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Date:   Tue, 06 May
From:   Shelley

Hello,

I receive your email announcements and was wondering if you could answer a question for me. We granted NSO's to some consultants. Their options vested and they exercised them. What reporting requirements are there from the company's standpoint? We are a privately held company, and therefore, our stock is not traded.

Thank you,

Shelley
Controller and Corporate Secretary

Answer

Date:   Fri, 9 May 2003

Hello Shelley,

Since the options were granted to consultants, I take it these people were not employees. (I'm not sure how "vesting" would apply to a non-employee.) Assuming this is correct, the company is required to determine a fair market value for the stock on the date of exercise and issue a Form 1099 MISC to the consultants reporting the excess of the fair market value of the stock over the option price as non-employee compensation. The information returns should be issued to the consultants by January 31 of the year following the year of exercise, and to the IRS by February 28.

The company will also need to give information about the details of the exercises to its accountants in order to claim a tax deduction for this item on its income tax returns.

You should check with your corporate counsel about any other reporting requirements under the securities laws and with your accountants about disclosure requirements for your financial statements. (This probably will have an impact on your earnings per share disclosures.)

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.