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1999 Stock Incentive Plan - Re
2010-04-01 19:59:24 来源：
1999 Stock Incentive Plan - Redback Networks Inc.(Jun 01, 2001)
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
REDBACK NETWORKS INC.
1999 STOCK INCENTIVE PLAN
SUMMARY AND PROSPECTUS
THE DATE OF THIS PROSPECTUS IS JUNE 1, 2001
Table of Contents
Page
----
QUESTIONS AND ANSWERS ABOUT THE 1999 STOCK INCENTIVE PLAN ...................... 1
GENERAL PLAN PROVISIONS ........................................................ 1
1. What is the basic structure of the 1999 Stock Incentive Plan? ........... 1
2. When did the Company adopt the Plan? .................................... 1
3. Who administers the Plan? ............................................... 2
4. Who is eligible to participate in the Plan? ............................. 2
5. How many shares of common stock may be issued under the Plan? ........... 2
6. What happens if there is a change in the Company's capital structure? ... 3
7. May the Company amend or terminate the Plan? ............................ 3
GRANT OF OPTIONS ............................................................... 4
8. How are options granted? ................................................ 4
9. What type of options may the Company grant? ............................. 4
10. Will I have to pay for my option? ....................................... 4
11. How does the Company determine the exercise price? ...................... 4
12. How does the Company determine the fair market value of our common
stock? ................................................................. 4
13. May I assign or transfer my option? ..................................... 5
14. When do I acquire the rights of a stockholder? .......................... 5
15. May the Company offer to buy out my option? ............................. 5
EXERCISE OF OPTIONS ............................................................ 5
16. When may I exercise my option? .......................................... 5
17. When will my option terminate? .......................................... 5
18. How do I exercise my option? ............................................ 6
19. How do I pay the exercise price of my option? ........................... 6
INCENTIVE STOCK OPTIONS ........................................................ 7
20. Who may receive an incentive stock option? .............................. 7
21. Is there a limit on the number of shares for which an incentive stock
option may become exercisable in one calendar year? .................... 7
22. Can an incentive stock option lose its qualified status? ................ 8
23. What limitations apply to incentive stock options granted to a 10%
stockholder? ........................................................... 8
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EARLY TERMINATION OF OPTIONS ................................................... 8
24. What happens to my options if my service terminates? .................... 8
25. What happens to my options if I die or become disabled? ................. 9
RESTRICTED SHARES .............................................................. 9
26. What are restricted share awards? ....................................... 9
27. How do I pay for restricted shares? ..................................... 9
DISPOSITION OF SHARES .......................................................... 10
28. When may I sell my shares? .............................................. 10
MODIFICATION OR ASSUMPTION OF OPTIONS .......................................... 10
29. May we modify or assume options? ........................................ 10
ACCELERATION OF VESTING ........................................................ 10
30. May the exercisability of an award be accelerated? ...................... 10
31. What happens to my awards upon a merger of the Company? ................. 11
DEFERRAL OF AWARDS ............................................................. 11
32. May I defer receipt of option shares? ................................... 11
MISCELLANEOUS .................................................................. 11
33. Do I have the right to remain employed until my options or my shares
vest? .................................................................. 11
34. Is the Plan subject to ERISA? ........................................... 12
RESTRICTIONS ON RESALE ......................................................... 12
35. What restrictions apply if I am a Section 16 Insider? ................... 12
36. What restrictions apply if I am an affiliate? ........................... 14
37. Are there any restrictions on resale that apply even if I am not an
affiliate or Section 16 insider? ....................................... 14
QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES .............................. 16
INCENTIVE STOCK OPTIONS ........................................................ 16
T1. Will I have federal income tax liability if I am granted an incentive
stock option? .......................................................... 16
T2. Will I have federal income tax liability if I exercise an incentive
stock option? .......................................................... 16
T3. When will I be subject to federal income tax on shares acquired under an
incentive stock option? ................................................ 16
T4. What constitutes a disposition of incentive stock option shares? ........ 16
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T5. How do I determine my federal income tax liability when I sell my
shares? ................................................................ 17
T6. What if I make a qualifying disposition? ................................ 17
T7. What are the normal tax rules for a disqualifying disposition? .......... 18
T8. What if the shares purchased under an Incentive Stock Option are subject
to a substantial risk of forfeiture, such as the Company's repurchase
right? ................................................................. 19
T9. What are the federal tax consequences to the Company? ................... 19
T10. What happens if I pay the exercise price of an incentive stock option by
delivering shares that I acquired by exercising another incentive stock
option, if the delivery of the shares results in a disqualifying
disposition? ........................................................... 20
T11. What happens if I pay the exercise price of an incentive stock option
with shares that I acquired through (a) an incentive stock option and
held for the requisite holding periods, (b) a nonstatutory stock option
or (c) open-market purchases? .......................................... 20
T12. What happens if I make a disqualifying disposition of shares purchased
under an incentive stock option with shares of our common stock? ....... 21
NONSTATUTORY STOCK OPTIONS ..................................................... 21
T13. Will I have federal income tax liability if I am granted a nonstatutory
stock option? .......................................................... 21
T14. Will I have federal income tax liability if I exercise a nonstatutory
stock option? .......................................................... 21
T15. What if the shares purchased under a nonstatutory stock option are
subject to a substantial risk of forfeiture, such as the Company's
repurchase right? ...................................................... 21
T16. What is the effect of making a Section 83(b) election? .................. 22
T17. Will I recognize additional income if I sell shares acquired under a
nonstatutory stock option? ............................................. 22
T18. What happens if I pay the exercise price of a nonstatutory stock option
with shares that I previously acquired by exercising an option or
through an open-market purchase? ....................................... 22
T19. What are the federal tax consequences to the Company? ................... 23
RESTRICTED SHARE AWARDS ........................................................ 23
T20. Will a restricted share award or purchase result in federal income tax
liability to me? ....................................................... 23
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Page
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T21. Will the vesting of shares under a restricted share award result in
federal income tax liability to me? .................................... 23
T22. What is the effect of making a Section 83(b) election? .................. 23
T23. What are the federal tax consequences to the Company? ................... 24
ALTERNATIVE MINIMUM TAX ........................................................ 24
T24. What is the alternative minimum tax? .................................... 24
T25. How is alternative minimum taxable income calculated? ................... 24
T26. What is the allowable exemption amount? ................................. 24
T27. Is the spread on an incentive stock option at the time of exercise
normally included in my alternative minimum taxable income? ............ 25
T28. How will the payment of alternative minimum tax in one year affect the
calculation of my tax in a later year? ................................. 25
COMPANY INFORMATION ............................................................ 27
iv
Questions and Answers About the
1999 Stock Incentive Plan
Redback Networks Inc.
QUESTIONS AND ANSWERS ABOUT THE 1999 STOCK INCENTIVE PLAN
We have established a stock incentive program. This program allows eligible
employees, consultants and outside directors to acquire shares of our common
stock and benefit from any increases in the value of our common stock. The
program is officially called the "Redback Networks Inc. 1999 Stock Incentive
Plan." We sometimes refer to it in this document as the "Plan."
This Summary and Prospectus explains in question and answer format the
major features of our 1999 Stock Incentive Plan and the principal rights and
benefits available to the participants. This document is only intended to be a
summary of the Plan. Some rules are described in abbreviated form and others are
not mentioned at all. If there is any ambiguity in this Summary and Prospectus
or if there is any conflict between this Summary and Prospectus and the Plan
text, then the Plan text will govern. You may request a copy of the Plan from
the Corporate Secretary.
Certain terms are used throughout this Summary and Prospectus and are
defined here. An "outside director" is a member of our board of directors who is
not a common-law employee of the Company or a parent or subsidiary of the
Company. A "parent" of the Company is any corporation that, directly or
indirectly, owns at least 50% of the Company. A "subsidiary" of the Company is
any corporation that is at least 50% owned by the Company, directly or
indirectly.
GENERAL PLAN PROVISIONS
--------------------------------------------------------------------------------
1. What is the basic structure of the 1999 Stock Incentive Plan?
Under our 1999 Stock Incentive Plan, we may award to eligible
participants the following kinds of equity-based compensation, collectively
referred to as "awards":
o Options to purchase shares of our common stock, and
o Restricted shares of our common stock.
2. When did the Company adopt the Plan?
Our board of directors adopted the Plan on March 3, 1999. It is
effective on the date of the initial public offering of our common stock (May
17, 1999). Our stockholders also approved the Plan. Since then, our board of
directors and our stockholders have from time to time approved amendments of the
Plan.
3. Who administers the Plan?
The compensation committee of our board of directors administers the
1999 Stock Incentive Plan. The compensation committee is comprised of two or
more board members who are outside directors.
Our compensation committee has full authority to determine:
o Who will receive an award under the Plan,
o When an award will be made,
o The number of shares included in each award,
o The vesting requirements of each award, and
o The other features and conditions of each award.
Our compensation committee also interprets the 1999 Stock Incentive Plan and
makes all other decisions relating to Plan operation. The decisions of our
compensation committee are final and binding.
In addition, the board of directors has appointed a "secondary
committee" consisting of our Chief Executive Officer. The secondary committee
may also grant options under the Plan, subject to certain limitations.
4. Who is eligible to participate in the Plan?
Our employees, outside directors, and consultants or advisers who
provide services to the Company, or to a parent or subsidiary of the Company,
are eligible to participate in the 1999 Stock Incentive Plan. However, our
compensation committee in its sole discretion determines who will actually
receive an award.
5. How many shares of common stock may be issued under the Plan?
We reserved 18,000,000 shares of our common stock for issuance under
our 1999 Stock Incentive Plan./1/ We may adjust this number for certain changes
in our capital structure, as explained in Question 6. As of January 1 of each
year, the reserve automatically increases by 10,000,000 shares./2/ All unused
shares that were reserved under our 1997 Stock Plan will also become available
for grants under the 1999 Stock Incentive Plan.
-------------------------------
/1/ Reflects original reserve of 2,500,000 shares; two-for-one stock split
applicable to stockholders of record on August 5, 1999; increase from 5,000,000
to 8,000,000 shares approved by stockholders on March 8, 2000; two-for-one stock
split applicable to stockholders of record on March 20, 2000; and increase from
16,000,000 to 18,00,000 shares approved by stockholders on May 16, 2001.
/2/ Reflects original annual addition of 1,500,000 shares; two-for-one stock
split applicable to stockholders of record on August 5, 1999; increase from
3,000,000 to 5,000,000 shares approved by stockholders on March 8, 2000; and
two-for-one stock split applicable to stockholders of record on March 20, 2000.
Annual addition originally was limited to 5% of total shares then outstanding;
stockholders approved elimination of limitation on May 16, 2001.
2
If shares of our common stock are forfeited, then the shares will
again become available for awards under the 1999 Stock Incentive Plan (except
awards of incentive stock options). If options are forfeited or terminate for
any other reason before being exercised, then the corresponding shares will
again become available for awards under the Plan.
We may grant to a participant in our 1999 Stock Incentive Plan options
covering a maximum of four million shares of our common stock in any fiscal
year.3 However, to a new employee we may grant options covering a maximum of
eight million shares in the fiscal year in which his or her service as an
employee first begins./3/
6. What happens if there is a change in the Company's capital structure?
A change in our capital structure includes:
o A stock split,
o A stock dividend,
o An extraordinary cash dividend or another distribution to
stockholders that has a material effect on the price of the
shares of our common stock,
o A reverse stock split,
o A recapitalization,
o A spin-off, or
o A similar event.
If one of these changes in our capital structure occurs, appropriate
adjustments will be made in one or more of the following:
o The number of shares reserved for future awards under the Plan,
o The maximum number of options that may be awarded to a
participant in any fiscal year,
o The number of shares of our common stock that are covered by each
outstanding option, and
o The exercise price under each outstanding option.
7. May the Company amend or terminate the Plan?
Yes. Our board of directors may amend or terminate the Plan at any
time and for any reason. However, no amendment may, without your consent,
adversely affect your rights and obligations under outstanding awards. If
required by applicable laws or regulations, we will seek stockholder approval
for an amendment of the Plan.
---------------------------
/3/ Reflects two-for-one stock splits applicable to stockholders of record on
August 5, 1999, and March 20, 2000.
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GRANT OF OPTIONS
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8. How are options granted?
Our compensation committee has complete discretion to determine:
o When and to whom options will be granted,
o The number of shares that are included in each grant,
o The type of option (incentive stock option or nonstatutory stock
option),
o When the option is to become exercisable, and
o The term for which the option is to remain outstanding.
You and the Company must sign an option agreement evidencing the
option.
9. What type of options may the Company grant?
Our compensation committee may grant incentive stock options designed
to meet the requirements of Section 422 of the Internal Revenue Code of 1986, or
nonstatutory stock options that do not satisfy these requirements. Please see
"Questions and Answers on Federal Tax Consequences" below for a discussion of
the difference in tax treatment between incentive stock options and nonstatutory
stock options.
10. Will I have to pay for my option?
No. We grant to you an option to recognize your services to us, and
you do not have to pay any cash. However, to purchase shares under the option,
you must pay the exercise price for the number of shares you elect to purchase.
Please see "Exercise of Options" below.
11. How does the Company determine the exercise price?
Our compensation committee determines the exercise price per share.
However, the exercise price of an incentive stock option cannot be less than
100% of the fair market value of our shares of common stock on the option grant
date. The exercise price of a nonstatutory stock option cannot be less than 30%
of the fair market value of our shares of common stock on the option grant date.
12. How does the Company determine the fair market value of our common
stock?
Our compensation committee determines the fair market value per share
of our common stock in good faith and on such basis as it deems appropriate.
Whenever possible, our compensation committee will use the prices reported in
The Wall Street Journal.
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13. May I assign or transfer my option?
No. Your option generally cannot be assigned or transferred, except by
the provisions of your will or the laws of inheritance following your death or
by the provisions of the Beneficiary Designation Form, as described in the next
paragraph. In addition, the compensation committee may subject the shares
acquired under the Plan to performance- or service-related vesting conditions or
transfer restrictions.
You may designate a beneficiary on the Beneficiary Designation Form
and may change that designation at any time by filing a new Beneficiary
Designation Form. The form will be valid only if it was filed with the Company
before your death. Should you die, your outstanding option will be transferred
to the individual identified in the Beneficiary Designation Form.
14. When do I acquire the rights of a stockholder?
As an option holder, you have none of the rights of a stockholder with
respect to the shares covered by your option. You will acquire stockholder
rights only when you file the required exercise notice, pay the exercise price
and become the holder of record of the purchased shares.
15. May the Company offer to buy out my option?
Our compensation committee may at any time:
o Offer to buy out for a payment in cash or cash equivalents an
option previously granted, or
o Authorize you to elect to cash out an option previously granted.
In either case, our compensation committee will determine the time and
the terms and conditions of the buyout.
EXERCISE OF OPTIONS
--------------------------------------------------------------------------------
16. When may I exercise my option?
You may exercise your option in one or more installments over the
period that you remain in our service. Our compensation committee determines
your exercise and vesting schedule at the time of grant, and the option
agreement includes the schedule. You may at any time purchase the shares for
which your option is exercisable, but you must exercise the option before it
terminates.
17. When will my option terminate?
The maximum term for an option granted under the Plan is 10 years from
the grant date. The actual expiration date of your option is set forth in your
option agreement. Your
5
option may, however, terminate before its designated expiration date if your
service terminates or certain other events occur. Please see "Early Termination
of Options" below.
18. How do I exercise my option?
To exercise your option, you must provide us with written notice of
the exercise in which you indicate the number of shares to be purchased under
your option. Your notice must also include payment of the exercise price for the
purchased shares, unless our compensation committee has allowed you to pay the
exercise price by executing a same-day sale. Please see Question 19. If your
legatee or heir is exercising the option, he or she must also include evidence
that he or she has the right to exercise the option. You must satisfy all
applicable income and employment tax withholding requirements at the time of
exercise. For information about tax withholding, please see "Questions and
Answers on Federal Tax Consequences" below.
19. How do I pay the exercise price of my option?
You may pay the exercise price in cash or by surrendering shares of
our common stock. But you may not surrender shares of our common stock if that
would cause us to recognize a compensation cost with respect to the option for
financial reporting purposes. Surrendered shares are credited at their fair
market value on the date of exercise.
In addition, our compensation committee, in its sole discretion, may
permit you to pay the exercise price in whole or in part by using one of the
following procedures:
o Same-day sale. On a form prescribed by us, you give directions to
sell option shares to a securities broker who was selected or
approved by us. The broker will deliver all or part of the sales
proceeds to us to pay the option exercise price and any
withholding taxes.
o Margin loan. On a form prescribed by us, you agree to pledge
shares to a securities broker or lender who was selected or
approved by us. The broker or lender will use the shares as
security for a loan and deliver all or part of the loan proceeds
to us to pay the option exercise price and any withholding taxes.
o Company loan. The Plan also authorizes the compensation committee
to accept a full-recourse promissory note as payment of the
exercise price (except for an amount equal to the par value of
the shares). But the compensation committee does not expect to
use this procedure on a regular basis.
Our compensation committee may also establish procedures for the sale
of shares of our common stock to cover withholding taxes or the withholding of
shares of our common stock issuable upon exercise of an option to satisfy such
taxes.
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INCENTIVE STOCK OPTIONS
--------------------------------------------------------------------------------
Questions 20 through 23 apply only to incentive stock options.
Nonstatutory stock options are not subject to these provisions.
20. Who may receive an incentive stock option?
We may grant incentive stock options only to our employees or
employees of our parent or subsidiary corporations.
21. Is there a limit on the number of shares for which an incentive stock
option may become exercisable in one calendar year?
Yes. $100,000 is the maximum value of the shares for which an
incentive stock option may first become exercisable in any calendar year. This
fair market value is determined on the date of the option grant. If you hold two
or more incentive stock options that become exercisable in the same calendar
year, the $100,000 limitation applies to both options in combination. It is
applied first to cut back the most recent option. You may exercise options that
do not qualify for incentive stock option treatment by reason of this dollar
limitation as nonstatutory stock options.
Example:
o On December 3, 1995, Sam Smith is granted a 1995 incentive stock
option to purchase 2,000 shares of common stock at an exercise
price of $40.00 per share, which was the fair market value of the
shares on that date.
o This 1995 option first becomes exercisable for 100% of the shares
on December 3, 1997, when the fair market value of the shares of
common stock is $55.00 per share.
o On November 25, 1996, Sam is granted a 1996 incentive stock
option to purchase 1,000 shares of common stock at an exercise
price of $50.00 per share, the fair market value of the shares on
that date.
o This 1996 option becomes exercisable in two equal annual
installments beginning on November 25, 1997, when the fair market
value of the shares of common stock is $55.00 per share.
o Under the 1995 option, the aggregate fair market value of the
2,000 shares of common stock on the grant date is $80,000.
o Under the 1996 option, the aggregate fair market value of the
1,000 shares of common stock on the grant date is $50,000.
o Accordingly, in 1997, shares valued at $80,000 first become
purchasable under the 1995 option (100% of the option shares) and
shares valued at $25,000 first become purchasable under the 1996
option (50% of the option shares).
7
o The aggregate value of the shares of common stock for which the
two options first become exercisable in 1997 exceeds $100,000 by
$5,000 ($80,000 + $25,000 = $105,000).
o The excess shares will come from the 1996 option, because it was
granted after the 1995 option.
o The excess is 100 shares ($5,000 / $50 = 100).
o Thus, 100 of the shares purchasable under the 1996 option will
not qualify for favorable tax treatment as incentive stock
options.
o The 100 excess shares may be exercised as nonstatutory stock
options.
o The incentive stock option analysis changes if the exercisability
of either option is accelerated, such that more shares become
exercisable in the same year.
22. Can an incentive stock option lose its qualified status?
Yes. An incentive stock option will be taxed as a nonstatutory stock
option if you exercise it more than three months after your employee status
terminates, unless the termination is due to death or permanent disability. If
your option agreement allows, you may exercise your option as an incentive stock
option for up to one year from the date of your termination due to permanent
disability. If your option agreement allows, the personal representative of your
estate or the person(s) to whom the options are transferred by your beneficiary
designation, your will or the laws of inheritance may exercise your option as an
incentive stock option at any time after your death. Certain amendments or
modifications to the option may also cause the loss of incentive stock option
status, but we would advise you of any such changes.
23. What limitations apply to incentive stock options granted to a 10%
stockholder?
If you hold stock with more than 10% of the total combined voting
power of all classes of stock of the Company or any parent or subsidiary
corporation, then the exercise price per share of your incentive stock option
must be at least 110% of the fair market value of the shares of common stock on
the grant date. In addition, the maximum term of the incentive stock option is
five years from the grant date. For this purpose, your stock ownership includes
ownership by your brothers, sisters, spouse, ancestors and lineal descendants.
EARLY TERMINATION OF OPTIONS
--------------------------------------------------------------------------------
24. What happens to my options if my service terminates?
After the termination of your service, you will have a limited period
of time in which to exercise your outstanding options for any shares in which
you were vested when your service terminated. Your option agreement explains the
length of this exercise period. In
8
addition, you must always exercise your options before the expiration of the
original option term (generally 10 years from the grant date). It is your
responsibility to keep track of the expiration dates of your options, including
an early expiration date triggered by your separation from the Company. The
unvested portion of your options will terminate immediately upon the termination
of your service.
25. What happens to my options if I die or become disabled?
If you die while any of your options are outstanding, the personal
representative of your estate or the person(s) to whom the options are
transferred by your beneficiary designation, your will or the laws of
inheritance may exercise your remaining options, to the extent vested. The right
to exercise such an option will lapse upon the earlier of (a) the expiration of
the original option term or (b) the date provided in your option agreement.
If you become disabled and your service terminates due to the
disability, your option agreement will tell you how long you have to exercise
your outstanding options. However, you must exercise your option before the
expiration of the original option term.
RESTRICTED SHARES
--------------------------------------------------------------------------------
26. What are restricted share awards?
Our compensation committee has the discretion to issue shares of our
common stock as compensation for services rendered to us, or to our parent or
subsidiary corporations. Our compensation committee may subject the shares to
any vesting restrictions that it deems appropriate. These restrictions may
relate to length of service or performance milestones, or a combination of both.
Before the shares vest, they may not be sold, pledged or otherwise transferred.
You and the Company will execute an agreement that embodies the
vesting conditions and other terms of a restricted share award. The holders of
restricted shares will have the same voting, dividend and other rights as our
other stockholders.
27. How do I pay for restricted shares?
In general, restricted shares are awarded in return for services
already rendered. If the restricted shares are "treasury shares" (shares that we
repurchased from stockholders), then they may also be awarded for services to be
provided during the vesting period.
If the compensation committee permits it, you may also pay for the
shares with a full-recourse promissory note. But if the shares are newly issued,
you must at least pay in cash an amount equal to the par value of the shares.
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DISPOSITION OF SHARES
--------------------------------------------------------------------------------
28. When may I sell my shares?
You may sell your vested shares at any time, unless you are subject to
securities law restrictions. Please see "Restrictions on Resale" below. But a
sale of your shares will probably have tax consequences. Please see "Questions
and Answers on Federal Tax Consequences" below.
MODIFICATION OR ASSUMPTION OF OPTIONS
--------------------------------------------------------------------------------
29. May we modify or assume options?
Subject to the terms of our 1999 Stock Incentive Plan, our
compensation committee may modify, extend or assume outstanding options. It may
also accept the cancellation of outstanding options in return for the grant of
new options for the same or a different number of shares and at the same or a
different exercise price. However, we cannot impair your contractual rights with
any modification without your consent.
ACCELERATION OF VESTING
--------------------------------------------------------------------------------
30. May the exercisability of an award be accelerated?
The agreement that governs an award of options or restricted shares
may provide for accelerated exercisability if you die, are disabled or retire.
In addition, the compensation committee may determine that the exercisability or
vesting of all or a portion of an award may be accelerated in the event that the
Company is subject to a change in control. A "change in control" means:
o A merger or consolidation of the Company with or into another
entity or any other corporate reorganization, if 50% or more of
the combined voting power of the continuing or surviving entity's
securities outstanding immediately after the merger,
consolidation or other reorganization is owned by persons who
were not our stockholders immediately before the merger,
consolidation or other reorganization,
o The sale, transfer or other disposition of all or substantially
all of our assets,
o Certain changes in the composition of our board of directors, or
o Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934),
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directly or indirectly, of our securities representing at least
50% of the total voting power represented by our then outstanding
voting securities.
31. What happens to my awards upon a merger of the Company?
To the extent not previously exercised or settled, your options will
terminate immediately before the dissolution or liquidation of the Company. If
the Company is a party to a merger or other reorganization, outstanding options
will be subject to the agreement of merger or reorganization. Such an agreement
will provide for one of the following:
o The continuation of the outstanding options by the Company, if
the Company is a surviving corporation,
o The assumption or substitution of the outstanding options by the
surviving corporation or its parent or subsidiary,
o Full exercisability or vesting and accelerated expiration of the
outstanding options, or
o Settlement of the full value of the outstanding options in cash
or cash equivalents, followed by cancellation of the options.
DEFERRAL OF AWARDS
--------------------------------------------------------------------------------
32. May I defer receipt of option shares?
If our compensation committee (in its sole discretion) permits or
requires it, you may defer the receipt of option shares. Instead of being
delivered to you, the shares that you purchase by exercising an option would be
converted into credits in a deferred compensation account established for you as
an entry on our books. Our compensation committee determines the amount of the
credits by referring to the fair market value of our shares of common stock as
of the date when they otherwise would have been delivered to you.
We may credit your deferred compensation account with interest or
other forms of investment return. You will have no rights to such an account
other than those of a general creditor of the Company. Such an account is an
unfunded and unsecured obligation of the Company and will be subject to the
terms and conditions of the applicable agreement between you and the Company.
MISCELLANEOUS
--------------------------------------------------------------------------------
33. Do I have the right to remain employed until my options or my shares
vest?
No. Nothing in our 1999 Stock Incentive Plan or in any award granted
under the Plan provides any person with the right to remain in our service for
any specific period. Both
11
you and we have the right to terminate your service at any time and for any
reason, with or without cause, subject to any employment agreement.
34. Is the Plan subject to ERISA?
Our 1999 Stock Incentive Plan is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA) or Section 401(a) of the
Internal Revenue Code.
RESTRICTIONS ON RESALE
--------------------------------------------------------------------------------
35. What restrictions apply if I am a Section 16 Insider?
The federal securities laws prohibit the taking of short-swing profits
by designated insiders. Specifically, Section 16(b) of the Securities Exchange
Act of 1934 requires us to recover any profit realized by a Section 16 insider
from any purchase and sale, or sale and purchase, of shares of our common stock
made within a period of less than six months. A Section 16 insider is an
executive officer or director of the Company or a stockholder who beneficially
owns more than 10% of the Company's outstanding securities. If you are a Section
16 insider, we will let you know.
The Securities and Exchange Commission has issued rules that govern
the short-swing liability treatment of transactions effected by a Section 16
insider under employee stock plans such as the 1999 Stock Incentive Plan. These
rules apply to various transactions under the Plan, as summarized below.
Grant of option. The receipt of an option under the Plan will be an
exempt transaction and will not be treated as a "purchase" of the underlying
shares for short-swing liability purposes, if the grant has "Section 16
Approval." This means that the grant is approved by:
o The board of directors,
o The compensation committee of the board of directors, or
o The stockholders.
If the grant has not received Section 16 Approval, the grant is still
exempt if the shares acquired under the grant are not sold until at least six
months after the date of grant. Should this six-month requirement not be
satisfied, then the grant will be treated as a "purchase" of the shares
retroactive to the grant date. Such a purchase will be matched, for short-swing
liability purposes, with any sale of shares of our common stock made within six
months before or after the grant date.
Option exercise by paying cash or through same-day sale. The exercise
of an option will be an exempt transaction and will not be treated as a
"purchase" of the acquired
12
shares for short-swing liability purposes, if the original option grant received
Section 16 Approval. (If the Section 16 Approval requirements have not been met,
then the exercise of an option is still an exempt transaction, unless the market
price of the shares when the option is exercised is lower than the exercise
price paid for the shares.) However, a same-day sale will be treated as a "sale"
transaction for short-swing liability purposes. It will be matched with any
non-exempt purchase of our stock--such as an open-market purchase--made by the
Section 16 Insider within six months before or after the date of the same-day
sale.
Option exercise by delivery of shares. The delivery of shares of our
common stock in payment of the exercise price and the exercise of the option
will be exempt transactions for short-swing liability purposes, if the original
option grant (including the feature permitting the delivery of shares) or the
exercise received Section 16 Approval.
Option exercise by stock withholding. The exercise of an option and
payment of the exercise price and/or applicable withholding taxes by the
withholding of a portion of the shares otherwise issuable to the Section 16
Insider by the Company are exempt, if the original option grant (including the
stock withholding feature) or the exercise received Section 16 Approval.
Award of restricted shares. The award of shares by the Company for
services rendered to the Company, a parent or a subsidiary is exempt if the
award received Section 16 Approval or if you hold the shares acquired for at
least six months before selling them.
Forfeiture of unvested shares. The surrender of unvested shares to the
Company for cancellation or expiration without any cash payment or other
consideration to the participant will not be deemed a "sale" of those shares for
short-swing liability purposes, if the original grant received Section 16
Approval.
Sale of shares. The sale of shares of our common stock acquired by a
Section 16 Insider (whether under the Plan or on the open market) will be
treated as a "sale" transaction for short-swing liability purposes. It will be
matched with any non-exempt purchase of our stock (such as an open-market
purchase) made by the Section 16 Insider within six months before or after the
date of the sale.
Reporting requirements. Each of the following Plan transactions
involving a Section 16 Insider must be reported on the annual Form 5 required to
be filed by the individual within 45 days after the close of the Company's
fiscal year in which the transaction occurs and may be reported on any
earlier-filed Form 4:
o Receipt of option,
o Receipt of stock award, and
o Forfeiture of restricted stock.
The following transactions must be reported on a Form 4 filed within
10 days after the close of the calendar month in which the transaction is
effected:
13
o Exercise of option (if the option grant has not yet been
reported, the grant must be reported on the same Form 4 on which
the option exercise is reported),
o Withholding or delivery of shares to satisfy tax withholding
obligations, and
o Sale of shares.
The surrender of options for cancellation or the expiration of options
for no consideration does not have to be reported.
36. What restrictions apply if I am an affiliate?
In general, executive officers and other persons with power to manage
and direct our policies, relatives of these persons and trusts, estates,
corporations or other entities controlled by any of these persons or their
relatives may be deemed to be our affiliates. Our affiliates must resell their
shares of common stock in compliance with Securities and Exchange Commission
Rule 144. This rule requires such sales to be effected in "broker's
transactions," as defined in the rule, and a written notice of each sale must be
filed with the Securities and Exchange Commission at the time of the sale. The
rule also limits the number of shares that may be sold in any three-month period
by affiliates to the greater of (a) 1% of the outstanding shares of our common
stock or (b) the average weekly reported volume of trading in our common stock
during the four calendar weeks preceding the filing of the required notice of
proposed sale. However, the holding period requirement of Rule 144 will not
apply to any shares of common stock acquired under the Plan.
37. Are there any restrictions on resale that apply even if I am not an
affiliate or Section 16 insider?
Your purchases and sales of shares of our common stock are subject to
Rule 10b-5 under the Securities Exchange Act of 1934. Rule 10b-5 makes it
unlawful to trade in our shares when you have material information about us that
is not yet known to the general public. In addition, your transactions in shares
of our common stock must comply with our insider trading policy.
If you are an officer or director of the Company or a stockholder who
owns more than 10% of the Company's outstanding securities, you should consult
with counsel before offering for sale any shares of common stock acquired under
the Plan in order to ensure your compliance with Rule 144, Section 16 and all
other applicable provisions of federal and state securities laws.
14
Questions and Answers on
Federal Tax Consequences
REDBACK NETWORKS INC.
QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES
We explain below the federal income tax consequences of your participation
in the 1999 Stock Incentive Plan. We do not explain the state and local tax
treatment, and you should know that the state and local tax treatment may vary
from the federal income tax treatment. In any event, you should consult your own
tax advisor as to the tax consequences of your particular transactions under the
Plan.
INCENTIVE STOCK OPTIONS
--------------------------------------------------------------------------------
T1. Will I have federal income tax liability if I am granted an incentive
stock option?
No.
T2. Will I have federal income tax liability if I exercise an incentive
stock option?
No. You will not recognize taxable income when the incentive stock
option is exercised. However, you do recognize alternative minimum taxable
income equal to the excess of the fair market value of the purchased shares at
the time of exercise over the exercise price paid for those shares. Please see
Question T27 below.
T3. When will I be subject to federal income tax on shares acquired under
an incentive stock option?
Generally, you will recognize income in the year in which you dispose
of the shares purchased under your incentive stock option.
T4. What constitutes a disposition of incentive stock option shares?
You dispose of shares purchased under an incentive stock option when
you transfer legal title to those shares by:
o Sale,
o Exchange,
o Gift, or
o Delivery of the shares to pay the exercise price of another
incentive stock option before you satisfy the incentive stock
option holding periods.
However, a disposition will not occur if you engage in any of the
following transactions:
o A transfer to your spouse,
16
o A transfer into joint ownership with right of survivorship, if
you remain one of the joint owners,
o A pledge of the shares as collateral for a loan,
o A transfer by bequest or inheritance upon your death, or
o Certain tax-free exchanges of the shares permitted under the
Internal Revenue Code of 1986.
T5. How do I determine my federal income tax liability when I sell my
shares?
Your federal income tax liability will depend upon whether you make a
qualifying or disqualifying disposition of the shares purchased under your
incentive stock option.
You make a qualifying disposition if your sale or other disposition of
the shares takes place (a) more than two years after the grant date of the
incentive stock option and (b) more than one year after the date the option was
exercised for the particular shares involved in the disposition.
A disqualifying disposition is any sale or other disposition made
before both of these minimum holding periods are satisfied.
T6. What if I make a qualifying disposition?
You will recognize a long-term capital gain equal to the excess of (a)
the amount realized upon the sale or disposition over (b) the exercise price
paid for the shares. In general, the maximum federal income tax rate on
long-term capital gains is 20%. You will recognize a capital loss if the amount
realized is lower than the exercise price paid for the shares.
Example:
o On October 1, 1995, we grant you an incentive stock option for
1,000 shares with an exercise price of $35.00 per share.
o On November 1, 1997, you exercise this option when the market
price is $45.00 per share.
o On December 1, 1998, you sell the shares for $50.00 per share.
Because you sell the shares (a) more than two years after the grant
date of October 1, 1995, and (b) more than one year after the exercise date
of November 1, 1997, the sale is a qualifying disposition of the shares.
For federal income tax purposes, you will recognize a long-term
capital gain of $15.00 per share. The gain will be subject to a maximum
federal income tax rate of 20%.
17
T7. What are the normal tax rules for a disqualifying disposition?
Normally, when shares purchased under an incentive stock option are
subject to a disqualifying disposition, the optionee will recognize ordinary
income at the time of the disposition in an amount equal to the excess of (a)
the fair market value of the shares on the exercise date over (b) the exercise
price paid for those shares. If the disqualifying disposition is effected by
means of an arm's length sale or exchange with an unrelated party, the ordinary
income will be limited to the amount equal to the excess of (a) the amount
realized from the disposition of the shares over (b) the exercise price paid for
the shares.
We report the amount of your disqualifying disposition income on your
W-2 wage statement for the year of the disposition. You are responsible for
paying any applicable taxes.
Any additional gain recognized from the disqualifying disposition will
be capital gain. The capital gain will be long-term if you held the shares more
than 12 months and short-term if you held the shares 12 months or less. The
maximum federal income tax rate on long-term capital gains is generally 20%.
Short-term capital gains are generally taxed at the same rate as ordinary
income.
Example:
o On October 1, 1995, we grant to you an incentive stock option for
1,000 shares with an exercise price of $35.00 per share.
o On November 1, 1997, you exercise this option when the market
price is $45.00 per share.
o On March 1, 1998, you sell the shares for $50.00 per share.
Because you sell the shares less than one year after the exercise date
of November 1, 1997, you make a disqualifying disposition of the shares.
For federal income tax purposes, the $15 per share gain will be divided
into two components:
Ordinary Income: You will recognize ordinary income in the amount
of $10.00 per share: The $45.00 per share market price of the shares
on the exercise date minus the $35.00 per share exercise price. The
$10 of ordinary income is added to the $35 exercise price to become
your "basis" in the share.
Capital Gain: You will also recognize a short-term capital gain
of $5.00 per share: The $50 per share sale price minus your $45 per
share basis.
If you make a disqualifying disposition of the incentive stock option
shares in an arm's length transaction with an unrelated party for more than the
exercise price paid for those shares but less than the market value on the
exercise date, then your ordinary income will be limited to the excess of (a)
the amount realized from the disposition of the shares over (b) the
18
exercise price paid for the shares. For example, if the shares in the above
Example were sold for $37.00 per share in the disqualifying disposition, you
would only recognize ordinary income of $2.00 per share.
If you make a disqualifying disposition of the incentive stock option
shares in an arm's length transaction with an unrelated party for less than the
exercise price paid for those shares, then you will not recognize any ordinary
income and will recognize a capital loss equal to the excess of (a) the exercise
price paid for the shares over (b) the amount realized from the disposition of
those shares. For example, if the shares in the above Example were sold for
$33.00 per share in the disqualifying disposition, then you would simply
recognize a short-term capital loss of $2.00 per share.
T8. What if the shares purchased under an Incentive Stock Option are
subject to a substantial risk of forfeiture, such as the Company's
repurchase right?
If the shares purchased under your Incentive Stock Option are subject
to a substantial risk of forfeiture, then the amount of ordinary income that you
would recognize upon a disqualifying disposition of those shares will be based
on their fair market value on the date when the forfeiture period lapses (rather
than the date when the Incentive Stock Option is exercised). One example of a
substantial risk of forfeiture is the Company's right to repurchase your shares
at the original exercise price in the event that your service terminates before
you vest in those shares. In this case, the amount of ordinary income that you
recognize upon a disqualifying disposition of the shares will be based on their
fair market value on the vesting date, and the holding period for determining
whether any additional gain is a long-term or short-term capital gain will not
commence until the vesting date.
This result can be avoided, and the normal disqualifying disposition
rules under Question T7 reinstated, by making a conditional election pursuant to
Section 83(b) of the Internal Revenue Code to have the ordinary income measured
when the Incentive Stock Option is exercised. Please see Question T16 for
further information concerning Section 83(b) elections.
In the case of a qualifying disposition, it makes no difference that
the shares were not yet vested when you purchased them.
T9. What are the federal tax consequences to the Company?
If you make a qualifying disposition of incentive stock option shares,
then we cannot take an income tax deduction with respect to such shares. If you
make a disqualifying disposition of the shares, then we will be entitled to an
income tax deduct
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