AeA Urges House of Representatives to Pass Stock Option Accounting Reform Act; H.R. 3574 Critical to High-Tech.

WASHINGTON -- AeA, the nation's largest high-tech trade association, today sent a letter to every Member of the U.S. House of Representatives urging support of H.R. 3574, the Stock Option Accounting Reform Act. A full vote on the House Floor on H.R. 3574, introduced by Rep. Richard Baker (R-LA), is expected soon.

The following is the text of the letter from William T. Archey, President and CEO of AeA.

July 8, 2004

House of Representatives
Washington, DC 20515

Dear Representative:

As Congress gets ready to consider H.R. 3574, the Stock Option
Accounting Reform Act, I wanted to take a moment to address some of
the misconceptions relating to stock option expensing. There has been
a lot of demagoguery surrounding the issue of stock options recently,
and with the Financial Accounting Standards Board (FASB) considering
rules that would require the expensing of all employee stock options,
it is imperative that we get the facts straight on this issue before
it is too late.

Assertion: It is wrong for Congress to interfere with independent
standards setters.

Fact: FASB has repeatedly acknowledged that it does not, and will not,
consider economic and labor consequences when setting accounting
standards. Its job is strictly accounting.

We agree that FASB should be independent, but that said, if FASB's
actions will have widespread negative economic, labor, and
competitiveness consequences, then Congress has not only a right but a
responsibility to act. One of the primary reasons why Senator Michael
Enzi introduced the Stock Option Accounting Reform Act in the Senate
is because FASB has repeatedly refused to consider economic concerns
during its decision making.

Assertion: A number of companies have already started expensing stock
options without any significant negative consequences. If those
companies can do it, why can't all companies?

Fact: Most of the companies that have begun to expense options do not
have broad-based employee stock programs and only provide options to
their most senior level executives - if they provide stock options at
all. In this respect, the high-tech industry is different, with
companies providing stock options to most, if not all, of their
employees. AeA has found that the average high-tech company provides
options to 84% of its employees. FASB's proposed expensing rules will
disproportionately impact the high-tech industry by distorting the
financial statements of companies that grant a significant number of
options to employees throughout the ranks.

Assertion: Only CEOs and other top level executives benefit from stock
options.

Fact: This is absolutely untrue in the high-tech industry where the
overwhelming majority of stock options are granted to rank-and-file
employees. If companies are forced to expense options, many will cut
back their broad-based employee stock programs, if not eliminate them
all together. Only senior level executives will end up receiving stock
options.

Assertion: This is simply an accounting change and will have no real
impact on a company's stock price since all companies will have to
expense options and investors will understand this change.

Fact: The sophisticated investor will probably be able to understand
the impact of expensing over time; however, it is likely that the
average investor will not. This accounting change will create a new
cost that will reduce a company's reported profits, and high-tech
companies that have broad-based employee stock option programs
benefiting rank-and-file employees will be disproportionately hit.
This change will put high tech at a disadvantage since other
industries will not have to report the same significant reduction in
profits.

For smaller companies, this change will be an even bigger problem due
to the uncertainty of how to value an option and the complexity of
making this calculation under the valuation models FASB has proposed.
The cost alone will be a disincentive to providing stock options to
employees throughout a company and will deprive small companies of an
invaluable labor tool.

Assertion: Stock options dilute company shares and investors do not
understand this because companies only disclose dilution information
in a footnote.

Fact: Stock options do dilute shares. In accordance with FASB's
current accounting rules, companies disclose the impact stock options
have on a company's earnings per share in footnotes that are often
pages long. These disclosures provide investors with information they
need to understand the potential dilutive effect of stock options.

We believe the real issue is that of transparency. H.R. 3574, as
passed by the House Financial Services Committee, would eliminate this
concern by directing the S.E.C. to promulgate new rules that would
increase the amount of information companies provide to investors in
their disclosures, mandate that companies draft this information in
"plain English," and increase the uniformity of stock option related
information so that investors are better able to compare information
from company to company.

Congress and government regulators need more time to evaluate the
impact stock options have on the U.S. economy and labor market, and
need to protect the ability of companies to offer this important
benefit to all company employees. When H.R. 3574 comes to the Floor
for a vote, we hope you will support this important legislation.

Thank you.

Sincerely,

William T. Archey
President and CEO

Advancing the business of technology, AeA (formerly the American Electronics Association) is the nation's largest high-tech trade association. AeA represents more than 3,000 companies with 1.8 million employees. These 3000+ companies span the high-technology spectrum, from software, semiconductors, medical devices and computers to Internet technology, advanced electronics and telecommunications systems and services. With 17 regional U.S. councils and offices in Brussels and Beijing, AeA offers a unique global policy grassroots capability and a wide portfolio of valuable business services and products for the high-tech industry. AeA has been representing the voice of the U.S. technology community since 1943.