The biotechnology industry was among business groups Thursdayexpressing relief at a Financial Accounting Standards Board (FASB)decision not to require companies to charge employee stock optionsagainst earnings in their profit and loss statements.

The FASB, the accounting industry's rule-making bodyheadquartered in Norwalk, Conn., said opposition to the proposalwas overwhelming and it decided instead to allow companies toreport the value of the stock options in a footnote to their financialstatements.

In biotechnology, where an estimated 85 percent of the industrygrants stock options to most employees, deducting the non-cashcompensation as an expense would have unfairly devastated thevaluations of the companies, said Carl Feldbaum, president of theBiotechnology Industry Organization in Washington.

For many biotechnology companies, industry experts said, theaccounting change would reflect deeper losses, distorting financialstatements and causing uncertainty among potential investors.

"FASB is a difficult group to communicate with, but we just keptsaying it and saying it and they finally got it," Feldbaum said."We've been saying [the stock option proposal] made no sense tobiotechnology companies and would have been destructive."

Robert Esposito, national director of KPMG Peat Marwick'sbiotechnology and life sciences practice, said FASB has beendebating disclosure of employee stock options for 10 years. Butpublic clamor for accountability, he observed, gained momentumseveral years ago after some top executives at large, non-biotechnology, corporations made millions of dollars cashing instock options that had never appeared on earnings' statements.

In the biotechnology industry, Esposito said, start-up companiescompeting for limited investors' cash use stock options to attracttalented employees at all levels.

"The companies are saying when they issue the options, `There's noguarantee the stock will go up and it could go down, but if we all dowell the stock will go up,'" Esposito observed.

If FASB had implemented its original proposal, he added, "As thosecompanies progressed toward breaking even and becomingprofitable, they would have been saddled with trying to represent theimputed value of these stock options . . . adding millions of dollars inexpenses that didn't represent any cash."

Esposito said making the stock options a financial footnote is only apartial victory.

"The companies will still be required to make the difficultcalculations [trying to value the stock options] and it will still causeuncertainty, inconsistency and concern," he said.

Feldbaum described the accounting debate in terms of a social issue.

"The biotechnology industry is characterized by the fact that it grewup in the '80s and '90s," he said. "It's not hierarchical. It's notbureaucratic. Everyone from the receptionist to the top executivedeserves a piece of the company. The idea that you involve everyonein the success of the company is a concept we want to engender." n

-- Charles Craig

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