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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

FP0000.203.0804December 30, 2004

Stock Options Are a Key Component of Employee Compensation

Stock Options Are a Key Component of Employee Compensation

• More than 21,000 for-profit companies offer equity-based compensation to their employees

• More than 10 million employees hold stock options

• Not just for management or executives anymore

• More than 21,000 for-profit companies offer equity-based compensation to their employees

• More than 10 million employees hold stock options

• Not just for management or executives anymore

Source of data: National Center for Employee Ownership, 2003.FP0000.203.0804December 30, 2004

Don’t Blow It!Don’t Blow It!

• This may be the largest lump sum of potential wealth you’ll receive

• Know when and how to exercise your options

• This may be the largest lump sum of potential wealth you’ll receive

• Know when and how to exercise your options

Source of data: National Center for Employee Ownership, 2003.FP0000.203.0804December 30, 2004

Today’s PresentationToday’s Presentation

• Stock Option Basics

• Types of Options

• Vesting Methods

• Tax Implications

• Exercising Your Options

• Avoiding Option Pitfalls

• Stock Option Basics

• Types of Options

• Vesting Methods

• Tax Implications

• Exercising Your Options

• Avoiding Option Pitfalls

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“What Basics Do I Need to Know?”“What Basics Do I Need to Know?”

FP0000.203.0804December 30, 2004

“What Does It Really Mean to Own a Stock Option?”“What Does It Really Mean to Own a Stock Option?”

A stock option is the right, but not the obligation, to buy a fixed number of shares of stock at a specified price for a specific period of time.

A stock option is the right, but not the obligation, to buy a fixed number of shares of stock at a specified price for a specific period of time.

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“How Do Stock Options Work?”“How Do Stock Options Work?”

$10$11

0

5

10

15

2003 2004 2005 2006

$10$11

0

5

10

15

2003 2004 2005 2006

Example:

• 2003—$10 grant price

• 2006—$11 stock price

• 2007—Exercise: $1 gain

Example:

• 2003—$10 grant price

• 2006—$11 stock price

• 2007—Exercise: $1 gain

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$

“Why Do Companies Set up Stock Option Plans?”“Why Do Companies Set up Stock Option Plans?”

• Performance-based incentive

• Hiring and retaining key employees

• Business succession

• Performance-based incentive

• Hiring and retaining key employees

• Business succession

FP0000.203.0804December 30, 2004

“Who Decides What Kind of Options I Get?”“Who Decides What Kind of Options I Get?”

• Shareholders

• Board of Directors or Executive Committee

• Compensation Committee

• Senior management

• Shareholders

• Board of Directors or Executive Committee

• Compensation Committee

• Senior management

FP0000.203.0804December 30, 2004

“How Do I Know How Much My Options Are Worth?”“How Do I Know How Much My Options Are Worth?”

Current Market Price

– Grant Price

= Value of Option

Current Market Price

– Grant Price

= Value of Option

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“What Types of Options Are There?”“What Types of Options Are There?”

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Two TypesTwo Types

• Nonqualified Stock Options (NSOs)

• Incentive Stock Options (ISOs)

• Nonqualified Stock Options (NSOs)

• Incentive Stock Options (ISOs)

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Nonqualified Stock Options (NSOs) Nonqualified Stock Options (NSOs)

• Most common type

• Differentiating factors• Pay ordinary income tax at exercise• Pay capital gains on profits after exercise• Cashless exercise triggers only ordinary

income tax

• Most common type

• Differentiating factors• Pay ordinary income tax at exercise• Pay capital gains on profits after exercise• Cashless exercise triggers only ordinary

income tax

FP0000.203.0804December 30, 2004

Incentive Stock Options (ISOs) Incentive Stock Options (ISOs)

• Granting is restrictive• Exercise period may not exceed 10 years• No more than $100,000 in options can

vest in any one-year• Must hold onto stock for at least one-year,

and two years after the grant date• No ordinary income tax when you exercise

the options; you pay capital gains taxes

• Granting is restrictive• Exercise period may not exceed 10 years• No more than $100,000 in options can

vest in any one-year• Must hold onto stock for at least one-year,

and two years after the grant date• No ordinary income tax when you exercise

the options; you pay capital gains taxes

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“What Should I Know About Exercising My Options?”

“What Should I Know About Exercising My Options?”

FP0000.203.0804December 30, 2004

“When Is the Right Time to Exercise My Options?”“When Is the Right Time to Exercise My Options?”

• Your options must be vested before you exercise them

• Review your financial goals

• The higher the stock price, the better

• Know when they expire

• Your options must be vested before you exercise them

• Review your financial goals

• The higher the stock price, the better

• Know when they expire

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“What Is Vesting and How Does It Affect My Options?”

“What Is Vesting and How Does It Affect My Options?”

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Straight VestingStraight Vesting

• Most common way to vest

• The options become exercisable at the same percentage each year

• Most common way to vest

• The options become exercisable at the same percentage each year

Example:

With options to buy 2,000 shares and four-year vesting, 25%, or 500 options, would become exercisable each year.

Example:

With options to buy 2,000 shares and four-year vesting, 25%, or 500 options, would become exercisable each year.

Year 1Year 1

500500

Year 2Year 2

500500

Year 3Year 3

500500

Year 4Year 4

500500

FP0000.203.0804December 30, 2004

Cliff VestingCliff Vesting

Example:

If you received options to buy 2,000 shares in 2004, all 2,000 options become vested in 2008, or after four years.

Example:

If you received options to buy 2,000 shares in 2004, all 2,000 options become vested in 2008, or after four years.

• All of your options become exercisable at one time and on one date

• All of your options become exercisable at one time and on one date

Year 1Year 1

00

Year 2Year 2

00

Year 3Year 3

00

Year 4Year 4

2,0002,000

FP0000.203.0804December 30, 2004

Step VestingThe Percentage of Options Exercisable Each Year VariesStep VestingThe Percentage of Options Exercisable Each Year Varies

40%

65%

85%

100%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008

40%

65%

85%

100%

0%

20%

40%

60%

80%

100%

2005 2006 2007 2008

% V

este

d

800 Options

800 Options

500 Options

500 Options

400 Options

400 Options

300 Options

300 Options

Example:In 2004, Options granted to buy 2,000 sharesExample:In 2004, Options granted to buy 2,000 shares

FP0000.203.0804December 30, 2004

Performance VestingPerformance Vesting

• The options become fully vested in the year that the company achieves a particular goal, such as a revenue or share price target

• The options become fully vested in the year that the company achieves a particular goal, such as a revenue or share price target

Example:

Your 2,000 options become vested when your company’s revenue reaches $1 billion

Example:

Your 2,000 options become vested when your company’s revenue reaches $1 billion

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“How Will Exercising My Options Affect My Taxes?”

“How Will Exercising My Options Affect My Taxes?”

FP0000.203.0804December 30, 2004

Tax Treatment of NSOs Tax Treatment of NSOs

• Option gains are taxed the same way as your paycheck

• You pay capital gains taxes if you hold on to the stock after the exercise

• Rate varies depending on how long you hold the stock after the exercise

• Option gains are taxed the same way as your paycheck

• You pay capital gains taxes if you hold on to the stock after the exercise

• Rate varies depending on how long you hold the stock after the exercise

FP0000.203.0804December 30, 2004

NSOs NSOs

Example:

• Payroll tax

$100,000 gain

28% tax rate = $28,000 in taxes

• Capital gains tax

$100,000 gain

15% capital gains tax one-year later = $15,000 in taxes

Example:

• Payroll tax

$100,000 gain

28% tax rate = $28,000 in taxes

• Capital gains tax

$100,000 gain

15% capital gains tax one-year later = $15,000 in taxes

FP0000.203.0804December 30, 2004

Tax Treatment of ISOs Tax Treatment of ISOs

• Pay capital gains taxes when you sell stock and on any additional gains

• Required to meet restrictions or the option is treated like an NSO1. Exercise period may not exceed 10 years.2. $100,000 exercise maximum in the first year.3. Must hold on to stock for at least one-year,

and two years after the grant date.

• Exempt from ordinary income tax—if conditions are met

• Pay capital gains taxes when you sell stock and on any additional gains

• Required to meet restrictions or the option is treated like an NSO1. Exercise period may not exceed 10 years.2. $100,000 exercise maximum in the first year.3. Must hold on to stock for at least one-year,

and two years after the grant date.

• Exempt from ordinary income tax—if conditions are met

FP0000.203.0804December 30, 2004

ISOs ISOs

Example:

• Payroll tax

$100,000 gain

28% tax rate = $28,000 in taxes

• Capital gains tax

$200,000 gain

Capital gains tax = difference betweengrant price and sale price

Example:

• Payroll tax

$100,000 gain

28% tax rate = $28,000 in taxes

• Capital gains tax

$200,000 gain

Capital gains tax = difference betweengrant price and sale price

FP0000.203.0804December 30, 2004

Watch Out for the Alternative Minimum TaxWatch Out for the Alternative Minimum Tax

• While ISOs allow you to pay fewer taxes, AMT is used by the IRS to capture some of the taxes they lost

• AMT “trap” is widening–not just for highly compensated employees anymore

• While ISOs allow you to pay fewer taxes, AMT is used by the IRS to capture some of the taxes they lost

• AMT “trap” is widening–not just for highly compensated employees anymore

FP0000.203.0804December 30, 2004

In SummaryIn Summary

• Know what types of options you own

• Consider tax implications

• Consult tax planning specialist if needed

• Know what types of options you own

• Consider tax implications

• Consult tax planning specialist if needed

FP0000.203.0804December 30, 2004

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“What Are the Alternatives for Exercising My Options?”

“What Are the Alternatives for Exercising My Options?”

FP0000.203.0804December 30, 2004

Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

• Cashless exercise

• Sell to cover

• Cash purchase and hold

• Cashless exercise

• Sell to cover

• Cash purchase and hold

Options Can Be Exercised in Three Basic WaysOptions Can Be Exercised in Three Basic Ways

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• No cash necessary

• A broker will lend you the money, purchase the shares, and sell them the same day

• You receive either cash or stock

• No cash necessary

• A broker will lend you the money, purchase the shares, and sell them the same day

• You receive either cash or stock

Cashless ExerciseCashless Exercise

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• You need no cash up front

• You exercise all of your options, and sell just enough shares to cover the purchase price, taxes, fees and commissions

• You are a shareholder of your company

• You need no cash up front

• You exercise all of your options, and sell just enough shares to cover the purchase price, taxes, fees and commissions

• You are a shareholder of your company

Sell to CoverSell to Cover

FP0000.203.0804December 30, 2004

• Exercise your options and hold on to the stock

• You pay for the shares yourself

• You become a shareholder of your company

• Unless you have ISOs, you will owe payroll taxes

• Exercise your options and hold on to the stock

• You pay for the shares yourself

• You become a shareholder of your company

• Unless you have ISOs, you will owe payroll taxes

Cash Purchase and HoldCash Purchase and Hold

FP0000.203.0804December 30, 2004

• Exercise your options and hold on to the stock

• You pay for the shares yourself

• You become a shareholder of your company

• Unless you have ISOs, you will owe payroll taxes

• Exercise your options and hold on to the stock

• You pay for the shares yourself

• You become a shareholder of your company

• Unless you have ISOs, you will owe payroll taxes

Cash Purchase and Hold (cont’d)Cash Purchase and Hold (cont’d)

• Exercising Options in Closely Held Companies

• May be restricted until sale of the company or an IPO

• If not, be sure there will be a market for the shares

• Exercising Options in Closely Held Companies

• May be restricted until sale of the company or an IPO

• If not, be sure there will be a market for the shares

FP0000.203.0804December 30, 2004

• Options may fully vest and be immediately exercisable

• Options may transfer to new company

• Unvested or unexercised options may lapse or expire

• Options may fully vest and be immediately exercisable

• Options may transfer to new company

• Unvested or unexercised options may lapse or expire

“What Happens If My Company Is Sold?”“What Happens If My Company Is Sold?”

FP0000.203.0804December 30, 2004

• How much of your portfolio is allocated to company stock?

• Are you properly diversified?

• Any upcoming life changes? Do you have an immediate need for cash?

• How much of your portfolio is allocated to company stock?

• Are you properly diversified?

• Any upcoming life changes? Do you have an immediate need for cash?

“How Do Options Fit Into My Overall Financial Picture?”“How Do Options Fit Into My Overall Financial Picture?”

FP0000.203.0804December 30, 2004

• Review your asset allocation

• Determine your short-term and long-term financial goals

• Review your asset allocation

• Determine your short-term and long-term financial goals

“What Should I Do With the Proceeds?”“What Should I Do With the Proceeds?”

FP0000.203.0804December 30, 2004

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Managing Your Stock Options Wisely

Managing Your Stock Options Wisely

“How Can I Avoid Common Mistakes People Make With Options?”

“How Can I Avoid Common Mistakes People Make With Options?”

FP0000.203.0804December 30, 2004

• Usually 10 years is the maximum holding period, but it can be less

• Check the expiration date of your options

• Remember, expired options are worthless

• Usually 10 years is the maximum holding period, but it can be less

• Check the expiration date of your options

• Remember, expired options are worthless

#1 Don’t Let Your Options Expire#1 Don’t Let Your Options Expire

FP0000.203.0804December 30, 2004

• Usually 30–90 day period to exercise vested options

• Depends on reason for termination

• Ask Human Resources if you’re unsure

• Usually 30–90 day period to exercise vested options

• Depends on reason for termination

• Ask Human Resources if you’re unsure

#2 Know How Termination Will Affect Your Options#2 Know How Termination Will Affect Your Options

FP0000.203.0804December 30, 2004

• There is no guarantee that the stock will go up

• Don’t sell too soon

• Don’t hold too long

• Be realistic

• There is no guarantee that the stock will go up

• Don’t sell too soon

• Don’t hold too long

• Be realistic

#3 Remember That Stocks Fluctuate#3 Remember That Stocks Fluctuate

FP0000.203.0804December 30, 2004

• It is against the law to buy or sell stock when you are aware of “material inside information”

• Know what applies to you

• It is against the law to buy or sell stock when you are aware of “material inside information”

• Know what applies to you

#4 Don’t Fall Victim to Insider Trading

#4 Don’t Fall Victim to Insider Trading

FP0000.203.0804December 30, 2004

Here’s How I Can Help YouHere’s How I Can Help You

• Determining the best time to exercise and sell

• Determining tax consequences

• Establishing financial goals

• Diversification before and after exercise

• Determining the best time to exercise and sell

• Determining tax consequences

• Establishing financial goals

• Diversification before and after exercise

FP0000.203.0804December 30, 2004

Another Important Partner: OppenheimerFunds–The Right Way to Invest

Another Important Partner: OppenheimerFunds–The Right Way to Invest• Founded in 1960

• One of the most recognized names in the industry• Over 155 billion in assets under management1

(including subsidiaries and controlled affiliates) in more than 7 million shareholder accounts as of September 30, 2004

• A broad range of investment products covering the full risk reward spectrum

• Long-standing partnerships with financial advisors nationwide

• Founded in 1960

• One of the most recognized names in the industry• Over 155 billion in assets under management1

(including subsidiaries and controlled affiliates) in more than 7 million shareholder accounts as of September 30, 2004

• A broad range of investment products covering the full risk reward spectrum

• Long-standing partnerships with financial advisors nationwide

1. As of September 30, 2004.FP0000.203.0804December 30, 2004

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund’s investment objectives, risks, charges and expenses. Fund prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, calling us at 1.800.525.7048 or visiting our website at www.oppenheimerfunds.com. Read prospectuses carefully before investing.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.

Oppenheimer funds are distributed by OppenheimerFunds Distributor, Inc.

Two World Financial Center, 225 Liberty Street, New York, NY 10281-1008

©Copyright 2004 OppenheimerFunds Distributor, Inc. All rights reserved.[FP0000.203.0804] December 30, 2004

FP0000.203.0804December 30, 2004