stock of each of the combined companies, at which time the Companies became wholly- owned subsidiaries of eBay Inc. EX-99.2 4 BILLPOINT, INC. AUDITED FINANCIAL STATEMENTS Exhibit 99.2 Report of Independent Accountants To the Board of Directors and Shareholders of Billpoint, Inc. In our opinion, the accompanying balance sheet and the related statements of operations, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Billpoint, Inc. (a company in the development stage) at December 31, 1998 and the results of its operations and its cash flows for the period from September 1, 1998 (date of inception) through December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California July 20, 1999 BILLPOINT, INC. (A Development Stage Company) BALANCE SHEET (in thousands, except share amounts)
December 31, March 31, 1998 1999 -------------- -------------- (unaudited) ASSETS Current assets: Cash and cash equivalents.................................................... $ 50 $ 3,134 Other current assets......................................................... -- 52 ----- ------- Total current assets..................................................... 50 3,186 Property and equipment, net..................................................... 12 627 Other assets ................................................................... -- 50 ----- ------- $ 62 $ 3,863 ===== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable............................................................. $ 20 $ 752 ----- ------- Total current liabilities................................................ 20 752 ----- ------- Shareholders' equity: Convertible Preferred Stock, no par value; 3,723,793 shares authorized; 220,000 shares issued and outstanding at December 31, 1998 and 3,165,975 (unaudited) shares issued and outstanding at March 31, 1999........ 110 3,772 Common Stock, no par value; 20,000,000 shares authorized; 5,700,000 shares issued and outstanding at December 31, 1998 and March 31, 1999 (unaudited)................................................................. 6 6 Additional paid-in capital.................................................... -- 1,549 Unearned compensation......................................................... -- (1,396) Deficit accumulated during the development stage.............................. (74) (820) ----- ------- Total shareholders' equity............................................... 42 3,111 ----- ------- $ 62 $ 3,863 ===== =======
The accompanying notes are an integral part of these financial statements. BILLPOINT, INC. (A Development Stage Company) STATEMENT OF OPERATIONS (in thousands)
Period from Period from September 1, September 1, 1998 (inception) Three months 1998 (inception) to December 31, ended March 31, to March 31, 1998 1999 1999 ----------------- ----------------- ----------------- (unaudited) Operating expenses: Sales and marketing.............................................. $ 3 $ 414 $ 417 Product development.............................................. 34 239 273 General and administrative....................................... 37 105 142 ----- ----- ----- Total operating expenses..................................... 74 758 832 ----- ----- ----- Loss from operations................................................ (74) (758) (832) Interest income..................................................... -- 12 12 ----- ----- ----- Net loss............................................................ $ (74) $(746) $(820) ===== ===== =====
The accompanying notes are an integral part of these financial statements. BILLPOINT, INC. (A Development Stage Company) STATEMENT OF SHAREHOLDERS' EQUITY (in thousands, except per share amounts)
Deficit Accumulated Total Convertible Additional in the Share- Preferred Stock Common Stock Paid-in Unearned Development Holders' Shares Amount Shares Amount Capital Compensation Stage Equity ------ ------ ------ ------ ------- ------------ ------------- ------- Issuance of Series A Convertible Preferred Stock for cash at $0.50 per share in October 1998, net ......... 220 $ 110 -- - $ -- $ -- $ -- $ 110 Issuance of Common Stock for cash at $0.001 per share in October 1998 .... -- -- 5,700 6 -- -- -- 6 Net loss ............................... -- -- -- -- -- -- (74) (74) ------ ------ ------ ------ ------ ------- ------- ------ Balance at December 31, 1998 ........... 220 110 5,700 6 -- -- (74) 42 Issuance of Series A Convertible Preferred Stock for cash at $0.50 per share in January 1999, net (unaudited) ......................... 100 46 -- -- -- -- -- 46 Issuance of Series B Convertible Preferred Stock for cash at $1.28 per share in March 1999, net (unaudited) ......................... 2,846 3,616 -- -- -- -- -- 3,616 Issuance of Preferred Stock Warrant (unaudited) ......................... -- -- -- -- 468 (468) -- -- Amortization of Preferred Stock Warrant (unaudited) ................. -- -- -- -- -- 117 -- 117 Unearned stock compensation (unaudited) ......................... -- -- -- -- 1,081 (1,081) -- -- Amortization of unearned stock compensation (unaudited) ............ -- -- -- -- -- 36 -- 36 Net loss (unaudited) ................... -- -- -- -- -- -- (746) (746) ------ ------ ------ ------ ------ ------- ------- ------ Balance at March 31, 1999 (unaudited) .. 3,166 $3,772 5,700 $ 6 $1,549 $(1,396) $(820) $3,111 ====== ====== ====== ====== ====== ======= ======= ======
The accompanying notes are an integral part of these statements. BILLPOINT, INC. (A Development Stage Company) STATEMENT OF CASH FLOWS (in thousands)
Period from Period from September 1, September 1, 1998 (inception) Three months 1998 (inception) to December 31, ended March 31, to March 31, 1998 1999 1999 ----------------- ----------------- ----------------- (unaudited) Cash flows from operating activities: Net loss ...................................................... $ (74) $ (746) $ (820) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization ............................... -- 26 26 Amortization of unearned compensation ....................... -- 36 36 Amortization of Preferred Stock Warrant ..................... -- 117 117 Changes in assets and liabilities: Other current assets ...................................... -- (52) (52) Other assets .............................................. -- (50) (50) Accounts payable .......................................... 20 732 752 ----- ------ ------ Net cash provided by (used in) operating activities ............ (54) 63 9 ----- ------ ------ Cash flows from investing activities: Purchases of property and equipment ......................... (12) (641) (653) ----- ------ ------ Net cash used in investing activities .......................... (12) (641) (653) ----- ------ ------ Cash flows from financing activities: Proceeds from issuance of Convertible Preferred Stock, net .... 110 3,662 3,772 Proceeds from issuance of Common Stock ........................ 6 -- 6 ----- ------ ------ Net cash provided by financing activities ...................... 116 3,662 3,778 ----- ------ ------ Net increase in cash and cash equivalents ...................... 50 3,084 3,134 Cash and cash equivalents at beginning of period ............... -- 50 -- ----- ------ ------ Cash and cash equivalents at end of period ..................... $ 50 $3,134 $3,134 ===== ====== ====== Supplemental non-cash financing activity: Issuance of Preferred Stock Warrant ......................... $ -- $ 468 $ 468
The accompanying notes are an integral part of these financial statements. BILLPOINT, INC. (A Development Stage Company) NOTES TO FINANCIAL STATEMENTS (in thousands, except share amounts) 1. The Company and Summary of Significant Accounting Policies The Company Billpoint, Inc. (the "Company"), began operations on September 1, 1998, and was incorporated in California on September 24, 1998. The Company has developed a centralized, turnkey authorization, billing and payment fulfillment solution that permits individuals and small merchants to accept credit cards as payment for Internet-based sales transactions. The Company's service, which was launched in December 1998, is expected to derive revenues based upon a variety of fee arrangements, including percentage-of- transaction, fixed-fee per transaction and flat monthly rates. Since its inception, the Company has been in the development stage, engaged primarily in research and development, recruiting personnel and raising capital. To date, no revenues have been generated from its planned operations. Accordingly, the accompanying financial statements are not indicative of a normal operating period. The Company has incurred losses during all periods since inception and expects to incur further losses related to the development of its product and service offerings; however, management believes that existing capital resources, including the equity financing secured subsequent to December 31, 1998, will be sufficient to fund the Company's cash requirements through at least December 31, 1999. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 1998 and March 31, 1999, $50 and $3,134 (unaudited), respectively, of money market funds, the fair value of which approximates cost, are included in cash and cash equivalents. Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company deposits cash and cash equivalents with financial institutions that management believes are of high credit quality. Software development costs Software development costs are included in research and development and are expensed as incurred. After technological feasibility is established using the working model approach, material software development costs are capitalized. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs. Property and equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally one to three years, or the lease term of the respective assets if shorter. Long-lived assets The Company evaluates the recoverability of its long-lived assets in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires recognition of impairment of long- lived assets in the event the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Income taxes Income taxes are accounted for using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Companies' financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. Research and development Research and development costs are charged to expense as incurred. Stock compensation The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB Opinion No. 25, unearned compensation is based on the difference, if any, on the date of the grant, between the fair value of the Company's Common Stock and the exercise price of the option. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF 96-18. Comprehensive income There were no items required to be reported in comprehensive loss for the periods presented. Recent accounting pronouncements In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP No. 98-1 requires that entities capitalize certain costs related to internal-use software once certain criteria have been met. The Company does not expect the adoption of SOP No. 98-1 to have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-1 for the year ending December 31, 1999. In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of Start-Up Activities." SOP No. 98-5 requires that all start-up costs related to new operations be expensed as incurred. In addition, all start-up costs that were capitalized in the past must be written off when SOP No. 98-5 is adopted. The Company does not expect the adoption of SOP No. 98-5 to have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SOP No. 98-5 for the year ending December 31, 1999. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative financial instruments and hedging activities. Because the Company currently holds no derivative instruments and does not engage in hedging activities, the Company does not expect the adoption of SFAS No. 133 to have a material impact on its financial position, results of operations or cash flows. The Company will be required to implement SFAS No. 133 for the year ending December 31, 2000. Unaudited interim financial information The accompanying interim financial statements as of March 31, 1999 and for the three months then ended are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position at March 31, 1999 and its results of operations and cash flows for the three months then ended. The financial data and other information disclosed in these notes to the financial statements related to this period is unaudited. The results for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. 2. Balance Sheet Components
December 31, March 31, 1998 1999 --------------- -------------- (unaudited) Property and equipment, net: Computer equipment........................................................... $ 12 $ 428 Software..................................................................... -- 174 Furniture and fixtures....................................................... -- 29 Leasehold improvements....................................................... -- 22 ----- ----- Less: Accumulated depreciation and amortization............................... -- (26) ----- ----- $ 12 $ 627 ===== =====
3. Income Taxes No provision for federal and state income taxes has been recorded as the Company has incurred net operating losses from inception (September 1, 1998) to December 31, 1998. As of December 31, 1998, the Company had net operating loss carryforwards of approximately $50 for federal income tax purposes which can be used to reduce future taxable income. These net operating loss carryforwards begin to expire in 2014. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period. As a result of this limitation, the net operating loss carryforwards may expire prior to their utilization. 4. Commitments Leases The Company leases office space and equipment under noncancelable operating leases with various expiration dates through February 2003. Rent expense for the year ended December 31, 1998 and the period ended March 31, 1999 totaled $2,000 and $10,000 (unaudited), respectively. The terms of the facility lease provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period, and has accrued for rent expense incurred but not paid. Future minimum lease payments under noncancelable operating leases, including lease commitments entered into subsequent to December 31, 1998, are as follows:
Year Ending December 31, 1999 .......................................................... $ 96 2000 .......................................................... 133 2001 .......................................................... 25 2002 .......................................................... 3 2003 .......................................................... 1 ---- Total minimum lease payments................................... $258 ====
5. Shareholders' Equity Convertible Preferred Stock The Company's Articles of Incorporation, as amended, authorize the issuance of 3,723,793 shares of Convertible Preferred Stock, of which 320,000 shares, 2,853,793 shares, and 550,000 shares are designated as Series A, Series B and Series C, respectively. The holders of Convertible Preferred Stock have various rights and preferences as follows: Voting Each share of Series A and B Convertible Preferred Stock has voting rights equal to an equivalent number of shares of Common Stock into which it is convertible and votes together as one class with the Common Stock. As long as at least fifty percent of the Convertible Preferred Stock remain outstanding, the Company must obtain approval from a majority of the holders of Convertible Preferred Stock in order to amend the Articles of Incorporation as related to Convertible Preferred Stock, change the authorized number of shares of Convertible Preferred Stock, repurchase any shares of Common Stock other than shares subject to the right of repurchase by the Company, change the authorized number of Directors, authorize a dividend for any class or series other than Convertible Preferred Stock, create a new class of stock or effect a merger, consolidation or sale of assets where the existing shareholders retain less than 50% of the voting stock of the surviving entity. Dividends Holders of Series A and B Convertible Preferred Stock are entitled to receive noncumulative dividends at the per annum rate of $0.04 and $0.10 per share, respectively, when and if declared by the Board of Directors. The holders of Series A and B Convertible Preferred Stock will also be entitled to participate in dividends on Common Stock, when and if declared by the Board of Directors, based on the number of shares of Common Stock held on an as-if converted basis. No dividends on Convertible Preferred Stock or Common Stock have been declared by the Board of Directors from inception to December 31, 1998 and March 31, 1999 (unaudited), respectively. Liquidation In the event of any liquidation, dissolution or winding up of the Company, including a merger, acquisition, or sale of assets where the beneficial owners of the Company's Common Stock and Convertible Preferred Stock own less than 50% of the resulting voting power of the surviving entity, the holders of Series A and B Convertible Preferred Stock are entitled to receive an amount of $0.50 and $1.28 per share, respectively, plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of Common Stock. The remaining assets, if any, shall be distributed ratably among the holders of Common Stock according to the number of shares of Common Stock such holders then hold. Should the Company's legally available assets be insufficient to satisfy the liquidation preferences, the funds will be distributed ratably among the holders of Series A and B Convertible Preferred Stock in proportion to the full preferential amount each such holder is entitled to receive. At December 31, 1998 the aggregate liquidation preference of Series A Convertible Preferred Stock totaled $110. At March 31, 1999 the aggregate liquidation preference of Series A and Series B Convertible Preferred Stock totaled $156 and $3,616 (unaudited), respectively. Conversion Each share of Series A and Series B Convertible Preferred Stock is convertible, at the option of the holder, according to a conversion ratio subject to adjustment for dilution. Each share of Series A and B Convertible Preferred Stock automatically converts into the number of shares of Common Stock into which such shares are convertible at the then effective conversion ratio upon: (1) the closing of a public offering of Common Stock at a price of at least $3.00 per share with gross proceeds of at least $15,000 (2) a merger sale of substantially all of the assets of the Company, or other transactions which result in a change in control or (3) the consent of the holders of the majority of Convertible Preferred Stock. At December 31, 1998, the Company reserved 3,173,793 shares of Common Stock for the conversion of Series A and B Convertible Preferred Stock. Preferred Stock Warrant (unaudited) On March 18, 1999, as consideration for entering into an agreement to develop a co-branded transaction processing service for individual users on the Internet, the Company granted Excite, Inc. a warrant to purchase 550,000 shares of the Company's Preferred Stock. The warrant has an exercise price of $2.60 per share, was fully vested on the grant date and has a term of one year from the date of the agreement. Using the Black-Scholes option pricing model, the estimated fair value of the warrant totaled $468 which was recorded as unearned stock compensation and is being recognized ratably over the one year term of the agreement as a charge to sales and marketing expense. Amortization of the fair value of the Preferred Stock warrant totaled $117 (unaudited) for the three months ended March 31, 1999. Common Stock The Company's Articles of Incorporation, as amended, authorize the Company to issue 20,000,000 shares of Common Stock. A portion of the shares outstanding are subject to repurchase by the Company over a four-year period from the earlier of the issue date or employee hire date, as applicable. At December 31, 1998 and March 31, 1999 there were 5,344,750 and 4,987,500 (unaudited) shares, respectively, were subject to repurchase rights. 6. Stock Option Plans (unaudited) During 1999, the Company adopted the Employee Stock Option Plan (the "Plan"). The Plan provides for the granting of stock options to employees and consultants of the Company. Options granted under the Plan may be either incentive stock options ("ISO") or nonqualified stock options ("NSO"). ISOs may be granted only to Company employees, including officers and directors who are also employees. NSOs may be granted to Company employees and consultants. The Company has reserved 2,189,091 shares of Common Stock for issuance under the Plan. Options under the Plan may be granted for periods of up to ten years and at prices no less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an ISO and NSO shall not be less than 100% and 85% of the estimated fair value of the shares on the date of grant, respectively, and (ii) the exercise price of an ISO and NSO granted to a 10% shareholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. Options are exercisable based on a vesting schedule which provides a 25% vest one year after the date of grant and the remaining options thereafter in monthly installments over the remaining 36 months. To date, options granted generally vest over four years. Activity under the Plan is as follows:
Options Outstanding ----------------------------------- Weighted Average Shares Exercise available for price per grant Shares share ----------------- --------------- --------------- Shares reserved at Plan inception................................... 2,189,091 -- $ -- Options granted .................................................. (537,096) 537,096 0.13 Options exercised ................................................ -- -- -- Options canceled ................................................. -- -- -- --------- ------------ Balance at March 31, 1999........................................... 1,651,995 537,096 0.13 ========= ============ Options exercisable at March 31, 1999............................... -- ============
Options outstanding and exercisable at March 31, 1999 (unaudited) are as follows:
Options Outstanding at Options Exercisable at March 31, 1999 March 31, 1999 ------------------------------------------------------------------- ---------------------------- Weighted Weighted Average Average Weighted Range of Number of Remaining Exercise Number of Average Exercise Price Shares Contractual Life Price Shares Exercise Price -------------- ----------- ---------------- -------- ----------- -------------- $ 0.13 537,096 9.71 years $0.13 -- $0.13
Fair value disclosures (unaudited) Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for the awards under a method prescribed by SFAS No. 123, the Company's net loss would have been increased to the pro forma amounts indicated below:
Three Months Ended March 31, 1999 --------------------- (unaudited) Net Loss: As reported....................................................................... $746 ==== Pro forma......................................................................... $750 ====
The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes pricing method with the following assumptions: volatility 0%; dividend yield at 0%; weighted average expected option term of four years; risk free interest rate of 6% for the three months ended March 31, 1999. The weighted average fair value of options granted during March 1999 was $0.06. Unearned stock compensation (unaudited) In connection with certain stock option grants during the three months ended March 31, 1999, the Company recorded unearned stock compensation totaling $1,081,000, which is being amortized over the four year vesting period of the related option. Amortization of unearned stock compensation totaled $36,000 for the three months ended March 31, 1999. 7. Employee Benefit Plans The Company sponsors a 401(k) defined contribution plan covering all employees. Contributions made by the Company are determined annually by the Board of Directors. No employer contributions were made during the period from inception to December 31, 1998 or during the three months ended March 31, 1999 (unaudited), respectively. 8. Subsequent Events (unaudited) Stock compensation In April 1999, in connection with certain stock option grants, the Company recorded unearned stock compensation totaling $4,740, which will be amortized over the four year vesting period of the related options. Acquisition On May 25, 1999, eBay Inc. acquired all of the Company's outstanding capital stock at which time the Company became a wholly-owned subsidiary of eBay Inc. EX-99.3 5 BUTTERFIELD & BUTTERFIELD AUDITED FINANCIAL STATEMENTS EXHIBIT 99.3 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors, Stockholders and Members of the Butterfield & Butterfield Group of Companies In our opinion, the accompanying combined balance sheet and the related combined statements of income, of group equity and of cash flows present fairly, in all material respects, the combined financial position of the Butterfield & Butterfield Group of Companies at December 31, 1997 and 1998, and the results of their combined operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP San Jose, California July 23, 1999 -1- BUTTERFIELD & BUTTERFIELD GROUP OF COMPANIES COMBINED BALANCE SHEET (in thousands, except share amounts)
December 31, --------------------- March 31, 1997 1998 1999 --------- --------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents........................................................... $ 7,748 $ 4,952 $ 862 Accounts receivable and advances, net............................................... 6,401 6,036 6,011 Inventories......................................................................... 1,851 1,139 327 Other current assets................................................................ 1,064 1,114 883 ------- ------- ------- Total current assets............................................................... 17,064 13,241 8,083 Property and equipment, net.......................................................... 29,436 31,966 32,297 Asset held for sale.................................................................. 1,360 1,160 1,060 Intangible assets, net............................................................... 630 2,345 2,330 Note receivable...................................................................... 2,806 1,946 1,919 Investment in partnerships........................................................... -- 926 928 Other assets......................................................................... 137 42 42 ------- ------- ------- $51,433 $51,626 $46,659 ======= ======= ======= LIABILITIES AND GROUP EQUITY Current liabilities: Accounts payable.................................................................... $ 493 $ 1,380 $ 1,532 Accrued expenses.................................................................... 586 131 144 Accrued compensation and benefits................................................... 1,497 1,221 875 Notes payable, current.............................................................. 6,282 3,790 3,396 Payable to consignors............................................................... 11,571 6,390 4,315 ------- ------- ------- Total current liabilities.......................................................... 20,429 12,912 10,262 Accrued investment loss.............................................................. 3,099 -- -- Minority interests in deficit of combined companies.................................. (944) (180) (102) Accrued environmental and seismic costs.............................................. 5,700 5,900 5,900 Notes payable, long-term............................................................. 15,668 18,111 17,888 ------- ------- ------- 43,952 36,743 33,948 ------- ------- ------- Commitments and contingencies (Notes 7) Group equity: Common stock -- par value $.001, 15,000,000 shares authorized, 4,752,364 shares issued and outstanding............................................ 4 4 4 Members' equity..................................................................... 10,297 15,620 15,620 Additional paid-in capital.......................................................... 1,064 1,364 1,364 Accumulated deficit................................................................. (3,884) (2,105) (4,277) ------- ------- ------- Total group equity................................................................. 7,481 14,883 12,711 ------- ------- ------- $51,433 $51,626 $46,659 ======= ======= =======
The accompanying notes are an integral part of these combined financial statements. -2- BUTTERFIELD & BUTTERFIELD GROUP OF COMPANIES COMBINED STATEMENT OF OPERATIONS (in thousands)
Year Ended Three Months Ended December 31, March 31, --------------------------------- ---------------------- 1996 1997 1998 1998 1999 --------- --------- --------- ----------- -------- (unaudited) Net revenues: Auction fees and services............................... $20,027 $23,806 $24,026 $4,397 $5,183 Real estate rentals..................................... 3,892 4,300 4,486 1,155 1,057 ------- ------- ------- ------ ------ Net revenues........................................... 23,919 28,106 28,512 5,552 6,240 ------- ------- ------- ------ ------ Cost of net revenues: Auction fees and services............................... 3,832 4,325 5,002 799 1,769 Real estate rentals..................................... 1,622 1,773 2,146 681 478 ------- ------- ------- ------ ------ Cost of net revenues................................... 5,454 6,098 7,148 1,480 2,247 ------- ------- ------- ------ ------ Gross profit........................................... 18,465 22,008 21,364 4,072 3,993 ------- ------- ------- ------ ------ Operating expenses: Sales and marketing..................................... 10,016 10,817 12,523 2,403 3,161 General and administrative.............................. 2,683 2,760 2,222 463 1,303 ------- ------- ------- ------ ------ Total operating expenses............................... 12,699 13,577 14,745 2,866 4,464 ------- ------- ------- ------ ------ Income (loss) from operations............................ 5,766 8,431 6,619 1,206 (471) ------- ------- ------- ------ ------ Other income (expense): Interest and other income, net.......................... 358 975 861 362 154 Interest expense........................................ (2,161) (2,308) (2,114) (462) (512) ------- ------- ------- ------ ------ Income (loss) from combined companies before taxes and minority interests..................... 3,963 7,098 5,366 1,106 (829) ------- ------- ------- ------ ------ Provision for income taxes............................... (42) (40) (48) -- (1) Minority interest in combined company.................... (576) (314) 70 173 59 ------- ------- ------- ------ ------ Income (loss) from combined companies.................... 3,345 6,744 5,388 1,279 (771) Equity interest in partnership loss...................... (86) (320) (381) (95) (78) ------- ------- ------- ------ ------ Net income (loss)........................................ $ 3,259 $ 6,424 $ 5,007 $1,184 $ (849) ======= ======= ======= ====== ======
The accompanying notes are an integral part of these combined financial statements. -3- BUTTERFIELD & BUTTERFIELD GROUP OF COMPANIES COMBINED STATEMENT OF GROUP EQUITY (in thousands)
Additional Total Members' Paid-in Accumulated Group Shares Amount Equity Capital Deficit Equity --------- ------ -------- ---------- ------------- --------- Balance, December 31, 1996........................... 4,752 $4 $ 9,809 $ 914 $(5,752) $ 4,975 Capital contributions from stockholders/members..... - - 488 150 - 638 Distributions to stockholders/members............... - - - - (4,556) (4,556) Net income.......................................... - - - - 6,424 6,424 --------- -- ------- ------ ------- ------- Balance, December 31, 1997........................... 4,752 4 10,297 1,064 (3,884) 7,481 Capital contributions from stockholders/members..... - - 5,323 300 - 5,623 Distributions to stockholders/members............... - - - - (3,228) (3,228) Net income.......................................... - - - - 5,007 5,007 --------- -- ------- ------ ------- ------- Balance, December 31, 1998........................... 4,752 4 15,620 1,364 (2,105) 14,883 Distributions to stockholders/members (unaudited)... - - - - (1,323) (1,323) Net loss (unaudited)................................ - - - - (849) (849) --------- -- ------- ------ ------- ------- Balance, March 31, 1999 (unaudited).................. 4,752 $4 $15,620 $1,364 $(4,277) $12,711 ========= == ======= ====== ======= =======
The accompanying notes are an integral part of these combined financial statements. -4- BUTTERFIELD & BUTTERFIELD GROUP OF COMPANIES COMBINED STATEMENT OF CASH FLOWS (in thousands)
Three Months Ended Year Ended December 31, March 31, ---------------------------- ---------------------- 1996 1997 1998 1998 1999 ------- ------- -------- ---------- -------- (unaudited) Cash flows from operating activities: Net income (loss) $3,259 $6,424 $ 5,007 $1,184 $ (849) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 1,188 1,269 1,486 416 372 Allowance for doubtful accounts........................ -- 30 54 -- 91 (Gain)/Loss sale of property and equipment............. 190 -- (333) (200) -- Loss on impairment of asset held for sale.............. -- -- 200 -- 100 Minority interest in deficit of combined companies..... 86 24 764 708 78 Net change in equity interest in partnerships ......... 576 (146) (4,025) 36 (2) Changes in assets and liabilities: Accounts receivable and advances...................... 3,904 (167) 311 (367) (66) Inventories........................................... 46 (1,414) 712 (254) 812 Other assets.......................................... 111 981 45 758 231 Accounts payable...................................... (375) 151 887 (89) 152 Accrued expenses...................................... (304) (168) (455) (870) 13 Accrued compensation and benefits..................... 113 707 (276) (4) (346) Payable to consignors................................. 1,038 2,555 (5,181) (8,015) (2,075) Accrued environmental and seismic costs............... 750 -- 200 -- -- ------ ------ ------- ------ ------- Net cash provided by (used in) operating activities.... 10,582 10,246 (604) (6,697) (1,489) ------ ------ ------- ------ ------- Cash flows from investing activities: Purchase of property and equipment...................... (1,228) (2,168) (3,338) (197) (688) Purchase of intangible assets........................... (36) (141) (1,248) (34) -- Proceeds from sale of property and equipment............ 1,051 -- 1,274 390 -- Related party advances/repayments....................... (1,369) -- -- -- -- Payments on notes receivable............................ 32 145 109 27 27 ------ ------ ------- ------ ------- Net cash provided by (used in) investing activities.... (1,550) (2,164) (3,203) 186 (661) ------ ------ ------- ------ ------- Cash flows from financing activities: Net borrowings (repayments) on line of credit........... (2,375) 1,990 1,001 (400) (394) Net borrowings (repayments) on notes payable............ (3,876) (960) (2,385) (2,048) (223) Contributions from stockholders......................... 467 638 5,623 1,292 -- Distributions to stockholders........................... (2,107) (4,556) (3,228) (1,160) (1,323) ------ ------ ------- ------ ------- Net cash used in financing activities.................. (7,891) (2,888) (1,011) (2,316) (1,940) ------ ------ ------- ------ ------- Net increase (decrease) in cash and cash equivalents..... 1,141 5,194 (2,796) (8,827) (4,090) Cash and cash equivalents, beginning of period........... 1,413 2,554 7,748 7,748 4,952 ------ ------ ------- ------ ------- Cash and cash equivalents, end of period................. $2,554 $7,748 $ 4,952 (1,079) $ 862 ====== ====== ======= ====== ======= Supplemental disclosures: Cash paid for interest.................................. $2,077 $1,830 $ 1,633 462 $ 513 Cash paid for income taxes.............................. $ 2 $ 70 $ 45 -- 1 Non-cash investing and financing activities: Building and inventory obtained in connection with foreclosure............................................ $ -- $1,510 $ 751 $ -- $ -- Notes and accounts payable assumed in connection with foreclosure............................................ $ -- $ 695 $ -- $ -- $ -- Receivables canceled in connection with foreclosure..... -- 815 500 -- -- Land and building transferred in exchange for assumption of debt...................................... -- -- 835 -- --
The accompanying notes are an integral part of these combined financial statements. -5- BUTTERFIELD & BUTTERFIELD GROUP OF COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands except share amounts) Note 1--The Group and Summary of Significant Accounting Policies: Butterfield & Butterfield The Group Companies and Basis of Presentation The accompanying combined financial statements include the accounts of Butterfield & Butterfield Auctioneers Corp. and all affiliated entities under common control including; Butterfield Credit Corporation Inc., 111 Potrero, LLC and HBJ Partners, LLC. (collectively the "Group" or "Group Companies"). All intercompany accounts and transactions have been eliminated in the preparation of these combined statements. Butterfield & Butterfield Auctioneers Corp. ("B&B") - B&B was established in 1865, incorporated in California in July 1970 and reincorporated in the state of Delaware in March 1999. B&B conducts auctions and performs appraisal services of fine art, jewelry, antiques and wine primarily in San Francisco, Los Angeles and Chicago. Butterfield Credit Corporation Inc. ("BCCI") - BCCI is a wholly-owned subsidiary of B&B and is incorporated in California. BCCI operates as a financing corporation whose sole purpose is serving B&B's clients. 111 Potrero Partners, LLC - ("111 Potrero") - 111 Potrero is a limited liability corporation organized in May 1996. 111 Potrero owns several commercial properties located in San Francisco and Los Angeles, which are currently occupied by B&B and third parties. HBJ Partners, LLC - ("HBJ") - HBJ is a limited liability corporation organized in California in September 1996. HBJ owns several commercial properties located in San Francisco, which are currently occupied by B&B and third parties. HBJ also has general partnership interests in 111 Santa Fe Avenue Partners, 2959 Victoria Street Partners and 6700 Cherry Avenue Partners. Ownership interests in the above partnerships were 58%, 60% and 38%, respectively. Investment in general partnerships Interests in general partnerships in which the Group owns more than 50 percent ownership and exerts control are reported under the consolidation method of accounting; the combined accounts include 100 percent of the assets and liabilities of these general partnerships and the ownership interests of minority investors are recorded as "Minority interest in combined companies". Investments in general partnerships in which the Group owns more than 20 percent are accounted for by the equity method of accounting and are recorded as "Investment in partnerships". Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and cash equivalents The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of acquisition to be cash equivalents. Cash equivalents consist primarily of deposits in money market funds. Concentration of credit risk Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and accounts receivable. Cash and cash equivalents are deposited with financial institutions that management believes are of high credit quality. The Company's accounts receivable are derived from revenue earned from customers located in the U.S. and are denominated in U.S. dollars. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. During the years ended December 31, 1996, 1997 and 1998, and the periods ended March 31, 1998 (unaudited) and 1999 (unaudited) respectively, one customer accounted for 13.3%, 11.4%, 11.5%, 14.8% (unaudited) and 13.2% (unaudited), respectively of net revenues. No other customer accounted for more than 10% of net revenues or net accounts receivable. Fair value of financial instruments The Company's financial instruments, including cash, cash equivalents, accounts receivable, accounts payable and debt are carried at cost, which approximates their fair value because of the short-term maturity of these instruments. Inventory Inventory generally consists of objects obtained as a result of the auction process or of goods purchased specifically for resale. Inventory is valued at the lower of cost, specifically identified, or estimated net realizable value. Property and equipment Property and equipment are stated at historical cost. Depreciation and amortization are computed using the straight-line method and accelerated methods over the estimated useful lives of the related assets, ranging from three years for computer equipment to 31.5 years for buildings. Intangible assets Goodwill and other intangible assets resulting from the acquisition of Dunnings Auction Services, Inc. in June 1998 were estimated by management to be primarily associated with a covenant not to compete and goodwill and are being amortized over their estimated useful lives of five and 15 years, respectively. -6- Impairment of long-lived assets The Company evaluates the recoverability of long-lived assets in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the fair value as estimated by management based on appraisals, current market value, comparable sales values and the estimated undiscounted future cash flows attributable to such assets. Environmental expenditures Environmental expenditures that relate to current operations are charged to expense or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and that do not contribute to current or future revenue generation, are charged to expense. Liabilities are recorded when environmental assessments are made and remediation obligations are probable and the costs can be reasonably estimated. The timing of these accruals is generally no later than the completion of feasibility studies. HBJ and 111 Potrero own or control numerous real estate properties that are either used in the auction business or leased to unrelated parties for various commercial applications. Certain environmental and structural deficiencies have been identified in the past for which the Company has remediation responsibility. The amount accrued to correct these matters are based upon estimates developed in preliminary studies by external consultants. Due to uncertainties inherent in the estimation process, it is at least reasonably possible that as additional information is obtained, the amounts accrued for these matters may be revised in future periods. Revenue recognition Auction revenues are derived primarily from auction commissions and fees from sale of property through the auction process. Revenue from these sources are recognized at the date the related auction is concluded. Services revenues are derived from financial, appraisal and other related services which are recognized as such services are rendered. Advertising expense The Group Companies incur advertising expenses primarily related to the distribution of catalogues and advertising for specific auction events. Advertising expenses are recognized in accordance with Statement of Position ("SOP") 93-7 "Reporting on Advertising Costs." As such, the Group expenses the costs of producing advertisements at the time production occurs, and expenses the cost of communicating advertising in the period in which the advertising space or airtime is used. Advertising expenses totaled $926, $868, $1,337, $197 (unaudited) and $289 (unaudited) during the years ended December 31, 1996, 1997 and 1998, and the three months ended March 31, 1998 and 1999, respectively. Income taxes For all periods presented in these combined financial statements, B&B and BCCI have elected to be taxed as "S" Corporations and therefore, their respective taxable income or loss have been reported on the shareholders' individual tax returns. As limited liability corporations, 111 Potrero's and HBJ's taxable income or loss have also been reported on the members, individual income tax returns. Accordingly the provison for income taxes is comprised solely of the California state franchise tax applicable to S Corporations. Unaudited interim financial information The accompanying interim combined financial statements as of March 31, 1999 and for the three months ended March 31, 1998 and 1999, are unaudited. The unaudited interim combined financial statements have been prepared on the same basis as the annual combined financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Group Companies' financial position, results of operations and cash flows as of March 31, 1999 and for the three months ended March 31, 1998 and 1999. The financial data and other information disclosed in these notes to the combined financial statements related to -7- these period are unaudited. The results for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the year ending December 31, 1999. Comprehensive income Effective January 1, 1998, the Group Companies adopted the provisions of Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income." SFAS No. 130 establishes the standard for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. To date, the Group Companies have not had any transactions that are required to be reported in comprehensive income. Recent accounting pronouncements In April 1998, the AICPA issued SOP 98-5 "Reporting on the Costs of Start-Up Activities." Start-up activities are defined broadly as those one-time activities related to opening a new facility, introducing a new product or service, commencing some new operation or organizing a new entity. Under SOP 98-5, the cost of start-up activities should be expensed as incurred. SOP 98-5 is effective January 1, 1999 and the Group Companies do not expect its adoption to have a material effect on their combined results of operations, financial position or cash flows. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 "Accounting for Derivatives and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Group Companies will adopt SFAS No. 133 in July 2000 and have not assessed the impact of adoption on their combined results of operations, financial position or cash flows. 2. Balance Sheet Components
December 31, --------------- March 31, 1997 1998 1999 ---------- ---------- -------------- (unaudited) Accounts receivable and advances, net: Auction receivables........................................... $5,498 $5,203 $4,307 Consignor advances............................................ 1,358 1,342 2,304 Less: Allowance for doubtful accounts -- auction receivables.. (268) (314) (474) Less: Allowance for doubtful accounts -- consignor advances... (187) (195) (126) ------ ------ ------ $6,401 $6,036 $6,011 ====== ====== ====== Property and equipment, net: Land and buildings............................................ $34,043 $ 37,359 $ 37,945 Computer equipment............................................ 1,658 1,821 1,885 Furniture, fixtures and equipment............................. 421 543 590 Leasehold improvements........................................ 2,154 2,199 2,234 Automobiles................................................... 244 367 383 Construction in progress...................................... -- 189 -- ------- -------- -------- 38,520 42,478 43,037 Less: accumulated depreciation................................ (9,084) (10,512) (10,740) ------- -------- -------- $29,436 $ 31,966 $ 32,297 ======= ======== ========
-8- 3. Borrowings
Decmeber 31, March 31, 1997 1998 1999 ----------- ---------- -------------- (unaudited) Revolving line of credit, prime rate ................ $ 1,990 $ 2,991 $ 2,597 Mortgage notes, prime plus 1%, due September 31, 2002 ............................ 2,013 1,905 1,878 Mortgage notes, LIBOR plus 1.75%, due July 15 2001 .................................. 3,067 3,638 3,600 Mortgage notes, 8.255%, due May 15, 2000 .................................. 12,407 12,249 12,111 10.5% loan on foreclosed property due October 2010 .................................. 663 618 606 8.5% loan in connection with Dunnings acquisition due June 30, 2000 ................................. - 500 500 Related party 10% demand note ....................... 1,710 - - Demand note payable, prime rate ..................... 100 - - ---------------------------------- Subtotal .......................................... 21,950 21,901 21,284 Less current portion ................................ (6,282) (3,790) (3,396) ---------------------------------- $15,668 $18,111 $17,888 ==================================
At December 31, 1997, HBJ maintained a revolving line of credit with a bank that provided for borrowings of up to $2,000 and is personally guaranteed by the members. Effective August 1, 1998, the agreement was amended to increase the amount available to $4,500. The line of credit accrues interest on outstanding borrowings at a rate equal to the bank's prime rate (8.5% and 7.75% at December 31, 1997 and 1998, respectively). B&B and BCCI each maintain a $3,000 bank line of credit which expire on July 31, 1999 and are each guaranteed by the other party. There were no outstanding balances at December 31, 1997, 1998 and at March 31, 1999 (unaudited). The lines of credit require compliance with certain financial covenants and annual profitability. The Companies were in compliance with these covenants at December 31, 1998 and March 31, 1999 (unaudited). Interest is generally charged at the Bank's prime rate (8.0% at December 31, 1998) less .25%. However, the Company has the option to select from variations of the London Interbank Offered Rate (LIBOR) 5.59% at December 31, 1998) plus 2% for all or a portion of the outstanding balance for a predetermined loan term of 30 days to one year. The mortgage notes outstanding are on property owned by the real estate general partnerships and are personally guaranteed by the general partners. The notes have variable interest rates ranging from 7.34% to 8.75% at December 31, 1998 and are secured by certain land, buildings and improvements. The notes are repayable in equal monthly installments over six to ten year terms, with final installments consisting of all remaining unpaid principal and accrued interest at the end of the term. During 1997, B&B foreclosed on secured receivables totaling $815 and assumed a related note payable for $668, plus unpaid property taxes of $27. The property received in the foreclosure consisted of inventory with estimated value of $150 and real property recorded at the remaining value of consideration given of $1,360, which approximates its fair value. The real property has been classified as asset held for sale on the accompanying combined balance sheet, because B&B has not used the property in its business operations and has actively listed the property for sale since the foreclosure date. The related loan bears interest at a fixed rate of 10.5% and is due in monthly principal and interest installments of $9. In connection with the purchase of Dunnings Auction Services, Inc., ("Dunnings") (see Note 9), the Company assumed a note payable to the prior owners in the original amount of $500. The note carries interest at 8.5%, and is due in two approximately equal installments on June 30, 1999 and 2000. In July 1993, an affiliate of HBJ entered into a note payable from a general partner for $1,800. The note was payable on demand and accrued interest at an annual rate of 10%. During the first quarter of 1998, the Company paid off the note in full. Notes payable consist of one demand note payable to an individual totaling $100 at December 31, 1997 with an interest rate of prime and was repaid during 1998. Minimum annual repayments on these notes at December 31, 1998 are as follows: Year ending December 31, 1999............................... $ 4,319 2000............................... 12,210 2001............................... 3,479 2002............................... 1,618 2003............................... 48 Thereafter......................... 227 ------- $21,901 ======= Interest expense for all obligations for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 totaled $2,161, $2,308, $2,114, $462 (unaudited) and $512 (unaudited), respectively. -9- 4. Leasing Arrangements HBJ and underlying general partnerships and 111 Potrero's leasing operations consist principally of the leasing of certain land and buildings. These leases are classified as operating leases that expire at various intervals between 1999 and 2010. Certain of these leases contain renewal options and have escalation clauses tied to changes in CPI. Under the terms of the leases, the tenants are generally responsible for the payment of property taxes, insurance and maintenance costs related to the leased property. B&B leases space from HBJ and 111 Potrero at market rates. These lease arrangements have been eliminated in consolidation. Property on Operating Leases and Property Held for Lease The following schedule provides an analysis of the Company's investment in property use under operating leases and property held for lease by major classes:
December 31, 1997 1998 ------- -------- Land................................. $ 6,956 $ 7,265 Building............................. 7,133 8,581 Improvements......................... 8,535 9,672 Other................................ 37 37 ------- ------- 22,661 25,555 Less: Accumulated depreciation....... (3,751) (4,249) ------- ------- $18,910 $21,306 ======= =======
The following is a schedule by year of minimum future rental income on noncancellable operating leases as of December 31, 1998:
Year ending December 31 1999......................................... $ 3,960 2000......................................... 3,964 2001......................................... 3,967 2001......................................... 3,837 2002......................................... 3,841 Thereafter................................... 21,110 ------- Total minimum future rentals................. $40,679 =======
5. Sale of Real Estate Properties During 1998, the partners of 131 North Gilbert Avenue Partners, including HBJ a 63.3% holder, sold the property to an unrelated party for $2,450 in cash and recognized a gain on the transaction of $200. In August, HBJ also sold the Parthenia property for $865 in cash and recognized a gain of $133. 6. Employee Benefit Plans The Company has a defined savings contribution plan that covers employees after one year of service. Under the Plan, participants may elect to contribute up to 15% of their compensation, up to a maximum amount allowable under IRS regulations on a pre-tax basis. In addition, the Company may contribute to the plan up to 25% of the first 2% of each participant's compensation in an amount determined annually by the Board of Directors. The Company's contributions amounted to $14, $11, $20 and $5 (unaudited) for the years ended December 31, 1996, 1997, 1998 and for the three month ended March 31, 1999, respectively. 7. Commitments and Contingencies Operating leases The Group leases office and warehouse space and equipment under noncancelable operating leases with varying expiration dates through the year 2005. Rent expense for the years ended December 31, 1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999, totaled $5, $5, $58, $1 (unaudited) and $27 (unaudited), respectively. Future minimum annual lease payments for noncancelable operating leases are not material. -10- Employment Agreement In connection with the Dunnings purchase (see Note 9), the Group Companies entered into employment agreement with a former owner of Dunnings. Under the agreement, the Group Companies shall continue base salary payments of $175 annually through the November 2001 expiration date in the event of the employee's death or termination with or without cause. Payments shall cease upon resignation or termination with cause. 8. Acquisition Effective June 30, 1998, the Group Companies acquired all net assets of Dunning Auction Services, Inc., an auction house located in Elgin, Illinois. The acquistion has been accounted for using the purchase method of accounting and accordingly, the purchase price has been allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective fair values on the date of acquisition. The total purchase price of $750 consisted of $250 in cash and the assumption of $500 in debt. Of the total purchase price, $100 was allocated to an agreement not to compete and the excess was allocated to goodwill. The results of operations are included in the combined financial statements commencing on July 1, 1998. The pro forma results of operations to present what the results would have been had the acquisitions actually taken place at the beginning of the respective periods presented did not result in a material difference from the reported results of operations. 9. Operating Segment Reporting Effective January 1, 1998, the Group Companies adopted the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes the standards for reporting information about operating segments in annual financial statements and requires that certain selected information about operating segments be reported in interim financial reports. It also establishes standards for related disclosures about products and services, and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief decision-maker in order to allocate resources and in assessing performance. The Group Companies have identified two primary operating segments: auction services and real estate. The auction services segment consists of the operations of B&B and BCCI. The real estate segment consists of the HBJ, 111 Potrero and the various general partnership interests. All segments conducted their operations solely in the United States. Segment selection was based upon the internal organization structure, the manner in which these operations are managed and their performance evaluated by management, the availability of separate financial information, and overall materiality considerations. The operating information for the two segments identified are as follows:
Auction Services Real Estate Total --------------- ---------------- ---------- March 31, 1999 (unaudited) Net revenues: Net revenues from external customers.......... $ 5,183 $ 1,057 $ 6,240 Intersegment net revenues..................... 168 447 615 --------------- ---------------- ---------- Total segment net revenues.................. 5,351 1,504 6,855 Income: Income before taxes........................... (1,506) 736 (770) Provision for income taxes.................... (1) - (1) Minority interest............................. - (78) (78) --------------- ---------------- ---------- Net income.................................... (1,507) 658 (849) Other disclosuress: Depreciation and amortization................. (167) (205) (372) Interest income............................... 111 43 154 Interest expense.............................. (98) (414) (512) Capital expenditures.......................... (517) (2) (519) Unconsolidated affiliates: Equity in income/loss....................... - 59 59 Investment in............................... - 928 928 Total assets at year-end...................... 14,845 31,814 46,659 Auction Services Real Estate Total --------------- ---------------- ---------- Year ended December 31, 1998 Net revenues: Net revenues from external customers.......... $ 24,026 $ 4,486 $ 28,512 Intersegment net revenues..................... 1,237 1,422 2,659 --------------- ---------------- ---------- Total segment net revenues.................. 25,263 5,908 31,171 Income: Income before taxes........................... 2,578 2,858 5,436 Minority interest............................. - (381) (381) Provision for income taxes.................... (48) - (48) --------------- ---------------- ---------- Net income.................................... 2,530 2,477 5,007 Other disclosures: Depreciation and amortization................. 619 867 1,486 Interest income............................... 374 410 784 Interest expense.............................. 481 1,633 2,114 Capital expenditures.......................... 638 4,166 4,804 Unconsolidated affiliates: Equity in income/loss....................... - (70) (70) Investment in............................... - 928 928 Total assets at year-end...................... 17,483 34,143 51,626 Auction Services Real Estate Total --------------- ---------------- ---------- Year ended December 31, 1997 Net revenues: Net revenues from external customers.......... $ 23,806 $ 4,300 $ 28,106 Intersegment net revenues..................... 628 1,684 2,312 --------------- ---------------- ---------- Total segment net revenues.................. 24,434 5,984 30,418 Income: Income before taxes........................... 4,223 2,561 6,784 Minority interest............................. - (320) (320) Provision for income taxes.................... (40) - (40) --------------- ---------------- ---------- Net income.................................... 4,183 2,241 6,424 Other disclosures: Depreciation and amortization................. 491 778 1,269 Interest income............................... 792 183 975 Interest expense.............................. 606 1,702 2,308 Capital expenditures.......................... 478 2,516 2,994 Unconsolidated affiliates: Equity in income/loss....................... - (314) (314) Investment in............................... - (3,099) (3,099) Total assets at year-end...................... 20,223 31,210 51,433 Auction Services Real Estate Total --------------- ---------------- ---------- Year ended December 31, 1996 Net revenues: Net revenues from external customers.......... $ 20,027 $ 3,892 $ 23,919 Intersegment net revenues..................... 664 1,596 2,260 --------------- ---------------- ---------- Total segment net revenues.................. 20,691 5,488 26,179 Income: Income before taxes........................... 2,632 755 3,387 Minority interest............................. - (86) (86) Provision for income taxes.................... (42) - (42) --------------- ---------------- ---------- Net income.................................... 2,590 669 3,259 Other disclosures: Depreciation and amortization................. 536 652 1,188 Loss on sale of asset......................... - 340 340 Interest income............................... 698 - 698 Interest expense.............................. 485 1,676 2,161 Capital expenditures.......................... 520 708 1,228 Unconsolidated affiliates: Equity in income/loss....................... - (576) (576) Investment in............................... - (3,245) (3,245) Total assets at year-end...................... 14,965 29,114 44,079
10. Subsequent Events Initial Public Offering Withdrawn In April 1999, B&B withdrew its registration statement for its initial public offering. Accordingly, in the second quarter of 1999, the Company will record a charge of approximately $2.6 million related to the costs of the withdrawn offering. Of these costs, approximately $202 (unaudited) was included in prepaid assets at March 31, 1999. Acquisition by eBay Inc. On May 28, 1999, eBay Inc. acquired all of the outstanding equity interests of the Group Companies at which time they each became wholly-owned subsidiaries of eBay Inc. -11- -----END PRIVACY-ENHANCED MESSAGE-----