eBay 1998 Annual Report Download - page 27

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Product Development
eBay’ s product development expenses increased from $28,000, or 7.5% of net revenues, in 1996 to $831,000,
or 14.5% of net revenues, in 1997, and to $4.6 million, or 9.7% of net revenues, in 1998. The increases in absolute
dollars primarily resulted from increases in salaries, benefits and other personnel-related expenses as the Company
significantly increased the size of its research and development staff, as well as expenses related to contractors and
consultants used to increase the product development department. These increases were more than offset by
increases in net revenues in 1998, resulting in the decline in development expenses as a percentage of net revenues
from 14.5% in 1997 to 9.7% in 1998.
General and Administrative
eBay’ s general and administrative expenses increased from $45,000, or 12.1% of net revenues, in 1996 to
$950,000, or 16.5% of net revenues, in 1997, and to $9.1 million, or 19.2% of net revenues, in 1998. The increase
from 1996 to 1997 primarily resulted from increases in salaries, benefits and other personnel-related expenses and,
to a lesser extent, from increases in the allowance for doubtful accounts, fees for professional services and overhead
costs. The increase from 1997 to 1998 primarily resulted from the Company’ s contribution in June 1998 of 321,750
shares of common stock with an estimated fair value of $1.2 million to a charitable foundation. In June 1998, the
Company also recorded compensation expense of $429,000 associated with purchases of restricted shares of
common stock by the Company’ s outside directors. The increase from 1997 to 1998 also resulted from the Company
recording a compensation expense of approximately $1.7 million associated with stock options granted to
employees. Increases in personnel-related expenses, the allowance for doubtful accounts, fees for professional
services and overhead costs also contributed to the increase from 1997 to 1998.
Amortization of Acquired Intangibles
During 1998, eBay recognized expenses totaling $150,000 for in-process technology assumed in the acquisition
of Jump and charged this amount 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 also recognized amortization
expense of approximately $655,000 in 1998 associated with the covenants not to compete, the customer list and
goodwill assumed in the Jump acquisition. See Note 2 of Notes to Consolidated Financial Statements.
Interest and Other Income, Net
eBay’ s interest and other income, net increased from $1,000 in 1996 to $56,000 in 1997 and to $869,000 in
1998. The increase from 1996 to 1997 was a result of interest earned on increased cash, cash equivalents and short-
term investments, from the net proceeds of the Company’ s sales of preferred stock and warrants in June 1997. The
increase in 1998 from 1997 resulted from interest earned on the net proceeds from the Company’ s initial public
offering in September 1998 and, to a lesser extent, interest earned on proceeds from the exercise of warrants in May
1998 and interest earned from loans made to employees in connection with the exercise of their stock options.
Provision for Income Taxes
eBay’ s effective federal and state income tax rate was 41.7% in 1996, 43.4% in 1997 and 65.9% in 1998. The
1998 effective tax rate differed from the combined federal and state statutory rate of approximately 41.8% as a result
of the non-deductibility of charges for stock based compensation and expenses related to the acquisition of Jump.
The variation in the effective tax rates for 1996 and 1997 reflects differences in the deductibility of certain expenses.
See Note 7 of Notes to the Consolidated Financial Statements.
Stock-Based Compensation
In connection with the grant of certain stock options from May 1997 through June 30, 1998, eBay recorded
aggregate unearned compensation totaling $6.8 million, which amount is being amortized over the four-year vesting