eBay 1998 Annual Report Download - page 24

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was expensed during 1998. In March 1999, eBay and AOL expanded the scope of their strategic relationship. Under
this new agreement, eBay will pay AOL $75 million over the four-year term of the contract. Under this agreement,
the Company’ s remaining payment obligations to AOL were cancelled. See Notes 6 and 11 of Notes to Consolidated
Financial Statements.
Product Development
eBay’ s product development expenses consist primarily of compensation for product development staff and
payments to outside contractors and, to a lesser extent, of depreciation on equipment used for development and
overhead costs. The Company expenses product development costs as they are incurred. Product development
expenses increased substantially in absolute dollars in each quarter throughout the past eight quarters. Compensation
and other personnel-related expenses grew most rapidly on a percentage basis between the first quarter of 1997 and
the second quarter of 1997. Product development expenses increased to 11.5% of net revenues in the second quarter
of 1998 from 8.7% in the first quarter of 1998 as the Company significantly increased its engineering staff and the
use of outside contractors, while the rate of growth of net revenues declined. Increases in engineering staff were
level with net revenues growth in the third quarter of 1998 and, accordingly, product development expenses as a
percentage of net revenues remained relatively constant. In the fourth quarter of 1998, product development
expenses remained relatively unchanged from the prior quarter, while net revenues grew. This resulted in a decline
in product development expenses to 7.9% of net revenues in the fourth quarter of 1998 from 11.7% in the third
quarter of 1998. The Company expects that product development expenses will continue to increase in absolute
dollars and will vary as a percentage of net revenues in future quarters primarily due to the addition of headcount
relative to the rate of net revenues growth.
General and Administrative
eBay’ s general and administrative expenses consist primarily of compensation for personnel and, to a lesser
extent, fees for outside professional advisors and overhead costs. General and administrative expenses increased as a
percentage of net revenues in the third quarter of 1997 as personnel-related costs increased. General and
administrative expenses increased as a percentage of net revenues to 35.3% in the second quarter of 1998 because,
in that quarter, the Company donated 321,750 shares of its common stock, with an estimated fair value of $1.2
million, to a charitable foundation, recorded compensation expense of $429,000 associated with purchases of
restricted common stock by its outside directors and recorded compensation expense of $403,000 associated with
the grant of stock options to employees. General and administrative expenses decreased as a percentage of net
revenues to 16.4% in the third quarter of 1998 and 14.2% in the fourth quarter of 1998 as increases in personnel
related costs and professional fees were more than offset by increases in net revenues. The Company expects that
general and administrative expenses will continue to increase in absolute dollars in future quarters as the Company
continues to build its administrative staff and infrastructure, but may eventually decline as a percentage of net
revenues, and fluctuate from quarter to quarter depending on the rate of net revenue growth.
Amortization of Acquired Intangibles
During the second quarter of 1998, eBay recognized expenses totaling $150,000 for in-process technology
assumed in the acquisition of Jump and charged it to operations because the technology had not reached the stage of
technological feasibility at the acquisition date and had no alternative future use. The Company recognized
amortization expense of approximately $328,000 in each of the third and fourth quarters of 1998 associated with the
covenants not to compete, customer list and goodwill assumed in the Jump acquisition. Amortization associated with
these intangible assets is anticipated to be approximately $328,000 in each of the first three quarters of 1999, and
approximately $26,000 in each of the fourth quarter of 1999 and the first and second quarters of 2000, assuming no
additional acquisitions and no impairment of value resulting in an acceleration of amortization. See Note 2 of Notes
to Consolidated Financial Statements.