Mr. Jonathan G. Katz
Secretary
U. S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549-0609

April 2, 2001

Re: File No. S7-04-01 (Release Nos. 33-7944, 34-43892)
Disclosure of Equity Compensation Plan Information

Dear Mr. Katz:

Arthur Andersen LLP is pleased to respond to the Securities and Exchange Commission's request for comments on Release Nos. 33-7944/34-43892, Disclosure of Equity Compensation Plan Information, (the "Proposal").

Summary

With the increased use of equity compensation instruments, we acknowledge the importance of adequate disclosure of a company's use of equity compensation plans. We are not in a position to evaluate the merits of the Proposal from the perspective of investors. However, we believe it is appropriate for us to comment on the ways in which the proposed disclosures appear to duplicate information currently provided in financial statements and elsewhere in SEC filings. Our view is that redundancies in reported information unnecessarily increase registrants' costs of providing information to investors while at the same time decrease investors' ability to identify and evaluate relevant information. For this reason, we support efforts such as the FASB-sponsored Business Reporting Research Project to eliminate existing redundancies and recommend ways in which future redundancies could be prevented.

The Proposal states that the proposed rules are in response to concerns regarding:

• The absence of full disclosure to security holders about equity compensation plans;

• The potential dilutive effect of equity compensation plans; and

• The adoption of many plans without the approval of security holders.

Disclosures of material information about equity compensation plans, including the dilutive effect of these plans, are already required in registrants' financial statements. Although there are some minor differences between the Proposal and existing disclosures, it does not appear to us that those differences are sufficient to warrant requiring the volume of information proposed. Further, it is our understanding that the issue of security holder approval of equity compensation plans is a matter of corporate governance that is being addressed currently in proposals by the New York Stock Exchange and Nasdaq. Accordingly, it would appear to us that the Commission's objectives are being met and that no incremental rulemaking is necessary at this time.

Our detail comments focus primarily on the issue of duplication. However, should the Commission decide to issue a final rule, we offer some specific observations about the Proposal's requirements.

Duplicative Disclosure Requirements

Proposed Items 201(d) of Regulations S-B and S-K would require that registrants disclose the following information in tabular format:

• The number of securities authorized for issuance under each equity compensation plan of the registrant in effect as of the end of the most recently completed fiscal year;

• The number of securities issued pursuant to equity awards made during the last completed fiscal year, plus the number of securities to be issued upon the exercise of options, warrants or rights granted during the last completed fiscal year, under each plan;

• The number of securities to be issued upon the exercise of outstanding options, warrants or rights under each plan; and

• Other than securities to be issued upon the exercise of outstanding options, warrants or rights, the number of securities remaining available for future issuance under each plan.

The Background section of the Proposal indicates that certain equity compensation disclosures are "sometimes available indirectly" through the financial statements. However, the Proposal notes that such disclosures are not "consistently available in any one location or format, may not include non-derivative securities awarded to employees and may not include stock options granted to non-employees." We believe that the accounting profession has appropriately addressed the issues of full disclosure of (a) equity compensation arrangements to employees and non-employees and (b) the potentially dilutive effects of such arrangements. Our view is based our analysis of the requirements of generally accepted accounting principles as well as our understanding of the basis for these disclosures, as explained by the Financial Accounting Standards Board (the "Board") in their deliberations on recent standards. It is our conclusion that the proposed disclosures are substantially equivalent to the information that is presented in registrants' financial statements. Further, to the extent that the disclosures are incremental, we question whether the value of the additional information is sufficient to merit its cost.

Related to the Commission's concern regarding full disclosure of equity compensation arrangements, Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, requires disclosure of information related to equity compensation arrangements provided to employees and non-employees. Specifically, Statement 123 requires disclosure of the following:

• Paragraph 46 of Statement 123 requires registrants to "...provide a description of the plan(s), including the general terms of awards under the plan(s), such as vesting requirements, the maximum term of options granted, and the number of shares authorized for grants of options or other equity instruments."

• Paragraph 47a. of Statement 123 requires disclosure of "The number and weighted-average exercise prices of options for each of the following groups of options: (1) those outstanding at the beginning of the year, (2) those outstanding at the end of the year, (3) those exercisable at the end of the year, and those (4) granted, (5) exercised, (6) forfeited, or (7) expired during the year."

• To the extent a registrant uses equity instruments to compensate suppliers, customers and other non-employees, paragraph 46 of Statement 123 states that "...An entity that uses equity instruments to acquire goods or services other than employee services shall provide disclosures similar to those required by this paragraph and paragraphs 47 and 48 to the extent that those disclosures are important in understanding the effects of those transactions on the financial statements."

We acknowledge that the Proposal would require disclosure of information for each individual plan whereas Statement 123 does not mandate this level of disaggregation in all circumstances. Statement 123 approaches disaggregation on the basis of whether the additional information would be meaningful to investors. Specifically, paragraphs 47 and 48 indicate that separate or segmented disclosures are appropriate when such disclosures are important to an understanding of a registrant's use of stock-based compensation. In assessing the level of disclosure to require, the Board considered and obtained input regarding the appropriate extent of separate disclosures. In its Basis for Conclusions, the Board states (emphasis added):

"The Exposure Draft proposed requiring entities with both fixed and indexed or performance-based plans to provide separate disclosures for the different types of plans. Some respondents to the Exposure Draft requested additional guidance on the situations in which separate disclosures would be necessary and what information should be provided separately for fixed plans and other plans. The Board decided that separate disclosures should be provided to the extent that differences in the characteristics of the awards make those disclosures important to an understanding of the entity's use of stock-based compensation. This Statement gives examples of such circumstances rather than specifying detailed requirements. The Board recognizes that entities differ in the extent to which they use various forms of stock-based employee compensation. An entity should exercise its judgment in providing detailed information that is useful in its own situation." (paragraph 254 of Statement 123)

The Proposal mandates disaggregation for each plan but permits aggregation for "individual arrangements." It is not clear to us why aggregation for individual arrangements is sufficient for investors but aggregation as permitted by Statement 123 is not.

Regarding the Commission's concern related to the potential dilutive effect of equity compensation arrangements, the Board specifically considered whether the adequacy of the disclosures required by Statement 123 would be sufficient for an understanding of the potentially dilutive effect of options and warrants issued as compensation. In its Basis for Conclusions the Board indicated that they addressed this issue, concluding that "the disclosures required by this Statement are generally consistent with disclosure long required for other potentially dilutive securities" (paragraph 257 of Statement 123).

In addition to the matters addressed by Statement 123, Statement of Financial Accounting Standards No. 128, Earnings Per Share, addresses the effect of dilution of stock options, warrants and similar instruments on registrants' earnings. Specifically, paragraphs 38 and 40 of Statement 128 require the presentation of (a) diluted earnings per share data, (b) a reconciliation that includes the individual income and share amount affects of all securities that affect earnings per share, and (c) information about securities that could potentially dilute basic EPS in the future that were excluded because they currently are antidilutive. These disclosures relate to circumstances existing at the balance sheet date. However, Statement 128 also requires disclosure of transactions such as the issuance of warrants and options or the exercise of potential common shares that occur after the date of the financial statements but prior to the issuance of the financial statements.

In its Basis for Conclusions related to Statement 128, the Board discusses the computation and presentation of dilution at length. For example:

"The Board decided to require a reconciliation of the numerators and denominators of the basic and diluted EPS computations in this Statement because the reconciliation is simple and straightforward and will help users better understand the dilutive effect of certain securities included in EPS computations...The Board agreed that disclosing the nature and impact of each dilutive potential common share (or series of shares) included in the diluted EPS computation, as well as separately identifying those antidilutive potential common shares that could dilute earnings per share in the future, allows users to exercise their own judgment as to the `likely' EPS number. " (paragraph 137)

In addition to the disclosures required by Statements 123 and 128, Item 402 of Regulation S-K currently requires disclosure of equity-based compensation information for the registrant's most highly compensated officers; compensation of directors; and option repricings for any executive officer during the last 10 fiscal years. In addition, the compensation committee report discusses the registrant's compensation policy for all executive officers.

We acknowledge that the existing disclosures discussed above are not presented in a standard format or in a single location. However, we are not persuaded that a standardized format or location for disclosures of all equity-based compensation arrangements by all registrants will provide a meaningful presentation, nor are we persuaded that concerns about the format and location of information are sufficient to merit duplicative disclosures.

We have been encouraged by the willingness of the Commission and the accounting profession to address concerns about duplicative disclosures, as indicated by the March 2001 report from the Business Reporting Research Project working group on GAAP-SEC Disclosure Requirements. One of the working group's recommendations is that the Commission's staff request FASB assistance when a proposed rule would create redundancy with existing GAAP disclosures. Prior to issuing a final rule on disclosures of equity-based compensation arrangements, we encourage the Commission staff to work with the FASB staff to understand the extent to which the Commission's disclosure objectives are met currently by the accounting literature and whether the Commission's incremental disclosure requirements could be narrowed.

Other Observations

Should the Commission decide to proceed with the proposed disclosures, we have the following specific comments regarding the Proposal:

• Regarding the extent of security holder approval of equity compensation plans, we encourage the Commission to await the outcomes of the efforts that have been undertaken by the New York Stock Exchange and Nasdaq before instituting any incremental requirements.

• The Proposal calls for disclosures of equity compensation plans covering both employees and nonemployees. Although the primary focus of investor concern appears to relate to arrangements with employees, the extent, frequency and location of these proposed disclosures are the same whether the recipient is an employee or not. We question whether the concerns and need for disclosure are as great when the equity based arrangement is with nonemployees. Accordingly, we ask the Commission to consider whether less frequent or more abbreviated disclosures would be appropriate for information related to arrangements with nonemployees.

• The Proposal requires the disclosures to be presented in the proxy for any years in which the registrant is seeking security holder action regarding an equity compensation plan, and in the 10-K or 10-KSB for other years. We question whether investors will be confused by the potential relocation of this information from year to year. If the goal of the Commission is to assist investors by providing a more certain location for all equity compensation related information, we suggest that it be presented in one document on a consistent basis.

• We suggest that investors might find any expanded disclosures to be more useful if the employee-related compensation disclosures were made part of an expanded executive compensation disclosure requirement and presented in the proxy as part of an expanded total package of compensation information. Equity plan arrangements with nonemployees also would be presented in the proxy immediately following or preceding the executive and employee compensation discussion. This approach would enhance the investor's ability to more easily distinguish equity instruments used to provide incentive and compensate employees and equity instruments used to pay third parties for goods and services.

• The Proposal calls for presenting disclosures for domestic registrants only and indicates that these disclosures need not be provided in a registration statement. Given the Commission's stated concerns regarding the security holders' information needs for purposes of making investment decisions, it would be helpful for the Commission's final release to explain its basis for determining the scope of these disclosures.

• We believe that registrants may have difficulty understanding the requirements for disclosure. This could lead to disclosures that are not in accordance with the intent of the rules and therefore not comparable across registrants. For example:

  • The Proposal indicates that the disclosures for "individual arrangements" can be aggregated, while the disclosures for "plans" cannot. The definition of a "plan", via the references to Regulation S-K Item 402, states that "a plan may be applicable to one person." There is no definition for an "individual arrangement." How are registrants to determine whether an arrangement is an "individual arrangement" or a "plan"? Is an "individual arrangement" an arrangement with one individual or a single arrangement with one or more individuals? Is an "individual" a "person" as the word "person" is used in Regulation S-K Item 402(a)(7)(ii) or as the word "person" is defined in Regulation S-X, Rule 1-02?

  • One of the columns of information that is required under the Proposal is "the number of securities issued pursuant to equity awards made during the last completed fiscal year, plus the number of securities to be issued upon the exercise of options, warrants or rights granted during the last completed fiscal year, under each plan." Is disclosure required only for securities issued during the year for equity awards made during the year - i.e., is no disclosure required for securities issued during the year for equity awards made in prior years? Disclosing only a portion of the securities issued during the year does not appear consistent with the Commission's stated objectives.

  • It is not clear to us whether the definition of a "plan" includes instruments such as debt or preferred stock that are convertible to common stock, interest on debt that is payable in common stock, or preferred dividends that are payable in common stock. Footnote 35 in the proposal does not mention creditors and preferred security holders but the definition of a plan in Regulation S-K Item 402(a)(7)(ii) does not appear to exclude these parties.

• We suggest that any release containing final rules include an appendix providing questions and answers and examples illustrating how the rules should be applied. The Commission used this approach in Release 33-7878, Financial Statements and Periodic Reports For Related Issuers and Guarantors, and we believe registrants found it to be helpful.

• The Proposal requires disclosure of the number of securities issued or to be issued under equity compensation plans. No disclosure is required for any other potentially pertinent information, such as pricing or vesting information. Can security holders adequately evaluate potential dilution without any information that would be indicative of the amount or timing of dilution? The disclosures currently required by Statement 123 encompass these additional factors.

• The Proposal does not identify or address transitional issues.

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We appreciate the opportunity to comment on the rules the Commission has proposed. If you would like to discuss our comments, please do not hesitate to contact us. Please contact Amy Ripepi at 312-507-7258 or via electronic mail at amy.a.ripepi@us.andersen.com.

Very truly yours,

Arthur Andersen LLP