November 18, 1999 FASB Redeliberations Continue on Proposed Interpretation of Opinion 25 Final Interpretation Now Scheduled For Release in First Quarter of 2000   The Financial Accounting Standards Board (FASB) is now four months and eight meetings into its redeliberation process with respect to the proposed interpretation of APB Opinion No. 25, Accounting for Stock Issued to Employees (Opinion 25). To date, the FASB has resolved a majority of the issues in the proposed interpretation and plans to issue a final interpretation in the first quarter of 2000. Summarized below are the FASB's conclusions with respect to the most substantive issues that have been redeliberated thus far. A detailed outline of the proposed interpretation and the results of the FASB's redeliberations to date is presented in the Exhibit at the end of this letter. Scope of Interpretation Opinion 25 will be strictly applied to only employees of the employer entity, as defined by common law and Internal Revenue Service (IRS) payroll tax rules; stock options or awards granted to independent contractors and other service providers who are not employees will not be accounted for under Opinion 25 (i.e., there will be compensation cost) The only exceptions to the employee definition are that (1) stock options or awards granted to independent members of an entity’s board of directors will continue to be accounted for under Opinion 25, and (2) leased employees may qualify for Opinion 25 treatment for stock options or awards granted by a lessee entity, provided that several stringent requirements are met In consolidated financial statements, Opinion 25 will apply to all stock options or awards granted by any member of the consolidated group to any other member of the consolidated group In separate financial statements of a consolidated subsidiary, grants of parent-company stock options or awards to employees of the consolidated subsidiary will be accounted for under Opinion 25; however, grants of a consolidated subsidiary’s stock options or awards to parent-company employees (or to employees of any other consolidated subsidiary) will not fall within the scope of Opinion 25 Grants of parent-company stock options or awards to employees of a nonconsolidated entity (such as a joint venture or other equity investment) will not fall within the scope of Opinion 25 Award Modifications "Fixed" stock options that are repriced (i.e., there is a "direct" change to the exercise price or number of shares) or cancelled and reissued within 6 months of one another (i.e., there is an "indirect" or "synthetic" change to the exercise price or number of shares) will be accounted for prospectively as a "variable award" from the date of modification until the date of exercise Accelerated vesting provisions that are either discretionary or not pursuant to the original terms of the stock option or award will result in the remeasurement of compensation cost; the amount of newly measured compensation cost will be equal to the accelerated award’s "intrinsic value" as of the modification date, not the acceleration date Other modifications to outstanding stock options or awards will not result in a new "measurement date" (or variable award accounting), provided that the modifications do not directly or indirectly affect the exercise price or number of shares, or extend the option term Cash Settlements and Repurchases Cash settlements of outstanding stock options or awards (or the repurchase of shares within 6 months of option exercise or issuance) will result in compensation cost equal to the sum of (1) the award’s original intrinsic value (if any), and (2) any cash paid in excess of the lesser of the award’s original intrinsic value or the intrinsic value as of the cash settlement date Stock-for-tax withholding in excess of "minimum statutory" withholding rates will result in compensation cost equal to the award’s total intrinsic value as of the excess withholding date; further, variable award accounting will be required (prior to actual excess withholding) for all stock options or awards granted pursuant to plans or agreements where either (1) the employee has "sole discretion" to elect excess withholding, or (2) the employer exhibits a "pattern of consistently approving" excess withholding Share repurchase features, such as puts, calls, and rights of first refusal, will not result in an otherwise fixed award becoming variable, so long as the purchase price is based on "fair value" and the shares are not expected to be repurchased within 6 months of option exercise or issuance; nonpublic entities may calibrate the purchase price on other than fair value, so long as the employee makes "a 100 percent investment" in the award at the date of grant using the purchase price or formula prescribed by the plan Other Provisions Broad-based employee stock purchase plans meeting the criteria of the Internal Revenue Code (IRC) will continue to retain their status as "noncompensatory" under Opinion 25; thus, there will continue to be no recognition of compensation cost for purchase discounts of up to 15 percent at either grant or purchase Stock options or awards that are awarded contingent on shareholder approval will not be deemed granted until shareholder approval is actually obtained, unless such approval is perfunctory Stock options or awards with a related cash bonus feature will be accounted for as a variable award only if the amount of the bonus is not fixed and payment is contingent upon exercise of the underlying award Deferred tax assets (i.e., future tax deductions) for fixed stock options or awards that have intrinsic value at grant will not be reduced for subsequent declines in stock price Most important, the FASB has decided not to apply the new rules to transactions occurring prior to the issuance of a final interpretation, with two notable exceptions. The exceptions are that, pending further redeliberations by the FASB, stock option repricings (including synthetic repricings) and grants of stock options or awards to nonemployees (presumably independent contractors, employees of nonconsolidated entities, and other nonemployee service providers) will continue to be subject to the controversial December 15, 1998 "retroactive application date." All other transactions, including award modifications, accelerated vesting, changes in employment status, and excess stock-for-tax withholding, that occur prior to the issuance of the final interpretation will not be subject to the new rules. The issues that remain to be redeliberated by the FASB are (1) changes in employment status, i.e., from employee to nonemployee and vice versa, (2) the amount of compensation cost to recognize if an award is modified and a new measurement date is required, (3) implementation issues with respect to synthetic repricings, i.e., indirect changes to the exercise price or number of shares, and (4) exchanges of stock options in pooling-of-interests and purchase business combinations.