Automatic Shelf Registration Statement for Securities of a Well-Known Seasoned Issuer — Form S-3 Filing Table of Contents
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S-3ASR — Automatic Shelf Registration Statement for Securities of a Well-Known Seasoned Issuer Document Table of Contents
Approximate date of commencement of proposed sale to the
public: From time to time after the effective date of this
registration statement.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans,
please check the following box. o
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, other than
securities offered only in connection with dividend or interest
reinvestment plans, check the following
box. þ
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that
shall become effective upon filing with the Commission pursuant
to Rule 462(e) under the Securities Act, check the
following box. þ
If this form is a post-effective amendment to registration
statement filed pursuant to General Instruction I.D. filed
to register additional securities or additional classes of
securities pursuant to Rule 413(b) under the Securities
Act, check the following box. o
CALCULATION
OF REGISTRATION FEE
Proposed Maximum
Proposed Maximum
Title of Each Class of
Amount to be
Offering Price Per
Aggregate Offering
Amount of
Securities To Be
Registered
Registered(1)
Share(2)
Price(2)
Registration Fee
Common Stock, $0.001 par value per
share
20,221,827
$45.12
$912,408,834.24
$97,627.75
(1)
Pursuant to Rule 416 under the Securities Act, the shares
being registered hereunder include such indeterminate number of
shares of common stock as may be issuable with respect to the
shares being registered hereunder as a result of stock splits,
stock dividends or similar transactions.
(2)
Estimated solely for the purpose of calculating the registration
fee in accordance with Rule 457 under the Securities Act.
The price per share and aggregate offering price are based on
the average of the high and low prices of the registrant’s
common stock on November 29, 2005, as reported on the
Nasdaq National Market.
This prospectus relates to the resale of up to
20,221,827 shares of our common stock by the selling
stockholders listed in the section entitled “Selling
Stockholders” beginning on page 29 of this prospectus.
The shares of common stock offered under this prospectus by the
selling stockholders were issued pursuant to a Sale and Purchase
Agreement, dated as of September 11, 2005, by and among
eBay, Skype Technologies S.A., or Skype, and the shareholders of
Skype. We are not selling any securities under this prospectus
and will not receive any of the proceeds from the sale of shares
by the selling stockholders.
The selling stockholders may sell the shares of common stock
described in this prospectus in a number of different ways and
at varying prices. We provide more information about how the
selling stockholders may sell their shares of common stock in
the section entitled “Plan of Distribution” on
page 33. We will not be paying any underwriting discounts
or commissions in this offering.
Our common stock is traded on the Nasdaq National Market under
the symbol “EBAY.” On November 29, 2005, the last
reported sale price of our common stock was $44.50 per share.
Investing in our common stock involves risk. See
“Risk Factors” beginning on page 2 of this
prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
You should rely only on the information contained or
incorporated by reference in this prospectus. We have not, and
the selling stockholders have not, authorized anyone to provide
you with information different from that contained in this
prospectus. The selling stockholders are offering to sell, and
seeking offers to buy, shares of our common stock only in
jurisdictions where it is lawful to do so. The information in
this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this
prospectus or any sale of our common stock.
This prospectus and other documents that are and will be
incorporated into this prospectus contain statements that
involve expectations, plans or intentions (such as those
relating to future business or financial results, new features
or services, or management strategies). These statements are
forward-looking and are subject to risks and uncertainties, so
actual results may vary materially. You can identify these
forward-looking statements by words such as “may,”“should,”“expect,”“anticipate,”“believe,”“estimate,”“intend,”“plan” and other similar expressions. You should
consider our forward-looking statements in light of the risks
discussed under the heading “Risk Factors” below and
in documents incorporated herein by reference, including our
consolidated financial statements, related notes, and other
financial information appearing in our other filings and
documents incorporated herein by reference. Given the risk and
uncertainty we caution you not to place undue reliance on such
forward-looking statements. The forward-looking statements
contained in this prospectus speak only as of the date hereof
and we assume no obligation to update such statements.
This summary highlights information contained elsewhere or
incorporated by reference into this prospectus. Because it is a
summary, it does not contain all of the information that you
should consider before investing in our securities. You should
read this entire prospectus carefully, including the section
entitled “Risk Factors” and the documents that we
incorporate by reference into this prospectus, before making an
investment decision.
eBAY
INC.
We pioneered online trading by developing an Internet-based
marketplace in which a community of buyers and sellers are
brought together in an entertaining, intuitive,
easy-to-use
environment to browse, buy and sell an enormous variety of
items. Through our PayPal service, we enable any business or
consumer with email to send and receive online payments
securely, conveniently and cost-effectively.
On October 14, 2005, we completed our acquisition of the
outstanding securities of Skype Technologies S.A., or Skype, a
limited company (société anonyme) registered under the
laws of the Grand Duchy of Luxembourg, pursuant to the terms of
the Sale and Purchase Agreement dated September 11, 2005.
In addition, we also entered into a Registration Rights
Agreement with the selling stockholders that requires us to file
a registration statement covering the resale of the shares of
our common stock issued to the selling stockholders stock within
75 days following the closing of the acquisition. Each of
the shares that may be offered under this prospectus were issued
by us to the selling stockholders named herein in connection
with our acquisition of Skype. These shares are being offered on
a continuous basis under Rule 415 of the Securities Act of
1933.
Common stock that may be offered
by selling stockholders
20,221,827 shares
Common stock to be outstanding
after this offering
1,418,592,053 shares*
Use of proceeds
We will not receive any proceeds.
*
The number of shares to be outstanding after this offering is
based on the number of shares outstanding as of
November 10, 2005. This number includes the shares issued
in exchange for the outstanding capital stock of Skype that are
being registered hereunder.
eBay Inc. was formed as a sole proprietorship in September 1995
and was incorporated in California in May 1996. In April 1998,
we reincorporated in Delaware and in September 1998 we completed
the initial public offering of our common stock. Our principal
executive offices are located at 2145 Hamilton Avenue, San
Jose, California, 95125, and our telephone number is
(408) 376-7400.
When we refer to “we,”“our” or
“eBay” in this prospectus, we mean the current
Delaware corporation (eBay Inc.) and its California predecessor,
as well as all of our consolidated subsidiaries. When we refer
to “eBay.com,” we mean the online marketplace located
at www.ebay.com. When we refer to “PayPal.com,” we
mean our global payments platform located at www.paypal.com.
The risks and uncertainties described below are not the only
ones facing us. Other events that we do not currently anticipate
or that we currently deem immaterial also may affect our results
of operations and financial condition.
Our
operating results may fluctuate.
Our operating results have varied on a quarterly basis during
our operating history. Our operating results may fluctuate
significantly as a result of a variety of factors, many of which
are outside our control. Factors that may affect our operating
results include the following:
•
our ability to retain an active user base, to attract new users,
and to encourage existing users to list items for sale, purchase
items through our websites, or use our payment or communication
services;
•
the volume, size, timing, and completion rate of transactions on
our websites;
•
the amount and timing of operating costs and capital
expenditures relating to the maintenance and expansion of our
businesses, operations, and infrastructure;
•
technical difficulties or service interruptions involving our
websites or services provided to our users by third parties;
•
regulatory actions imposing obligations on our businesses
(including Skype) or our users;
•
the actions of our competitors, including the introduction of
new sites, services, and products;
•
consumer confidence in the safety and security of transactions
on our websites;
•
the cost and availability of online and traditional advertising,
and the success of our brand building and marketing campaigns;
•
new laws or regulations, or interpretations of existing laws or
regulations, that harm the Internet, electronic commerce, or our
business models;
•
our ability to comply with the requirements of entities whose
services are required for our operations, such as credit card
associations;
•
our ability to upgrade and develop our systems, infrastructure,
and customer service capabilities to accommodate growth at a
reasonable cost;
•
the costs and results of litigation that involves us;
•
our ability to integrate, manage, and profitably expand the
newly-acquired Skype business;
•
our ability to expand PayPal’s product offerings outside of
the U.S. (including our ability to obtain any necessary
regulatory approvals) and to increase the acceptance of PayPal
by online merchants outside of the eBay marketplace;
•
our ability to keep our websites operational at a reasonable
cost;
•
our ability to develop product enhancements at a reasonable cost
and to develop programs and features in a timely manner,
including expanding our fixed-price offerings;
•
our ability to successfully integrate and manage recent and
prospective acquisitions, including the recently closed
acquisitions of Shopping.com, Skype and VeriSign, Inc.’s
payment gateway business;
•
our ability to manage PayPal’s transaction loss and credit
card chargeback rates and payment funding mix;
•
the success of our geographic and product expansions;
•
our ability to attract new personnel in a timely and effective
manner and to retain key employees;
the continued financial strength of our technology suppliers and
other parties with whom we have commercial relations;
•
continued consumer acceptance of the Internet and other online
services for commerce in the face of increasing publicity about
fraud, spoofing, viruses, and other dangers of the Internet;
•
general economic conditions and those economic conditions
specific to the Internet and
e-commerce industries;
and
•
geopolitical events such as war, threat of war, or terrorist
actions.
Our limited operating history and the increased variety of
services offered on our websites make it difficult for us to
forecast the level or source of our revenues or earnings
accurately. In view of the rapidly evolving nature of our
business and our limited operating history, we believe that
period-to-period
comparisons of our operating results may not be meaningful, and
you should not rely upon them as an indication of future
performance. We do not have backlog, and substantially all of
our net revenues each quarter come from transactions involving
sales or payments during that quarter. Due to the inherent
difficulty in forecasting revenues it is also difficult to
forecast income statement expenses as a percentage of net
revenues. Quarterly and annual income statement expenses as a
percentage of net revenues may be significantly different from
historical or projected rates. Our operating results in one or
more future quarters may fall below the expectations of
securities analysts and investors. In that event, the trading
price of our common stock would almost certainly decline.
We may
not maintain our level of profitability or rates of
growth.
We believe that our continued profitability and growth will
depend in large part on our ability to do the following:
•
attract new users, keep existing users active on our websites,
and increase the activity levels of our active users;
•
manage the costs of our business, including the costs associated
with maintaining and developing our websites, customer support,
buyer protection and chargeback rates, and international and
product expansion;
•
maintain sufficient transaction volume to attract buyers and
sellers;
•
increase the awareness of our brands; and
•
provide our customers with superior community, customer support,
and trading and payment experiences.
We invest heavily in marketing and promotion, customer support,
and further development of the operating infrastructure for our
core and recently acquired operations. Some of this investment
entails long-term contractual commitments. As a result, we may
be unable to adjust our spending rapidly enough to compensate
for any unexpected revenue shortfall, which may harm our
profitability. In addition, we are spending in advance of
anticipated growth, which may also harm our profitability.
Growth rates in our most established markets, such as Germany
and the U.S., have declined over time and may continue to do so
as the existing base of users and transactions becomes larger.
The expected future growth of our PayPal and Skype businesses
may also cause downward pressure on our profit margin because
those businesses have lower gross margins than our eBay
Marketplaces business.
There
are many risks associated with our international
operations.
Our international expansion has been rapid and we have only
limited experience in many of the countries in which we now do
business. Our international business, especially in Germany, the
U.K., and South Korea, has also become critical to our revenues
and profits. Net revenues outside the United States accounted
for approximately 42% and 46% of our net revenues in 2004 and
the first nine months of 2005, respectively. Expansion into
international markets requires management attention and
resources and requires us to localize our service to conform to
local cultures, standards, and policies. The commercial,
Internet, and transportation infrastructure in lesser-developed
countries may make it difficult for us to replicate our business
model. In many countries, we compete with local companies who
understand the local market better than we do, and we may not
benefit from
first-to-market
advantages. We may not be successful in expanding into
particular international markets or in generating revenues from
foreign operations. For example, in 2002 we withdrew from the
Japanese market. Even if we are successful, we expect the costs
of operating new sites to exceed our net revenues for at least
12 months in most countries. As we continue to expand
internationally, including through the expansion of PayPal,
Skype and Shopping.com, we are subject to risks of doing
business internationally, including the following:
•
regulatory requirements, including regulation of Internet
services, auctioneering, professional selling, distance selling,
communications, banking, and money transmitting, that may limit
or prevent the offering of some or all of our services in some
jurisdictions, prevent enforceable agreements between sellers
and buyers, prohibit the listing of certain categories of goods,
require special licensure, or limit the transfer of information
between eBay and our affiliates;
•
legal uncertainty regarding our liability for the listings and
other content provided by our users, including uncertainty as a
result of less Internet-friendly legal systems, unique local
laws, and lack of clear precedent or applicable law;
•
difficulties in integrating with local payment providers,
including banks, credit and debit card associations, and
electronic fund transfer systems;
•
differing levels of retail distribution, shipping, and
communications infrastructures;
•
different employee/employer relationships and the existence of
workers’ councils and labor unions;
•
difficulties in staffing and managing foreign operations;
•
longer payment cycles, different accounting practices, and
greater problems in collecting accounts receivable;
•
potentially adverse tax consequences, including local taxation
of our fees or of transactions on our websites;
•
higher telecommunications and Internet service provider costs;
•
strong local competitors;
•
different and more stringent consumer protection, data
protection and other laws;
•
cultural ambivalence towards, or non-acceptance of, online
trading, payments or voice communications;
•
seasonal reductions in business activity;
•
expenses associated with localizing our products, including
offering customers the ability to transact business in the local
currency;
•
laws and business practices that favor local competitors or
prohibit foreign ownership of certain businesses;
volatility in a specific country’s or region’s
political or economic conditions; and
•
differing intellectual property laws.
Some of these factors may cause our international costs of doing
business to exceed our comparable domestic costs. As we expand
our international operations and have additional portions of our
international revenues denominated in foreign currencies, we
also could become subject to increased difficulties in
collecting accounts receivable and risks relating to foreign
currency exchange rate fluctuations. The impact of currency
exchange rate fluctuations is discussed in more detail under
“We are exposed to fluctuations in currency exchange
rates,” below.
We are in the process of expanding PayPal’s services
internationally. Both eBay and PayPal have limited experience
with the payments business outside of the U.S. In some
countries, expansion of PayPal’s business may require a
special license or a close commercial relationship with one or
more local financial institutions. We do not know if these or
other factors may prevent, delay, or limit PayPal’s
expansion or reduce its profitability. Any limitation on our
ability to expand PayPal internationally could harm our business.
We maintain a portion of Shopping.com’s research and
development facilities and personnel in Israel, and as a result,
political, economic and military conditions in Israel affect
those operations. Increased hostilities or terrorism within
Israel or armed hostilities between Israel and neighboring
states could make it more difficult for us to continue our
operations in Israel, which could increase our costs. In
addition, many of Shopping.com’s employees in Israel are
obligated to perform up to 36 days of military reserve duty
each year, and are subject to being called for active duty under
emergency circumstances. If a military conflict or war arises,
these individuals could be required to serve in the military for
extended periods of time. Shopping.com’s Israeli operations
could be disrupted by the absence of employees due to military
service, which could adversely affect its business.
Our
operations in China are subject to risks and uncertainties
relating to the laws and regulations of the People’s
Republic of China.
Our operations in the People’s Republic of China, or PRC,
are conducted through our EachNet subsidiary and through a
PayPal subsidiary. EachNet and PayPal are Delaware corporations
and foreign persons under the laws of the PRC and are subject to
many of the risks of doing business internationally described
above in “There are many risks associated with our
international operations.” The PRC currently regulates its
Internet sector through regulations restricting the scope of
foreign investment and through the enforcement of content
restrictions on the Internet. While many aspects of these
regulations remain unclear, they purport to limit and require
licensing of various aspects of the provision of Internet
information services. These regulations have created substantial
uncertainties regarding the legality of foreign investments in
PRC Internet companies, and the business operations of such
companies, including EachNet’s and PayPal’s PRC
operations. In order to meet local ownership and regulatory
licensing requirements, the eBay EachNet website is operated
through a foreign-owned enterprise indirectly owned by
eBay’s European operating entity, which acts in cooperation
with a local PRC company owned by certain local employees. The
PayPal China website is operated through a foreign-owned
enterprise owned by PayPal’s International headquarters
entity, which acts in cooperation with a local PRC company owned
by certain local employees. We believe EachNet’s and
PayPal’s current ownership structure complies with all
existing PRC laws, rules, and regulations. There are, however,
substantial uncertainties regarding the interpretation of
current PRC laws and regulations, and it is possible that the
PRC government will ultimately take a view contrary to ours. The
People’s Bank of China, or PBOC, has recently proposed
guidelines for payment settlement organizations which, if
enacted and applied to PayPal’s operations in China, could
have a material adverse effect on those operations, including,
but not limited to, requiring the local PRC company to have at
least three years of profitable operations (which PayPal’s
current local PRC partner does not have), and to obtain prior
approval and licensure from the PBOC. There are also
uncertainties regarding EachNet’s and PayPal’s ability
to enforce contractual relationships it has entered into with
respect to management and control of the company’s
business. If EachNet or PayPal were found to be in violation of
any existing or future PRC laws or regulations, it could be
subject to fines and other financial penalties, have its
business and Internet content provider licenses revoked, or be
forced to discontinue its business entirely. In addition, any
finding of a violation by EachNet or PayPal of PRC laws or
regulations could make it more difficult for us to launch new or
expanded services in the PRC.
Although Skype does not conduct operations in the PRC directly,
its service is used by residents of the PRC. PRC regulations
surrounding VoIP telephony are unclear but do appear to prohibit
some Skype services, and the national regulatory bodies in the
PRC may adopt further regulations that restrict or prohibit the
use of Skype’s services. In addition, recent press reports
have indicated that certain provinces in the PRC may be taking
steps to restrict the use of Skype’s services.
We are
exposed to fluctuations in currency exchange
rates.
Because we conduct a significant and growing portion of our
business outside the United States but report our results in
U.S. dollars, we face exposure to adverse movements in
currency exchange rates. In connection with its multi-currency
service, PayPal fixes exchange rates twice per day, and may face
financial exposure if it incorrectly fixes the exchange rate.
PayPal also holds some corporate and customer funds in
non-U.S. currencies,
and thus its financial results are affected by the translation
of these
non-U.S. currencies
into U.S. dollars. In addition, the results of operations
of our internationally focused websites are exposed to foreign
exchange rate fluctuations as the financial results of the
applicable subsidiaries are translated from the local currency
into U.S. dollars upon
consolidation. If the U.S. dollar weakens against foreign
currencies, as it did in 2004 and the first part of 2005, the
translation of these foreign-currency-denominated transactions
will result in increased net revenues, operating expenses, and
net income. The change in weighted average foreign currency
exchange rates in the first nine months of 2005 relative to the
first nine months of 2004 resulted in an increase in net
revenues of approximately $52.7 million and an increase in
aggregate cost of revenues and operating expenses of
approximately $28.5 million. Similarly, our net revenues,
operating expenses, and net income will decrease if the
U.S. dollar strengthens against foreign currencies as has
occurred more recently. As exchange rates vary, net sales and
other operating results, when translated, may differ materially
from expectations. In particular, to the extent the
U.S. dollar strengthens against the Euro and British Pound,
our European revenues and profits will be reduced as a result of
these translation adjustments. In addition, to the extent the
U.S. dollar strengthens against the Euro and the British
Pound, cross-border trade related to purchases of
dollar-denominated goods by
non-U.S. purchasers
may decrease, and that decrease may not be offset by a
corresponding increase in cross-border trade involving purchases
by U.S. buyers of goods denominated in other currencies.
While we from time to time enter into transactions to hedge
portions of our foreign currency translation exposure, these
hedges are relatively costly and, even with them in effect, it
is impossible to perfectly predict or completely eliminate the
effects of this exposure.
We
depend on the continued growth of online commerce.
The business of selling goods over the Internet, particularly
through online trading, is dynamic and relatively new. Growth in
the use of the Internet as a medium for consumer commerce may
not continue. Concerns about fraud, privacy, and other problems
may discourage additional consumers from adopting the Internet
as a medium of commerce. Market acceptance for recently
introduced services and products over the Internet is highly
uncertain, and there are few proven services and products. In
countries such as the U.S. and Germany, where our services and
online commerce generally have been available for some time and
the level of market penetration of our services is high,
acquiring new users for our services may be more difficult and
costly than it has been in the past. In order to expand our user
base, we must appeal to and acquire consumers who historically
have used traditional means of commerce to purchase goods. If
these consumers prove to be harder to acquire or are less active
than our earlier users, and we are unable to gain efficiencies
in our operating costs, including our cost of acquiring new
customers, our business could be adversely impacted.
Acquisitions
could result in operating difficulties, dilution and other
harmful consequences.
We have acquired a number of businesses in the past, and have
completed or announced eight acquisitions in 2005. These
include, most recently, the acquisition of Skype, the
acquisition of Shopping.com, and the acquisition through PayPal,
of VeriSign, Inc.’s payment gateway business.
We expect to continue to evaluate and consider a wide array of
potential strategic transactions, including business
combinations, acquisitions and dispositions of businesses,
technologies, services, products and other assets, including
interests in our existing subsidiaries. At any given time we may
be engaged in discussions or negotiations with respect to one or
more of such transactions. Any of such transactions could be
material to our financial condition and results of operations.
There is no assurance that any such discussions or negotiations
will result in the consummation of any transaction. The process
of integrating any acquired business may create unforeseen
operating difficulties and expenditures and is itself risky. The
areas where we may face difficulties include:
•
diversion of management time, as well as a shift of focus from
operating the businesses to issues of integration and future
products, particularly given the large number and size and
varying scope of our recent acquisitions;
•
declining employee morale and retention issues resulting from
changes in compensation, reporting relationships, future
prospects, or the direction of the business;
•
the need to integrate each company’s accounting, management
information, human resource and other administrative systems to
permit effective management, and the lack of control if such
integration is delayed or not implemented;
the need to implement controls, procedures and policies
appropriate for a larger public company at companies that prior
to acquisition had lacked such controls, procedures and
policies; and
•
in some cases, including in connection with our acquisition of
VeriSign’s payment gateway business, the need to transition
operations, users, and/or customers onto our existing platforms.
Foreign acquisitions involve special risks, including those
related to integration of operations across different cultures
and languages, currency risks, and the particular economic,
political, and regulatory risks associated with specific
countries. Moreover, we may not realize the anticipated benefits
of any or all of our acquisitions. As a result of future
acquisitions or mergers, we might need to issue additional
equity securities, spend our cash, or incur debt, liabilities,
or amortization expenses related to intangible assets, any of
which could reduce our profitability and harm our business.
System
failures could harm our business.
We have experienced system failures from time to time, and any
interruption in the availability of our websites will reduce our
current revenues and profits, could harm our future revenues and
profits, and could subject us to regulatory scrutiny.
eBay’s primary website has been interrupted for periods of
up to 22 hours, and our PayPal site suffered intermittent
unavailability over a five-day period in October 2004. Any
unscheduled interruption in our services results in an
immediate, and possibly substantial, loss of revenues. Frequent
or persistent interruptions in our services could cause current
or potential users to believe that our systems are unreliable,
leading them to switch to our competitors or to avoid our sites,
and could permanently harm our reputation and brands. These
interruptions increase the burden on our engineering staff,
which, in turn, could delay our introduction of new features and
services on our sites. Because PayPal is a regulated financial
entity, frequent or persistent site interruptions could lead to
regulatory inquiries. These inquiries could result in fines,
penalties, or mandatory changes to PayPal’s business
practices, and ultimately could cause PayPal to lose existing
licenses it needs to operate or prevent it from obtaining
additional licenses that it needs to expand. Finally, because
our customers may use our products for critical transactions,
any system failures could result in damage to our
customers’ businesses. These customers could seek
significant compensation from us for their losses. Even if
unsuccessful, this type of claim likely would be time consuming
and costly for us to address.
Although our systems have been designed around industry-standard
architectures to reduce downtime in the event of outages or
catastrophic occurrences, they remain vulnerable to damage or
interruption from earthquakes, floods, fires, power loss,
telecommunication failures, terrorist attacks, computer viruses,
computer
denial-of-service
attacks, and similar events. Some of our systems, including
PayPal’s customer support operations, are not fully
redundant, and our disaster recovery planning is not sufficient
for all eventualities. Our systems are also subject to
break-ins, sabotage, and intentional acts of vandalism. Despite
any precautions we may take, the occurrence of a natural
disaster, a decision by any of our third-party hosting providers
to close a facility we use without adequate notice for financial
or other reasons, or other unanticipated problems at our hosting
facilities could result in lengthy interruptions in our
services. In addition, the failure by our hosting facilities to
provide our required data communications capacity could result
in interruptions in our service. We do not carry business
interruption insurance sufficient to compensate us for losses
that may result from interruptions in our service as a result of
system failures.
Our
growth will depend on our ability to develop our brands, and
these efforts may be costly.
Our historical growth has been largely attributable to word of
mouth, and to frequent and high visibility national and local
media coverage. We believe that continuing to strengthen our
brands will be critical to achieving widespread acceptance of
our services, and will require an increased focus on active
marketing efforts. The demand for and cost of online and
traditional advertising have been increasing, and may continue
to increase. Accordingly, we will need to spend increasing
amounts of money on, and devote greater resources to,
advertising, marketing, and other efforts to create and maintain
brand loyalty among users. In addition, we are supporting an
increasing number of brands, each of which requires its own
resources. Brand promotion activities may not yield increased
revenues, and even if they do, any increased revenues may not
offset the expenses incurred in building our brands. If we do
attract new users to our services, they may not conduct
transactions over our services on a regular basis. If we fail to
promote and maintain our brands, or if we incur substantial
expenses in an unsuccessful attempt to promote and maintain our
brands, our business would be harmed.
Our
business and users may be subject to sales tax and other
taxes.
The application of indirect taxes (such as sales and use tax,
value added tax, or VAT, goods and services tax, business tax,
and gross receipt tax) to
e-commerce businesses
such as eBay and our users is a complex and evolving issue. Many
of the fundamental statutes and regulations that impose these
taxes were established before the growth of the Internet and
e-commerce. In many
cases, it is not clear how existing statutes apply to the
Internet or e-commerce.
In addition, some jurisdictions have implemented or may
implement laws specifically addressing the Internet or some
aspect of e-commerce.
The application of existing, new, or future laws could have
adverse effects on our business.
Several proposals have been made at the U.S. state and local
level that would impose additional taxes on the sale of goods
and services through the Internet. These proposals, if adopted,
could substantially impair the growth of
e-commerce, and could
diminish our opportunity to derive financial benefit from our
activities. In December 2004, the U.S. federal government
enacted legislation extending the moratorium on states and other
local authorities imposing access or discriminatory taxes on the
Internet through November 2007. This moratorium does not
prohibit federal, state, or local authorities from collecting
taxes on our income or from collecting taxes that are due under
existing tax rules.
In conjunction with the Streamlined Sales Tax Project, the U.S.
Congress continues to consider overriding the Supreme
Court’s Quill decision, which limits the ability of
state governments to require sellers outside of their own state
to collect and remit sales taxes on goods purchased by in-state
residents. An overturning of the Quill decision would
harm our users and our business.
We do not collect taxes on the goods or services sold by users
of our services. One or more states or foreign countries may
seek to impose a tax collection or reporting or record-keeping
obligation on companies such as eBay that engage in or
facilitate e-commerce.
Such an obligation could be imposed if eBay were ever deemed to
be the legal agent of eBay sellers by a jurisdiction in which
eBay operates. A successful assertion by one or more states or
foreign countries that we should collect taxes on the exchange
of merchandise or services on our websites would harm our
business.
In July 2003, in compliance with the changes brought about by
the European Union (EU) VAT directive on “electronically
supplied services,” eBay began collecting VAT on the fees
charged to EU sellers on eBay sites catering to EU residents.
eBay also pays input VAT to suppliers within the various
countries the company operates. In most cases, eBay is entitled
to reclaim input VAT from the various countries with regard to
our own payments to suppliers or vendors. However, because of
our unique business model, the application of the laws and rules
that allow such reclamation is sometimes uncertain. A successful
assertion by one or more countries that eBay is not entitled to
reclaim VAT would harm our business.
We continue to work with the relevant tax authorities and
legislators to clarify eBay’s obligations under new and
emerging laws and regulations. Passage of new legislation and
the imposition of additional tax requirements could harm eBay
sellers and our business. There have been, and will continue to
be, substantial ongoing costs associated with complying with the
various indirect tax requirements in the numerous markets in
which eBay conducts or will conduct business.
Fraudulent
activities on our websites and disputes between users of our
services may harm our business.
PayPal faces significant risks of loss due to fraud and disputes
between senders and recipients, including:
•
non-delivery of, or disputes over the quality of, goods and
services due to merchant fraud or inadequate merchant business
practices;
•
reversal of payment by buyers both for legitimate reasons and in
cases of buyer fraud;
•
unauthorized use of credit card and bank account information and
identity theft;
the need to provide effective customer support to process
disputes between senders and recipients;
•
potential breaches of system security;
•
potential employee fraud; and
•
use of PayPal’s system by customers to make or accept
payment for illegal or improper purposes.
For the year ended December 31, 2004 and the nine months
ended September 30, 2005, PayPal’s transaction loss
expense totaled $50.5 million and $47.0 million,
representing 0.27% and 0.24% of PayPal’s total payment
volume, respectively. Failure to deal effectively with
fraudulent transactions and customer disputes would increase
PayPal’s loss rate and harm its business.
PayPal’s highly automated and liquid payment service makes
PayPal an attractive target for fraud. In configuring its
service, PayPal faces an inherent trade-off between customer
convenience and security. Identity thieves and those committing
fraud using stolen credit card or bank account numbers can
potentially steal large amounts of money from businesses such as
PayPal. We believe that several of PayPal’s current and
former competitors in the electronic payments business have gone
out of business or significantly restricted their businesses
largely due to losses from this type of fraud. We expect that
technically knowledgeable criminals will continue to attempt to
circumvent PayPal’s anti-fraud systems. In addition,
PayPal’s service could be subject to employee fraud or
other internal security breaches, and PayPal would be required
to reimburse customers for any funds stolen as a result of such
breaches. Merchants could also request reimbursement, or stop
using PayPal, if they are affected by buyer fraud.
PayPal incurs substantial losses from merchant fraud, including
claims from customers that merchants have not performed or that
their goods or services do not match the merchant’s
description. PayPal also incurs losses from claims that the
customer did not authorize the purchase from buyer fraud, from
erroneous transmissions and from customers who have closed bank
accounts or have insufficient funds in them to satisfy payments.
In addition to the direct costs of such losses, if they are
related to credit card transactions and become excessive they
could result in PayPal losing the right to accept credit cards
for payment. If PayPal were unable to accept credit cards, the
velocity of trade on eBay could decrease, in which case our
business would further suffer. PayPal has been assessed
substantial fines for excess chargebacks in the past, and
excessive chargebacks may arise in the future. PayPal has taken
measures to detect and reduce the risk of fraud, but these
measures may not be effective against new forms of fraud. If
these measures do not succeed, our business will suffer.
In October 2003, PayPal launched a buyer protection program that
refunds to buyers up to $500 in certain eBay transactions if
they do not receive the goods they purchased or if the goods
differ significantly from what was described by the seller. In
November 2004, PayPal increased the amount of protection
available under its buyer protection program to $1,000. If
PayPal makes such a refund, it seeks to collect reimbursement
from the seller, but may not be able to receive any funds from
the seller. The PayPal buyer protection program has increased
PayPal’s loss rate and could cause future fluctuations.
eBay faces similar risks to those of PayPal with respect to
fraudulent activities. eBay periodically receives complaints
from users who may not have received the goods that they had
purchased. In some cases individuals have been arrested and
convicted for fraudulent activities using our websites. eBay
also receives complaints from sellers who have not received
payment for the goods that a buyer had contracted to purchase.
Non-payment may occur because of miscommunication, because a
buyer has changed his or her mind and decided not to honor the
contract to purchase the item, or because the buyer bid on the
item maliciously, in order to harm either the seller or eBay. In
some European jurisdictions, buyers may also have the right to
withdraw from a sale made by a professional seller within a
specified time period.
While eBay can suspend the accounts of users who fail to fulfill
their payment or delivery obligations to other users, eBay does
not have the ability to require users to make payment or deliver
goods, or otherwise make users whole other than through our
limited buyer protection programs. Other than through these
programs, eBay does not compensate users who believe they have
been defrauded by other users, although users who pay through
PayPal may have reimbursement rights from their credit card
company or bank, which in turn will seek reimbursement from
PayPal. eBay also periodically receives complaints from buyers
as to the quality of the goods purchased. We
expect to continue to receive communications from users
requesting reimbursement or threatening or commencing legal
action against us if no reimbursement is made. Our liability for
these sort of claims is only beginning to be clarified and may
be higher in some non-U.S. jurisdictions than it is in the U.S.
Litigation involving liability for third-party actions could be
costly for us, divert management attention, result in increased
costs of doing business, lead to adverse judgments, or otherwise
harm our business. In addition, affected users will likely
complain to regulatory agencies that could take action against
us, including imposing fines or seeking injunctions.
Negative publicity and user sentiment generated as a result of
fraudulent or deceptive conduct by users of our eBay and PayPal
services could damage our reputation, reduce our ability to
attract new users or retain our current users, and diminish the
value of our brand names.
Changes
to credit card association fees, rules, or practices could
negatively affect PayPal’s business.
Because PayPal is not a bank, it cannot belong to or directly
access credit card associations, such as Visa and MasterCard. As
a result, PayPal must rely on banks or payment processors to
process transactions, and must pay a fee for this service. From
time to time, credit card associations may increase the
interchange fees that they charge for each transaction using one
of their cards. MasterCard and Visa have each implemented
increases in their interchange fees for credit cards effective
in April 2005. PayPal’s credit card processors have the
right to pass any increases in interchange fees on to PayPal as
well as increase their own fees for processing. Such increased
fees increase PayPal’s operating costs and reduce its
profit margins. PayPal is also required by its processors to
comply with credit card association operating rules, and PayPal
has agreed to reimburse its processors for any fines they are
assessed by credit card associations as a result of processing
payments for PayPal. The credit card associations and their
member banks set and interpret the credit card rules. Some of
those member banks compete with PayPal. Visa, MasterCard,
American Express, or Discover could adopt new operating rules or
re-interpret existing rules that PayPal or its processors might
find difficult or even impossible to follow. As a result, PayPal
could lose its ability to give customers the option of using
credit cards to fund their payments. If PayPal were unable to
accept credit cards, its business would be seriously damaged. In
addition, the velocity of trade on eBay could decrease and our
business would further suffer.
In 2002, both Visa and MasterCard adopted new operating rules
for Internet payment services like PayPal. In order to comply
with the associations’ rules, PayPal and its credit card
processors have implemented changes to existing business
processes for merchant customers. Any problems with these
business processes could result in fines, the amount of which
would be within Visa’s and MasterCard’s discretion.
PayPal also could be subject to fines from MasterCard and Visa
if it fails to detect that merchants are engaging in activities
that are illegal or activities that are considered “high
risk,” primarily the sale of certain types of digital
content. For “high risk” merchants, PayPal must either
prevent such merchants from using PayPal or register such
merchants with MasterCard and Visa and conduct additional
monitoring with respect to such merchants. PayPal has incurred
fines from its credit card processor relating to PayPal’s
failure to detect the use of its service by “high
risk” merchants and merchants engaged in illegal
activities. The amount of these fines has not been material, but
any additional fines in the future would likely be for larger
amounts, could become material, and could result in a
termination of PayPal’s ability to accept credit cards or
changes in PayPal’s process for registering new customers,
which would seriously damage PayPal’s business.
Changes
in PayPal’s funding mix could adversely affect
PayPal’s results.
PayPal pays significant transaction fees when senders fund
payment transactions using credit cards, nominal fees when
customers fund payment transactions by electronic transfer of
funds from bank accounts, and no fees when customers fund
payment transactions from an existing PayPal account balance.
Senders funded 53% and 52% of PayPal’s payment volume using
credit cards during 2004 and the first nine months of 2005,
respectively, and PayPal’s financial success will remain
highly sensitive to changes in the rate at which its senders
fund payments using credit cards. Senders may prefer funding
using credit cards rather than bank account transfers for a
number of reasons, including the ability to dispute and reverse
charges if merchandise is not delivered or is not as described,
the ability to earn frequent flier miles or other incentives
offered by credit cards, the ability to defer payment, or a
reluctance to provide bank account information to PayPal. PayPal
has received inquiries regarding its disclosure practices with
regard to funding mechanisms from the attorneys general of a
number of states, and in March 2005, a
complaint seeking class action status was filed alleging, among
other things, that PayPal’s disclosure regarding the
effects of users’ choice of funding mechanism is deceptive.
While we believe PayPal’s disclosure is legal and accurate,
any required change to our disclosure practices could result in
increased use of credit card funding, damaging PayPal’s
business.
If
PayPal were found to be subject to or in violation of any U.S.
laws or regulations governing banking, money transmission, or
electronic funds transfers, it could be subject to liability and
forced to change its business practices.
A number of U.S. states have enacted legislation regulating
money transmitters. To date, PayPal has obtained licenses in 33
of these jurisdictions and interpretations in nine states that
licensing is not required under their existing statutes. As a
licensed money transmitter, PayPal is subject to bonding
requirements, restrictions on its investment of customer funds,
reporting requirements, and inspection by state regulatory
agencies. In July 2005, PayPal entered into a settlement
agreement and agreed to pay $225,000 to the California
Department of Financial Institutions in connection with alleged
violations of the California Financial Code relating to the use
of a receipt form for international payments that had not been
pre-approved by the Department, and incomplete reporting to the
Department. If PayPal were found to be in violation of other
money services laws or regulations, PayPal could be subject to
liability, forced to cease doing business with residents of
certain states, or forced to change its business practices. Any
change to PayPal’s business practices that makes the
service less attractive to customers or prohibits its use by
residents of a particular jurisdiction could decrease the
velocity of trade on eBay, which would further harm our
business. Even if PayPal is not forced to change its business
practices, it could be required to obtain additional licenses or
regulatory approvals that could impose a substantial cost on
PayPal.
We believe that the licensing or approval requirements of the
U.S. Office of the Comptroller of the Currency, the Federal
Reserve Board, and other federal or state agencies that regulate
banks, bank holding companies, or other types of providers of
e-commerce services do
not apply to PayPal, except for certain money transmitter
licenses mentioned above. However, PayPal has received written
communications in the past from state regulatory authorities
expressing the view that its service might constitute an
unauthorized banking business. PayPal has taken steps to address
these states’ concerns. However, we cannot guarantee that
the steps PayPal has taken to address these regulatory concerns
will be effective in all states, and one or more states may
conclude that PayPal is engaged in an unauthorized banking
business. If PayPal is found to be engaged in an unauthorized
banking business in one or more states, it might be subject to
monetary penalties and adverse publicity and might be required
to cease doing business with residents of those states. Even if
the steps it has taken to resolve these states’ concerns
are deemed sufficient by the state regulatory authorities,
PayPal could be subject to fines and penalties for its prior
activities. The need to comply with state laws prohibiting
unauthorized banking activities could also limit PayPal’s
ability to enhance its services in the future. Any change to
PayPal’s business practices that makes the service less
attractive to customers or prohibits its use by residents of a
particular jurisdiction could decrease the velocity of trade on
eBay, which would further harm our business.
Although there have been no definitive interpretations to date,
PayPal has assumed that its service is subject to the Electronic
Fund Transfer Act and Regulation E of the Federal
Reserve Board. As a result, among other things, PayPal must
provide advance disclosure of changes to its service, follow
specified error resolution procedures, comply with certain
marketing limitations, and absorb losses above $50 from
transactions not authorized by the consumer. In addition, PayPal
is subject to the financial privacy provisions of the
Gramm-Leach-Bliley Act, state financial privacy laws, and
related regulations. As a result, some customer financial
information that PayPal receives is subject to limitations on
reuse and disclosure. Existing and potential future privacy laws
may limit PayPal’s ability to develop new products and
services that make use of data gathered through its service. The
provisions of these laws and related regulations are
complicated, and PayPal does not have extensive experience in
complying with them. Even technical violations of these laws can
result in penalties of up to $1,000 for each non-compliant
transaction. PayPal processed an average of approximately
1.25 million transactions per day during the first nine
months of 2005, and any violations could expose PayPal to
significant liability.
PayPal’s
status under banking or financial services laws or other laws in
markets outside the U.S. is unclear.
PayPal currently allows its customers with credit cards to send
payments from 54 markets outside the U.S., and to receive
payments in 42 of those markets. In 25 of these 42 markets,
customers can withdraw funds to local bank accounts, and in
eight of these markets customers can withdraw funds by receiving
a bank draft in the mail. PayPal offers customers the ability to
send or receive payments denominated in U.S. dollars,
British pounds, Euros, Canadian dollars, Japanese yen, and
Australian dollars. We act in cooperation with a local company
in the People’s Republic of China, or PRC, which offers PRC
residents the ability to send or receive payments denominated in
renminbi. In March 2005, PayPal received an Australian Financial
Services License from the Australian Securities and Investments
Commission. In February 2004, PayPal (Europe) Ltd., a
wholly-owned subsidiary of PayPal, received a license to operate
as an Electronic Money Institution in the United Kingdom as a
vehicle for providing localized versions of PayPal’s
service to customers in the EU. 25 of the 54 markets outside of
the U.S. whose residents can use the PayPal service are members
of the European Union. As PayPal (Europe) develops localized
services for the domestic market in these countries, it is
implementing such localized services through an expedited
“passport” notification process through the UK
regulator to regulators in other EU member states, pursuant to
EU Directives. PayPal (Europe) has completed the
“passport” notice process in all EU member countries.
The regulators in these countries could notify PayPal (Europe)
of local consumer protection laws that will apply to its
business, in addition to UK consumer protection law. Any such
responses from these regulators could increase the cost of, or
delay, PayPal’s plans for expanding its business. PayPal
(Europe) is subject to significant fines or other enforcement
action if it violates the disclosure, reporting, anti-money
laundering, capitalization, funds management or other
requirements imposed on electronic money institutions.
In many markets outside of the U.S. and the European Union, it
is not clear whether PayPal’s
U.S.-based service is
subject to local law or, if it is subject to local law, whether
such local law requires a payment processor like PayPal to be
licensed as a bank or financial institution or otherwise. Even
if PayPal is not currently required to obtain a license in those
countries, future localization or targeted marketing of
PayPal’s service in those countries could require licensure
and other laws of those countries (such as data protection and
anti-money laundering laws) may apply. If PayPal were found to
be subject to and in violation of any foreign laws or
regulations, it could be subject to liability, forced to change
its business practices or forced to suspend providing services
to customers in one or more countries. Alternatively, PayPal
could be required to obtain licenses or regulatory approvals
that could impose a substantial cost on it and involve
considerable delay to the provision or development of its
product. Delay or failure to receive such a license would
require PayPal to change its business practices or features in
ways that would adversely affect PayPal’s international
expansion plans and could require PayPal to suspend providing
services to customers in one or more countries.
Growth
of Skype’s business may be harmed by a lack of public
acceptance of Voice over Internet Protocol (VoIP) telephony, new
or existing regulations, or the actions of
competitors.
The VoIP
communications medium is in its early stages and may not achieve
broad public acceptance.
The success of Skype’s service depends on continued growth
in its network of users, which in turn depends on wider public
acceptance of VoIP telephony. The VoIP communications medium is
in its early stages, and it may not develop a broad audience.
Potential new users may view VoIP as unattractive relative to
traditional telephone services for a number of reasons,
including the need to purchase computer headsets, the need to
leave a personal computer on in order to make or receive calls,
or the perception that the price advantage for VoIP is
insufficient to justify the perceived inconvenience. Potential
users may also view more familiar online communication methods,
such as e-mail or
instant messaging, as sufficient for their communications needs.
There is no assurance that VoIP will ever achieve broad public
acceptance.
The
current regulatory environment for VoIP services is unclear, and
Skype’s business could be harmed by new regulations or the
application of existing regulations to its services.
The current regulatory environment for VoIP services is unclear.
Skype’s VoIP communications services are not currently
subject to all of the same regulations that apply to traditional
telephony. VoIP providers are generally
subject to different regulatory regimes in different countries,
and in some cases are subject to lower regulatory fees and
lesser regulatory requirements. Governments may impose increased
fees and administrative burdens on VoIP providers. Increased
fees could include access charges payable to local exchange
carriers to carry and terminate traffic, contributions to the
Universal Service Fund in the United States and elsewhere, and
other charges. New laws and regulations may require Skype to
meet various emergency service requirements (such as
“e911”), disability access requirements, consumer
protection requirements, number assignment and portability
requirements, and interception or wiretapping requirements, such
as the Communications Assistance for Law Enforcement Act. Such
regulations could result in substantial costs depending on the
technical changes required to accommodate the requirements, and
any increased costs could erode Skype’s pricing advantage
over competing forms of communication. Regulations that decrease
the degree of privacy on Skype’s network could also slow
adoption of its service. The increasing growth of the VoIP
telephony market and popularity of VoIP telephony products and
services heighten the risk that governments will seek to
regulate VoIP telephony and the Internet. In the United States,
various state legislatures are considering legislation to impose
their own requirements and taxes on VoIP services. Increased
regulatory requirements or VoIP would increase Skype’s
costs, and, as a result, our business would suffer.
Regulatory agencies may require Skype to conform to rules that
are unsuitable for VoIP communications technologies, that are
difficult or impossible to comply with due to the nature of IP
routing, or that are unnecessary or unreasonable in light of the
manner in which we offer service to our customers. For example,
while suitable alternatives may be developed in the future, the
current IP network does not enable Skype to identify the
geographic origin of the traffic traversing the Internet or to
provide detailed calling information about
computer-to-computer
calls, either of which may make complying with future regulatory
requirements, such as emergency service requirements, difficult
or impossible.
In many countries in which Skype operates or provides VoIP
services, the laws that may relate to its services are unclear.
We cannot be certain that Skype or its customers are currently
in full compliance with regulatory or other legal requirements
in all countries in which Skype’s service is offered, that
Skype or its customers will be able to comply with existing or
future requirements, or that Skype or its customers will
continue in full compliance with any requirements. Skype’s
failure or the failure of those with whom Skype transacts
business to comply with these requirements could materially
adversely affect our business, financial condition and results
of operations.
New rules and regulations are being considered in various
countries around the world. Such new rules and regulations could
increase our costs of doing business or prevent us from
delivering our products and services over the Internet, which
could adversely affect Skype’s customer base and its
revenue.
Actions
by competitors such as incumbent telephone companies could harm
Skype’s service.
Skype depends on many of its competitors, such as incumbent
telephone companies and cable operators, for access to
broadband, Internet, telecommunications and other services
needed to provide its service. Such competitors could use a
number of methods to disrupt or degrade the quality of
Skype’s service in various ways such as restricting or
prohibiting the use of their lines for our services, filtering,
blocking or delaying VoIP packets used to transmit users’
calls, or denying requests for number portability. These
activities are technically feasible, and recent U.S. regulatory
changes may permit competitors to take these actions in the
U.S. Worldwide, a number of companies have announced plans
to take such actions or are selling products designed to
facilitate such actions. In addition, large, established
telecommunication companies may devote substantial lobbying
efforts to influence the regulation of the VoIP telephony
market, seeking to encourage the increased regulatory burdens
described above.
Skype
depends on key technology that is licensed from third
parties.
Skype licenses from third parties it does not control technology
underlying certain components of its service, including the
technology underlying its
peer-to-peer
architecture and firewall traversal technology, and the audio
codec used to provide high sound quality. Both of these
technologies are key to the service Skype provides. In addition,
various other technologies used by Skype to provide its service
are licensed from third parties. Although Skype has contracts in
place with its third party technology providers, there can be no
assurance that the licensed technology or other technology that
we may seek to license in the future will continue to be
available on commercially reasonable terms, or at all. The loss
of, or inability to maintain, existing licenses could result in
service delays, a decrease in service quality, or a complete
failure of Skype’s service until equivalent technology or
suitable alternative products can be developed, identified,
licensed and integrated. While we believe Skype has the ability
to either extend these licenses on commercially reasonable terms
or identify and obtain or develop suitable alternative products,
the costs associated with licensing and/or developing such
products could be high. Any failure to maintain these licenses
on commercially reasonable terms or to license or develop
alternative technologies would harm Skype’s business.
We are
subject to regulations relating to consumer
privacy.
Many jurisdictions have laws that limits the uses of personal
information gathered online or offline Several new jurisdictions
have recently passed such laws, and jurisdictions with these
laws continually consider strengthening them, especially against
online services. eBay and PayPal in certain instances are
subject to some of these current laws. PayPal may also be
subject to recently enacted legislation in several states and
countries imposing greater restrictions on the ability of
financial services companies to share user information with
third parties without affirmative user consent. However, the
Fair and Accurate Credit Transactions Act of 2003, or FACT,
included a provision preempting conflicting state laws on the
sharing of information between corporate affiliates, and as a
result we believe that PayPal and eBay will not be subject to
the laws of each individual state with respect to matters within
the scope of FACT, but will remain subject to the provisions of
FACT and the Fair Credit Reporting Act. Courts are currently
determining the scope of these preemptive provisions.
Specific statutes intended to protect user privacy have been
passed in many non-U.S. jurisdictions, including virtually every
non-U.S. jurisdiction in which we currently have a localized
website. Compliance with these laws, given the tight integration
of our systems across different countries and the need to move
data to facilitate transactions amongst our users, including to
payment companies and shipping companies, is both necessary and
difficult. Failure to comply could subject us to lawsuits,
fines, criminal penalties, statutory damages, adverse publicity,
and other losses that could harm our business. A number of data
protection and privacy laws are being discussed by Congress, the
states, and foreign governments. Changes to existing laws or the
passage of new laws intended to address privacy and data
protection and retention issues could directly affect the way we
do business or could create uncertainty on the Internet. This
could reduce demand for our services, increase the cost of doing
business as a result of litigation costs or increased service or
delivery costs, or otherwise harm our business.
New
and existing regulations could harm our business.
We are subject to the same foreign and domestic laws as other
companies conducting business on and off the Internet. Today,
there are still relatively few laws specifically directed
towards online services. However, due to the increasing
popularity and use of the Internet and online services, many
laws relating to the Internet are being debated at all levels of
government around the world and it is possible that such laws
and regulations will be adopted. These laws and regulations
could cover issues such as user privacy, freedom of expression,
pricing, fraud, content and quality of products and services,
taxation, advertising, intellectual property rights, and
information security. It is not clear how existing laws
governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel and
defamation, obscenity, and personal privacy apply to online
businesses. The vast majority of these laws were adopted prior
to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the
Internet and related technologies. Those laws that do reference
the Internet, such as the U.S. Digital Millennium Copyright Act
and the European Union’s Directive on Distance Selling and
Electronic Commerce have begun to be interpreted by the courts
and implemented by the EU Member States, but their applicability
and scope remain somewhat uncertain. As our activities and the
types of goods listed on our website expand, regulatory agencies
or courts may claim or hold that we or our users are either
subject to licensure or prohibited from conducting our business
in their jurisdiction, either with respect to our services in
general, or in order to allow the sale of certain items, such as
real estate, event tickets, cultural goods, boats, and
automobiles.
Numerous states and foreign jurisdictions, including the State
of California, where our headquarters are located, have
regulations regarding “auctions” and the handling of
property by “pawnbrokers.” No final legal
determination has been made as to whether the California
regulations apply to our business (or that of our users) and
little precedent exists in this area. Several states and some
foreign jurisdictions have attempted, and may attempt in
the future, to impose such regulations upon us or our users.
Attempted enforcement of these laws against some of our users
appears to be increasing and such attempted enforcements could
harm our business. In August 2002, Illinois amended its auction
law to provide for a special regulatory regime for
“Internet auction listing services,” and we have
registered as an Internet auction listing service in Illinois.
Although we do not expect this registration to have a negative
impact on our business, other regulatory and licensure claims
could result in costly litigation or could require us to change
the way we or our users do business in ways that increase costs
or reduce revenues or force us to prohibit listings of certain
items for some locations. We could also be subject to fines or
other penalties, and any of these outcomes could harm our
business.
In addition, because our services are accessible worldwide, and
we facilitate sales of goods to users worldwide, foreign
jurisdictions may claim that we are required to comply with
their laws. For example, the Australian high court has ruled
that a U.S. website in certain circumstances must comply with
Australian laws regarding libel. As we expand and localize our
international activities, we become obligated to comply with the
laws of the countries in which we operate. Laws regulating
Internet companies outside of the U.S. may be less favorable
than those in the U.S., giving greater rights to consumers,
content owners, and users. Compliance may be more costly or may
require us to change our business practices or restrict our
service offerings relative to those in the U.S. Our failure to
comply with foreign laws could subject us to penalties ranging
from criminal prosecution to bans on our services.
Our
business is subject to online commerce security risks, including
security breaches and identity theft.
To succeed, online commerce and communications must provide a
secure transmission of confidential information over public
networks. Our security measures may not prevent security
breaches that could harm our business. Currently, a significant
number of our users authorize us to bill their credit card
accounts directly for all transaction fees charged by us.
PayPal’s users routinely provide credit card and other
financial information. We rely on encryption and authentication
technology licensed from third parties to provide the security
and authentication to effect secure transmission of confidential
information, including customer credit card numbers. Advances in
computer capabilities, new discoveries in the field of
cryptography, intentional disclosure by employees or others with
legitimate access to such information, or other developments may
result in a compromise or breach of the technology used by us to
protect transaction data. In addition, any party who is able to
illicitly obtain a user’s password could access the
user’s transaction data. An increasing number of websites
have reported breaches of their security. Any compromise of our
security could harm our reputation and, therefore, our business.
In addition, a party who is able to circumvent our security
measures could misappropriate proprietary information, or cause
interruptions in our operations, damage our computers or those
of our users, or otherwise damage our reputation and business.
Our servers are also vulnerable to computer viruses, physical or
electronic break-ins, and similar disruptions, and we have
experienced
“denial-of-service”
type attacks on our system that have made all or portions of our
websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to
address problems caused by breaches. These issues are likely to
become more difficult as we expand the number of places where we
operate. Security breaches could damage our reputation and
expose us to a risk of loss or litigation and possible
liability. Our insurance policies carry low coverage limits,
which may not be adequate to reimburse us for losses caused by
security breaches.
Our users, as well as those of other prominent Internet
companies, have been and will continue to be targeted by parties
using fraudulent emails to misappropriate passwords, credit card
numbers, or other personal information or to introduce viruses
through “trojan horse” programs to our users’
computers. These emails appear to be legitimate emails sent by
eBay, PayPal or Skype but direct recipients to fake websites
operated by the sender of the email or request that the
recipient send a password or other confidential information via
email or download a program. We actively pursue the parties
responsible for these attempts at misappropriation, and we have
developed tools to detect, and help users detect, fake websites
and unauthorized access to customer accounts and we encourage
our users to divulge sensitive information only after they have
verified that they are on our legitimate websites, but we cannot
entirely eliminate these types of activities.
PayPal’s
failure to manage customer funds properly would harm its
business.
PayPal’s ability to manage and account accurately for
customer funds requires a high level of internal controls.
PayPal has neither an established operating history nor proven
management experience in maintaining, over a long term, these
internal controls. As PayPal’s business continues to grow,
it must strengthen its internal controls accordingly.
PayPal’s success requires significant public confidence in
its ability to handle large and growing transaction volumes and
amounts of customer funds. Any failure to maintain necessary
controls or to manage accurately customer funds could diminish
customer use of PayPal’s product severely.
Our
failure to manage growth could harm our business.
We are currently expanding our headcount, facilities, and
infrastructure in the U.S. and internationally. We anticipate
that further expansion will be required to address potential
growth in our customer base and number of listings and payment
transactions, as well as our expansion into new geographic
areas, types of goods, and alternative methods of sale. This
expansion has placed, and we expect it will continue to place, a
significant strain on our management, operational, and financial
resources. The areas that are put under strain by our growth
include the following:
•
Our Websites. We must constantly add new
hardware, update software and add new engineering personnel to
accommodate the increased use of our and our subsidiaries’
websites and the new products and features we regularly
introduce. This upgrade process is expensive, and the increased
complexity of our websites increases the cost of additional
enhancements. Failure to upgrade our technology, features,
transaction processing systems, security infrastructure, or
network infrastructure to accommodate increased traffic or
transaction volume could harm our business. Adverse consequences
could include unanticipated system disruptions, slower response
times, degradation in levels of customer support, impaired
quality of users’ experiences of our services, impaired
quality of services for third-party application developers using
our externally accessible Application Programming Interface, or
API, and delays in reporting accurate financial information. We
may be unable to effectively upgrade and expand our systems in a
timely manner or smoothly integrate any newly developed or
purchased technologies or businesses with our existing systems,
and any failure to do so could result in problems on our sites.
For example, in October 2004, we experienced unscheduled
downtime on the PayPal website related to system upgrades.
Despite our efforts to increase site scalability and
reliability, our infrastructure could prove unable to handle a
larger volume of customer transactions. Any failure to
accommodate transaction growth could impair customer
satisfaction, lead to a loss of customers, impair our ability to
add customers, or increase our costs, all of which would harm
our business. Further, steps to increase the reliability and
redundancy of our systems are expensive, reduce our margins, and
may not be successful in reducing the frequency or duration of
unscheduled downtime.
•
Customer Account Billing. Our revenues depend
on prompt and accurate billing processes. We recently completed
a significant project to enhance our billing software. Problems
with the conversion to the new billing system during the second
and third quarters of 2004 caused incorrect account balance
totals to be displayed for some users. While these problems have
been corrected and we believe that no users were overcharged,
our failure to grow our transaction-processing capabilities to
accommodate the increasing number of transactions that must be
billed would harm our business and our ability to collect
revenue. In July 2004, a complaint seeking class action status
was filed alleging that eBay improperly billed its users and
improperly debited some user accounts. The complaint was
recently amended to include a larger variety of billing related
problems and a longer time frame.
•
Customer Support. We are expanding our
customer support operations to accommodate the increased number
of users and transactions on our websites and the increased
level of trust and safety activity we provide worldwide. If we
are unable to provide these operations in a cost-effective
manner, users of our websites may have negative experiences,
current and future revenues could suffer, and our operating
margins may decrease.
We must continue to hire, train, and manage new employees at a
rapid rate. If our new hires perform poorly, if we are
unsuccessful in hiring, training, managing, and integrating
these new employees, or if we are not successful in retaining
our existing employees, our business may be harmed. To manage
the expected growth of our operations
and personnel, we will need to improve our transaction
processing, operational and financial systems, procedures, and
controls. This is a special challenge as we acquire new
operations with different systems. Our current and planned
personnel, systems, procedures, and controls may not be adequate
to support our future operations. The additional headcount and
capital investments we are adding increase our cost base, which
will make it more difficult for us to offset any future revenue
shortfalls by expense reductions in the short term.
Our
business is adversely affected by anything that causes our users
to spend less time on their computers, including seasonal
factors and national events.
Anything that diverts our users from their customary level of
usage of our websites could adversely affect our business. We
would therefore be adversely affected by geopolitical events
such as war, the threat of war, or terrorist activity, and
natural disasters, such as hurricanes or earthquakes. Similarly,
our results of operations historically have been seasonal
because many of our users reduce their activities on our
websites with the onset of good weather during the summer
months, and on and around national holidays. We have
historically experienced our strongest quarters of online growth
in our first and fourth fiscal quarters. PayPal has shown
similar seasonality, especially in the fourth fiscal quarter.
Shopping.com exhibits strong seasonality with revenue peaking in
the fourth quarter. These patterns of seasonality may become
more pronounced as our websites gain acceptance by a broader
base of mainstream users and as the size of our European
operations, which experience greater seasonality, grows relative
to our other operations.
Use of
our services for illegal purposes could harm our
business.
The law relating to the liability of providers of online
services for the activities of their users on their service is
currently unsettled in the United States and internationally. We
are aware that certain goods, such as weapons, adult material,
tobacco products, alcohol, and other goods that may be subject
to regulation, have been listed and traded on our service. We
may be unable to prevent our users from selling unlawful goods
or selling goods in an unlawful manner, and we may be subject to
allegations of civil or criminal liability for unlawful
activities carried out by users through our service. We have
been subject to several lawsuits based upon such allegations. In
December 2004, an executive of Baazee.com, our Indian
subsidiary, was arrested in connection with a user’s
listing of a pornographic video clip on that site. Similarly,
our Korean subsidiary and one of its employees were found
criminally liable for listings on the Korean subsidiary’s
website. In order to reduce our exposure to this liability, we
have prohibited the listing of certain items and increased the
number of personnel reviewing questionable items. In the future,
we may implement other protective measures that could require us
to spend substantial resources or discontinue certain service
offerings. Any costs incurred as a result of potential liability
relating to the sale of unlawful goods or the unlawful sale of
goods could harm our business. In addition, we have received
significant and continuing media attention relating to the
listing or sale of unlawful goods using our services. This
negative publicity could damage our reputation and diminish the
value of our brand names. It also could make users reluctant to
continue to use our services.
PayPal’s payment system is also susceptible to potentially
illegal or improper uses. These may include illegal online
gambling, fraudulent sales of goods or services, illicit sales
of prescription medications or controlled substances, piracy of
software and other intellectual property, money laundering, bank
fraud, child pornography trafficking, prohibited sales of
alcoholic beverages or tobacco products, and online securities
fraud. In September 2004, PayPal implemented a change in its
acceptable use policy that would enable PayPal to fine users in
certain jurisdictions up to $500 or take legal action to recover
its losses for certain violations of that policy, including
online gambling and illegal sales of prescription medications.
Despite measures PayPal has taken to detect and lessen the risk
of this kind of conduct, illegal activities could still be
funded using PayPal.
PayPal is subject to money laundering laws and regulations that
prohibit, among other things, its involvement in transferring
the proceeds of criminal activities. Although PayPal has adopted
a program to comply with these laws and regulations, any errors
or failure to implement the program properly could lead to
lawsuits, administrative action, and prosecution by the
government. In July 2003, PayPal agreed with the U.S. Attorney
for the Eastern District of Missouri that it would pay
$10 million as a civil forfeiture to settle allegations
that its provision of services to online gambling merchants
violated provisions of the USA PATRIOT Act and further agreed to
have its compliance program reviewed by an independent audit
firm. PayPal is also subject to regulations that require it to
report suspicious activities involving transactions of $2,000 or
more and may be required to obtain and keep more detailed
records on the senders and recipients in certain transfers of
$3,000 or more. The interpretation of suspicious activities in
this context is uncertain. Future regulations under the USA
PATRIOT Act may require PayPal to revise the procedures it uses
to verify the identity of its customers and to monitor
international transactions more closely. As PayPal localizes its
service in other countries, additional verification and
reporting requirements could apply. These regulations could
impose significant costs on PayPal and make it more difficult
for new customers to join its network. PayPal could be required
to learn more about its customers before opening an account, to
obtain additional verification of customers and to monitor its
customers’ activities more closely. These requirements, as
well as any additional restrictions imposed by Visa, MasterCard,
American Express, and Discover, could raise PayPal’s costs
significantly and reduce the attractiveness of its product.
Failure to comply with federal, state or foreign country money
laundering laws could result in significant criminal and civil
lawsuits, penalties, and forfeiture of significant assets.
We are
subject to intellectual property and other
litigation.
In April 2001, two of our European subsidiaries, eBay GmbH and
eBay International AG, were sued by Montres Rolex S.A. and
certain of its affiliates in the regional court of Cologne,
Germany. The suit subsequently was transferred to the regional
court in Düsseldorf, Germany. Rolex alleged that our
subsidiaries were infringing Rolex’s trademarks as a result
of users selling counterfeit Rolex watches through our German
website. The suit also alleged unfair competition. Rolex sought
an order enjoining the sale of Rolex-branded watches on the
website as well as damages. In December 2002, a trial was held
in the matter and the court ruled in favor of eBay on all causes
of action. Rolex appealed the ruling to the Higher Regional
Court of Düsseldorf, and the appeal was heard in October
2003. In February 2004, the court rejected Rolex’s appeal
and ruled in our favor. Rolex has appealed the ruling to the
German Federal Supreme Court. In March 2004, the German Federal
Supreme Court ruled in favor of Rolex in a case involving an
unrelated company, ricardo.de AG, but somewhat comparable legal
theories. The court issued its written decision in that case in
September 2004. Although it is not yet clear what effect the
reasoning of the German Federal Supreme Court’s ricardo.de
decision would have when applied to eBay, we believe the
Court’s decision will likely not require significant
changes to our business practices.
In September 2001, MercExchange LLC filed a complaint against
us, our Half.com subsidiary and ReturnBuy, Inc. in the U.S.
District Court for the Eastern District of Virginia
(No. 2:01-CV-736)
alleging infringement of three patents (relating to online
consignment auction technology, multiple database searching and
electronic consignment systems) and seeking a permanent
injunction and damages (including treble damages for willful
infringement). In October 2002, the court granted in part our
summary judgment motion, effectively invalidating the patent
related to online auction technology and rendering it
unenforceable. This ruling left only two patents in the case.
Trial of the matter began in April 2003. In May 2003, the jury
returned a verdict finding that eBay had willfully infringed one
and Half.com had willfully infringed both of the patents in the
suit, awarding $35 million in compensatory damages. Both
parties filed post-trial motions, and in August 2003, the court
entered judgment for MercExchange in the amount of
$29.5 million, plus pre-judgment interest and post-judgment
interest in an amount to be determined, while denying
MercExchange’s request for an injunction and
attorneys’ fees. We appealed the verdict and judgment in
favor of MercExchange and MercExchange filed a cross-appeal of
the granting in part of our summary judgment motion and the
denial of its request for an injunction and attorneys’ fees.
In March 2005, the U.S. Court of Appeals for the Federal Circuit
issued a ruling in the appeal of the MercExchange patent
litigation suit which, among other things (1) invalidated
all claims asserted against eBay and Half.com arising out of the
multiple database search patent and reduced the verdict amount
by $4.5 million; (2) upheld the electronic consignment
system patent; (3) affirmed the district court’s
refusal to award attorneys’ fees or enhanced damages
against us; (4) reversed the district court’s order
granting summary judgment in our favor regarding the auction
patent; and (5) reversed the district court’s refusal
to grant an injunction and remanded that issue to the district
court for further proceedings. In May 2005, the Court of Appeals
for the Federal Circuit granted our petition to stay the mandate
in the case in order to allow us to petition the U.S. Supreme
Court for review on certain issues. We filed our petition for
review with the U.S. Supreme Court on July 25, 2005, and on
November 28, 2005, the U.S. Supreme Court granted our
petition for review. In parallel with the federal court
proceedings, at our request, the U.S. Patent and Trademark
Office is actively reexamining each of the patents in suit,
having found that
substantial questions exist regarding the validity of the claims
contained in them. In January 2005, the Patent and Trademark
Office issued an initial ruling rejecting all of the claims
contained in the patent that related to online auctions; in
March 2005, the Patent and Trademark Office issued an initial
ruling rejecting all of the claims contained in the patent that
related to electronic consignment systems; and in May 2005, the
Patent and Trademark Office issued an initial ruling rejecting
all of the claims contained in the patent that related to
multiple database searching. Even if successful, our litigation
of these matters will continue to be costly. In addition, as a
precautionary measure, we have modified certain functionality of
our websites and business practices in a manner which we believe
would avoid any further infringement. For this reason, we
believe that any injunction that might be issued by the district
court will not have any impact on our business. We also believe
we have appropriate reserves for this litigation. Nonetheless,
if the modifications to the functionality of our websites and
business practices are not sufficient to make them
non-infringing, we would likely be forced to pay significant
additional damages and licensing fees and/or modify our business
practices in an adverse manner.
In August 2002, Charles E. Hill & Associates, Inc.
filed a lawsuit in the U.S. District Court for the Eastern
District of Texas
(No. 2:02-CV-186)
alleging that we and 17 other companies, primarily large
retailers, infringed three patents owned by Hill generally
relating to electronic catalog systems and methods for
transmitting and updating data at a remote computer. The suit
seeks an injunction against continuing infringement, unspecified
damages, including treble damages for willful infringement, and
interest, costs, expenses, and fees. The case was transferred to
the U.S. District Court for the Southern District of Indiana in
January 2003, but was transferred back to the U.S. District
Court for the Eastern District of Texas in December 2003. A
scheduling conference was held in November 2004 and a
preliminary trial date has been set for February 2006. A claim
construction hearing was held on August 19, 2005. The
defendants have filed a motion for summary judgment of
noninfringement and a motion for summary judgment on the
priority date of the parent patent and consequential invalidity
of the two subsequent patents. A number of the initial
defendants have settled this with the plaintiff with respect to
their activities. We believe that we have meritorious defenses
and intend to defend ourselves vigorously.
In February 2002, PayPal was sued in California state court
(No. CV-805433) in
a purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates California state consumer
protection laws and is an unfair business practice and a breach
of PayPal’s User Agreement. This action was re-filed with a
different named plaintiff in June 2002
(No. CV-808441),
and a similar action was also filed in the U.S. District Court
for the Northern District of California in June 2002
(No. C-02-2777).
In March 2002, PayPal was sued in the U.S. District Court for
the Northern District of California
(No. C-02-1227) in
a purported class action alleging that its limiting access to
customer accounts and failure to promptly restore access to
legitimate accounts violates federal and state consumer
protection and unfair business practice laws. The two federal
court actions were consolidated into a single case, and the
state court action was stayed pending developments in the
federal case. In June 2004, the parties announced that they had
reached a proposed settlement. The settlement received approval
from the federal court on November 2, 2004, and the state
court action was dismissed with prejudice in March 2005. In the
settlement, PayPal does not acknowledge that any of the
allegations in the case are true. Under the terms of the
settlement, certain PayPal account holders will be eligible to
receive payment from a settlement fund of $9.25 million,
less administrative costs and the amount awarded to
plaintiffs’ counsel by the court. That sum is being
distributed to class members who have submitted timely claims in
accordance with the settlement’s plan of allocation, part
of which still must be approved by the court. The parties expect
that the remaining part of the plan of allocation will be
submitted to the court in the fourth quarter of 2005. The amount
of the settlement was fully accrued in our consolidated
statement of income for the year ended December 31, 2003.
In July 2004, a purported class action lawsuit was filed by two
eBay users in Superior Court of the State of California, County
of Santa Clara (No. 104CV022708) alleging that eBay engaged
in improper billing practices as the result of problems with the
rollout of a new billing software system in the second and third
quarters of 2004. The lawsuit sought damages and injunctive
relief. An amended complaint was filed in January 2005, dropping
one plaintiff, changing the capacity of the other plaintiff to
that of representative plaintiff, and adding seven additional
eBay users as plaintiffs. The amended complaint expanded its
claim to include numerous alleged improper billing practices
from September 2003 until the present. In February 2005, eBay
filed a motion to strike and a demurrer
seeking to dismiss the complaint. In April 2005, the court
sustained portions of the demurrer, but granted the plaintiffs
leave to amend their complaint. The plaintiffs filed a second
amended complaint, dropping the last original plaintiff and
again adding new plaintiffs. We filed a motion to strike and a
demurrer regarding the plaintiffs’ second amended
complaint. In July 2005, the court again sustained a portion of
the demurrer and again granted the plaintiffs leave to amend
their complaint, and the plaintiffs filed a third amended
complaint. We have filed an answer to the plaintiffs’ third
amended complaint, and are currently in the initial phase of
discovery. We believe that we have meritorious defenses and
intend to defend ourselves vigorously.
In February 2005, eBay was sued in Superior Court of the State
of California, County of Santa Clara (No. 105CV035930) in a
purported class action alleging that certain bidding features of
our site constitute “shill bidding” for the purpose of
artificially inflating bids placed by buyers on the site. The
complaint alleges violations of California’s Auction Act,
California’s Consumer Remedies Act, and unfair competition.
The complaint seeks injunctive relief, damages, and a
constructive trust. In April 2005, we filed a demurrer seeking
to dismiss the complaint. We have agreed to stay the demurrer
and participate in a mediation with the plaintiffs, which is
ongoing. We believe that we have meritorious defenses and intend
to defend ourselves vigorously.
In March 2005, eBay, PayPal, and an eBay seller were sued in
Supreme Court of the State of New York, County of Kings
(No. 6125/05) in a purported class action alleging that
certain disclosures regarding PayPal’s Buyer Protection
Policy, users’ chargeback rights, and the effects of
users’ choice of funding mechanism are deceptive and/or
misleading. The complaint alleged misrepresentation on the part
of eBay and PayPal, breach of contract and deceptive trade
practices by PayPal, and that PayPal and eBay have jointly
violated the civil RICO statute (18 U.S.C.
Section 1961(4)). In April 2005, eBay and PayPal removed
the case to the U.S. District Court for the Eastern District of
New York and the plaintiffs filed an amended complaint in the
U.S. District Court
(No. 05-CV-01720)
repeating the allegations of the initial complaint but dropping
the civil RICO allegations. The complaint seeks injunctive
relief, compensatory damages, and punitive damages. The parties
agreed to stay further proceedings pending a mediation hearing,
which took place in July 2005. The parties are continuing
mediation discussions, though the stay of proceedings has
expired. We believe that eBay and PayPal have meritorious
defenses and intend to defend ourselves vigorously.
In January 2005, 51 former shareholders of Epinions, Inc. common
stock including founders and former employees of that company
filed a lawsuit in Superior Court of the State of California
County of San Francisco (No. CGC 05-437906) related to the
April 2003 merger of Epinions and DealTime, Ltd. The lawsuit was
filed against certain of Epinions’ former officers and
directors and preferred shareholders and the company that
resulted from the merger, Shopping.com Ltd. eBay completed its
acquisition of Shopping.com Ltd. on August 30, 2005. The
lawsuit contended that the defendants were responsible for
breaches of fiduciary duty and material misstatements and
omissions, that defendants undervalued the DealTime stock that
Epinions’ shareholders received in connection with the
merger, and that plaintiffs’ common stock of Epinions was
wrongfully cancelled without compensation. Defendants disputed
the contentions of the case and denied any allegations of
wrongdoing. The parties have reached agreement on a settlement
of this matter. The settlement amount has been accounted for as
an assumed liability in connection with our acquisition of
Shopping.com.
Other third parties have from time to time claimed, and others
may claim in the future, that we have infringed their
intellectual property rights. We have been notified of several
potential patent disputes, and expect that we will increasingly
be subject to patent infringement claims as our services expand
in scope and complexity. In particular, we expect to face
additional patent infringement claims involving services we
provide, including various aspects of our Payments and
communications businesses. We have in the past been forced to
litigate such claims. We may also become more vulnerable to
third-party claims as laws such as the Digital Millennium
Copyright Act, the Lanham Act and the Communications Decency Act
are interpreted by the courts and as we expand geographically
into jurisdictions where the underlying laws with respect to the
potential liability of online intermediaries like ourselves are
either unclear or less favorable. These claims, whether
meritorious or not, could be time consuming and costly to
resolve, cause service upgrade delays, require expensive changes
in our methods of doing business, or could require us to enter
into costly royalty or licensing agreements.
From time to time, we are involved in other disputes or
regulatory inquiries that arise in the ordinary course of
business. The number and significance of these disputes and
inquiries are increasing as our business expands and our company
grows larger. Any claims or regulatory actions against us,
whether meritorious or not, could be time consuming, result in
costly litigation, require significant amounts of management
time, and result in the diversion of significant operational
resources.
Government
inquiries may lead to charges or penalties.
A large number of transactions occur on our websites. We believe
that government regulators have received a substantial number of
consumer complaints about both eBay and PayPal, which, while
small as a percentage of our total transactions, are large in
aggregate numbers. As a result, we have from time to time been
contacted by various foreign and domestic governmental
regulatory agencies that have questions about our operations and
the steps we take to protect our users from fraud. PayPal has
received inquiries regarding its restriction and disclosure
practices from the Federal Trade Commission and these and other
business practices from the attorneys general of a number of
states. If PayPal’s processes are found to violate federal
or state law on consumer protection and unfair business
practices, it could be subject to an enforcement action or
fines. If PayPal becomes subject to an enforcement action, it
could be required to restructure its business processes in ways
that would harm its business, and to pay substantial fines. Even
if PayPal is able to defend itself successfully, an enforcement
action could cause damage to its reputation, could consume
substantial amounts of its management’s time and attention,
and could require PayPal to change its customer service and
operations in ways that could increase its costs and decrease
the effectiveness of its anti-fraud program. Both eBay and
PayPal are likely to receive additional inquiries from
regulatory agencies in the future, which may lead to action
against either company. We have responded to all inquiries from
regulatory agencies by describing our current and planned
antifraud efforts, customer support procedures, operating
procedures and disclosures. If one or more of these agencies is
not satisfied with our response to current or future inquiries,
we could be subject to fines or other penalties, or forced to
change our operating practices in ways that could harm our
business.
In January 1999, we received initial requests to produce certain
records and information to the federal government relating to an
investigation of possible illegal transactions in connection
with our websites. We were informed that the inquiry includes an
examination of our practices with respect to these transactions.
In order to protect the investigation, the court has ordered
that no further public disclosures be made with respect to the
matter. Any civil or criminal charges against us would likely
harm our business due to negative publicity, the cost of
litigation, the diversion of management time, and any fines or
penalties assessed.
We are subject to laws relating to the use and transfer of
personally identifiable information about our users, especially
users located outside of the U.S. Violation of these laws, which
in many cases apply not only to third-party transactions but
also to transfers of information between ourselves and our
subsidiaries, and between ourselves, our subsidiaries, and other
parties with which we have commercial relations, could subject
us to significant penalties and negative publicity and could
adversely affect us.
The
listing or sale by our users of pirated or counterfeit items may
harm our business.
We have received in the past, and we anticipate receiving in the
future, communications alleging that certain items listed or
sold through our service by our users infringe third-party
copyrights, trademarks and trade names, or other intellectual
property rights. Although we have sought to work actively with
the owners of intellectual property rights to eliminate listings
offering infringing items on our websites, some rights owners
have expressed the view that our efforts are insufficient.
Content owners and other intellectual property rights owners
have been active in defending their rights against online
companies, including eBay. Allegations of infringement of
intellectual property rights have resulted in litigation against
us from time to time, including litigation brought by
Tiffany & Co. in the U.S., Rolex S.A. in Germany, and a
number of other owners of intellectual property rights. While we
have been largely successful to date in defending against such
litigation, more recent cases have been based, at least in part,
on different legal theories than those of earlier cases, and
there is no guarantee that we will continue to be successful in
our defense. In addition, we expect that this type of litigation
may increase as our sites gain prominence in markets outside of
the U.S., where the laws may be unsettled or less favorable to
us. Such litigation is costly for us, could result in damage
awards or increased costs of doing business through adverse
judgment or
settlement, could require us to change our business practices in
expensive ways, or could otherwise harm our business. Litigation
against other online companies could result in interpretations
of the law that could also require us to change our business
practices or otherwise increase our costs.
We are
subject to risks associated with information disseminated
through our service.
The law relating to the liability of online services companies
for information carried on or disseminated through their
services is currently unsettled. Claims could be made against
online services companies under both U.S. and foreign law for
defamation, libel, invasion of privacy, negligence, copyright or
trademark infringement, or other theories based on the nature
and content of the materials disseminated through their
services. Several private lawsuits seeking to impose liability
upon us under a number of these theories have been brought
against us. In addition, domestic and foreign legislation has
been proposed that would prohibit or impose liability for the
transmission over the Internet of certain types of information.
Our service features a Feedback Forum, which includes
information from users regarding other users. Although all such
feedback is generated by users and not by us, claims of
defamation or other injury have been made in the past and could
be made in the future against us for content posted in the
Feedback Forum. Several recent court decisions have narrowed the
scope of the immunity provided to Internet service providers
like us under the Communications Decency Act. This trend, if
continued, may increase our potential liability to third parties
for the user-provided content on our site. Our liability for
such claims may be higher in jurisdictions outside the U.S.
where laws governing Internet transactions are unsettled. If we
become liable for information provided by our users and carried
on our service in any jurisdiction in which we operate, we could
be directly harmed and we may be forced to implement new
measures to reduce our exposure to this liability. This may
require us to expend substantial resources or to discontinue
certain service offerings, which would negatively affect our
financial results. In addition, the increased attention focused
upon liability issues as a result of these lawsuits and
legislative proposals could harm our reputation or otherwise
impact the growth of our business. Any costs incurred as a
result of this potential liability could harm our business.
Customer
complaints or negative publicity about our customer service
could diminish use of our services.
Customer complaints or negative publicity about our customer
service could severely diminish consumer confidence in and use
of our services. Breaches of our customers’ privacy and our
security measures could have the same effect. Measures we
sometimes take to combat risks of fraud, violations of our
rules, and breaches of privacy and security can damage relations
with our customers and can result in temporary or long term
suspension of their right to do business with us, which in turn
may result in substantial loss of business to them. These
measures heighten the need for prompt and accurate customer
service to resolve irregularities and disputes. Effective
customer service requires significant personnel expense, and
this expense, if not managed properly, could significantly
impact our profitability. Failure to manage or train our
customer service representatives properly could compromise our
ability to handle customer complaints effectively. If we do not
handle customer complaints correctly and effectively, we may
become involved in litigation or our reputation may suffer and
we may lose our customers’ confidence. Any of these results
could adversely affect our business.
Because it is providing a financial service and operating in a
more regulated environment, PayPal, unlike eBay, must provide
telephone as well as email customer service and must resolve
certain customer contacts within shorter time frames. As part of
PayPal’s program to reduce fraud losses, it may temporarily
restrict the ability of customers to withdraw their funds if
those funds or the customer’s account activity are
identified by PayPal’s anti-fraud models as suspicious.
PayPal has in the past received negative publicity with respect
to its customer service and account restrictions, and has been
the subject of purported class action lawsuits and state
attorney general inquiries alleging, among other things, failure
to resolve account restrictions promptly. If PayPal is unable to
provide quality customer support operations in a cost-effective
manner, PayPal’s users may have negative experiences,
PayPal may receive additional negative publicity, its ability to
attract new customers may be damaged, and it could become
subject to additional litigation. Current and future revenues
could suffer, or its operating margins may decrease. In
addition, negative publicity about or experiences with
PayPal’s customer support could cause eBay’s
reputation to suffer or affect consumer confidence in eBay as a
whole.
Our
stock price has been and may continue to be extremely
volatile.
The trading price of our common stock has been and is likely to
be extremely volatile and could fluctuate in response to a
variety of factors, including the following:
•
actual or anticipated variations in our quarterly operating
results and expected future results;
•
changes in, or failure to meet, financial estimates by
securities analysts;
•
unscheduled system downtime;
•
announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures, new
products or capital commitments;
•
additions or departures of key personnel;
•
announcements of technological innovations or new services by us
or our competitors;
•
initiation of or developments in litigation affecting us;
•
conditions or trends in the Internet and online commerce
industries;
•
changes in the market valuations of other Internet, online
commerce, or technology companies;
•
developments in regulation;
•
unanticipated economic or political events;
•
sales of our common stock or other securities in the open
market; and
•
other events or factors, including those described in this
“Risk Factors That May Affect Results of Operations and
Financial Condition” section and others that may be beyond
our control.
The trading prices of Internet stocks in general, and ours in
particular, have experienced extreme price and volume
fluctuations in recent periods. These fluctuations often have
been unrelated or disproportionate to the operating performance
of these companies. Even considering recent changes, the
valuation of our stock remains high based on conventional
valuation standards such as
price-to-earnings
and
price-to-sales
ratios. The trading price of our common stock has decreased
sharply from its level in the fourth quarter of 2004, but
remains higher than our stock price during 2002 and early 2003.
This trading price and valuation may not be sustained. Negative
changes in the public’s perception of the prospects of
Internet or e-commerce
or technology companies have in the past and may in the future
depress our stock price regardless of our results. Other broad
market and industry factors may decrease the market price of our
common stock, regardless of our operating performance. Market
fluctuations, as well as general political and economic
conditions, such as recession or interest rate or currency rate
fluctuations, also may decrease the market price of our common
stock. Securities
class-action litigation
is often instituted following declines in the market price of a
company’s securities. Litigation of this type could result
in substantial costs and a diversion of management’s
attention and resources.
Problems
with third parties who provide services to our users could harm
our business.
A number of parties provide services to our users that
indirectly benefit us. Such services include seller tools that
automate and manage listings, merchant tools that manage
listings and interface with inventory management software,
storefronts that help our users list items, caching services
that make our sites load faster, among others. In some cases we
have contractual agreements with these companies that give us a
direct financial interest in their success, while in other cases
we have none. In either circumstance, financial, regulatory,
technical or other problems that prevent these companies from
providing services to our users could reduce the number of
listings on our websites or make completing transactions on our
websites more difficult, and thereby harm our business. Any
security breach at one of these companies could also affect our
customers and harm our business. Although we generally have been
able to renew or extend the terms of contractual arrangements
with these third party service providers on acceptable terms,
there can be no assurance that we will continue to be able to do
so in the future.
Other
companies or governmental agencies may view our behavior as
anti-competitive.
Other companies have in the past and may in the future allege
that our actions violate the antitrust or competition laws of
the U.S. or other countries, or otherwise constitute unfair
competition. Such claims typically are very expensive to defend,
involve negative publicity and diversion of management time and
effort, and could result in significant judgments against us.
We
depend on key personnel.
Our future performance depends substantially on the continued
services of our senior management and other key personnel and
our ability to retain and motivate them. The loss of the
services of any of our executive officers or other key employees
could harm our business. We do not have long-term employment
agreements with any of our key personnel, we do not maintain any
“key person” life insurance policies, and our Chief
Executive Officer has fully vested the vast majority of her
equity incentives. Our new businesses all depend on attracting
and retaining key personnel. Our future success also will depend
on our ability to attract, train, retain and motivate highly
skilled technical, managerial, marketing, and customer support
personnel. Competition for these personnel is intense, and we
may be unable to successfully attract, integrate, or retain
sufficiently qualified personnel. In making employment
decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the stock
options they are to receive in connection with their employment.
Fluctuations in our stock price may make it more difficult to
retain and motivate employees whose stock option strike prices
are substantially above current market prices. Similarly,
decreases in the number of unvested stock options held by
existing employees, either because their options have vested or
because the size of follow-on option grants has declined, may
make it more difficult to retain and motivate employees.
Skype’s future success depends substantially upon the
continued services of its senior management and key personnel,
and the loss of their services could harm our business. Several
key members of Skype’s engineering team are consultants,
not full time employees, who provide services to us and third
parties. Many of Skype’s employees had equity in Skype
prior to its acquisition by eBay. Skype equity holders were
given the option of receiving their portion of the acquisition
consideration in the form of a lump-sum up-front payment or
receiving a lower up-front payment in exchange for the
possibility of receiving additional consideration in the form of
potential earn-out payments tied to the achievement of certain
performance targets prior to June 30, 2009. Most of
Skype’s senior management and key employees chose to
receive less up-front consideration in exchange for the
possibility of receiving the performance-based earn-out
payments. Eligible Skype employees are also expected to be
granted eBay stock options. However, the earn-out payments are
not tied to continued employment with Skype or eBay, and key
Skype employees may choose to depart due to differences in
corporate culture, because they believe the earn-out targets
will be achieved without their contributions, or because they
believe the earn-out targets are not achievable. The loss of the
services of any of Skype’s senior management or key
personnel could delay the development and introduction of new
features and services, and could harm our ability to grow
Skype’s business.
Our
industry is intensely competitive.
eBay’s Marketplaces businesses currently or potentially
compete with a number of companies providing both particular
categories of goods and broader ranges of goods. The Internet
provides new, rapidly evolving and intensely competitive
channels for the sale of all types of goods. We expect
competition to intensify in the future. The barriers to entry
into these channels are relatively low, and current offline and
new competitors can easily launch online sites at a nominal cost
using commercially available software or partnering with any one
of a number of successful
e-commerce companies.
Our broad-based competitors include the vast majority of
traditional department, warehouse, discount, and general
merchandise stores, emerging online retailers, online classified
services, and other shopping channels such as offline and online
home shopping networks. These include most prominently:
Wal-Mart, Kmart, Target, Sears, Macy’s, JC Penney, Costco,
Office Depot, Staples, OfficeMax, Sam’s Club, Amazon.com,
Buy.com, AOL.com, Yahoo! Shopping, MSN, QVC, and Home Shopping
Network.
A number of companies have launched a variety of services that
provide new channels for buyers to find and buy items from
sellers of all sizes. We recently acquired Shopping.com Ltd., an
online shopping comparison site.
Shopping.com competes with sites such as Buy.com, Google’s
Froogle, In-Store.com, MySimon.com, Nextag.com,
Pricegrabber.com, Shopzilla, and Yahoo! Product Search, which
offer shopping search engines that allow consumers to search the
Internet for specified products. Similarly, sellers are
increasingly acquiring new customers through search engines,
both through such search engines “natural search”
capabilities and by paying for search-related advertisements on
search engine sites such as Google and Yahoo!. The providers of
search technology seek to improve their products and make them
more attractive to, among others, our users. We use product
search engines and paid search advertising to channel users to
our sites, but these services also have the potential to divert
users to other online shopping destinations.
We also face competition from local, regional, and national
specialty retailers and exchanges in each of our categories of
products. Many competitors have been successful at establishing
marketplaces that cater to a particular retail category, such as
vehicles, tickets, or sporting goods. Examples of
category-specific competitors include:
Books/Movies/Music: Abebooks.com, Amazon.com,
Barnes & Noble, Alibris.com, Blockbuster, BMG, Columbia
House, Best Buy, CDNow, Express.com, Emusic.com, and Tower
Records;
Clothing &
Accessories: Abercrombie & Fitch,
AE.com, Bloomingdale’s, Bluefly.com, Coldwater-Creek.com,
Delias.com, Dockers.com, DSW, Eddie Bauer, eBags, eLuxury, The
Gap, J. Crew, Kohl’s, Land’s End, Lane Bryant, The
Limited, LLBean, Macy’s, The Men’s Wearhouse,
Neiman-Marcus, Nordstrom, Old Navy, Overstock.com, Payless,
Ross, Saks Fifth Avenue, Shoes.com, Urban Outfitters,
Victoria’s Secret, Yoox.com, and Zappos.com;
Collectibles: Beckett, Bonhams &
Butterfields, Christie’s, Collectiblestoday.com, Go
Collect, Greg Manning Auctions, Heritage, Just Glass, Mastronet,
Pottery Auction, Replacements.com, Ruby Lane, Shop At Home,
Sotheby’s, Tias, US Mint, US Postal Service, antique and
collectible dealers, antique and collectible fairs, auction
houses, estate sales, flea markets and swap meets, independent
coin and stamp dealers, coin and stamp shows, and specialty
retailers;
Computers, Consumer Electronics, and Cameras &
Photo: Abe Electronics, Best Buy, Buy.com,
Circuit City, CNET, CompUSA, Computer Discount Warehouse, Dell,
Electronics Boutique, Fry’s Electronics, Gamestop, Gateway,
The Good Guys, Hewlett Packard, IBM, MicroWarehouse,
Overstock.com, PC Connection, PCMall.com, Radio Shack, Ritz
Camera, Tech Depot, Tiger Direct, Tweeter Home Entertainment,
uBid, major wireless carriers, and computer, consumer
electronics, and photography retailers;
Jewelry & Watches: Bluenile.com,
Diamond.com, Macy’s, Mondera.com, HSN.com, QVC.com,
Odimo.com, Ross-Simons, ShopNBC.com, Signet/Sterling, Tiffany,
Whitehall, Zales, and a variety of independent jewelry and watch
retailers who have opened their own ecommerce sites;
Motors (used vehicles and parts): Advance Auto
Parts, AutoByTel.com, Autonation.com, AutoPartsPlace,
AutoTrader.com, Autozone, Barons Ltd., Barrett-Jackson,
California Classics, Car Parts Wholesale, Car-Part.com, CarMax,
Cars.com, CarsDirect.com, Collectorcartraderonline.com, CSK
Auto, Dealix, Discount Auto Parts, Dupont Registry,
eClassics.com, ExpressAutoparts.com, General Parts (Carquest),
Genuine/NAPA, Hemmings, iMotors.com, JC Whitney, Kragen, Kruse
International, OpenAuto.com, PartsAmerica.com, Pep Boys, RM
Auctions, Inc., The Tire Rack, TraderOnline, Trader Publishing,
newspaper classifieds, used car dealers, swap meets, car clubs,
and vehicle recyclers;
Sports: Academy Sports, Bass Pro Shops, Big 5,
Cabela’s, Dick’s Sporting Goods, GolfClubExchange.com,
Golfsmith, GSI Commerce, Performance Bike, Play It Again Sports,
REI, The Sports Authority, SportsLine.com, and TGW.com; and
Toys: FAO Schwarz, KB Toys, Towerhobbies.com,
Toys R Us, and independent specialty toy and hobby retailers.
Our international marketplace websites compete with similar
online and offline channels in each of their vertical categories
in most countries. In addition, they compete with general online
e-commerce sites, such
as Quelle and Otto in Germany, Yahoo-Kimo in Taiwan, Daum and
Gmarket in South Korea, TaoBao and 1pai, a partnership between
Sina.com and Yahoo! in China, and Amazon in the U.K. and other
countries. In some of these countries, there are online sites
that have much larger customer bases and greater brand
recognition than we do, and in certain of these jurisdictions
there are competitors that may have a better understanding of
local culture and commerce than we do.
The principal competitive factors for eBay include the following:
•
ability to attract buyers and sellers;
•
volume of transactions and price and selection of goods;
•
customer service; and
•
brand recognition.
With respect to our online competition, additional competitive
factors include:
Some current and potential competitors have longer company
operating histories, larger customer bases and greater brand
recognition in other business and Internet sectors than we do.
Other online trading services may be acquired by, receive
investments from, or enter into other commercial relationships
with larger, well-established and well-financed companies. As a
result, some of our competitors with other revenue sources may
be able to devote more resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote
substantially more resources to website and systems development
than we can. Some of our competitors have offered services for
free and others may do this as well. We may be unable to compete
successfully against current and future competitors. In
addition, certain offline competitors may encourage
manufacturers to limit or cease distribution of their products
to dealers who sell through online channels such as eBay, or may
attempt to use existing or future government regulation to
prohibit or limit online commerce in certain categories of goods
or services. The adoption by manufacturers or government
authorities of policies or regulations discouraging the sales of
goods or services over the Internet could force eBay users to
stop selling certain products on our websites. Increased
competition or anti-Internet distribution policies or
regulations may result in reduced operating margins, loss of
market share and diminished value of our brand.
In order to respond to changes in the competitive environment,
we may, from time to time, make pricing, service or marketing
decisions or acquisitions that could harm our profitability. For
example, we have implemented a buyer protection program that
generally insures items up to a value of $200, with a $25
deductible, for users with a non-negative feedback rating at no
cost to the user. PayPal has implemented a similar buyer
protection program covering losses from selected eBay sellers up
to $1,000, with no deductible. Depending on the amount and size
of claims we receive under these programs, these product
offerings could harm our profitability. In addition, certain
competitors may offer or continue to offer free shipping or
other transaction related services, which could be
impractical or inefficient for eBay users to match. New
technologies may increase the competitive pressures by enabling
our competitors to offer a lower cost service.
Although we have established Internet traffic arrangements with
several large online services and search engine companies, these
arrangements may not be renewed on commercially reasonable terms
or these companies may decide to promote competitive services.
Even if these arrangements are renewed, they may not result in
increased usage of our services. In addition, companies that
control user access to transactions through network access,
Internet browsers, or search engines, could promote our
competitors, channel current or potential users to their
vertically integrated electronic commerce sites or their
advertisers’ sites, attempt to restrict our access, or
charge us substantial fees for inclusion.
The market for PayPal’s product is emerging, intensely
competitive, and characterized by rapid technological change.
PayPal competes with existing online and off-line payment
methods, including, among others:
•
credit card merchant processors that offer their services to
online merchants, including Card Services International, Chase
Paymentech Solutions, First Data, iPayment, and Wells Fargo;
and payment gateways, including CyberSource and Authorize.net;
•
Western Union, BidPay.com and Western Union MoneyZap, each
operated by subsidiaries of First Data;
•
CheckFree;
•
processors that provide online merchants the ability to offer
their customers the option of paying for purchases from their
bank account, including Certegy and TeleCheck, a subsidiary of
First Data, or to pay on credit, including Bill Me Later;
•
providers of traditional payment methods, particularly credit
cards, checks, money orders, and Automated Clearing House
transactions; and
•
issuers of stored value targeted at online payments, including
VisaBuxx, NetSpend and Next Estate.
In addition, Google has stated it is developing a new payment
service.
Some of these competitors have longer operating histories,
significantly greater financial, technical, marketing, customer
service and other resources, greater name recognition, or a
larger base of customers in affiliated businesses than PayPal.
PayPal’s competitors may respond to new or emerging
technologies and changes in customer requirements faster and
more effectively than PayPal. They may devote greater resources
to the development, promotion, and sale of products and services
than PayPal, and they may offer lower prices. PayPal may be
forced to lower its prices in response. Competing services tied
to established banks and other financial institutions may offer
greater liquidity and engender greater consumer confidence in
the safety and efficacy of their services than PayPal.
Overseas, PayPal faces competition from similar channels and
payment methods. In each country, numerous banks provide
standard online credit card acquiring and processing services,
and these banks typically have leading market share. In
addition, PayPal faces competition from Visa’s Visa Direct,
MasterCard’s MoneySend, ING’s Way2Pay and Royal Bank
of Scotland’s World Pay in the European Community, NOCHEX,
Moneybookers, and NETeller and FirePay in the U.K., CertaPay and
HyperWallet in Canada, Paymate in Australia, Alipay and 99Bill
in China and Inicis in South Korea. In addition, in certain
countries, such as Germany and Australia, electronic funds
transfer is a leading method of payment for both online and
offline transactions. As in the U.S., established banks and
other financial institutions that do not currently offer online
payments could quickly and easily develop such a service.
The market for Skype’s services is also emerging, intensely
competitive, and characterized by rapid technological change.
Many traditional telecommunications carriers and cable providers
offer, or have indicated that they plan to offer, VoIP services
that compete with the services Skype provides. In addition, many
Internet companies, including AOL, Google, Microsoft, and Yahoo!
offer, or have indicated that they plan to offer in the near
future, VoIP services that are similar to Skype’s. We
expect VoIP competitors to continue to improve the performance
of their current products and services and introduce new
products, services, and technologies. If Skype’s
competitors successfully introduce new products or services or
enhance their existing products or services,
this could reduce the market for Skype’s products and
services, increase price competition, or make Skype’s
products and services obsolete. For example, Skype’s
competitors may integrate more traditional methods of online
communication that do not involve VoIP technology, such as
instant messaging, with content and functionality that Skype
does not have, or that is superior to Skype’s, which could
lower Skype’s adoption rates, decrease its ability to
attract new users or cause its current users to migrate to a
competing service. In addition, some of Skype’s
competitors, such as telecommunications carriers and cable
television providers, may be able to bundle services and
products that Skype does not offer with VoIP telephony services.
These services could include various forms of wireless
communications, voice and data services, Internet access and
cable television. This form of bundling would put Skype at a
competitive disadvantage if these providers can combine a
variety of service offerings at a single attractive price.
Furthermore, competitors may choose to make their services
interoperable (as has recently been announced by Microsoft and
Yahoo) which could increase the attractiveness of their services
relative to Skype.
Many of Skype’s current and potential competitors have
longer operating histories, are substantially larger, and have
greater financial, marketing, technical, and other resources.
Many also have greater name recognition and a larger installed
base of customers than Skype has. As a result of their greater
resources, many current and potential competitors may be able
may be able to lower their prices substantially, thereby eroding
some or all of Skype’s cost advantage. Competitors may also
use their financial resources to lobby the government for
greater protection of their traditional businesses and to impose
costly regulatory burdens on Skype’s business.
Our
business depends on the development and maintenance of the
Internet infrastructure.
The success of our service will depend largely on the
development and maintenance of the Internet infrastructure. This
includes maintenance of a reliable network backbone with the
necessary speed, data capacity, and security, as well as timely
development of complementary products, for providing reliable
Internet access and services. The Internet has experienced, and
is likely to continue to experience, significant growth in the
numbers of users and amount of traffic. The Internet
infrastructure may be unable to support such demands. In
addition, increasing numbers of users, increasing bandwidth
requirements, or problems caused by “viruses,”“worms,” and similar programs may harm the performance
of the Internet. The backbone computers of the Internet have
been the targets of such programs. The Internet has experienced
a variety of outages and other delays as a result of damage to
portions of its infrastructure, and it could face outages and
delays in the future. These outages and delays could reduce the
level of Internet usage as well as the level of traffic and the
processing transactions on our service.
We
need to develop new services, features, and functions in order
to expand.
We plan to expand our operations by developing new or
complementary services, products, or transaction formats and
expanding the breadth and depth of our pre-trade and post-trade
services. We may be unable to expand our operations in a
cost-effective or timely manner. We are pursuing strategic
relationships with other companies to provide some of these
services. As a result, we may be unable to control the quality
of these services or adequately address problems that arise.
Expanding our operations in this manner also will require
significant additional expenses, development, operations and
other resources and will strain our management, financial and
operational resources. The lack of acceptance of any new
businesses or services could harm our business, damage our
reputation, and diminish the value of our brand.
We may
be unable to protect or enforce our own intellectual property
rights adequately.
We regard the protection of our trademarks, copyrights, patents,
domain names, trade dress, and trade secrets as critical to our
success. We aggressively protect our intellectual property
rights by relying on a combination of trademark, copyright,
patent, trade dress and trade secret laws, and through the
domain name dispute resolution system. We also rely on
contractual restrictions to protect our proprietary rights in
products and services. We have entered into confidentiality and
invention assignment agreements with our employees and
contractors, and confidentiality agreements with parties with
whom we conduct business in order to limit access to and
disclosure of our proprietary information. These contractual
arrangements and the other steps we have taken to protect our
intellectual property may not prevent misappropriation of our
technology or deter independent development of similar
technologies by others. We pursue the registration of our domain
names, trademarks, and service marks in the U.S. and
internationally. Effective trademark, copyright, patent, domain
name, trade dress, and trade secret
protection is very expensive to maintain and may require
litigation. We must protect our trademarks, patents, and domain
names in an increasing number of jurisdictions, a process that
is expensive and may not be successful in every location. We
have licensed in the past, and expect to license in the future,
certain of our proprietary rights, such as trademarks or
copyrighted material, to others. These licensees may take
actions that diminish the value of our proprietary rights or
harm our reputation.
We are
subject to the risks of owning real property.
We own real property including land and buildings related to our
operations. We have little experience in managing real property.
Ownership of this property subjects us to risks, including:
•
the possibility of environmental contamination and the costs
associated with fixing any environmental problems;
•
adverse changes in the value of these properties, due to
interest rate changes, changes in the neighborhoods in which the
properties are located, or other factors;
•
the possible need for structural improvements in order to comply
with zoning, seismic, disability act, or other requirements; and
•
possible disputes with tenants, neighboring owners, or others.
Some
anti-takeover provisions may affect the price of our common
stock.
Our Board of Directors has the authority to issue up to
10,000,000 shares of preferred stock and to determine the
preferences, rights and privileges of those shares without any
further vote or action by the stockholders. The rights of the
holders of common stock may be harmed by rights granted to the
holders of any preferred stock that may be issued in the future.
Some provisions of our certificate of incorporation and bylaws
could have the effect of making it more difficult for a
potential acquirer to acquire a majority of our outstanding
voting stock. These include provisions that provide for a
classified board of directors, prohibit stockholders from taking
action by written consent and restrict the ability of
stockholders to call special meetings. We are also subject to
provisions of Delaware law that prohibit us from engaging in any
business combination with any interested stockholder for a
period of three years from the date the person became an
interested stockholder, unless certain conditions are met. This
restriction could have the effect of delaying or preventing a
change of control.
We will not receive any of the proceeds from the sale of the
shares by the selling security holders. All proceeds from the
sale of the shares will be for the accounts of the selling
security holders.
This prospectus relates to the possible resale by the selling
stockholders of shares of common stock that we issued to them
pursuant to a Sale and Purchase Agreement, dated as of
September 11, 2005, by and among eBay, Skype Technologies
S.A. and the shareholders of Skype. We are filing the
registration statement of which this prospectus is a part
pursuant to the provisions of the registration rights agreement
we entered into with the selling stockholders.
The selling stockholders may from time to time offer and sell
pursuant to this prospectus any or all of the shares that such
selling stockholders acquired under the sale and purchase
agreement.
The following table presents information regarding the selling
stockholders and the shares that each such selling stockholder
may offer and sell from time to time under this prospectus. This
table is prepared based on information supplied to us by the
selling stockholders and reflects holdings as of
November 10, 2005. As used in this prospectus, the term
“selling stockholder” includes those selling
stockholders identified below and any donees, pledgees,
transferees or other successors in interest selling shares
received after the date of this prospectus from a selling
stockholder as a gift, pledge, or other non-sale related
transfer. The number of shares in the column “Number
of Shares Being Offered” represents all of the shares that
a selling stockholder may offer under this prospectus. The
column “Shares of Common Stock Beneficially Owned After
Offering” assumes that the selling stockholders sell all of
the shares offered under this prospectus. However, because the
selling stockholders may offer from time to time all, some or
none of their shares under this prospectus, or in another
permitted manner, no assurances can be given as to the actual
number of shares that will be sold by the selling security
holders or that will be held by the selling security holders
after completion of the sales. In addition, we do not know how
long the selling stockholders will hold their shares before
selling them, and we currently have no agreements, arrangements
or understandings with any selling stockholders regarding the
sale of any of their shares. Except as noted in the footnotes,
no selling stockholder has had, within the past three years, any
position, office, or material relationship with us or any of our
predecessors or affiliates.
Beneficial ownership is determined in accordance with
Rule 13d-3(d)
promulgated by the SEC under the Securities Exchange Act of
1934, as amended. The percentage of shares beneficially owned
prior to the offering is based on 1,398,370,226 shares of
our common stock actually outstanding as of November 10,2005.
Shares of Common Stock
Shares of Common Stock
Beneficially Owned
Beneficially Owned
Prior to Offering
Number of Shares
After Offering
Security Holder
Number
Percent
Being Offered(1)
Number
Percent
A.B. Konditionalis
756,552
(2)
*
756,552
0
*
AB Grossemad
581,955
(3)
*
581,955
0
*
Ambient Sound Investments OU
1,780,065
(4)
*
1,780,065
0
*
BESSEC Ventures V LP
244,649
(5)
*
244,649
0
*
Bessemer Venture Investors III LP
35,060
(6)
*
35,060
0
*
Bessemer Venture Partners V LP
216,966
(7)
*
216,966
0
*
Bizworld Foundation
15,010
(8)
*
15,010
0
*
BVE 2001 (Q) LLC
82,572
(9)
*
82,572
0
*
BVE 2001 LLC
5,076
(10)
*
5,076
0
*
Draper Fisher Jurvetson ePlanet
Partners Fund LLC
187,296
(11)
*
187,296
0
*
Draper Fisher Jurvetson ePlanet
Ventures GmbH & Co. KG
159,128
(12)
*
159,128
0
*
Draper Fisher Jurvetson ePlanet
Ventures L.P.
9,017,237
(13)
*
9,017,237
0
*
Hardymon Family Limited Partnership
48,682
(14)
*
48,682
0
*
Howard Hartenbaum
177,123
(15)
*
177,123
0
*
JABE, LLC
162,894
(16)
*
162,894
0
*
Johan Orring
597,147
(17)
*
597,147
0
*
Kenluck Investment Limited
939,373
(18)
*
939,373
0
*
New Tech Venture Capital
Fund S.C.A.
1,111,339
(19)
*
1,111,339
0
*
Post Lane Investments, LLC
11,822
(20)
*
11,822
0
*
SAM-Skype Investment Partnership
146,994
(21)
*
146,994
0
*
Skyinvest Associates Limited
626,264
(22)
*
626,264
0
*
Stavco Arbitrage Group LLC
241,674
(23)
*
127,141
114,533
*
The Timothy Draper Living Trust
476,718
(24)
*
476,718
0
*
Todd Christie
73,881
(25)
*
73,881
0
*
William H. Draper III and Phyllis
C. Draper, Trustees of the William H. Draper III Revocable
Trust, Dated 12/23/88
Other selling stockholders as a
group representing less than 1% owners of our common stock
1,711,091
(28)
*
1,489,722
221,369
*
*
Less than 1%.
(1)
Includes shares held escrow to satisfy certain claims by eBay,
one-third of which shares will be released on October 15,2007 and any remaining shares will be released on
October 14, 2008 (the “Escrow”). Also includes
shares subject to a lock-up agreement pursuant to which either
(a) one-third of such shares will be released on each of
April 12, 2006, October 9, 2006 and April 7, 2007
(“Lockup A”); or (b) one-fourth of such shares
will be released on each of April 12, 2006, October 9,2006, April 7, 2007 and October 4, 2007 (“Lockup
B”).
(2)
Includes 75,021 shares of eBay common stock held in Escrow
and 681,531 shares subject to Lockup B. Mattias Köling
has voting and investment control over such shares. The business
address for the selling stockholder is c/o Mattias Köling,
Karlaplan 3A, 114 60 Stockholm, Sweden.
(3)
Includes 62,645 shares of eBay common stock held in Escrow,
43,177 shares of eBay common stock subject to Lockup A and
461,740 shares of eBay common stock subject to Lockup B.
Johan Orring has voting and investment control over such shares.
The business address for the selling stockholder is Karlavigen
94, 11522, Stockholm, Sweden.
(4)
Includes 176,513 shares of eBay common stock held in Escrow
and 1,603,552 shares of eBay common stock subject to Lockup
B. Tolvo Annus, Priit Kasesalu, Jaan Tallinn and Ahti Heinla
have shared voting and investment control over such shares. The
business address for the selling stockholder is Akadeemia tee
21F, Tallinn, 12618, Estonia.
(5)
Includes 41,668 shares of eBay common stock held in Escrow
and 152,235 shares of eBay common stock subject to Lockup
A. Robert P. Goodman, Rob S. Chandra, J. Edmund Colloton, David
J. Cowan and Duncan McCallum are the Executive Managers of Deer
V & Co. LLC, the General Partner of Bessec Ventures V
L.P. and have shared voting and investment control over such
shares. However, Mr. Goodman, Mr. Chandra,
Mr. Colloton, Mr. Cowan and Mr. McCallum disclaim
beneficial ownership of such shares except to the extent of
their pecuniary interest arising therein. The business address
for the selling stockholder is c/o Bessemer Venture Partners,
1865 Palmer Avenue, Larchmont, NY10538.
(6)
Includes 5,972 shares of eBay common stock held in Escrow
and 21,816 shares of eBay common stock subject to Lockup A.
Robert P. Goodman, Rob S. Chandra, J. Edmund Colloton, David J.
Cowan and Duncan McCallum are the Executive Managers of Deer
V & Co. LLC, the General Partner of Bessemer Venture
Investors III L.P. and have shared voting and investment control
over such shares. However, Mr. Goodman, Mr. Chandra,
Mr. Colloton, Mr. Cowan and Mr. McCallum disclaim
beneficial ownership of such shares except to the extent of
their pecuniary interest arising therein. The business address
for the selling stockholder is c/o Bessemer Venture Partners,
1865 Palmer Avenue, Larchmont, NY10538.
(7)
Includes 36,953 shares of eBay common stock held in Escrow
and 135,009 shares of eBay common stock subject to Lockup
A. Robert P. Goodman, Rob S. Chandra, J. Edmund Colloton, David
J. Cowan and Duncan McCallum are the Executive Managers of Deer
V & Co. LLC, the General Partner of Bessemer Venture
Partners V L.P. and have shared voting and investment control
over such shares. However, Mr. Goodman, Mr. Chandra,
Mr. Colloton, Mr. Cowan and Mr. McCallum disclaim
beneficial ownership of such shares except to the extent of
their pecuniary interest arising therein. The business address
for the selling stockholder is c/o Bessemer Venture Partners,
1865 Palmer Avenue, Larchmont, NY10538.
(8)
Includes 2,557 shares of eBay common stock held in Escrow
and 9,339 shares of eBay common stock subject to Lockup A.
Catherine Hutton has voting and investment control over such
shares. The business address for the selling stockholder is 444
De Haro Street, #203, San Francisco, CA94107.
Includes 14,064 shares of eBay common stock held in Escrow
and 51,381 shares of eBay common stock subject to Lockup A.
Robert P. Goodman, Rob S. Chandra, J. Edmund Colloton, David J.
Cowan and Duncan McCallum are the Executive Managers of Deer
V & Co. LLC, the General Partner of BVE 2001
(Q) LLC and have shared voting and investment control over
such shares. However, Mr. Goodman, Mr. Chandra,
Mr. Colloton, Mr. Cowan and Mr. McCallum disclaim
beneficial ownership of such shares except to the extent of
their pecuniary interest arising therein. The business address
for the selling stockholder is c/o Bessemer Venture Partners,
1865 Palmer Avenue, Larchmont, NY10538.
(10)
Includes 865 shares of eBay common stock held in Escrow and
3,158 shares of eBay common stock subject to Lockup A.
Robert P. Goodman, Rob S. Chandra, J. Edmund Colloton, David J.
Cowan and Duncan McCallum are the Executive Managers of Deer
V & Co. LLC, the General Partner of BVE 2001 LLC and
have shared voting and investment control over such shares.
However, Mr. Goodman, Mr. Chandra, Mr. Colloton,
Mr. Cowan and Mr. McCallum disclaim beneficial
ownership of such shares except to the extent of their pecuniary
interest arising therein. The business address for the selling
stockholder is c/o Bessemer Venture Partners, 1865 Palmer
Avenue, Larchmont, NY10538.
(11)
Includes 10,257 shares of eBay common stock held in Escrow
and 132,779 shares of eBay common stock subject to Lockup
A. Timothy Draper, John Fisher and Steve Jurvetson have shared
voting and investment control over such shares. The business
address for the selling stockholder is 2882 Sand Hill Road,
suite 150, Menlo Park, CA94025.
(12)
Includes 8,715 shares of eBay common stock held in Escrow
and 112,809 shares of eBay common stock subject to Lockup
A. Timothy Draper, John Fisher, Steve Jurvetson and Asad Jamal
have shared voting and investment control over such shares. The
business address for the selling stockholder is 2882 Sand Hill
Road, suite 150, Menlo Park, CA94025.
(13)
Includes 493,804 shares of eBay common stock held in Escrow
and 6,392,574 shares of eBay common stock subject to Lockup
A. Timothy Draper, John Fisher, Steve Jurvetson and Asad Jamal
have shared voting and investment control over such shares. The
business address for the selling stockholder is 2882 Sand Hill
Road, suite 150, Menlo Park, CA94025.
(14)
Includes 8,292 shares of eBay common stock held in Escrow
and 30,292 shares of eBay common stock subject to Lockup A.
G. Felda Hardymon has voting and investment control over such
shares. The business address for the selling stockholder is c/o
Bessemer Venture Partners, 1865 Palmer Avenue, Larchmont, NY10538.
(15)
Includes 30,167 shares of eBay common stock held in Escrow
and 110,217 shares of eBay common stock subject to Lockup A.
(16)
Includes 16,153 shares of eBay common stock held in Escrow
and 146,741 shares of eBay common stock subject to Lockup
B. Timothy Draper, as member, has voting and investment control
over such shares. The business address for the selling
stockholder is c/o Draper Fisher Jurvetson, 2882 Sand Hill Road,
Suite 150, Menlo Park, CA94025.
(17)
Includes 2,588 shares of eBay common stock held in Escrow
and 9,453 shares of eBay common stock subject to Lockup A.
Also includes 519,310 shares of eBay common stock held by
AB Grossemad.
(18)
Includes 93,150 shares of eBay common stock held in Escrow
and 846,223 shares of eBay common stock subject to Lockup
B. Edmond Ip Tak Chuen, Ezra Pau Yee Wan, John Lau Chin Sung,
James Wang Qi, William Shurniak and Christian Salbaing have
shared voting and investment control over such shares. The
business address for the selling stockholder is c/o 7th Floor,
Cheung Kong Center, 2 Queen’s road Central, Hong Kong, SAR,
People’s Republic of China.
(19)
Includes 172,319 shares of eBay common stock held in
Escrow, 543,222 shares of eBay common stock subject to
Lockup A and 214,723 shares of eBay common stock subject to
Lockup B. Mark Tluszcz, Gerard Lopez, Hans-Jurgen Schmitz,
Antoine Gilson DeRouvreux and Herve Schunke have shared voting
and investment control over such shares. The business address
for the selling stockholder is c/o Ms. Laurence Sieban,
Services Financiers, 5, Allee Scheffer, L-2520 Luxembourg.
(20)
Includes 8,103 shares of eBay common stock subject to
Lockup A. Mark D. Larner has voting and investment control over
such shares. The business address for the selling stockholder is
25 Post Lane, Livingston, NJ07039.
Includes 25,036 shares of eBay common stock held in Escrow
and 91,468 shares of eBay common stock subject to Lockup A.
Scott Alderton, V. Joseph Stubbs, Murray markiles, John
McIlvery, Jonathan Hodes, Greg Akselrud have shared voting and
investment control over such shares. The business address for
the selling stockholder is 15821 Ventura Blvd., Suite 525,
Encino, CA91436.
(22)
Includes 62,101 shares of eBay common stock held in Escrow
and 564,163 shares of eBay common stock subject to Lockup
B. Chau Hoi Shuen and Solina Holly have shared voting and
investment control over such shares. The business address for
the selling stockholder is c/o 29th floor, Harbour Centre, 25
Harbour Road, Wanchai, Hong Kong.
(23)
Includes 12,608 shares of eBay common stock held in Escrow
and 114,533 shares of eBay common stock subject to Lockup
B. Robert Stavis and Jeffrey Rosenbluth have shared voting and
investment control over such shares. Each of Mr. Stavis and
Mr. Rosenbluth have a 50% economic interest in the assets
of the selling stockholder and disclaim beneficial ownership
except to the extent of their pecuniary interest therein. The
business address for the selling stockholder is c/o Bessemer
Venture Partners, 1865 Palmer Avenue, Larchmont, NY10538.
(24)
Includes 47,272 shares of eBay common stock held in Escrow
and 429,446 shares of eBay common stock subject to Lockup
B. Timothy Draper, as trustee, has voting and investment control
over such shares. The business address for the selling
stockholder is c/o Draper Fisher Jurvetson, 2882 Sand Hill Road,
Suite 150, Menlo Park, CA94025.
(25)
Includes 50,640 shares of eBay common stock subject to
Lockup A.
(26)
Includes 72,146 shares of eBay common stock held in Escrow,
651,977 shares of eBay common stock subject to Lockup A and
197,890 shares of eBay common stock subject to Lockup B.
William H. Draper III, Trustee, and Phyllis C. Draper, Trustee,
have shared voting and investment control over such shares. The
business address for the selling stockholder is c/o Draper
Fisher Jurvetson, 2882 Sand Hill Road, Suite 150, MenloPark, CA94025.
(27)
Includes 8,103 shares of eBay common stock subject to
Lockup A.
(28)
Includes 149,850 shares of eBay common stock held in
Escrow, 571,365 shares of eBay common stock subject to
Lockup A and 22,511 shares of eBay common stock subject to
Lockup B. Also includes options to purchase 234,788 shares
of eBay common stock exercisable within 60 days of the date
of this table.
We are registering 20,221,827 shares of common stock under
this prospectus on behalf of the selling stockholders. Except as
described below, to our knowledge, the selling stockholders have
not entered into any agreement, arrangement or understanding
with any particular broker or market maker with respect to the
shares of common stock offered hereby, nor, except as described
below, do we know the identity of the brokers or market makers
that will participate in the sale of the shares.
The selling stockholders may decide not to sell any shares. The
selling stockholders may from time to time offer some or all of
the shares of common stock through brokers, dealers or agents
who may receive compensation in the form of discounts,
concessions or commissions from the selling stockholders and/or
the purchasers of the shares of common stock for whom they may
act as agent. In effecting sales, broker-dealers that are
engaged by the selling stockholders may arrange for other
broker-dealers to participate. The selling stockholders may be
deemed to be “underwriters” within the meaning of the
Securities Act. Any brokers, dealers or agents who participate
in the distribution of the shares of common stock may also be
deemed to be “underwriters,” and any profits on the
sale of the shares of common stock by them and any discounts,
commissions or concessions received by any such brokers, dealers
or agents may be deemed to be underwriting discounts and
commissions under the Securities Act. To the extent the selling
stockholders may be deemed to be an underwriter, the selling
stockholders will be subject to the prospectus delivery
requirements of the Securities Act and may be subject to certain
statutory liabilities of, including but not limited to,
Sections 11, 12 and 17 of the Securities Act and
Rule 10b-5 under
the Securities Exchange Act of 1934, as amended, or the Exchange
Act.
The selling stockholders will act independently of us in making
decisions with respect to the timing, manner and size of each
sale. Such sales may be made over the Nasdaq Stock Market, on
the
over-the-counter
market or otherwise, or in a combination of such methods of
sale, at then prevailing market prices, at prices related to
prevailing market prices or at negotiated prices. The shares of
common stock may be sold according to one or more of the
following methods:
•
a block trade in which the broker or dealer so engaged will
attempt to sell the shares of common stock as agent but may
position and resell a portion of the block as principal to
facilitate the transaction;
•
purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
•
an
over-the-counter
distribution in accordance with the rules of the Nasdaq;
•
ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
•
privately negotiated transactions;
•
a combination of such methods of sale; and
•
any other method permitted pursuant to applicable law.
In connection with sales of the shares of common stock or
otherwise, the selling stockholders may enter into hedging
transactions with broker-dealers, which may in turn engage in
short sales of the shares of common stock in the course of
hedging in positions they assume. The selling stockholders may
also sell shares of common stock short and deliver shares of
common stock covered by this prospectus to close out short
positions and to return borrowed shares in connection with such
short sales. The selling stockholders may also loan or pledge
shares of common stock to broker-dealers that in turn may sell
such shares.
Any shares covered by this prospectus which qualify for sale
pursuant to Rule 144 of the Securities Act may be sold
under Rule 144 rather than pursuant to this prospectus. In
addition, the selling stockholders may transfer the shares by
other means not described in this prospectus.
Any broker-dealer participating in such transactions as agent
may receive commissions from the selling stockholders (and, if
they act as agent for the purchaser of such shares, from such
purchaser). Broker-dealers may agree with the selling
stockholders to sell a specified number of shares at a
stipulated price per share, and, to the extent such a
broker-dealer is unable to do so acting as agent for the selling
stockholders, to purchase as principal any unsold shares at the
price required to fulfill the broker-dealer commitment to the
selling stockholders. Broker-dealers who acquire shares as
principal may thereafter resell such shares from time to time in
transactions (which may involve crosses and block transactions
and which may involve sales to and through other broker-dealers,
including transactions of the nature described above) on the
Nasdaq Stock Market, on the
over-the-counter
market, in privately-negotiated transactions or otherwise at
market prices prevailing at the time of sale or at negotiated
prices, and in connection with such resales may pay to or
receive from the purchasers of such shares commissions computed
as described above. To the extent required under the Securities
Act, an amendment to this prospectus, or a supplemental
prospectus will be filed, disclosing:
•
the name of any such broker-dealers;
•
the number of shares involved;
•
the price at which such shares are to be sold;
•
the commission paid or discounts or concessions allowed to such
broker-dealers, where applicable;
•
that such broker-dealers did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus, as supplemented; and
•
other facts material to the transaction.
Underwriters and purchasers that are deemed underwriters under
the Securities Act may engage in transactions that stabilize,
maintain or otherwise affect the price of the securities,
including the entry of stabilizing bids or
syndicate covering transactions or the imposition of penalty
bids. The selling stockholders and any other persons
participating in the sale or distribution of the shares will be
subject to the applicable provisions of the Exchange Act and the
rules and regulations thereunder including, without limitation,
Regulation M. These provisions may restrict certain
activities of, and limit the timing of, purchases by the selling
stockholders or other persons or entities. Furthermore, under
Regulation M, persons engaged in a distribution of
securities are prohibited from simultaneously engaging in market
making and certain other activities with respect to such
securities for a specified period of time prior to the
commencement of such distributions, subject to special
exceptions or exemptions. Regulation M may restrict the
ability of any person engaged in the distribution of the
securities to engage in market-making and certain other
activities with respect to those securities. In addition, the
anti-manipulation rules under the Exchange Act may apply to
sales of the securities in the market. All of these limitations
may affect the marketability of the shares and the ability of
any person to engage in market-making activities with respect to
the securities.
Under the securities laws of some states, the shares of common
stock may be sold in such states only through registered or
licensed brokers or dealers. In addition, in some states the
shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is
complied with.
We have agreed to pay the expenses of registering the shares of
common stock under the Securities Act, including registration
and filing fees, printing expenses, administrative expenses and
certain legal and accounting fees, as well as certain fees of
counsel for the selling stockholders incurred in the preparation
of the registration statement of which this prospectus forms a
part. The selling stockholders will bear all discounts,
commissions or other amounts payable to underwriters, dealers or
agents, as well as transfer taxes and certain other expenses
associated with the sale of securities.
Under the terms of the sale and purchase agreement and the
registration rights agreement in connection with our acquisition
of Skype, we have agreed to indemnify the selling stockholders
against certain liabilities in connection with the offering of
the shares of common stock offered hereby, including liabilities
arising under the Securities Act or, if such indemnity is
unavailable, to contribute toward amounts required to be paid in
respect of such liabilities.
At any time a particular offer of the shares of common stock is
made, a revised prospectus or prospectus supplement may be filed
with the SEC, or a report filed pursuant to the Exchange Act and
incorporated by reference into this prospectus (which Exchange
Act report will be identified in a prospectus filed to the
extent required by the Securities Act), to reflect the
disclosure of required additional information with respect to
the distribution of the shares of common stock. If required,
such prospectus supplement or post-effective amendment will be
distributed. We may suspend the sale of shares by the selling
stockholders pursuant to this prospectus for certain periods of
time for certain reasons, including if the prospectus is
required to be supplemented or amended to include additional
material information.
The financial statements and management’s assessment of the
effectiveness of internal control over financial reporting
(which is included in Management’s Report on Internal
Control Over Financial Reporting) of eBay Inc. incorporated in
this Prospectus by reference to the Annual Report on
Form 10-K for the
year ended December 31, 2004 have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the
authority of said firm as experts in auditing and accounting.
The audited historical financial statements of Skype
Technologies S.A. included in eBay Inc.’s Current Report on
Form 8-K dated
October 14, 2005 and filed on November 30, 2005 have
been so incorporated in reliance on the
We file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any
document we file at the SEC’s Public Reference Room at 100
F. Street, N.E., Room 1580, Washington, D.C. 20549. Please
call the SEC at
1-800-SEC-0330
for more information about the operation of the public reference
room. The SEC maintains an Internet site that contains reports,
proxy and information statements, and other information
regarding issuers that file electronically with the SEC,
including us. The SEC’s Internet site can be found at
http://www.sec.gov. Our website address is www.ebay.com.
Information contained on our website is not part of this
prospectus.
The Securities and Exchange Commission allows us to
“incorporate by reference” into this prospectus
information that we file with it, which means that we can
disclose important information to you by referring you to those
documents. The information incorporated by reference is an
important part of this prospectus. Information in this
prospectus supersedes information incorporated by reference that
we filed with the Securities and Exchange Commission prior to
the date of this prospectus, while information that we file
later with the Securities and Exchange Commission will
automatically update and supersede this information. We
incorporate by reference into this registration statement and
prospectus the documents listed below and any future filings
(other than information in a report on
Form 8-K furnished
pursuant to Item 2.02 or Item 7.01 of
Form 8-K and
exhibits filed on such form that are related to such
information) we may make with the Securities and Exchange
Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, after the date of
this prospectus but prior to the termination of the offering of
the securities covered by this prospectus. Any statements in any
such future filings will automatically be deemed to modify and
supersede any information in any document we previously filed
with the Securities and Exchange Commission that is incorporated
or deemed to be incorporated herein by reference to the extent
that statements in the later filed document modify or replace
such earlier statements.
our current report on
Form 8-K filed
with the SEC on June 2, 2005;
•
our current report on
Form 8-K filed
with the SEC on July 27, 2005;
•
our current report on
Form 8-K filed
with the SEC on September 15, 2005, as amended;
•
our current report on
Form 8-K filed
with the SEC on October 11, 2005;
•
our current report on
Form 8-K filed
with the SEC on October 14, 2005;
•
our current report on
Form 8-K filed
with the SEC on October 18, 2005;
•
the filed portions of our current report on
Form 8-K filed
with the SEC on October 19, 2005; and
•
the description of our common stock, which is registered under
Section 12 of the Exchange Act in our registration
statement on Form 8-A,
filed with the SEC on August 20, 1998, including any
amendments or reports filed for the purpose of updating such
description.
We will provide to each person, including any beneficial owner,
to whom a prospectus is delivered, without charge upon written
or oral request, a copy of any or all of the documents that are
incorporated by reference into this prospectus but not delivered
with the prospectus, including exhibits which are specifically
incorporated by reference into such documents. Requests should
be directed to:
The following table sets forth the estimated costs and expenses
payable by the Registrant in connection with the common stock
being registered. The selling stockholders will not bear any
portion of such expenses. All the amounts shown are estimates,
except the SEC registration fee.
SEC Registration Fee
$
97,627.75
Accounting Fees and Expenses
2,500
Legal Fees and Expenses
10,000
Transfer Agent Fees and Expenses
1,000
Printing and miscellaneous expenses
2,500
Total
$
113,627.75
Item 15.
Indemnification
of Directors and Officers.
As permitted by Section 145 of the Delaware General
Corporation Law, the Bylaws of the Registrant provide that
(i) the Registrant is required to indemnify its directors
and officers to the fullest extent permitted by the Delaware
General Corporation Law, (ii) the Registrant may, in its
discretion, indemnify other persons as set forth in the Delaware
General Corporation Law, (iii) to the fullest extent
permitted by the Delaware General Corporation Law, the
Registrant is required to advance all expenses incurred by its
directors and officers in connection with a legal proceeding
(subject to certain exceptions), (iv) the rights conferred
in the Bylaws are not exclusive, (v) the Registrant is
authorized to enter into indemnification agreements with its
directors, officers, employees and agents and (vi) the
Registrant may not retroactively amend the Bylaws provisions
relating to indemnity.
The Registrant has entered into agreements with its directors
and executive officers that require the Registrant to indemnify
such persons against expenses, judgments, fines, settlements and
other amounts that such person might become legally obligated to
pay (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any
such person may be made a party by reason of the fact that such
person is or was a director or officer of the Registrant or any
of its affiliated enterprises, provided such person acted in
good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Registrant. The
indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification
thereunder.
Item 16.
Exhibits.
Exhibit
Number
Description of the
Document
2
.1
Sale and Purchase Agreement dated
as of September 11, 2005, by and among eBay Inc., Skype
Technologies S.A. and the parties identified on Schedule 1
thereto. (1)
4
.1
Form of Specimen Stock
Certificate (2)
4
.2
Amended and Restated Certificate
of Incorporation (3)
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the
“Calculation of Registration Fee” table in the
effective registration statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (1)(i), (1)(ii) and
(1)(iii) do not apply if the information required to be included
in a post-effective amendment by those paragraphs is contained
in reports filed with or furnished to the Commission by the
registrant pursuant to section 13 or section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement, or is contained in a
form of prospectus filed pursuant to Rule 424(b) that is
part of the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for purposes of determining any liability under
the Securities Act of 1933, each filing of the registrant’s
annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan’s annual report pursuant
to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(5) That, for the purpose of determining liability under
the Securities Act of 1933 to any purchaser:
(A) Each prospectus filed by a Registrant pursuant to
Rule 424(b)(3) shall be deemed to be part of the
registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
(B) Each prospectus required to be filed pursuant to
Rule 424(b)(2), (b)(5) or (b)(7) as part of a registration
statement in reliance on Rule 430B relating to an offering
made pursuant to Rule 415(a)(1)(i),
(vii) or (x) for the purpose of providing the
information required by Section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the
registration statement as of the earlier of the date such form
of prospectus is first used after effectiveness or the date of
the first contract of sale of securities in the offering
described in the prospectus. As provided in Rule 430B, for
liability purposes of the issuer and any person that is at that
date an underwriter, such date shall be deemed to be a new
effective date of the registration statement relating to the
securities in the registration statement to which the prospectus
relates, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will,
as to a purchaser with a time of contract of sale prior to such
effective date, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately
prior to such effective date.
That, for the purpose of determining liability of a Registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities, each undersigned Registrant
undertakes that in a primary offering of securities of an
undersigned Registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following
communications, the undersigned Registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of an
undersigned Registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of an undersigned Registrant or used or
referred to by an undersigned Registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
an undersigned Registrant or its securities provided by or on
behalf of an undersigned Registrant; and
(iv) Any other communication that is an offer in the
offering made by an undersigned Registrant to the purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form S-3 and has
duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on December 1, 2005.
eBAY INC.
By:
/s/ Margaret
C. Whitman
Margaret C. Whitman
President, Chief Executive Officer and Director
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Margaret C.
Whitman, Rajiv Dutta, Michael R. Jacobson and Douglas Jeffries,
and each of them, as true and lawful attorneys-in-fact and
agents, with full powers of substitution and resubstitution, for
them and in their name, place and stead, in any and all
capacities, to sign any and all amendments (including
pre-effective and post-effective amendments) to this
registration statement and any additional registration
statements filed pursuant to Rule 462, and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission (the “SEC”), and generally to do all such
things in their names and behalf in their capacities as officers
and directors to enable the registrant to comply with the
provisions of the Securities Act and all requirements of the
SEC, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he
or she might or could do in person, ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their
or his substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following
persons in the capacities and on the dates indicated.
Sale and Purchase Agreement dated
as of September 11, 2005, by and among eBay Inc., Skype
Technologies S.A. and the parties identified on Schedule 1
thereto. (1)
4
.1
Form of Specimen Stock
Certificate (2)
4
.2
Amended and Restated Certificate
of Incorporation (3)