Newsletter Vol. 1, No. 1 September 1997

There has been continued interest in the deferred delivery of shares in connection with exercises of nonqualified stock options (NSOs). The transaction begins with an exercise of a NSO with previously acquired shares having sufficient value currently to cover the exercise price of the option. To add a deferral feature, the optionee elects to defer receipt of the new shares in advance of the exercise date by a substantial period, say, at least 6 months, and gives up the right to receive the new shares (or their value) during the deferral period. The optionee and the Company agree to make the payment in the form of securities other than Company stock. The goal is to defer taxable income until payment is received (and not at exercise) and to diversify by having the payment made in property other than Company stock. While there is some consensus on the tax issues, the accounting treatment has been uncertain. However, in July 1997 the Emerging Issues Task Force concluded that such arrangements were subject to variable plan accounting like stock appreciation rights.

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