Updated from 11:45 a.m. EST
In a dispute with federal authorities,
is deciding to take a gamble. When it comes to stock options, though, the company is staying the course.
The U.S. attorney's office for the eastern district of Missouri has accused eBay's PayPal unit of violating the USA Patriot Act by transmitting funds in online gambling transactions, the company said in a regulatory filing Monday. Although the attorney's office offered to settle the dispute, eBay has declined to settle, saying PayPal believed it was not violating the law.
Whatever the outcome, however, eBay said the matter should not materially affect its earnings, financial position or cash flows.
eBay completed its acquisition of online payment processor PayPal last October. When it
agreed to acquire the company last summer, eBay said it would discontinue PayPal's online gaming business.
About 6% of PayPal's revenue in 2002 was related to online gambling and prior to the merger, the payments processor had counted on gaming as a source of growth. But the effort has already drawn scrutiny. PayPal agreed
last August to cease processing gambling payments for New York residents and paid a $200,000 penalty to cover the New York attorney general's investigation into the matter.
eBay disclosed the letter from the U.S. Attorney's Office in its annual report, issued on Monday. A representative of the U.S. Attorney's Office refused to confirm or deny the letter.
Separately, eBay said in its annual report that its earnings per share would have shrunk by more than 75% if it expensed stock options.
eBay reported in January that it earned $249.9 million, or 85 cents a share, in 2002. But the company would have earned just $62.9 million, or 21 cents a share, if it had counted stock options as an expense.
Like most technology companies, eBay accounts for stock options through the "intrinsic value" method. Since most options have no value at the time they are granted, they don't detract from reported earnings.
However, in the wake of repeated accounting scandals, pressure is building to force companies to expense stock options by a method which looks at what the options could be worth over their lifetime, rather than what they are worth on the day they are granted.
At eBay, the top five most highly paid executives received 850,000 options in 2002, or about 6.1% of all options granted by the company.
Options have meant big bucks for eBay executives. Maynard Webb, the company's chief operating officer, exercised options worth $6.9 million in 2002. Jeffrey Jordan, general manager of eBay's U.S. business, exercised options worth $2.6 million last year. Company CEO Meg Whitman did not exercise any options last year, according to the company's proxy statement and annual report, but she did
sell more than $100 million in stock.
Despite the ongoing debate, a requirement that companies expense stock options is increasingly looking like a done deal. The Financial Accounting Standards Board, which regulates accounting in the United States, took up the issue of options expensing earlier this month and is expected to mandate options expensing in the near future.
The cost to eBay of options is actually an improvement from the past two years, when expensing options would have turned the company's reported profit into a loss. In 2001, for instance, eBay reported that it earned $90.4 million, or 32 cents a share. If it expensed the fair value of its options, however, the company would have lost $118 million, or 44 cents a share.