1. Alternatives for Dealing with Underwater Stock Options Presentation for KPMG LLP Executive Compensation Strategies October 9, 2002

2. - 2 - Addressing Underwater Stock Options Underwater Stock Options Currently a very common problem in many public and private companies Desired impact of compensation programs, including stock options:  Attract  Motivate  Reward  Retain Underwater options can be a disincentive to employees However, this must be balanced with the shareholder’s perspective

3. - 3 - Addressing Underwater Stock Options Factors that KPMG’s Executive Compensation Strategies group utilizes in evaluating the preferred strategy: Earnings Shares outstanding Overhang* Employee perception Shareholder perception Implementation issues Future equity reward strategy * Stock currently outstanding from Equity Compensation Programs plus shares available for future grants under these programs as a percentage of total shares outstanding.

4. - 4 - Addressing Underwater Stock Options The Perils of Variable Accounting (Under APB 25): n Fixed Accounting  Stock option exercise at market = no compensation expense  6 million stock options outstanding = no expense (but potential increase in dilution) n Variable Accounting  $1 increase in stock price above exercise price = $1 increase in compensation expense  6 million stock options outstanding = $6 million expense

5. - 5 - Addressing Underwater Stock Options Companies have several alternatives, each with its own advantages and disadvantages: Alternative 1:Cancel and Re-issue/ Reprice (“e.g., current FMV” or “current FMV + 10%”) Alternative 2:Issue additional stock options Alternative 3: Cancel all, or a portion of, underwater stock options and reissue new stock options after six months Alternative 4: Exchange restricted stock for all, or a portion of, underwater stock options Alternative 5: Use cash Many companies will take no action.

6. - 6 - Addressing Underwater Stock Options Alternative 1: Cancel and Re-Issue/ Reprice n Repricing will cause re-measurement under APB 25, resulting in variable accounting n Earnings can be severely impacted; charge is not predictable n Lowering the exercise price will increase EPS dilution as calculated under the Treasury Stock Method n In a 1-for-2 exchange, overhang will be unaffected if shares are not retired but potential dilution is reduced n No tax impact to employee at the time of the repricing. Employees taxable gain will be calculated based on the new lower exercise price Overhang 0% 5% 10% 15% 20% 25% 30% BeforeAfter Before After Shares AwardedShares Available for Awards

7. - 7 - Addressing Underwater Stock Options Alternative 2: Issue Additional Stock Options n Granting additional stock options does not require re-measurement and therefore carries no earnings charge n EPS dilution will increase with stock price growth from the new grant n Overhang will not increase if available plan shares are used, however, the number of shares available for future grants will significantly diminish n If this award is accompanied by an increase in plans shares, overhang will increase n No tax impact on existing stock options. New stock options are taxed as normal. Earnings Impact $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 EPS Impact $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 0% 5% 10% 15% 20% 25% 30% BeforeAfter Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Overhang Before After Shares AwardedShares Available for Awards

8. - 8 - Addressing Underwater Stock Options Alternative 3: Cancel Stock Options, Reissue After Six Months n The 6 month approach does not require re-measurement and therefore, also carries no earnings cost n EPS dilution will increase due to the relationship between the lower exercise price and current fair market value (I.e., more “in the money” potential) n In a 1-for-2 exchange, overhang will be unaffected if shares are not retired but potential dilution is reduced n No tax impact to employee upon stock option cancellation. New stock options are taxed as normal Earnings Impact $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 EPS Impact $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Overhang 0% 5% 10% 15% 20% 25% 30% BeforeAfter Before After Shares AwardedShares Available for Awards

9. - 9 - Addressing Underwater Stock Options Alternative 4: Exchange Restricted Stock for Stock Options n Exchanging restricted stock for options does not require re-measurement of the stock options n Granting restricted stock triggers a fixed charge, spread across the vesting period n EPS dilution will increase due to the incremental number of shares of restricted stock that are granted n Assuming an increased exchange ratio of 1-for-4 (restricted stock for stock options) and that shares would remain in the plan, more shares would be available for future grants n No tax impact to employee for exchanged stock options. Restricted stock will be taxed at vesting dates Earnings Impact $0.0 $10.0 $20.0 $30.0 $40.0 $50.0 EPS Impact $0.00 $0.20 $0.40 $0.60 $0.80 $1.00 Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08 Overhang 0% 5% 10% 15% 20% 25% 30% BeforeAfter Before After Shares AwardedShares Available for Awards

10. - 10 - Addressing Underwater Stock Options Alternative 5: Use Cash Always an earnings charge Additional incentive  If payment directly or indirectly reduces exercise price, it will trigger variable accounting

11. - 11 - Addressing Underwater Stock Options Underwater stock options are a company-specific problem  Extent of underwater grants  How much underwater and why?  What are competitors for talent doing? “Repricing” sets a precedent Need to revisit equity strategy Take No Action

12. - 12 - Addressing Underwater Stock Options Comparison of Alternatives - Summary Alternative Accounting Cost Predictability Dilution Impact Value to Employee Shareholder Perception Ease to Implement 1: Cancel and Reissue (reprice) 2:Issue Additional Stock Options 3:Cancel, Regrant after 6 months 4:Cancel, Grant Restricted Stock 5:Using Cash Take no Action Meets objectives Partially meets objectives Does not meet objectives

13. - 13 - Underwater Stock Option Alternatives in Practice KPMG reviewed 165 organizations who have addressed their underwater stock option issues to see which strategies are the most prevalent in today’s environment (those organizations who chose “No Action” were excluded from this study.) The companies (see Appendix for list) in our review used the following strategies: n Grant new options 6 months and 1 day after cancellation of the underwater stock options n Reprice the current underwater stock options to the current Fair Market Value, or some other value n Swap the current underwater stock options for a number of restricted shares - typically using a ratio of stock options to restricted shares n Grant additional stock options at the current market price n Provide cash to the employee in exchange for the underwater stock options based on a predetermined value per share n Use a combination of the alternatives mentioned above

14. - 14 - Underwater Stock Option Alternatives in Practice Of the 165 organizations in this study. We have found the following: Alternative UsedNumber of Companies 6&185 Reprice30 RS Swap23 Multiple14 Grant Addl Options11 Cash in Exchange2

15. - 15 - Appendix

16. - 16 - Appendix - Underwater Stock Option Alternatives in Practice The organizations included in the Underwater Stock Option Alternatives in Practice review and the alternative(s) that they used are as follows:

17. - 17 - Appendix - Underwater Stock Option Alternatives in Practice (continued)

18. - 18 - Appendix - Underwater Stock Option Alternatives in Practice (continued) Grant Additional Shares Boston ScientificAmazon.comReprice and Grant Addl Shrs Cisco SystemsBreakaway Solutions6&1 or RS Swap DellBroadbase SoftwareReprice and Grant Addl Shrs GlobixBroadcom6&1 or Grant Addl Shrs IMS HealthClarent Corp.6&1, Reprice and Grant Addl Shrs IntelCypress CommunicationsReprice and RS Swap Lucent TechnologiesFairMarketReprice and Grant Addl Shrs MicrosoftFranklin CoveyRS Swap and Cash in Exchnge OneMainITC Deltacom6&1 and RS Swap PSInetKana Communications6&1 and RS Swap ViaLinkLante6&1 and RS Swap NetSpeak6&1 and Reprice Novell6&1 and Grant Addl Shrs Cash in Exchange Vignette6&1 and RS Swap NPC Int'l Quaker-State Pennzoil Multiple Programs