\n T21. Will the vesting of shares under a restricted share award result in
\n federal income tax liability to me? ……………………………… 23
\n T22. What is the effect of making a Section 83(b) election? ……………… 23
\n T23. What are the federal tax consequences to the Company? ………………. 24<\/p>\nALTERNATIVE MINIMUM TAX ……………………………………………….. 24<\/p>\n
T24. What is the alternative minimum tax? ……………………………… 24<\/p>\n
T25. How is alternative minimum taxable income calculated? ………………. 24<\/p>\n
T26. What is the allowable exemption amount? …………………………… 24<\/p>\n
T27. Is the spread on an incentive stock option at the time of exercise
\n normally included in my alternative minimum taxable income? ………… 25<\/p>\n
T28. How will the payment of alternative minimum tax in one year affect the
\n calculation of my tax in a later year? …………………………… 25<\/p>\n
COMPANY INFORMATION …………………………………………………… 27<\/p>\n
<\/c><\/s><\/caption>\n<\/table>\n
iv<\/p>\n
Questions and Answers About the
\n 1999 Stock Incentive Plan<\/p>\n
Redback Networks Inc.<\/p>\n
QUESTIONS AND ANSWERS ABOUT THE 1999 STOCK INCENTIVE PLAN<\/p>\n
We have established a stock incentive program. This program allows eligible
\nemployees, consultants and outside directors to acquire shares of our common
\nstock and benefit from any increases in the value of our common stock. The
\nprogram is officially called the “Redback Networks Inc. 1999 Stock Incentive
\nPlan.” We sometimes refer to it in this document as the “Plan.”<\/p>\n
This Summary and Prospectus explains in question and answer format the
\nmajor features of our 1999 Stock Incentive Plan and the principal rights and
\nbenefits available to the participants. This document is only intended to be a
\nsummary of the Plan. Some rules are described in abbreviated form and others are
\nnot mentioned at all. If there is any ambiguity in this Summary and Prospectus
\nor if there is any conflict between this Summary and Prospectus and the Plan
\ntext, then the Plan text will govern. You may request a copy of the Plan from
\nthe Corporate Secretary.<\/p>\n
Certain terms are used throughout this Summary and Prospectus and are
\ndefined here. An “outside director” is a member of our board of directors who is
\nnot a common-law employee of the Company or a parent or subsidiary of the
\nCompany. A “parent” of the Company is any corporation that, directly or
\nindirectly, owns at least 50% of the Company. A “subsidiary” of the Company is
\nany corporation that is at least 50% owned by the Company, directly or
\nindirectly.<\/p>\n
GENERAL PLAN PROVISIONS
\n——————————————————————————–<\/p>\n
1. What is the basic structure of the 1999 Stock Incentive Plan?<\/p>\n
Under our 1999 Stock Incentive Plan, we may award to eligible
\nparticipants the following kinds of equity-based compensation, collectively
\nreferred to as “awards”:<\/p>\n
o Options to purchase shares of our common stock, and<\/p>\n
o Restricted shares of our common stock.<\/p>\n
2. When did the Company adopt the Plan?<\/p>\n
Our board of directors adopted the Plan on March 3, 1999. It is
\neffective on the date of the initial public offering of our common stock (May
\n17, 1999). Our stockholders also approved the Plan. Since then, our board of
\ndirectors and our stockholders have from time to time approved amendments of the
\nPlan.<\/p>\n
3. Who administers the Plan?<\/p>\n
The compensation committee of our board of directors administers the
\n1999 Stock Incentive Plan. The compensation committee is comprised of two or
\nmore board members who are outside directors.<\/p>\n
Our compensation committee has full authority to determine:<\/p>\n
o Who will receive an award under the Plan,<\/p>\n
o When an award will be made,<\/p>\n
o The number of shares included in each award,<\/p>\n
o The vesting requirements of each award, and<\/p>\n
o The other features and conditions of each award.<\/p>\n
Our compensation committee also interprets the 1999 Stock Incentive Plan and
\nmakes all other decisions relating to Plan operation. The decisions of our
\ncompensation committee are final and binding.<\/p>\n
In addition, the board of directors has appointed a “secondary
\ncommittee” consisting of our Chief Executive Officer. The secondary committee
\nmay also grant options under the Plan, subject to certain limitations.<\/p>\n
4. Who is eligible to participate in the Plan?<\/p>\n
Our employees, outside directors, and consultants or advisers who
\nprovide services to the Company, or to a parent or subsidiary of the Company,
\nare eligible to participate in the 1999 Stock Incentive Plan. However, our
\ncompensation committee in its sole discretion determines who will actually
\nreceive an award.<\/p>\n
5. How many shares of common stock may be issued under the Plan?<\/p>\n
We reserved 18,000,000 shares of our common stock for issuance under
\nour 1999 Stock Incentive Plan.\/1\/ We may adjust this number for certain changes
\nin our capital structure, as explained in Question 6. As of January 1 of each
\nyear, the reserve automatically increases by 10,000,000 shares.\/2\/ All unused
\nshares that were reserved under our 1997 Stock Plan will also become available
\nfor grants under the 1999 Stock Incentive Plan.<\/p>\n
——————————-
\n\/1\/ Reflects original reserve of 2,500,000 shares; two-for-one stock split
\napplicable to stockholders of record on August 5, 1999; increase from 5,000,000
\nto 8,000,000 shares approved by stockholders on March 8, 2000; two-for-one stock
\nsplit applicable to stockholders of record on March 20, 2000; and increase from
\n16,000,000 to 18,00,000 shares approved by stockholders on May 16, 2001.<\/p>\n
\/2\/ Reflects original annual addition of 1,500,000 shares; two-for-one stock
\nsplit applicable to stockholders of record on August 5, 1999; increase from
\n3,000,000 to 5,000,000 shares approved by stockholders on March 8, 2000; and
\ntwo-for-one stock split applicable to stockholders of record on March 20, 2000.
\nAnnual addition originally was limited to 5% of total shares then outstanding;
\nstockholders approved elimination of limitation on May 16, 2001.<\/p>\n
2<\/p>\n
If shares of our common stock are forfeited, then the shares will
\nagain become available for awards under the 1999 Stock Incentive Plan (except
\nawards of incentive stock options). If options are forfeited or terminate for
\nany other reason before being exercised, then the corresponding shares will
\nagain become available for awards under the Plan.<\/p>\n
We may grant to a participant in our 1999 Stock Incentive Plan options
\ncovering a maximum of four million shares of our common stock in any fiscal
\nyear.3 However, to a new employee we may grant options covering a maximum of
\neight million shares in the fiscal year in which his or her service as an
\nemployee first begins.\/3\/<\/p>\n
6. What happens if there is a change in the Company’s capital structure?<\/p>\n
A change in our capital structure includes:<\/p>\n
o A stock split,<\/p>\n
o A stock dividend,<\/p>\n
o An extraordinary cash dividend or another distribution to
\n stockholders that has a material effect on the price of the
\n shares of our common stock,<\/p>\n
o A reverse stock split,<\/p>\n
o A recapitalization,<\/p>\n
o A spin-off, or<\/p>\n
o A similar event.<\/p>\n
If one of these changes in our capital structure occurs, appropriate
\nadjustments will be made in one or more of the following:<\/p>\n
o The number of shares reserved for future awards under the Plan,<\/p>\n
o The maximum number of options that may be awarded to a
\n participant in any fiscal year,<\/p>\n
o The number of shares of our common stock that are covered by each
\n outstanding option, and<\/p>\n
o The exercise price under each outstanding option.<\/p>\n
7. May the Company amend or terminate the Plan?<\/p>\n
Yes. Our board of directors may amend or terminate the Plan at any
\ntime and for any reason. However, no amendment may, without your consent,
\nadversely affect your rights and obligations under outstanding awards. If
\nrequired by applicable laws or regulations, we will seek stockholder approval
\nfor an amendment of the Plan.<\/p>\n
—————————
\n\/3\/ Reflects two-for-one stock splits applicable to stockholders of record on
\nAugust 5, 1999, and March 20, 2000.<\/p>\n
3<\/p>\n
GRANT OF OPTIONS
\n——————————————————————————–<\/p>\n
8. How are options granted?<\/p>\n
Our compensation committee has complete discretion to determine:<\/p>\n
o When and to whom options will be granted,<\/p>\n
o The number of shares that are included in each grant,<\/p>\n
o The type of option (incentive stock option or nonstatutory stock
\n option),<\/p>\n
o When the option is to become exercisable, and<\/p>\n
o The term for which the option is to remain outstanding.<\/p>\n
You and the Company must sign an option agreement evidencing the
\noption.<\/p>\n
9. What type of options may the Company grant?<\/p>\n
Our compensation committee may grant incentive stock options designed
\nto meet the requirements of Section 422 of the Internal Revenue Code of 1986, or
\nnonstatutory stock options that do not satisfy these requirements. Please see
\n“Questions and Answers on Federal Tax Consequences” below for a discussion of
\nthe difference in tax treatment between incentive stock options and nonstatutory
\nstock options.<\/p>\n
10. Will I have to pay for my option?<\/p>\n
No. We grant to you an option to recognize your services to us, and
\nyou do not have to pay any cash. However, to purchase shares under the option,
\nyou must pay the exercise price for the number of shares you elect to purchase.
\nPlease see “Exercise of Options” below.<\/p>\n
11. How does the Company determine the exercise price?<\/p>\n
Our compensation committee determines the exercise price per share.
\nHowever, the exercise price of an incentive stock option cannot be less than
\n100% of the fair market value of our shares of common stock on the option grant
\ndate. The exercise price of a nonstatutory stock option cannot be less than 30%
\nof the fair market value of our shares of common stock on the option grant date.<\/p>\n
12. How does the Company determine the fair market value of our common
\n stock?<\/p>\n
Our compensation committee determines the fair market value per share
\nof our common stock in good faith and on such basis as it deems appropriate.
\nWhenever possible, our compensation committee will use the prices reported in
\nThe Wall Street Journal.<\/p>\n
4<\/p>\n
13. May I assign or transfer my option?<\/p>\n
No. Your option generally cannot be assigned or transferred, except by
\nthe provisions of your will or the laws of inheritance following your death or
\nby the provisions of the Beneficiary Designation Form, as described in the next
\nparagraph. In addition, the compensation committee may subject the shares
\nacquired under the Plan to performance- or service-related vesting conditions or
\ntransfer restrictions.<\/p>\n
You may designate a beneficiary on the Beneficiary Designation Form
\nand may change that designation at any time by filing a new Beneficiary
\nDesignation Form. The form will be valid only if it was filed with the Company
\nbefore your death. Should you die, your outstanding option will be transferred
\nto the individual identified in the Beneficiary Designation Form.<\/p>\n
14. When do I acquire the rights of a stockholder?<\/p>\n
As an option holder, you have none of the rights of a stockholder with
\nrespect to the shares covered by your option. You will acquire stockholder
\nrights only when you file the required exercise notice, pay the exercise price
\nand become the holder of record of the purchased shares.<\/p>\n
15. May the Company offer to buy out my option?<\/p>\n
Our compensation committee may at any time:<\/p>\n
o Offer to buy out for a payment in cash or cash equivalents an
\n option previously granted, or<\/p>\n
o Authorize you to elect to cash out an option previously granted.<\/p>\n
In either case, our compensation committee will determine the time and
\nthe terms and conditions of the buyout.<\/p>\n
EXERCISE OF OPTIONS
\n——————————————————————————–<\/p>\n
16. When may I exercise my option?<\/p>\n
You may exercise your option in one or more installments over the
\nperiod that you remain in our service. Our compensation committee determines
\nyour exercise and vesting schedule at the time of grant, and the option
\nagreement includes the schedule. You may at any time purchase the shares for
\nwhich your option is exercisable, but you must exercise the option before it
\nterminates.<\/p>\n
17. When will my option terminate?<\/p>\n
The maximum term for an option granted under the Plan is 10 years from
\nthe grant date. The actual expiration date of your option is set forth in your
\noption agreement. Your<\/p>\n
5<\/p>\n
option may, however, terminate before its designated expiration date if your
\nservice terminates or certain other events occur. Please see “Early Termination
\nof Options” below.<\/p>\n
18. How do I exercise my option?<\/p>\n
To exercise your option, you must provide us with written notice of
\nthe exercise in which you indicate the number of shares to be purchased under
\nyour option. Your notice must also include payment of the exercise price for the
\npurchased shares, unless our compensation committee has allowed you to pay the
\nexercise price by executing a same-day sale. Please see Question 19. If your
\nlegatee or heir is exercising the option, he or she must also include evidence
\nthat he or she has the right to exercise the option. You must satisfy all
\napplicable income and employment tax withholding requirements at the time of
\nexercise. For information about tax withholding, please see “Questions and
\nAnswers on Federal Tax Consequences” below.<\/p>\n
19. How do I pay the exercise price of my option?<\/p>\n
You may pay the exercise price in cash or by surrendering shares of
\nour common stock. But you may not surrender shares of our common stock if that
\nwould cause us to recognize a compensation cost with respect to the option for
\nfinancial reporting purposes. Surrendered shares are credited at their fair
\nmarket value on the date of exercise.<\/p>\n
In addition, our compensation committee, in its sole discretion, may
\npermit you to pay the exercise price in whole or in part by using one of the
\nfollowing procedures:<\/p>\n
o Same-day sale. On a form prescribed by us, you give directions to
\n sell option shares to a securities broker who was selected or
\n approved by us. The broker will deliver all or part of the sales
\n proceeds to us to pay the option exercise price and any
\n withholding taxes.<\/p>\n
o Margin loan. On a form prescribed by us, you agree to pledge
\n shares to a securities broker or lender who was selected or
\n approved by us. The broker or lender will use the shares as
\n security for a loan and deliver all or part of the loan proceeds
\n to us to pay the option exercise price and any withholding taxes.<\/p>\n
o Company loan. The Plan also authorizes the compensation committee
\n to accept a full-recourse promissory note as payment of the
\n exercise price (except for an amount equal to the par value of
\n the shares). But the compensation committee does not expect to
\n use this procedure on a regular basis.<\/p>\n
Our compensation committee may also establish procedures for the sale
\nof shares of our common stock to cover withholding taxes or the withholding of
\nshares of our common stock issuable upon exercise of an option to satisfy such
\ntaxes.<\/p>\n
6<\/p>\n
INCENTIVE STOCK OPTIONS
\n——————————————————————————–<\/p>\n
Questions 20 through 23 apply only to incentive stock options.
\nNonstatutory stock options are not subject to these provisions.<\/p>\n
20. Who may receive an incentive stock option?<\/p>\n
We may grant incentive stock options only to our employees or
\nemployees of our parent or subsidiary corporations.<\/p>\n
21. Is there a limit on the number of shares for which an incentive stock
\n option may become exercisable in one calendar year?<\/p>\n
Yes. $100,000 is the maximum value of the shares for which an
\nincentive stock option may first become exercisable in any calendar year. This
\nfair market value is determined on the date of the option grant. If you hold two
\nor more incentive stock options that become exercisable in the same calendar
\nyear, the $100,000 limitation applies to both options in combination. It is
\napplied first to cut back the most recent option. You may exercise options that
\ndo not qualify for incentive stock option treatment by reason of this dollar
\nlimitation as nonstatutory stock options.<\/p>\n
Example:<\/p>\n
o On December 3, 1995, Sam Smith is granted a 1995 incentive stock
\n option to purchase 2,000 shares of common stock at an exercise
\n price of $40.00 per share, which was the fair market value of the
\n shares on that date.<\/p>\n
o This 1995 option first becomes exercisable for 100% of the shares
\n on December 3, 1997, when the fair market value of the shares of
\n common stock is $55.00 per share.<\/p>\n
o On November 25, 1996, Sam is granted a 1996 incentive stock
\n option to purchase 1,000 shares of common stock at an exercise
\n price of $50.00 per share, the fair market value of the shares on
\n that date.<\/p>\n
o This 1996 option becomes exercisable in two equal annual
\n installments beginning on November 25, 1997, when the fair market
\n value of the shares of common stock is $55.00 per share.<\/p>\n
o Under the 1995 option, the aggregate fair market value of the
\n 2,000 shares of common stock on the grant date is $80,000.<\/p>\n
o Under the 1996 option, the aggregate fair market value of the
\n 1,000 shares of common stock on the grant date is $50,000.<\/p>\n
o Accordingly, in 1997, shares valued at $80,000 first become
\n purchasable under the 1995 option (100% of the option shares) and
\n shares valued at $25,000 first become purchasable under the 1996
\n option (50% of the option shares).<\/p>\n
7<\/p>\n
o The aggregate value of the shares of common stock for which the
\n two options first become exercisable in 1997 exceeds $100,000 by
\n $5,000 ($80,000 + $25,000 = $105,000).<\/p>\n
o The excess shares will come from the 1996 option, because it was
\n granted after the 1995 option.<\/p>\n
o The excess is 100 shares ($5,000 \/ $50 = 100).<\/p>\n
o Thus, 100 of the shares purchasable under the 1996 option will
\n not qualify for favorable tax treatment as incentive stock
\n options.<\/p>\n
o The 100 excess shares may be exercised as nonstatutory stock
\n options.<\/p>\n
o The incentive stock option analysis changes if the exercisability
\n of either option is accelerated, such that more shares become
\n exercisable in the same year.<\/p>\n
22. Can an incentive stock option lose its qualified status?<\/p>\n
Yes. An incentive stock option will be taxed as a nonstatutory stock
\noption if you exercise it more than three months after your employee status
\nterminates, unless the termination is due to death or permanent disability. If
\nyour option agreement allows, you may exercise your option as an incentive stock
\noption for up to one year from the date of your termination due to permanent
\ndisability. If your option agreement allows, the personal representative of your
\nestate or the person(s) to whom the options are transferred by your beneficiary
\ndesignation, your will or the laws of inheritance may exercise your option as an
\nincentive stock option at any time after your death. Certain amendments or
\nmodifications to the option may also cause the loss of incentive stock option
\nstatus, but we would advise you of any such changes.<\/p>\n
23. What limitations apply to incentive stock options granted to a 10%
\n stockholder?<\/p>\n
If you hold stock with more than 10% of the total combined voting
\npower of all classes of stock of the Company or any parent or subsidiary
\ncorporation, then the exercise price per share of your incentive stock option
\nmust be at least 110% of the fair market value of the shares of common stock on
\nthe grant date. In addition, the maximum term of the incentive stock option is
\nfive years from the grant date. For this purpose, your stock ownership includes
\nownership by your brothers, sisters, spouse, ancestors and lineal descendants.<\/p>\n
EARLY TERMINATION OF OPTIONS
\n——————————————————————————–<\/p>\n
24. What happens to my options if my service terminates?<\/p>\n
After the termination of your service, you will have a limited period
\nof time in which to exercise your outstanding options for any shares in which
\nyou were vested when your service terminated. Your option agreement explains the
\nlength of this exercise period. In<\/p>\n
8<\/p>\n
addition, you must always exercise your options before the expiration of the
\noriginal option term (generally 10 years from the grant date). It is your
\nresponsibility to keep track of the expiration dates of your options, including
\nan early expiration date triggered by your separation from the Company. The
\nunvested portion of your options will terminate immediately upon the termination
\nof your service.<\/p>\n
25. What happens to my options if I die or become disabled?<\/p>\n
If you die while any of your options are outstanding, the personal
\nrepresentative of your estate or the person(s) to whom the options are
\ntransferred by your beneficiary designation, your will or the laws of
\ninheritance may exercise your remaining options, to the extent vested. The right
\nto exercise such an option will lapse upon the earlier of (a) the expiration of
\nthe original option term or (b) the date provided in your option agreement.<\/p>\n
If you become disabled and your service terminates due to the
\ndisability, your option agreement will tell you how long you have to exercise
\nyour outstanding options. However, you must exercise your option before the
\nexpiration of the original option term.<\/p>\n
RESTRICTED SHARES
\n——————————————————————————–<\/p>\n
26. What are restricted share awards?<\/p>\n
Our compensation committee has the discretion to issue shares of our
\ncommon stock as compensation for services rendered to us, or to our parent or
\nsubsidiary corporations. Our compensation committee may subject the shares to
\nany vesting restrictions that it deems appropriate. These restrictions may
\nrelate to length of service or performance milestones, or a combination of both.
\nBefore the shares vest, they may not be sold, pledged or otherwise transferred.<\/p>\n
You and the Company will execute an agreement that embodies the
\nvesting conditions and other terms of a restricted share award. The holders of
\nrestricted shares will have the same voting, dividend and other rights as our
\nother stockholders.<\/p>\n
27. How do I pay for restricted shares?<\/p>\n
In general, restricted shares are awarded in return for services
\nalready rendered. If the restricted shares are “treasury shares” (shares that we
\nrepurchased from stockholders), then they may also be awarded for services to be
\nprovided during the vesting period.<\/p>\n
If the compensation committee permits it, you may also pay for the
\nshares with a full-recourse promissory note. But if the shares are newly issued,
\nyou must at least pay in cash an amount equal to the par value of the shares.<\/p>\n
9<\/p>\n
DISPOSITION OF SHARES
\n——————————————————————————–<\/p>\n
28. When may I sell my shares?<\/p>\n
You may sell your vested shares at any time, unless you are subject to
\nsecurities law restrictions. Please see “Restrictions on Resale” below. But a
\nsale of your shares will probably have tax consequences. Please see “Questions
\nand Answers on Federal Tax Consequences” below.<\/p>\n
MODIFICATION OR ASSUMPTION OF OPTIONS
\n——————————————————————————–<\/p>\n
29. May we modify or assume options?<\/p>\n
Subject to the terms of our 1999 Stock Incentive Plan, our
\ncompensation committee may modify, extend or assume outstanding options. It may
\nalso accept the cancellation of outstanding options in return for the grant of
\nnew options for the same or a different number of shares and at the same or a
\ndifferent exercise price. However, we cannot impair your contractual rights with
\nany modification without your consent.<\/p>\n
ACCELERATION OF VESTING
\n——————————————————————————–<\/p>\n
30. May the exercisability of an award be accelerated?<\/p>\n
The agreement that governs an award of options or restricted shares
\nmay provide for accelerated exercisability if you die, are disabled or retire.
\nIn addition, the compensation committee may determine that the exercisability or
\nvesting of all or a portion of an award may be accelerated in the event that the
\nCompany is subject to a change in control. A “change in control” means:<\/p>\n
o A merger or consolidation of the Company with or into another
\n entity or any other corporate reorganization, if 50% or more of
\n the combined voting power of the continuing or surviving entity’s
\n securities outstanding immediately after the merger,
\n consolidation or other reorganization is owned by persons who
\n were not our stockholders immediately before the merger,
\n consolidation or other reorganization,<\/p>\n
o The sale, transfer or other disposition of all or substantially
\n all of our assets,<\/p>\n
o Certain changes in the composition of our board of directors, or<\/p>\n
o Any transaction as a result of which any person is the
\n “beneficial owner” (as defined in Rule 13d-3 under the Securities
\n Exchange Act of 1934),<\/p>\n
10<\/p>\n
directly or indirectly, of our securities representing at least
\n 50% of the total voting power represented by our then outstanding
\n voting securities.<\/p>\n
31. What happens to my awards upon a merger of the Company?<\/p>\n
To the extent not previously exercised or settled, your options will
\nterminate immediately before the dissolution or liquidation of the Company. If
\nthe Company is a party to a merger or other reorganization, outstanding options
\nwill be subject to the agreement of merger or reorganization. Such an agreement
\nwill provide for one of the following:<\/p>\n
o The continuation of the outstanding options by the Company, if
\n the Company is a surviving corporation,<\/p>\n
o The assumption or substitution of the outstanding options by the
\n surviving corporation or its parent or subsidiary,<\/p>\n
o Full exercisability or vesting and accelerated expiration of the
\n outstanding options, or<\/p>\n
o Settlement of the full value of the outstanding options in cash
\n or cash equivalents, followed by cancellation of the options.<\/p>\n
DEFERRAL OF AWARDS
\n——————————————————————————–<\/p>\n
32. May I defer receipt of option shares?<\/p>\n
If our compensation committee (in its sole discretion) permits or
\nrequires it, you may defer the receipt of option shares. Instead of being
\ndelivered to you, the shares that you purchase by exercising an option would be
\nconverted into credits in a deferred compensation account established for you as
\nan entry on our books. Our compensation committee determines the amount of the
\ncredits by referring to the fair market value of our shares of common stock as
\nof the date when they otherwise would have been delivered to you.<\/p>\n
We may credit your deferred compensation account with interest or
\nother forms of investment return. You will have no rights to such an account
\nother than those of a general creditor of the Company. Such an account is an
\nunfunded and unsecured obligation of the Company and will be subject to the
\nterms and conditions of the applicable agreement between you and the Company.<\/p>\n
MISCELLANEOUS
\n——————————————————————————–<\/p>\n
33. Do I have the right to remain employed until my options or my shares
\n vest?<\/p>\n
No. Nothing in our 1999 Stock Incentive Plan or in any award granted
\nunder the Plan provides any person with the right to remain in our service for
\nany specific period. Both<\/p>\n
11<\/p>\n
you and we have the right to terminate your service at any time and for any
\nreason, with or without cause, subject to any employment agreement.<\/p>\n
34. Is the Plan subject to ERISA?<\/p>\n
Our 1999 Stock Incentive Plan is not subject to the provisions of the
\nEmployee Retirement Income Security Act of 1974 (ERISA) or Section 401(a) of the
\nInternal Revenue Code.<\/p>\n
RESTRICTIONS ON RESALE
\n——————————————————————————–<\/p>\n
35. What restrictions apply if I am a Section 16 Insider?<\/p>\n
The federal securities laws prohibit the taking of short-swing profits
\nby designated insiders. Specifically, Section 16(b) of the Securities Exchange
\nAct of 1934 requires us to recover any profit realized by a Section 16 insider
\nfrom any purchase and sale, or sale and purchase, of shares of our common stock
\nmade within a period of less than six months. A Section 16 insider is an
\nexecutive officer or director of the Company or a stockholder who beneficially
\nowns more than 10% of the Company’s outstanding securities. If you are a Section
\n16 insider, we will let you know.<\/p>\n
The Securities and Exchange Commission has issued rules that govern
\nthe short-swing liability treatment of transactions effected by a Section 16
\ninsider under employee stock plans such as the 1999 Stock Incentive Plan. These
\nrules apply to various transactions under the Plan, as summarized below.<\/p>\n
Grant of option. The receipt of an option under the Plan will be an
\nexempt transaction and will not be treated as a “purchase” of the underlying
\nshares for short-swing liability purposes, if the grant has “Section 16
\nApproval.” This means that the grant is approved by:<\/p>\n
o The board of directors,<\/p>\n
o The compensation committee of the board of directors, or<\/p>\n
o The stockholders.<\/p>\n
If the grant has not received Section 16 Approval, the grant is still
\nexempt if the shares acquired under the grant are not sold until at least six
\nmonths after the date of grant. Should this six-month requirement not be
\nsatisfied, then the grant will be treated as a “purchase” of the shares
\nretroactive to the grant date. Such a purchase will be matched, for short-swing
\nliability purposes, with any sale of shares of our common stock made within six
\nmonths before or after the grant date.<\/p>\n
Option exercise by paying cash or through same-day sale. The exercise
\nof an option will be an exempt transaction and will not be treated as a
\n“purchase” of the acquired<\/p>\n
12<\/p>\n
shares for short-swing liability purposes, if the original option grant received
\nSection 16 Approval. (If the Section 16 Approval requirements have not been met,
\nthen the exercise of an option is still an exempt transaction, unless the market
\nprice of the shares when the option is exercised is lower than the exercise
\nprice paid for the shares.) However, a same-day sale will be treated as a “sale”
\ntransaction for short-swing liability purposes. It will be matched with any
\nnon-exempt purchase of our stock–such as an open-market purchase–made by the
\nSection 16 Insider within six months before or after the date of the same-day
\nsale.<\/p>\n
Option exercise by delivery of shares. The delivery of shares of our
\ncommon stock in payment of the exercise price and the exercise of the option
\nwill be exempt transactions for short-swing liability purposes, if the original
\noption grant (including the feature permitting the delivery of shares) or the
\nexercise received Section 16 Approval.<\/p>\n
Option exercise by stock withholding. The exercise of an option and
\npayment of the exercise price and\/or applicable withholding taxes by the
\nwithholding of a portion of the shares otherwise issuable to the Section 16
\nInsider by the Company are exempt, if the original option grant (including the
\nstock withholding feature) or the exercise received Section 16 Approval.<\/p>\n
Award of restricted shares. The award of shares by the Company for
\nservices rendered to the Company, a parent or a subsidiary is exempt if the
\naward received Section 16 Approval or if you hold the shares acquired for at
\nleast six months before selling them.<\/p>\n
Forfeiture of unvested shares. The surrender of unvested shares to the
\nCompany for cancellation or expiration without any cash payment or other
\nconsideration to the participant will not be deemed a “sale” of those shares for
\nshort-swing liability purposes, if the original grant received Section 16
\nApproval.<\/p>\n
Sale of shares. The sale of shares of our common stock acquired by a
\nSection 16 Insider (whether under the Plan or on the open market) will be
\ntreated as a “sale” transaction for short-swing liability purposes. It will be
\nmatched with any non-exempt purchase of our stock (such as an open-market
\npurchase) made by the Section 16 Insider within six months before or after the
\ndate of the sale.<\/p>\n
Reporting requirements. Each of the following Plan transactions
\ninvolving a Section 16 Insider must be reported on the annual Form 5 required to
\nbe filed by the individual within 45 days after the close of the Company’s
\nfiscal year in which the transaction occurs and may be reported on any
\nearlier-filed Form 4:<\/p>\n
o Receipt of option,<\/p>\n
o Receipt of stock award, and<\/p>\n
o Forfeiture of restricted stock.<\/p>\n
The following transactions must be reported on a Form 4 filed within
\n10 days after the close of the calendar month in which the transaction is
\neffected:<\/p>\n
13<\/p>\n
o Exercise of option (if the option grant has not yet been
\n reported, the grant must be reported on the same Form 4 on which
\n the option exercise is reported),<\/p>\n
o Withholding or delivery of shares to satisfy tax withholding
\n obligations, and<\/p>\n
o Sale of shares.<\/p>\n
The surrender of options for cancellation or the expiration of options
\nfor no consideration does not have to be reported.<\/p>\n
36. What restrictions apply if I am an affiliate?<\/p>\n
In general, executive officers and other persons with power to manage
\nand direct our policies, relatives of these persons and trusts, estates,
\ncorporations or other entities controlled by any of these persons or their
\nrelatives may be deemed to be our affiliates. Our affiliates must resell their
\nshares of common stock in compliance with Securities and Exchange Commission
\nRule 144. This rule requires such sales to be effected in “broker’s
\ntransactions,” as defined in the rule, and a written notice of each sale must be
\nfiled with the Securities and Exchange Commission at the time of the sale. The
\nrule also limits the number of shares that may be sold in any three-month period
\nby affiliates to the greater of (a) 1% of the outstanding shares of our common
\nstock or (b) the average weekly reported volume of trading in our common stock
\nduring the four calendar weeks preceding the filing of the required notice of
\nproposed sale. However, the holding period requirement of Rule 144 will not
\napply to any shares of common stock acquired under the Plan.<\/p>\n
37. Are there any restrictions on resale that apply even if I am not an
\n affiliate or Section 16 insider?<\/p>\n
Your purchases and sales of shares of our common stock are subject to
\nRule 10b-5 under the Securities Exchange Act of 1934. Rule 10b-5 makes it
\nunlawful to trade in our shares when you have material information about us that
\nis not yet known to the general public. In addition, your transactions in shares
\nof our common stock must comply with our insider trading policy.<\/p>\n
If you are an officer or director of the Company or a stockholder who
\nowns more than 10% of the Company’s outstanding securities, you should consult
\nwith counsel before offering for sale any shares of common stock acquired under
\nthe Plan in order to ensure your compliance with Rule 144, Section 16 and all
\nother applicable provisions of federal and state securities laws.<\/p>\n
14<\/p>\n
Questions and Answers on
\n Federal Tax Consequences<\/p>\n
REDBACK NETWORKS INC.<\/p>\n
QUESTIONS AND ANSWERS ON FEDERAL TAX CONSEQUENCES<\/p>\n
We explain below the federal income tax consequences of your participation
\nin the 1999 Stock Incentive Plan. We do not explain the state and local tax
\ntreatment, and you should know that the state and local tax treatment may vary
\nfrom the federal income tax treatment. In any event, you should consult your own
\ntax advisor as to the tax consequences of your particular transactions under the
\nPlan.<\/p>\n
INCENTIVE STOCK OPTIONS
\n——————————————————————————–<\/p>\n
T1. Will I have federal income tax liability if I am granted an incentive
\n stock option?<\/p>\n
No.<\/p>\n
T2. Will I have federal income tax liability if I exercise an incentive
\n stock option?<\/p>\n
No. You will not recognize taxable income when the incentive stock
\noption is exercised. However, you do recognize alternative minimum taxable
\nincome equal to the excess of the fair market value of the purchased shares at
\nthe time of exercise over the exercise price paid for those shares. Please see
\nQuestion T27 below.<\/p>\n
T3. When will I be subject to federal income tax on shares acquired under
\n an incentive stock option?<\/p>\n
Generally, you will recognize income in the year in which you dispose
\nof the shares purchased under your incentive stock option.<\/p>\n
T4. What constitutes a disposition of incentive stock option shares?<\/p>\n
You dispose of shares purchased under an incentive stock option when
\nyou transfer legal title to those shares by:<\/p>\n
o Sale,<\/p>\n
o Exchange,<\/p>\n
o Gift, or<\/p>\n
o Delivery of the shares to pay the exercise price of another
\n incentive stock option before you satisfy the incentive stock
\n option holding periods.<\/p>\n
However, a disposition will not occur if you engage in any of the
\nfollowing transactions:<\/p>\n
o A transfer to your spouse,<\/p>\n
16<\/p>\n
o A transfer into joint ownership with right of survivorship, if
\n you remain one of the joint owners,<\/p>\n
o A pledge of the shares as collateral for a loan,<\/p>\n
o A transfer by bequest or inheritance upon your death, or<\/p>\n
o Certain tax-free exchanges of the shares permitted under the
\n Internal Revenue Code of 1986.<\/p>\n
T5. How do I determine my federal income tax liability when I sell my
\n shares?<\/p>\n
Your federal income tax liability will depend upon whether you make a
\nqualifying or disqualifying disposition of the shares purchased under your
\nincentive stock option.<\/p>\n
You make a qualifying disposition if your sale or other disposition of
\nthe shares takes place (a) more than two years after the grant date of the
\nincentive stock option and (b) more than one year after the date the option was
\nexercised for the particular shares involved in the disposition.<\/p>\n
A disqualifying disposition is any sale or other disposition made
\nbefore both of these minimum holding periods are satisfied.<\/p>\n
T6. What if I make a qualifying disposition?<\/p>\n
You will recognize a long-term capital gain equal to the excess of (a)
\nthe amount realized upon the sale or disposition over (b) the exercise price
\npaid for the shares. In general, the maximum federal income tax rate on
\nlong-term capital gains is 20%. You will recognize a capital loss if the amount
\nrealized is lower than the exercise price paid for the shares.<\/p>\n
Example:<\/p>\n
o On October 1, 1995, we grant you an incentive stock option for
\n 1,000 shares with an exercise price of $35.00 per share.<\/p>\n
o On November 1, 1997, you exercise this option when the market
\n price is $45.00 per share.<\/p>\n
o On December 1, 1998, you sell the shares for $50.00 per share.<\/p>\n
Because you sell the shares (a) more than two years after the grant
\n date of October 1, 1995, and (b) more than one year after the exercise date
\n of November 1, 1997, the sale is a qualifying disposition of the shares.<\/p>\n
For federal income tax purposes, you will recognize a long-term
\n capital gain of $15.00 per share. The gain will be subject to a maximum
\n federal income tax rate of 20%.<\/p>\n
17<\/p>\n
T7. What are the normal tax rules for a disqualifying disposition?<\/p>\n
Normally, when shares purchased under an incentive stock option are
\nsubject to a disqualifying disposition, the optionee will recognize ordinary
\nincome at the time of the disposition in an amount equal to the excess of (a)
\nthe fair market value of the shares on the exercise date over (b) the exercise
\nprice paid for those shares. If the disqualifying disposition is effected by
\nmeans of an arm’s length sale or exchange with an unrelated party, the ordinary
\nincome will be limited to the amount equal to the excess of (a) the amount
\nrealized from the disposition of the shares over (b) the exercise price paid for
\nthe shares.<\/p>\n
We report the amount of your disqualifying disposition income on your
\nW-2 wage statement for the year of the disposition. You are responsible for
\npaying any applicable taxes.<\/p>\n
Any additional gain recognized from the disqualifying disposition will
\nbe capital gain. The capital gain will be long-term if you held the shares more
\nthan 12 months and short-term if you held the shares 12 months or less. The
\nmaximum federal income tax rate on long-term capital gains is generally 20%.
\nShort-term capital gains are generally taxed at the same rate as ordinary
\nincome.<\/p>\n
Example:<\/p>\n
o On October 1, 1995, we grant to you an incentive stock option for
\n 1,000 shares with an exercise price of $35.00 per share.<\/p>\n
o On November 1, 1997, you exercise this option when the market
\n price is $45.00 per share.<\/p>\n
o On March 1, 1998, you sell the shares for $50.00 per share.<\/p>\n
Because you sell the shares less than one year after the exercise date
\n of November 1, 1997, you make a disqualifying disposition of the shares.
\n For federal income tax purposes, the $15 per share gain will be divided
\n into two components:<\/p>\n
Ordinary Income: You will recognize ordinary income in the amount
\n of $10.00 per share: The $45.00 per share market price of the shares
\n on the exercise date minus the $35.00 per share exercise price. The
\n $10 of ordinary income is added to the $35 exercise price to become
\n your “basis” in the share.<\/p>\n
Capital Gain: You will also recognize a short-term capital gain
\n of $5.00 per share: The $50 per share sale price minus your $45 per
\n share basis.<\/p>\n
If you make a disqualifying disposition of the incentive stock option
\nshares in an arm’s length transaction with an unrelated party for more than the
\nexercise price paid for those shares but less than the market value on the
\nexercise date, then your ordinary income will be limited to the excess of (a)
\nthe amount realized from the disposition of the shares over (b) the<\/p>\n
18<\/p>\n
exercise price paid for the shares. For example, if the shares in the above
\nExample were sold for $37.00 per share in the disqualifying disposition, you
\nwould only recognize ordinary income of $2.00 per share.<\/p>\n
If you make a disqualifying disposition of the incentive stock option
\nshares in an arm’s length transaction with an unrelated party for less than the
\nexercise price paid for those shares, then you will not recognize any ordinary
\nincome and will recognize a capital loss equal to the excess of (a) the exercise
\nprice paid for the shares over (b) the amount realized from the disposition of
\nthose shares. For example, if the shares in the above Example were sold for
\n$33.00 per share in the disqualifying disposition, then you would simply
\nrecognize a short-term capital loss of $2.00 per share.<\/p>\n
T8. What if the shares purchased under an Incentive Stock Option are
\n subject to a substantial risk of forfeiture, such as the Company’s
\n repurchase right?<\/p>\n
If the shares purchased under your Incentive Stock Option are subject
\nto a substantial risk of forfeiture, then the amount of ordinary income that you
\nwould recognize upon a disqualifying disposition of those shares will be based
\non their fair market value on the date when the forfeiture period lapses (rather
\nthan the date when the Incentive Stock Option is exercised). One example of a
\nsubstantial risk of forfeiture is the Company’s right to repurchase your shares
\nat the original exercise price in the event that your service terminates before
\nyou vest in those shares. In this case, the amount of ordinary income that you
\nrecognize upon a disqualifying disposition of the shares will be based on their
\nfair market value on the vesting date, and the holding period for determining
\nwhether any additional gain is a long-term or short-term capital gain will not
\ncommence until the vesting date.<\/p>\n
This result can be avoided, and the normal disqualifying disposition
\nrules under Question T7 reinstated, by making a conditional election pursuant to
\nSection 83(b) of the Internal Revenue Code to have the ordinary income measured
\nwhen the Incentive Stock Option is exercised. Please see Question T16 for
\nfurther information concerning Section 83(b) elections.<\/p>\n
In the case of a qualifying disposition, it makes no difference that
\nthe shares were not yet vested when you purchased them.<\/p>\n
T9. What are the federal tax consequences to the Company?<\/p>\n
If you make a qualifying disposition of incentive stock option shares,
\nthen we cannot take an income tax deduction with respect to such shares. If you
\nmake a disqualifying disposition of the shares, then we will be entitled to an
\nincome tax deduction equal to the amount of ordinary income that you recognize
\nin connection with the disposition. The deduction will, in general, be allowed
\nto us in the taxable year in which your disposition occurs.<\/p>\n
19<\/p>\n
T10. What happens if I pay the exercise price of an incentive stock option
\n by delivering shares that I acquired by exercising another incentive
\n stock option, if the delivery of the shares results in a disqualifying
\n disposition?<\/p>\n
If you use shares acquired under an incentive stock option to pay the
\nexercise price under another incentive stock option before the holding periods
\nare satisfied for the first incentive stock option, then you will be subject to
\nordinary income taxation. The amount of the ordinary income is equal to the
\nexcess of (a) the fair market value of the delivered shares at the time of their
\noriginal purchase over (b) the exercise price paid for the delivered shares. You
\ndo not recognize any capital gain upon the delivery of the shares to pay the
\nexercise price.<\/p>\n
The tax basis and long-term capital gain holding periods for the
\nshares of common stock purchased upon exercise of the second incentive stock
\noption will be determined as follows:<\/p>\n
o To the extent that the newly purchased shares equal in number the
\n delivered shares, the basis for the new shares will be equal to
\n the fair market value of the delivered shares when they were
\n originally purchased. The long-term capital gain holding period
\n for the new shares will include the period for which the
\n delivered shares were held, measured from their original purchase
\n date.<\/p>\n
o To the extent that the number of newly purchased shares is
\n greater than the number of delivered shares, the additional
\n shares will have a zero basis and a long-term capital gain
\n holding period generally measured from the exercise date of the
\n second incentive stock option.<\/p>\n
o The holding period for all new shares, for purposes of qualifying
\n for incentive stock option treatment, does not begin until the
\n exercise date of the second incentive stock option.<\/p>\n
T11. What happens if I pay the exercise price of an incentive stock option
\n with shares that I acquired through (a) an incentive stock option and
\n held for the requisite holding periods, (b) a nonstatutory stock
\n option or (c) open-market purchases?<\/p>\n
If you pay the exercise price under the incentive stock option by
\nusing one of the above methods, you will not recognize any taxable income as a
\nresult of exercising the incentive stock option. Please see Question T27 below
\nfor the alternative minimum tax treatment.<\/p>\n
To the extent that the purchased shares equal in number the shares
\ndelivered in payment of the exercise price, the new shares will have the same
\nbasis and holding period for long-term capital gain purposes as the delivered
\nshares. To the extent the number of purchased shares exceeds the number of
\ndelivered shares, the additional shares will have a zero basis and a long-term
\ncapital gain holding period generally measured from the new exercise date. The
\nholding period for all new shares, for purposes of qualifying for incentive
\nstock option treatment, does not begin until the exercise date of the second
\nincentive stock option.<\/p>\n
20<\/p>\n
T12. What happens if I make a disqualifying disposition of shares purchased
\n under an incentive stock option with shares of our common stock?<\/p>\n
If you exercise an incentive stock option with shares of our common
\nstock, then those shares purchased under the incentive stock option that have a
\nzero basis will be treated as the first shares sold (or otherwise transferred)
\nin a disqualifying disposition. Accordingly, upon such a disqualifying
\ndisposition, you will recognize ordinary income with respect to the zero basis
\nshares in an amount equal to their fair market value on the date the option was
\nexercised for those shares.<\/p>\n
NONSTATUTORY STOCK OPTIONS
\n——————————————————————————–<\/p>\n
T13. Will I have federal income tax liability if I am granted a
\n nonstatutory stock option?<\/p>\n
No.<\/p>\n
T14. Will I have federal income tax liability if I exercise a nonstatutory
\n stock option?<\/p>\n
Yes. Normally, you will recognize ordinary income in the year in which
\nyou exercise a nonstatutory stock option in an amount equal to the excess of (a)
\nthe fair market value of the purchased shares on the exercise date over (b) the
\nexercise price paid for those shares. We report this income on your W-2 wage
\nstatement for the year of exercise, and you must satisfy the tax withholding
\nrequirements applicable to this income. (If you are not an employee or former
\nemployee, we will report the income on a Form 1099 and will generally not
\nwithhold taxes.)<\/p>\n
T15. What if the shares purchased under a nonstatutory stock option are
\n subject to a substantial risk of forfeiture, such as the Company’s
\n repurchase right?<\/p>\n
If the shares you purchase under a nonstatutory stock option are
\nsubject to a substantial risk of forfeiture, such as the Company’s right to
\nrepurchase those shares at the original exercise price upon the termination of
\nyour service prior to vesting in those shares, then you will not recognize any
\ntaxable income at the time of exercise. Instead, you will have to report as
\nordinary income, as the shares vest, an amount equal to the excess of (a) the
\nfair market value of the shares when they vest over (b) the exercise price paid
\nfor the shares. In addition, the holding period for determining whether any
\nadditional gain (upon a subsequent disposition of the shares) is a long-term or
\nshort-term capital gain will not commence until the shares vest.<\/p>\n
If you purchase shares subject to a substantial risk of forfeiture,
\nyou may elect under Section 83(b) of the Internal Revenue Code to recognize
\nincome at the time of exercise. Please see Question T16 below. If such an
\nelection is made, you will not recognize any additional income with respect to
\nyour shares until the shares are sold or otherwise transferred in a taxable
\ntransaction.<\/p>\n
21<\/p>\n
T16. What is the effect of making a Section 83(b) election?<\/p>\n
If you purchase shares subject to the Company’s repurchase right or
\nother substantial risk of forfeiture, you may elect under Section 83(b) of the
\nInternal Revenue Code to include as ordinary income in the year of exercise an
\namount equal to the excess of (a) the fair market value of the purchased shares
\non the exercise date over (b) the exercise price paid for the shares. The fair
\nmarket value of the purchased shares will be determined as if the shares were
\nnot subject to the Company’s repurchase right or other risk of forfeiture. If
\nyou make a Section 83(b) election, you will not recognize any additional income
\nwhen the Company’s repurchase right or other forfeiture risk subsequently
\nlapses.<\/p>\n
The Section 83(b) election must be filed with the Internal Revenue
\nService within 30 days after the option is exercised. Any ordinary income
\nresulting from the election will be subject to applicable tax withholding
\nrequirements if you are an employee or former employee. The election generally
\nis not revocable and cannot be made after the 30-day period has expired.<\/p>\n
T17. Will I recognize additional income if I sell shares acquired under a
\n nonstatutory stock option?<\/p>\n
Yes. You will recognize a capital gain to the extent that the amount
\nrealized from the sale of the shares exceeds your basis in the shares. (Your
\nbasis equals the exercise price you paid plus the ordinary income you previously
\nrecognized as a result of the exercise.) A capital loss will result if the
\namount realized from the sale is less than your basis. The gain or loss will be
\nlong-term if you held the shares more than 12 months. The holding period
\nnormally starts when the nonstatutory stock option is exercised.<\/p>\n
T18. What happens if I pay the exercise price of a nonstatutory stock
\n option with shares that I previously acquired by exercising an option
\n or through an open-market purchase?<\/p>\n
You will not recognize any taxable income to the extent that the
\nshares of our common stock received from the exercise of the nonstatutory stock
\noption equal in number the shares delivered to pay the exercise price. For
\nfederal income tax purposes, these newly-acquired shares will have the same
\nbasis and long-term capital gain holding period as the delivered shares. To the
\nextent that the delivered shares were acquired under an incentive stock option,
\nthe new shares received from the exercise of the nonstatutory stock option will
\ncontinue to be subject to taxation as incentive stock option shares. Please see
\nthe incentive stock option principles discussed above.<\/p>\n
The additional shares of our common stock received upon the exercise
\nof the nonstatutory stock option will, in general, have to be reported as
\nordinary income for the year of exercise in an amount equal to their fair market
\nvalue on the exercise date. These additional shares will have a tax basis equal
\nto this fair market value and a long-term capital gain holding period generally
\nmeasured from the exercise date.<\/p>\n
22<\/p>\n
T19. What are the federal tax consequences to the Company?<\/p>\n
We will be entitled to an income tax deduction equal to the amount of
\nordinary income that you recognize in connection with the exercise of a
\nnonstatutory stock option. The deduction will, in general, be allowed for our
\ntaxable year in which you recognize the ordinary income.<\/p>\n
RESTRICTED SHARE AWARDS
\n——————————————————————————–<\/p>\n
T20. Will a restricted share award or purchase result in federal income tax
\n liability to me?<\/p>\n
Restricted shares are shares that are subject to a vesting schedule
\n(or some other substantial risk of forfeiture). If you separate from service
\nbefore vesting in your shares, the shares are forfeited and revert to the
\nCompany. If you paid for the shares, the purchase price will be refunded.
\nGenerally, you will not recognize taxable income at the time of an award or
\npurchase of restricted shares. However, you may make an election under Section
\n83(b) of the Internal Revenue Code to be taxed at the time of the award. Please
\nsee Question T22 below.<\/p>\n
T21. Will the vesting of shares under a restricted share award result in
\n federal income tax liability to me?<\/p>\n
If you did not elect under Section 83(b) of the Internal Revenue Code
\nto recognize income at the time of the award or purchase, you will recognize
\ntaxable income at the time of vesting. The taxable income will be equal to the
\nexcess of the fair market value of the restricted shares when they vest over the
\namount (if any) that you paid for them.<\/p>\n
T22. What is the effect of making a Section 83(b) election?<\/p>\n
If you receive or purchase shares that remain subject to vesting, you
\nmay elect under Section 83(b) of the Internal Revenue Code to include as
\nordinary income in the year of the award or purchase an amount equal to the
\nexcess of (a) the fair market value of the shares on the transfer date over (b)
\nthe purchase price (if any) that you paid for the shares. The fair market value
\nof the purchased shares will be determined as if the shares were not subject to
\nforfeiture. If you make the Section 83(b) election, you will not recognize any
\nadditional income when the shares vest. Any appreciation in the value of the
\nrestricted shares after the award or purchase is not taxed as compensation but
\ninstead is taxed as a capital gain when the restricted shares are sold or
\ntransferred.<\/p>\n
If you make a Section 83(b) election and the restricted shares are
\nlater forfeited, you are not entitled to a tax deduction or a refund of the tax
\nalready paid.<\/p>\n
The Section 83(b) election must be filed with the Internal Revenue
\nService within 30 days after the shares are awarded or sold to you. Any ordinary
\nincome resulting from the election will be subject to applicable tax withholding
\nrequirements, if you are an employee or<\/p>\n
23<\/p>\n
former employee. The election generally is not revocable and cannot be made
\nafter the 30-day period has expired.<\/p>\n
T23. What are the federal tax consequences to the Company?<\/p>\n
The Company will be entitled to an income tax deduction equal to the
\namount of ordinary income that you recognize in connection with a restricted
\nshare award. The deduction will generally be allowed for the taxable year of the
\nCompany in which you recognize the ordinary income.<\/p>\n
ALTERNATIVE MINIMUM TAX
\n——————————————————————————–<\/p>\n
T24. What is the alternative minimum tax?<\/p>\n
The alternative minimum tax is an alternative method of calculating
\nthe income tax that you must pay each year in order to ensure that a minimum
\namount of tax is paid for the year. The alternative minimum tax rates are as
\nfollows:<\/p>\n
o The first $175,000 ($87,500 for a married taxpayer filing a
\n separate return) of your alternative minimum taxable income for
\n the year over the allowable exemption amount is subject to
\n alternative minimum taxation at the rate of 26%.<\/p>\n
o The balance of your alternative minimum taxable income is subject
\n to alternative minimum taxation at the rate of 28%.<\/p>\n
You only pay the alternative minimum tax to the extent that it exceeds
\nyour regular federal income tax for the year.<\/p>\n
T25. How is alternative minimum taxable income calculated?<\/p>\n
Your alternative minimum taxable income is based on your regular
\ntaxable income for the year, adjusted to (a) include certain additional items of
\nincome and tax preference and (b) disallow or limit certain deductions otherwise
\nallowable for regular tax purposes.<\/p>\n
T26. What is the allowable exemption amount?<\/p>\n
The allowable exemption amount is $45,000 for a married taxpayer
\nfiling a joint return, $33,750 for an unmarried taxpayer, and $22,500 for a
\nmarried taxpayer filing a separate return. The allowable exemption amount is,
\nhowever, reduced by 25(cent) for each $1.00 by which the individual’s
\nalternative minimum taxable income for the year exceeds $150,000 for a married
\ntaxpayer filing a joint return, $112,500 for an unmarried taxpayer, and $75,000
\nfor a married taxpayer filing a separate return. The alternative minimum tax is
\nbased only on your alternative minimum taxable income minus the allowable
\nexemption amount.<\/p>\n
24<\/p>\n
T27. Is the spread on an incentive stock option at the time of exercise
\n normally included in my alternative minimum taxable income?<\/p>\n
Yes. The spread on an incentive stock option is normally included in
\nyour alternative minimum taxable income at the time of exercise. The spread is
\nequal to the fair market value of the purchased shares at the time of exercise
\nminus the exercise price paid for those shares.<\/p>\n
A special rule applies if you dispose of the incentive stock option
\nshares in the same year as the option exercise through an arm’s length sale or
\nexchange with an unrelated party. If the amount you realize from the disposition
\nis less than the value of the shares at the time of the exercise, then the
\nalternative minimum taxable income attributable to your option exercise is only
\nequal to the amount you realize from the disposition minus the exercise price
\nyou paid. For example, assume that your incentive stock option has an exercise
\nprice of $10 per share. You exercise the option when the market value of our
\nstock is $15 per share. Then you sell the shares in the same year for $12 per
\nshare. Without the special rule, you would have alternative minimum taxable
\nincome of $5 per share and a short-term capital loss of $3 per share. If the
\nspecial rule is available, you have alternative minimum taxable income of $2 per
\nshare and no capital gain or loss.<\/p>\n
As a practical matter, if you make a disqualifying disposition of the
\nincentive stock option shares in the same year as the exercise, the taxable
\namount for that year is generally the same for the alternative minimum tax and
\nfor the regular tax. Therefore, no adjustment is necessary to compute
\nalternative minimum taxable income.<\/p>\n
T28. How will the payment of alternative minimum tax in one year affect the
\n calculation of my tax in a later year?<\/p>\n
If you pay alternative minimum tax for one or more taxable years, you
\nmay use the amount of the alternative minimum tax (subject to certain
\nadjustments and reductions) as a partial credit against your regular tax for
\nsubsequent taxable years. However, you cannot use this credit against your
\nalternative minimum tax in future years. In other words, you may use this credit
\nonly to the extent that your regular taxable income exceeds your alternative
\nminimum taxable income.<\/p>\n
Upon the sale or other disposition of the purchased shares, whether in
\nthe year of exercise or in any subsequent taxable year, your basis for computing
\nthe gain for purposes of alternative minimum taxable income (but not regular
\ntaxable income) will include the amount of the option spread previously included
\nin your alternative minimum taxable income. If you pay the regular tax in the
\nyear of disposition, your basis will not reflect the alternative minimum taxable
\nincome attributable to the exercise.<\/p>\n
25<\/p>\n
Company Information<\/p>\n
REDBACK NETWORKS INC.<\/p>\n
COMPANY INFORMATION<\/p>\n
The Company is a Delaware corporation with its principal executive
\noffices at 250 Holger Way, San Jose, CA 95134. The telephone number at the
\nprincipal executive offices is (408) 571-5000. You may contact us at this
\naddress or telephone number for further information concerning the 1999 Stock
\nIncentive Plan and its administration.<\/p>\n
A copy of the Company’s Annual Report to Stockholders for the most
\nrecent fiscal year will be furnished to each participant in the 1999 Stock
\nIncentive Plan, and additional copies will be furnished to you without charge
\nupon written or oral request to the Corporate Secretary at the Company’s
\nprincipal executive offices or upon telephoning the Company at its principal
\nexecutive offices. In addition, you may obtain without charge, upon written or
\noral request to the Corporate Secretary, a copy of any of the documents listed
\nbelow, which are hereby incorporated by reference into this Summary and
\nProspectus, other than certain exhibits to such documents:<\/p>\n
(a) The Company’s Annual Report on Form 10-K for the fiscal year ended
\n December 31, 2000, filed with the Securities and Exchange Commission
\n (the “SEC”) on April 2, 2001;<\/p>\n
(b) All other reports filed pursuant to Section 13(a) or 15(d) of the
\n Securities Exchange Act of 1934, as amended (the “1934 Act”), since
\n the end of the year covered by the document referred to in (a) above;<\/p>\n
(c) The description of the Company’s outstanding Common Shares contained
\n in the Company’s Registration Statement No. 000-25853 on Form 8-A
\n filed with the SEC on April 22, 1999, pursuant to Section 12 of the
\n 1934 Act, including any amendment or report filed for the purpose of
\n updating such description; and<\/p>\n
(d) All reports and definitive proxy or information statements filed
\n pursuant to Section 13(a), 13(c), 14 or 15(d) of the 1934 Act after
\n the date of this Summary and Prospectus and prior to the filing of a
\n post-effective amendment which indicates that all securities offered
\n hereby have been sold or which deregisters all securities then
\n remaining unsold.<\/p>\n
We will also deliver to each participant in the 1999 Stock Incentive
\nPlan who does not otherwise receive such materials a copy of all reports, proxy
\nstatements and other communications distributed to our stockholders.<\/p>\n
27<\/p>\n","protected":false},"template":"","meta":{"_acf_changed":false,"_stopmodifiedupdate":true,"_modified_date":"","_cloudinary_featured_overwrite":false},"corporate_contracts_companies":[8660],"corporate_contracts_industries":[],"corporate_contracts_types":[9539,9545],"class_list":["post-38363","corporate_contracts","type-corporate_contracts","status-publish","hentry","corporate_contracts_companies-redback-networks-inc","corporate_contracts_types-compensation","corporate_contracts_types-compensation__esp"],"acf":[],"_links":{"self":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts\/38363","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts"}],"about":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/types\/corporate_contracts"}],"wp:attachment":[{"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/media?parent=38363"}],"wp:term":[{"taxonomy":"corporate_contracts_companies","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_companies?post=38363"},{"taxonomy":"corporate_contracts_industries","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_industries?post=38363"},{"taxonomy":"corporate_contracts_types","embeddable":true,"href":"https:\/\/corporate.findlaw.com\/legal-api\/wp-json\/wp\/v2\/corporate_contracts_types?post=38363"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}