\n —————————– —————————- ——————————-<\/p>\n Exercise Price per share of Number of Shares Subject Number of Shares Subject to
\n Old Option to Old Option New Option
\n —————————– —————————- ——————————-
\n
\n $40.00 or less One (1) One (1)
\n —————————– —————————- ——————————-
\n $40.01 – $80.00 Five (5) One (1)
\n —————————– —————————- ——————————-
\n Above $80.00 Ten (10) One (1)
\n —————————– —————————- ——————————-
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n New Options will be granted under our 1999 Plan, unless prevented by law or
\napplicable regulations. All New Options will be nonstatutory stock options and
\nwill have a maximum term of five (5) years, subject to earlier expiration upon
\ncertain events, such as the termination of your employment. (Section 6)<\/p>\n
If you are a tax resident of a non-U.S. jurisdiction, certain other terms
\nand conditions may apply to your New Option in order to comply with the laws in
\nthat country or in order to preserve the possibility of favorable tax treatment.
\nFor example:<\/p>\n
. If you are an employee who is a tax resident of the United Kingdom,
\n your New Option will be subject to the execution of a joint election
\n between you and Redback, which is described in Section 26. (Section
\n 26)<\/p>\n
. Due to exchange control restrictions currently in place, if you are an
\n employee who is a tax resident of Brazil, Redback will at this time
\n require that you exercise your options by using only a full or partial
\n cashless exercise method, whereby you exercise your options without
\n remitting any cash, as described in Section 15. (Section 15)<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or the
\n People’s Republic of China, your options may be exercised only by
\n using a cashless exercise method, whereby the options are exercised
\n without remitting any cash and under which you must effect a same-day
\n exercise of the options and sale of the shares, as described in
\n Sections 22 and 23. (Sections 22 and 23)<\/p>\n
. If you are an employee who is a tax resident of Hong Kong and if your
\n New Options will vest in whole or in part within six (6) months of the
\n Replacement Date, you will be restricted from selling any shares
\n acquired upon the exercise of those options until a period of six (6)
\n months from the Replacement Date, as described in Section 19. (Section
\n 19)<\/p>\n
In addition, all New Options will be subject to a New Option agreement
\nbetween you and us. If you are a resident of any non-U.S. jurisdiction, please
\nbe sure to find and read the applicable Section in this Offer to Replace
\nregarding the laws in your country, and the terms and conditions of <\/p>\n
-4-<\/p>\n
this offer which are applicable to you, but which may differ from certain terms
\ndescribed in this Offer to Replace. (Sections 6, 15 through 26)<\/p>\n
When will I receive my New Options?<\/p>\n
We will cancel all validly tendered options accepted by us and grant the
\nNew Options on the first business day after the expiration of the offer. If the
\nOffer Expiration Date of the offer is October 12, 2001, as we expect it to be,
\nwe will cancel and replace your validly tendered Old Options on October 15, 2001
\nwhich is the first business day following the Offer Expiration Date.<\/p>\n
As discussed above, you must continue to be an employee on the Replacement
\nDate, which we expect to be October 15, 2001 in order to be eligible to receive
\nany New Options. If, for any reason, you do not remain an employee of Redback or
\none of our subsidiaries or affiliates through the Replacement Date, we will not
\naccept your tender of options and any Old Options you tendered will not be
\ncancelled as a result of this offer. (Section 2)<\/p>\n
If I tender options in the offer, will I give up eligibility to receive other
\noption grants later?<\/p>\n
No, you will continue to be eligible to receive other option grants.<\/p>\n
Will I be required to give up all my rights to the cancelled options?<\/p>\n
Yes. Once we have accepted options tendered by you, your options will be
\ncancelled and you will no longer have any rights under those options. We intend
\nto cancel all validly tendered options accepted for replacement and replace them
\nwith New Options on the first business day following the expiration of the
\noffer. We expect the Cancellation Date (and Replacement Date) to be October 15,
\n2001. (Section 6)<\/p>\n
What will the exercise price of the New Options be?<\/p>\n
In order to comply with certain applicable laws or to preserve the
\npossibility of favorable tax treatment in certain jurisdictions, the exercise
\nprice per share of the New Options may vary for different employees and will be
\nset as follows:<\/p>\n
. Except for Executive Officers (defined herein as those officers of
\n Redback who are defined as “officers” for purposes of Section 16(b) of
\n the Securities Exchange Act of 1934, as amended, and who are listed in
\n Schedule A to this Offer to Replace), the exercise price per share of
\n the New Options for eligible employees who are tax residents of the
\n United States, Brazil, France, Germany, Hong Kong, Japan, Korea, the
\n Netherlands, the People’s Republic of China, Taiwan or the United
\n Kingdom will be the lower of: (i) four dollars and seventeen cents
\n ——–
\n ($4.17) per share, which was the closing price of a share of Redback
\n common stock on August 29, 2001; and (ii) 100% of the fair market
\n value of Redback common stock on the Replacement Date, as determined
\n by the closing price reported by the Nasdaq National Market on the
\n Replacement Date.<\/p>\n
-5-<\/p>\n
. The exercise price per share for eligible employees who are tax
\n residents of Canada or Singapore will be 100% of the fair market value
\n of Redback common stock on the Replacement Date, as determined by the
\n closing price reported by the Nasdaq National Market on the
\n Replacement Date.<\/p>\n
. The exercise price per share for Executive Officers will be four
\n dollars and seventeen cents ($4.17) per share, which was the closing
\n price of a share of Redback common stock on August 29, 2001.<\/p>\n
For example, if the fair market value of Redback common stock on the
\nReplacement Date, which we expect to be October 15, 2001, is $4.00 per share,
\nthen the exercise price per share of the New Options would be: <\/p>\n
. For all non-Executive Officer eligible employees other than tax
\n residents of Canada and Singapore: $4.00 per share.<\/p>\n
. For all non-Executive Officer eligible employees who are tax residents
\n of Canada or Singapore: $4.00 per share.<\/p>\n
. For all Executive Officers of Redback: $4.17 per share.<\/p>\n
Similarly, if the fair market value of Redback common stock on the
\nReplacement Date is $4.50 per share, then the exercise price per share of the
\nNew Options would be: <\/p>\n
. For all non-Executive Officer eligible employees other than tax
\n residents of Canada and Singapore: $4.17 per share.<\/p>\n
. For all non-Executive Officer eligible employees who are tax residents
\n of Canada or Singapore: $4.50 per share.<\/p>\n
. For all Executive Officers of Redback: $4.17 per share.<\/p>\n
Accordingly, we cannot predict the exercise price of the New Options for
\nmost employees. If you are subject to the tax laws of Canada or Singapore, the
\nNew Options may have a higher exercise price than some or all of your current
\noptions because the exercise price of your New Options will not be set until the
\nReplacement Date. If you are subject to the tax laws in the United States,
\nBrazil, France, Germany, Hong Kong, Japan, Korea, the Netherlands, the People’s
\nRepublic of China, Taiwan or the United Kingdom, your New Options will be priced
\nno higher than four dollars and seventeen cents ($4.17) per share. This still
\nmeans that the exercise price of the New Options could be higher than the
\nexercise price of certain of your tendered options, such as those options
\nrequired to be tendered if you participate in the offer (that is, many of the
\noptions granted within the six (6) months prior to the Cancellation Date). For
\nboth U.S. and non-U.S. residents, we recommend that you evaluate current market
\nquotes for our shares, among other factors, before deciding whether or not to
\ntender your options. (Section 9)<\/p>\n
-6-<\/p>\n
When will the New Options vest?<\/p>\n
Each New Option granted will vest in accordance with a new vesting
\nschedule, which will be identical to the vesting schedule of the Old Options,
\nwith the exception of your vesting start date. The vesting schedule for the New
\nOptions will start on August 8, 2001, the date the Board of Directors approved
\n ————–
\nthe program. You will not receive credit for vesting accrued on the Old Options
\nprior to the Cancellation Date. As a result, you will have to wait for a longer
\nperiod before you may purchase common stock under your New Options than if you
\nkept your Old Options.<\/p>\n
For example, if you tendered an Old Option granted in July 2000 which
\nvested 25% on the first anniversary of the Old Option grant date and 1\/48th
\n(equal to 2.0833%) monthly thereafter, the New Option you receive in replacement
\nwill be completely unvested on the Replacement Date and will vest 25% on the
\nfirst anniversary of August 8, 2001, and 1\/48th (equal to 2.0833%) monthly
\nthereafter, as shown in the following example:<\/p>\n
An option to purchase 1,000 shares of Redback common stock granted on July
\n14, 2000 at an exercise price of $155.00 per share which vested as to 25% of the
\nshares subject to the option on the first anniversary of the grant date and
\n1\/48th (equal to 2.0833%) monthly thereafter would, at the time it is tendered
\nfor cancellation under this offer, have vested as to approximately 29% of the
\nshares, as follows:<\/p>\n
– July 14, 2000: 0% of 1,000 shares subject to the option vested<\/p>\n
– July 14, 2001: 25% of 1,000 vested = 250 shares vested<\/p>\n
– August 14, 2001: 27.0833% of 1,000 vested = 270 shares vested
\n (250 from above, plus an additional 1\/48th of the shares (equal
\n to 2.0833%) vested for the month, which is approximately 20
\n shares)<\/p>\n
– September 14, 2001: 29.167% of 1,000 vested = 291 shares vested
\n (270 from above, plus an additional 1\/48th of the shares (equal
\n to 2.0833%) vested for the month, which is approximately 21
\n shares)<\/p>\n
If this option was tendered and accepted for replacement, the New Option
\nwould be for 100 shares (since the exercise price per share of the Old Option
\nwas over $80.00). If the offer is not extended and the Replacement Date is
\nOctober 15, 2001, as expected, the New Option would vest as follows:<\/p>\n
– October 15, 2001: 0% of 100 shares subject to the option vested<\/p>\n
– August 8, 2002: 25% of 100 vested = 25 shares vested<\/p>\n
– September 8, 2002: 27.0833% of 100 vested = 27 shares vested (25
\n from above, plus an additional 1\/48th of the shares (equal to
\n 2.0833%) vested for the month, which is approximately 2 shares)<\/p>\n
– October 8, 2002: 29.167% of 100 vested = 29 shares vested (27
\n from above, plus an additional 1\/48th of the shares (equal to
\n 2.0833%) vested for the month, which is approximately 2 shares)<\/p>\n
-7-<\/p>\n
– Vesting would continue in this pattern until 100% vested on
\n August 8, 2005 (Section 9)<\/p>\n
However, regardless of the vesting schedule of the Old Option, if you are a
\ntax resident of Hong Kong, you may not sell your shares for a period of six (6)
\nmonths from the Replacement Date. Further, if you are a tax resident of Brazil,
\nyou will have to exercise using a full or partial cashless exercise method. If
\nyou are a tax resident of either the Netherlands or the People’s Republic of
\nChina you will have to exercise using a cashless exercise method, whereby the
\noptions are exercised without remitting any cash and under which you will have
\nto sell any shares you receive from the exercise of the New Option on the same
\nday that you exercise. Please be sure to see Sections 15, 19, 22 and 23 for more
\ndetails.<\/p>\n
Will I have to wait longer to purchase common stock under my New Options than I
\nwould under the options I tender for replacement?<\/p>\n
Yes. You will lose the benefits of any vesting of the Old Options that you
\ntender in the offer, and each New Option will then vest commencing on August 8,
\n2001 in accordance with the vesting schedule for that option. Accordingly, you
\ngenerally will not be able to purchase any of our common stock through the
\nexercise of the New Options for a period of time after you receive them.
\n(Section 9)<\/p>\n
What if I cease to be an employee of Redback or one of our subsidiaries or
\naffiliates before my New Options are fully vested?<\/p>\n
The vesting of your New Options will be subject to the terms and conditions
\nof the 1999 Plan and your new option agreement that you will sign upon receipt
\nof the New Option. Generally, if you cease to be an employee of Redback or one
\nof our subsidiaries or affiliates, all unvested portions of your New Options
\nwill be cancelled and you will lose all rights with respect to them. This
\napplies even if your Old Option would have been fully vested. As a result, you
\nmay not have the opportunity to exercise as much, or any, of your New Options as
\nyou would have been able to exercise under the Old Options, since your New
\nOptions may not be as fully vested, or may not be vested at all. For example, if
\nyou tendered an option which was fifty percent (50%) vested at the Cancellation
\nDate, your New Option would generally be zero percent (0%) vested. In most
\ncases, if you ceased to be a Redback employee the next week, you would be unable
\nto exercise any of those options. You should be sure to take this into
\nconsideration when deciding whether or not to tender your options for
\nreplacement. (Section 9)<\/p>\n
Your right to exercise any vested portions of the New Options will expire
\nwithin a limited time period after the termination of your employment, which
\nwill be set out in your option agreement.<\/p>\n
You are reminded that unless expressly provided in your employment
\nagreement or by the applicable laws of a non-U.S. jurisdiction, your employment
\nwith Redback or one of our subsidiaries or affiliates, as the case may be, will
\nremain “at will” and can be terminated by you or Redback, or one of our
\nsubsidiaries or affiliates, at any time, with or without cause or notice.<\/p>\n
-8-<\/p>\n
What if Redback enters into a merger or stock acquisition whereby Redback is
\nacquired by another company?<\/p>\n
If Redback is acquired prior to the expiration of the offer, you may
\nwithdraw any options which you tendered for replacement and your options will be
\ntreated in accordance with the option plan under which they were granted and
\nwith your old option agreement. Further, if Redback is acquired prior to the
\nexpiration of the offer, we reserve the right to withdraw the offer, in which
\ncase your Old Options and your rights under them will remain intact for the time
\nperiod set forth in your option agreement but you will receive no replacement
\noptions.<\/p>\n
If we are acquired after your Old Options have been accepted for
\nreplacement, cancelled and replaced with New Options, your New Options will be
\ngoverned by the terms of the 1999 Plan and your new option agreement. However,
\nif your old option agreement or another agreement with Redback provided that
\nyour Old Options were subject to a special “change of control” provision or
\nother acceleration provision, those provisions will still apply to you and to
\nyour New Options and will be reflected in your new option agreement.<\/p>\n
You should be aware that if you cease to be an employee of Redback or one
\nof our subsidiaries or affiliates as a result of an acquisition or merger, you
\nmay not have the opportunity to exercise as much of your New Options as you
\nwould have been able to exercise under the Old Options, since your New Options
\nmay not be as fully vested, or may not be vested at all. As a result, you may
\nnot receive as much, or any, benefit from your New Option as you would have
\nreceived if you had retained your Old Option. Please be sure to read the
\ndescription of the 1999 Plan, set forth in Section 9. (Section 9)<\/p>\n
Are there circumstances where I would not be granted New Options?<\/p>\n
Yes. If, for any reason, you are no longer an employee on the Replacement
\nDate, you will not receive any New Options because we will not accept your
\ntender of options and any Old Options you tendered will not be cancelled as a
\nresult of the offer. You are reminded that unless expressly provided in your
\nemployment agreement or by the applicable laws of a non-U.S. jurisdiction, your
\nemployment with Redback or one of our subsidiaries or affiliates, as the case
\nmay be, will remain “at will” and can be terminated by you or Redback, or one of
\nour subsidiaries or affiliates, at any time, with or without cause or notice.
\n(Section 2)<\/p>\n
Moreover, even if we accept your tendered options, we will not grant New
\nOptions to you if we are prohibited by applicable U.S. or non-U.S. law or
\nregulations from doing so. Such a prohibition could result from changes in SEC
\nrules, regulations or policies, Nasdaq listing requirements or the laws or
\nregulations of non-U.S. jurisdictions. We will use reasonable efforts to avoid
\nany such prohibitions, but if it is applicable throughout the period after the
\nReplacement Date, you will not be granted a New Option. We do not anticipate any
\nsuch prohibitions and are referring to the possibility in an abundance of
\ncaution. (Section 13)<\/p>\n
-9-<\/p>\n
If I choose to tender an option which is eligible for replacement, do I have to
\ntender all the shares in that option?<\/p>\n
Yes. We are not accepting partial tenders of options. However, you may
\ntender the remaining unexercised portion of an option which you have partially
\nexercised. In other words, you may tender one or more of your option grants, but
\nyou must tender all of the outstanding, unexercised shares subject to each grant
\nor none of the shares for that particular grant.<\/p>\n
In addition, if you received more than one grant on a single day, you must
\ntreat those grants as if they were one grant; therefore, you must tender all or
\nnone of the unexercised shares subject to all the options granted on that day.<\/p>\n
For example and except as otherwise described below, if you hold (i) an
\noption to purchase 1,000 shares at $10.00 per share, 700 of which you have
\nalready exercised, (ii) an option to purchase 1,000 shares at an exercise price
\nof $20.00 per share, all 1,000 of which remain unexercised and (iii) an option
\nto purchase 2,000 shares at an exercise price of $40.00 per share, all 2,000 of
\nwhich remain unexercised; and each of the three grants was granted to you on
\ndifferent dates, you would be allowed to tender:
\n—————<\/p>\n
. none of your options,<\/p>\n
. the first option grant covering the 300 remaining unexercised shares,<\/p>\n
. the second option grant covering all 1,000 shares,<\/p>\n
. the third option covering all 2,000 shares,<\/p>\n
. two of the three option grants covering all unexercised shares subject
\n to those two grants, or<\/p>\n
. all three of the option grants covering all 3,300 unexercised shares
\n (300 + 1,000 + 2,000).<\/p>\n
You may not tender only 150 shares (or any other partial amount) of the
\nfirst option grant or less than all of the shares under the second and third
\noption grants.<\/p>\n
However, if each of those grants were granted to you on the same day, you
\nwould only be allowed to tender either:<\/p>\n
. none of your options, or<\/p>\n
. all three of the option grants covering all 3,300 unexercised shares
\n (300 + 1,000 + 2,000).<\/p>\n
(Section 6)<\/p>\n
-10-<\/p>\n
Also, if you participate in the offer, then all options received during the
\nsix (6) month period prior to the Cancellation Date must be tendered, even if
\nthe option has an exercise price equal to or less than six dollars and fifty
\ncents ($6.50) per share, except: (i) options granted through the Salary for
\n ——
\nStock Options Exchange Program; and (ii) options granted on or after August 1,
\n2001 (collectively, the “Excepted Options”). These Excepted Options may not be
\ntendered under any circumstances. (Section 2)<\/p>\n
Why can’t Redback just grant additional options to everyone?<\/p>\n
Unfortunately, we currently have a large number of options outstanding that
\nhave an exercise price significantly above our recent trading prices, and so a
\nlarge grant of New Options in addition to these “underwater” options would have
\na severe dilutive impact on our outstanding shares.<\/p>\n
What happens to options that I choose not to tender or that are not accepted for
\nreplacement?<\/p>\n
Options that you choose not to tender for replacement or that we do not
\naccept for replacement will remain outstanding until they expire by their terms
\nand retain their current exercise price, vesting schedule and term.<\/p>\n
You should note that there is a risk that any eligible incentive stock
\noptions you have may be affected, even if you do not participate in the offer.
\nWe believe that eligible options that you choose not to tender for replacement
\nwill not be subject to current U.S. federal income tax if you do not elect to
\nparticipate in the option replacement program. We also believe that the option
\nreplacement program will not change the U.S. federal income tax treatment of
\nsubsequent grants and exercises of your incentive stock options (and sales of
\nshares acquired upon exercises of such options) if you do not participate in
\nthis offer to replace options. However, the IRS may characterize this offer to
\nreplace options as a “modification” of those incentive stock options, even if
\nyou decline to participate. In 1991, the IRS issued a private letter ruling in
\nwhich another company’s option exchange program was characterized as a
\n“modification” of all of the incentive stock options that could be exchanged.
\nThis does not necessarily mean that our offer to replace options will be viewed
\nthe same way. The company’s option exchange offer was not the same type of
\nprogram as our option replacement program, and so may be treated differently.
\nPrivate letter rulings given by the IRS contain the IRS’s opinion regarding only
\nthe specific facts presented by a specific person or company. The person or
\ncompany receiving the letter may rely on it, but no other person or company may
\nrely on the letter ruling, nor may they assume the same opinion would apply to
\ntheir situation, even if the facts at issue are similar. While such letters do
\nnot provide certainty, they may indicate how the IRS will view a similar
\nsituation. We therefore do not know if the IRS will assert the position that our
\noffer constitutes a “modification” of incentive stock options eligible for
\ntender. A successful assertion by the IRS of this position could extend the
\noptions’ holding period to qualify for favorable tax treatment. Accordingly, to
\nthe extent you dispose of your incentive stock option shares prior to the lapse
\nof the new extended holding period, your incentive stock option could be taxed
\nsimilarly to a nonstatutory stock option. (Section 14)<\/p>\n
-11-<\/p>\n
Will I have to pay taxes if I replace my options through the offer?<\/p>\n
If you replace your current options with New Options, you should not be
\nrequired under current law to recognize income solely as a result of such
\nreplacement for U.S. federal income tax purposes at the time of the replacement.
\nFurther, we believe that you will not be subject to additional tax solely by
\nvirtue of your participation in the offer and your tender of eligible options
\nfor replacement with New Options. However, the tax legislation in most of the
\ncountries outside of the United States does not specifically address the tax
\nconsequences of the tender of eligible options for replacement with New Options.
\nConsequently, although it appears that you will not be subject to any additional
\ntax liability if you participate in the offer, we cannot be certain of this
\nresult.<\/p>\n
For all employees, we recommend that you consult with your own tax advisor
\nto determine the tax consequences and any social insurance consequences of the
\noffer that pertain to you under the laws of the country in which you live and
\nwork. You should be certain to consult your own advisors. In addition, you
\nshould read the Section entitled “Certain Risks of Participating in the Offer”
\nas well as Sections 14 through 26 of the Offer to Replace for a discussion of
\ntax consequences which may apply to you as a result of participation in this
\noffer. If you are subject to the tax laws in more than one country, you should
\nbe aware that there may be other tax and social insurance consequences which may
\napply to you. (Sections 14 through 26)<\/p>\n
If my current options are incentive stock options, will my New Options be
\nincentive stock options?<\/p>\n
No, your New Options will be granted as nonstatutory stock options, not
\nincentive stock options under United States tax law. The New Options will not be
\neligible for the favorable tax treatment applicable to incentive stock options
\nunder U.S. tax law and you should consult with your personal tax advisor
\nregarding any effect that this may have with respect to your tax situation.
\n(Section 6)<\/p>\n
When will my New Options expire?<\/p>\n
Your New Options will expire five (5) years from the date of grant, or
\nearlier upon certain events, such as the termination of your employment with
\nRedback. (Section 9)<\/p>\n
When does the offer expire? Can the offer be extended, and if so, how will I be
\nnotified if it is extended?<\/p>\n
The offer expires on October 12, 2001, at 9:00 p.m., Pacific Time, unless
\nit is extended by us. We may, at any time and in our sole discretion, extend the
\noffer beyond the currently scheduled Offer Expiration Date, but we cannot assure
\nyou that the offer will be extended or, if extended, for how long. If the offer
\nis extended, we will make a public announcement of the extension promptly on the
\nnext business day following the previously scheduled expiration of the offer
\nperiod. (Section 2)
\n -12-<\/p>\n
How do I tender my options?<\/p>\n
If you decide to tender your options, you must deliver, before 9:00 p.m.,
\nPacific Time, on October 12, 2001 (or such later date and time as we may extend
\nthe expiration of the offer), a properly completed and executed Election Form
\nand any other documents required by the Election Form via facsimile (fax: 408-
\n571-5175) or hand delivery to Stock Administration (Attention Cindi Fisse or Kim
\nGonsalves) at Redback Networks Inc., 250 Holger Way, San Jose, CA 95134. This is
\na one-time offer, and we will strictly enforce the tender offer period. We
\nreserve the right to reject any or all tenders of options that we determine are
\nnot in appropriate form or that we determine are unlawful to accept. Subject to
\nour rights to extend, terminate and amend the offer, we presently expect that we
\nwill accept all properly tendered options promptly after the expiration of the
\noffer. (Section 4)<\/p>\n
The delivery of all documents, including Election Forms, any Notices to
\nWithdraw from the Offer and any other required documents, is at your risk, and
\nthe delivery will be deemed made only when actually received by Redback. We
\nintend to confirm the receipt of your Election Form within two (2) business
\ndays. If you have not received such a confirmation of receipt, it is your
\nresponsibility to ensure that your Election Form or Notice to Withdraw from the
\nOffer has been received by us.<\/p>\n
During what period of time may I withdraw previously tendered options?<\/p>\n
You may withdraw your tendered options at any time before the offer expires
\nat 9:00 p.m., Pacific Time, on October 12, 2001. If we extend the offer beyond
\nthat time, you may withdraw your tendered options at any time until the extended
\nexpiration of the offer. In addition, although we currently intend to accept
\nvalidly tendered options promptly after the expiration of this offer, if we have
\nnot accepted your tendered options by 9:00 p.m., Pacific Time, on November 1,
\n2001, you may withdraw your tendered options at any time after November 1, 2001.
\nTo withdraw tendered options, you must deliver to us via facsimile (fax: 408-
\n571-5175) or hand delivery to Stock Administration a signed Notice to Withdraw
\nfrom the Offer, with the required information while you still have the right to
\nwithdraw the tendered options. Once you have withdrawn options, you may re-
\ntender options only by again following the delivery procedures described above
\nprior to the Offer Expiration Date. (Section 5)<\/p>\n
The delivery of all documents, including, any Notices to Withdraw from the
\nOffer is at your risk, and the delivery will be deemed made only when actually
\nreceived by Redback. We intend to confirm the receipt of your Notice to Withdraw
\nfrom the Offer within two (2) business days. If you have not received such a
\nconfirmation of receipt, it is your responsibility to ensure that your Notice to
\nWithdraw from the Offer has been received by us.<\/p>\n
Please note that if you submit a Notice to Withdraw from the Offer, you
\nwill no longer participate in the offer. If you do not wish to withdraw all your
\ntendered options from the offer, you should not submit a Notice to Withdraw from
\nthe Offer. If you wish to change your mind about which options to tender, you
\nmust submit a new Election Form. Please read the following question and answer
\nregarding a change in election.<\/p>\n
-13-<\/p>\n
Can I change my election regarding particular tendered options?<\/p>\n
Yes, you may change your election regarding particular tendered options at
\nany time before the offer expires at 9:00 p.m., Pacific Time, on October 12,
\n2001. If we extend the offer beyond that time, you may change your election
\nregarding particular tendered options at any time until the extended expiration
\nof the offer. In order to change your election, you must deliver to us a new
\nElection Form via facsimile (fax: 408-571-5175) or hand delivery to Stock
\nAdministration, which includes the information regarding your new election, and
\nis signed and clearly dated after your original Election Form. Once we receive a
\nnew Election Form submitted by you, your previously submitted Election Form will
\nbe disregarded. (Section 5)<\/p>\n
What does Redback and the Board of Directors think of the offer?<\/p>\n
Although our Board of Directors has approved the making of the offer,
\nneither we nor our Board of Directors makes any recommendation as to whether you
\nshould tender or not tender your options. You must make your own decision
\nwhether or not to tender options. For questions regarding tax implications or
\nother investment-related questions, you should talk to your own legal counsel,
\naccountant and\/or financial advisor.<\/p>\n
Whom can you talk to if you have questions about the offer?<\/p>\n
For additional information or assistance, you should contact:<\/p>\n
Cindi Fisse or Kim Gonsalves
\n Stock Administration
\n Redback Networks Inc.
\n 250 Holger Way
\n San Jose, CA 95134
\n 408-571-5026 (Cindi Fisse)
\n 408-571-5113 (Kim Gonsalves)
\n stock@redback.com<\/p>\n
-14-<\/p>\n
CERTAIN RISKS
\n OF PARTICIPATING IN THE OFFER<\/p>\n
Participation in the offer involves a number of potential risks, including
\nthose described below. This list and the risk factors under the heading entitled
\n“Risk Factors” in Redback’s annual report on Form 10-K for the fiscal year ended
\nDecember 31, 2000 filed with the Securities and Exchange Commission (the “SEC”)
\nApril 2, 2001, and in Redback’s quarterly report on Form 10-Q for the quarter
\nended June 30, 2001 filed with the SEC on August 14, 2001 highlight the material
\nrisks of participating in this offer. Eligible participants should carefully
\nconsider these risks and are encouraged to speak with an investment and tax
\nadvisor as necessary before deciding to participate in the offer. In addition,
\nwe strongly urge you to read Sections 14 through 26 in this Offer to Replace
\ndiscussing tax consequences in various countries, as well as the rest of this
\nOffer to Replace, the Election Form and the Notice to Withdraw from the Offer
\nfor a more in-depth discussion of the risks which may apply to you before
\ndeciding to participate in the replacement offer.<\/p>\n
ECONOMIC RISKS
\n ————–<\/p>\n
– If you are a tax resident of Canada or Singapore, some or all of your
\n cancelled options might have been worth more than your New Options, if our
\n stock price increases.<\/p>\n
Since the per share exercise price of the New Options for employees who are
\ntax residents of Canada or Singapore will be equal to the fair market value of
\nRedback’s common stock on the Replacement Date, the exercise price of the New
\nOptions might be equal to or higher than the exercise price of the Old Options
\nwhich were tendered for replacement and cancelled. For example, if you cancel
\noptions with a $7.00 exercise price, and Redback’s stock appreciates to $7.50
\nper share when the replacement grants are made, your New Option will have a
\nhigher exercise price than the cancelled option.<\/p>\n
– If you are a tax resident of the United States, Brazil, France, Germany,
\n Hong Kong, Japan, Korea, the Netherlands, the People’s Republic of China,
\n Taiwan or the United Kingdom, or if you are an Executive Officer of
\n Redback, some, but not all, of your cancelled options might have been worth
\n more than your New Options, if our stock price increases.<\/p>\n
Since the per share exercise price of the New Options for employees who are
\ntax residents of the United States, Brazil, France, Germany, Hong Kong, Japan,
\nKorea, the Netherlands, the People’s Republic of China, Taiwan or the United
\nKingdom cannot be higher than four dollars and seventeen cents ($4.17) per share
\nand the exercise price for Executive Officers of Redback has been determined to
\nbe four dollars and seventeen cents ($4.17) per share, most of your New Options
\nwill have a lower exercise price than your Old Options. This is because options
\neligible to be tendered must have an exercise price of more than six dollars and
\nfifty cents ($6.50) per share. However, if you participate in the offer at all,
\nyou will be required to tender options granted to you within the six (6) months
\nprior to the Cancellation Date even if those options have an exercise price
\nequal to or less<\/p>\n
-15-<\/p>\n
than six dollars and fifty cents ($6.50) per share (however, you will not be
\nrequired, nor may you elect, to tender options granted through the Salary for
\nStock Options Exchange Program or options granted on or after August 1, 2001).
\nIf the options you are required to tender have exercise prices of less than four
\ndollars and seventeen cents ($4.17) per share, your New Option may have a higher
\nexercise price than those options you were required to tender.<\/p>\n
– If your employment terminates after the grant of the New Option, you might
\n receive less benefit from your New Option than you would have received had
\n you kept your Old Options.<\/p>\n
The vesting schedule of your New Options will re-start beginning on August
\n8, 2001. If your employment terminates for any reason or no reason after the New
\nOptions have been granted, you may not have the opportunity to exercise as many
\nof your New Option shares as you would have been able to exercise under the Old
\nOptions, to the extent that your New Options are not vested. As a result, you
\nmay not receive as much, or any, benefit from your New Option as you would have
\nreceived if you had retained your Old Option.<\/p>\n
TAX-RELATED RISKS FOR U.S. RESIDENTS
\n ————————————<\/p>\n
– Your New Option will be a nonstatutory stock option, whereas your cancelled
\n option may have been an incentive stock option.<\/p>\n
Even if your cancelled option was an incentive stock option, your New
\nOption will be a nonstatutory stock option. In general, nonstatutory stock
\noptions are less favorable to you from a tax perspective. For more detailed
\ninformation, please read the rest of the Offer to Replace, and see the tax
\ndisclosure set forth in the prospectus for the 1999 Plan, which is attached as
\nExhibit (a)(8) to the Schedule TO filed with the SEC in connection with this
\nOffer to Replace.<\/p>\n
– Even if you elect not to participate in the option replacement program,
\n your eligible incentive stock options may be affected.<\/p>\n
We believe that you will not be subject to current U.S. federal income tax
\nif you do not elect to participate in the option replacement program. We also
\nbelieve that the option replacement program will not change the U.S. federal
\nincome tax treatment of subsequent grants and exercises of your eligible
\nincentive stock options (and sales of shares acquired upon exercises of such
\noptions) if you do not participate in this offer to replace options. However,
\nthe IRS may characterize this offer to exchange options as a “modification” of
\nthose incentive stock options, even if you decline to participate. In 1991, the
\nIRS issued a private letter ruling in which another company’s option exchange
\nprogram was characterized as a “modification” of all of the incentive stock
\noptions that could be exchanged. This does not necessarily mean that our offer
\nto replace options will be viewed the same way. The company’s option exchange
\noffer was not the same type of program as our option replacement program, and so
\nmay be treated differently. Private letter rulings given by the IRS contain the
\nIRS’s opinion regarding only the specific facts presented by a specific person
\nor<\/p>\n
-16-<\/p>\n
company. The person or company receiving the letter may rely on it, but no
\nother person or company may rely on the letter ruling, nor may they assume the
\nsame opinion would apply to their situation, even if the facts at issue are
\nsimilar. While such letters do not provide certainty, they may indicate how the
\nIRS will view a similar situation. We therefore do not know if the IRS will
\nassert the position that our offer constitutes a “modification” of incentive
\nstock options eligible for tender. A successful assertion by the IRS of this
\nposition could extend the options’ holding period to qualify for favorable tax
\ntreatment. Accordingly, to the extent you dispose of your incentive stock option
\nshares prior to the lapse of the new extended holding period, your incentive
\nstock option could be taxed similarly to a nonstatutory stock option.<\/p>\n
TAX-RELATED RISKS FOR ELIGIBLE EMPLOYEES
\n —————————————- <\/p>\n
OUTSIDE OF THE UNITED STATES
\n —————————- <\/p>\n
We believe that you will not be subject to additional tax solely by virtue
\nof your participation in the offer and your tender of eligible options for
\nreplacement with New Options. However, the tax legislation in most of the
\ncountries outside of the United States does not specifically address the tax
\nconsequences of the tender of eligible options for replacement with New Options.
\nConsequently, although it appears that you will not be subject to any additional
\ntax liability if you participate in the offer, we cannot be certain of this
\nresult. It is possible that you may be subject to tax on the value of the New
\nOptions upon grant or on some other basis or that you may lose the ability to
\nclaim preferential tax treatment in connection with your New Options. We
\ntherefore strongly recommend that you consult with your tax advisor as to the
\ntax consequences of participating in the offer. Please also be sure to read the
\ndisclosure applicable to the country in which you live and work, found in
\nSections 15 through 26 of this Offer to Replace.<\/p>\n
If you are eligible for this replacement because you are an employee living
\nor working in the United States, Brazil, the Canadian provinces of British
\nColumbia or Ontario, France, Germany, Hong Kong, Japan, Korea, the Netherlands,
\nthe People’s Republic of China, Singapore, Taiwan or the United Kingdom, but are
\nalso subject to the tax laws in another country, you should be aware that there
\nmay be other tax and social insurance consequences which may apply to you. You
\nshould be certain to consult your own tax advisors to discuss these
\nconsequences.<\/p>\n
ADDITIONAL CONSIDERATIONS FOR RESIDENTS IN BRAZIL
\n ————————————————-<\/p>\n
Due to Brazilian exchange control regulations, any New Options that may be
\ngranted to you will be modified as follows: You must use the full or partial
\ncashless exercise method to exercise your New Options whereby you exercise your
\noptions without remitting any cash. Please see Section 15 for further details.<\/p>\n
-17-<\/p>\n
ADDITIONAL TAX AND OTHER CONSIDERATIONS FOR RESIDENTS IN CANADA
\n ————————————————————— <\/p>\n
In order to preserve the possibility of favorable tax treatment for your
\nNew Options, the exercise price of your New Options will be 100% of the fair
\nmarket value of Redback common stock on the Replacement Date, as determined by
\nthe closing price reported by the Nasdaq National Market on the Replacement
\nDate. As mentioned above, this means that the exercise price of your New Options
\nmight be equal to or higher than the exercise price of your Old Options which
\nwere tendered for replacement and cancelled.<\/p>\n
Any New Options granted to you will be conditional on obtaining necessary
\nsecurities regulatory approvals or exemptions from the applicable securities
\nregulatory authorities.<\/p>\n
Please see Section 16 for further details.<\/p>\n
ADDITIONAL CONSIDERATIONS FOR RESIDENTS IN HONG KONG
\n —————————————————-<\/p>\n
If the New Options granted to you under the terms of this offer will vest
\nin whole or in part within six (6) months of the Replacement Date, you will be
\nrestricted from selling any shares acquired upon the exercise of those options
\nuntil a period of six (6) months from the Replacement Date. Please see Section
\n19 for further details.<\/p>\n
ADDITIONAL TAX CONSIDERATIONS FOR THE RESIDENTS IN THE NETHERLANDS
\n ——————————————————————<\/p>\n
In order to defer the taxation of your New Options until the time of
\nexercise, the grant of the New Options will be conditioned on your execution of
\nan agreement to limit your method of exercise to a mandatory cashless exercise
\n(same day sale). Please see Section 22 for further details.<\/p>\n
ADDITIONAL CONSIDERATIONS FOR RESIDENTS
\n —————————————<\/p>\n
IN THE PEOPLE’S REPUBLIC OF CHINA
\n ——————————— <\/p>\n
Due to exchange control and securities law restrictions in China, any New
\nOptions granted to you will be modified as follows: You will only be able to
\nexercise the New Options using the full cashless exercise method whereby the
\noptions are exercised without remitting any cash. You will not be entitled to
\nreceive and hold shares of our stock when you exercise your New Options. Please
\nsee Section 23 for further details.<\/p>\n
-18-<\/p>\n
ADDITIONAL TAX CONSIDERATIONS FOR RESIDENTS IN SINGAPORE
\n ——————————————————–<\/p>\n
In order to increase the portion of your New Options which may qualify for
\nfavorable tax treatment under the Company Stock Option Scheme and\/or Qualified
\nEmployee Stock Option Plan Scheme, as described in Section 24, the exercise
\nprice of your New Options will be 100% of the fair market value of Redback
\ncommon stock on the Replacement Date, as determined by the closing price
\nreported by the Nasdaq National Market on the Replacement Date. As mentioned
\nabove, this means that the exercise price of your New Options might be equal to
\nor higher than the exercise price of your Old Options which were tendered for
\nreplacement and cancelled. Please see Section 24 for further details.<\/p>\n
ADDITIONAL TAX CONSIDERATIONS FOR RESIDENTS IN THE UNITED KINGDOM
\n —————————————————————–<\/p>\n
If you were granted options before 6 April 1999, you will not be subject to
\nNational Insurance Contributions (“NICs”) on the option spread upon at exercise
\nof such Old Options. However, any New Options that you receive pursuant to the
\noffer will be subject to NICs. In addition, if you tender your eligible options
\nfor replacement with New Options, you will be required to agree to enter into a
\njoint election (once the form of election is approved by the Inland Revenue)
\nwhich will provide that you will pay the employer’s portion of the NIC liability
\narising on the exercise of any New Options granted to you. The amount of the
\nemployer’s liability is currently 11.9% of the option spread at exercise; it is
\nour understanding that you will be entitled to deduct the employer’s portion of
\nthe NIC payments that you make for the purposes of calculating the amount of the
\ngain subject to income tax on the exercise of the New Options.<\/p>\n
BUSINESS-RELATED RISKS
\n ———————-<\/p>\n
For a description of risks related to Redback’s business, please see
\nSection 30 of this Offer to Replace.<\/p>\n
-19-<\/p>\n
INTRODUCTION<\/p>\n
Redback Networks Inc. (“Redback” or the “Company,” also referred to
\nwith the terms “we” or “us”) is offering to replace certain outstanding options
\nto purchase shares of Redback common stock held by eligible employees with new
\noptions (the “New Options”) we will grant under the Redback Networks Inc. 1999
\nStock Incentive Plan, as amended through May 16, 2001 (the “1999 Plan”). All
\noutstanding options that were granted before August 1, 2001 and which have an
\nexercise price greater than six dollars and fifty cents ($6.50) per share (the
\n“Old Options”) are eligible to be replaced. An “eligible employee” refers to
\nemployees of Redback or its subsidiaries who (i) were and continue to be
\nemployees as of August 1, 2001 through the date the tendered options are
\ncancelled and replaced; and (ii) live or work in the United States, Brazil, the
\nCanadian provinces of British Columbia or Ontario, France, Germany, Hong Kong,
\nJapan, Korea, the Netherlands, the People’s Republic of China, Singapore, Taiwan
\nor the United Kingdom. However, members of our Board of Directors are not
\neligible to participate in the replacement offer. We are making the offer upon
\nthe terms and conditions described in (i) this Offer to Replace; (ii) the
\nElection Form; and (iii) the Notice to Withdraw from the Offer (which together,
\nas they may be amended from time to time, constitute the “Voluntary Stock Option
\nReplacement Program,” also referred to as the “offer” or “program”).<\/p>\n
The number of shares subject to the New Options to be granted to each
\neligible participating employee will be determined according to the exercise
\nprice of the Old Options tendered. Subject to any adjustments for stock splits,
\nstock dividends and similar events (and rounded down to the nearest whole
\nnumber), the replacement ratios will be as follows: (i) an Old Option to
\npurchase stock with an exercise price of $40.00 per share or less will be
\nreplaced with a New Option for the same number of shares; (ii) an Old Option to
\npurchase stock with an exercise price between $40.01 per share and $80.00 per
\nshare will be replaced with a New Option covering one (1) share for every five
\n(5) shares covered by the Old Option; and (iii) an Old Option to purchase stock
\nwith an exercise price above $80.00 per share will be replaced with a New Option
\ncovering one (1) share for every ten (10) shares covered by the Old Option. Only
\nshares with an exercise price of more than six dollars and fifty cents ($6.50)
\nper share and which were granted before August 1, 2001 are eligible for
\nreplacement.<\/p>\n
Unless stated otherwise, all monetary denominations referred to in this
\noffer are United States dollars.<\/p>\n
Subject to the terms and conditions of this offer, we will grant the
\nNew Options on the same business day on which we cancel the options accepted for
\nreplacement. All tendered options accepted by us through the offer will be
\ncancelled and replaced promptly after the offer ends. The offer is currently
\nscheduled to expire at 9:00 p.m. Pacific Time on October 12, 2001 (the “Offer
\nExpiration Date”) and we will cancel and replace validly tendered options on the
\nfirst business day following the Offer Expiration Date, which we expect to be
\nOctober 15, 2001 (both the “Cancellation Date” and the “Replacement Date”).<\/p>\n
-20-<\/p>\n
If you tender any option grant for replacement, you will be required to
\nalso tender all option grants that you received during the six (6) month period
\nprior to the Cancellation Date, even if those option grants have an exercise
\nprice equal to or less than six dollars and fifty cents ($6.50) per share,
\nexcept: (i) options granted through the Salary for Stock Options Exchange
\n——
\nProgram; and (ii) options granted on or after August 1, 2001. Please note that
\nthese exceptions represent a change from the terms we thought we would implement
\nand which we described to you in the memorandum from Pierre Lamond dated August
\n13, 2001.<\/p>\n
Since we currently expect to cancel all tendered options on October 15,
\n2001, this means that if you participate in the offer, you will be required to
\ntender all options granted to you since April 15, 2001, unless the options fall
\ninto one of the exceptions mentioned. If the options fall into one of the
\nexceptions, they may not be tendered in this offer.
\n —<\/p>\n
We will not accept partial tenders of options. If you tender any
\neligible option, you must tender the entire unexercised portion of that option.
\nIn addition, if you tender any option granted to you on a particular date, you
\nwill be required to tender any other options granted to you on that same day,
\nsubject to the same exceptions as described above.<\/p>\n
The offer is not conditioned on a minimum number of options being
\ntendered. Participation in the offer is completely voluntary. The offer is
\nsubject to conditions that we describe in Section 7 of this Offer to Replace.<\/p>\n
If you tender options for replacement as described in the offer, and we
\naccept your tendered options, then, subject to the terms of this offer, we will
\ngrant you New Options under the 1999 Plan. All New Options granted pursuant to
\nthis offer will have a maximum term of five (5) years and will be nonstatutory
\nstock options, even if the Old Options had longer terms or were incentive stock
\noptions. If you are a tax resident of a non-U.S. jurisdiction, certain other
\nterms and conditions may apply to your New Option in order to comply with the
\nlaws in that country or in order to preserve the possibility of favorable tax
\ntreatment. For example:<\/p>\n
. If you are an employee who is a tax resident of the United Kingdom,
\n your New Option will be subject to the execution of a joint election
\n between you and Redback, as described in Section 26.<\/p>\n
. Due to exchange control restrictions currently in place, if you are
\n an employee who is a tax resident of Brazil, Redback will at this
\n time require that you exercise your options by using only a full or
\n partial cashless exercise method, whereby you exercise your options
\n without remitting any cash, as described in Section 15.<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or
\n the People’s Republic of China, your options may be exercised only
\n —-
\n by using a cashless exercise method, whereby the options are
\n exercised without remitting any cash and under which you will effect
\n a same-day exercise of the option and sale of the shares, as
\n described in Sections 22 and 23.<\/p>\n
-21-<\/p>\n
. If you are an employee who is a tax resident of Hong Kong and if
\n your New Options will vest in whole or in part within six (6) months
\n of the Replacement Date, you will be restricted from selling any
\n shares acquired upon the exercise of those options until a period of
\n six (6) months from the Replacement Date, as described in Section
\n 19.<\/p>\n
In order to comply with certain applicable laws or to preserve the
\npossibility of favorable tax treatment in certain jurisdictions, the exercise
\nprice per share of the New Options may vary for different employees and will be
\nset as follows:<\/p>\n
. Except for “Executive Officers” (those officers of Redback who are
\n defined as “officers” for purposes of Section 16(b) of the
\n Securities Exchange Act of 1934, as amended) of Redback, the
\n exercise price per share of the New Options for eligible employees
\n who are tax residents of the United States, Brazil, France, Germany,
\n Hong Kong, Japan, Korea, the Netherlands, the People’s Republic of
\n China, Taiwan or the United Kingdom will be the lower of: (i) four
\n ——–
\n dollars and seventeen cents ($4.17) per share, which was the
\n closing price of a share of Redback common stock on August 29, 2001;
\n and (ii) 100% of the fair market value of Redback common stock on
\n the Replacement Date, as determined by the closing price reported by
\n the Nasdaq National Market on the Replacement Date.<\/p>\n
. The exercise price per share for eligible employees who are tax
\n residents of Canada or Singapore will be 100% of the fair market
\n value of Redback common stock on the Replacement Date, as determined
\n by the closing price reported by the Nasdaq National Market on the
\n Replacement Date.<\/p>\n
. The exercise price per share for Executive Officers will be four
\n dollars and seventeen cents ($4.17) per share, which was the closing
\n price of a share of Redback common stock on August 29, 2001.<\/p>\n
Please note that the exercise prices for the New Options represent a
\nchange from the terms we thought we would implement and which we described to
\nyou in the memorandum from Pierre Lamond dated August 13, 2001 and in our 10-Q
\nfiled with the SEC on August 14, 2001.<\/p>\n
Each New Option granted will vest in accordance with a new vesting
\nschedule, which will be identical to the vesting schedule of the Old Options,
\nexcept for the vesting start date. The vesting schedule for all New Options will
\nstart on August 8, 2001, the date the Board of Directors approved the program.
\n ————–
\nYou will not receive credit for vesting accrued on the Old Options prior to the
\nCancellation Date. As a result, you will have to wait for a longer period before
\nyou may purchase common stock under your New Options than if you kept your Old
\nOptions. For example, if you tendered an Old Option granted in July 2000 which
\nvested 25% on the anniversary of the Old Option grant date and 1\/48th (equal to
\n2.0833%) monthly thereafter, the New Option you receive in replacement will be
\ncompletely unvested on the Replacement Date and will vest 25% on the first
\nanniversary of August 8, 2001 and 1\/48th (equal to 2.0833%) monthly thereafter.<\/p>\n
-22-<\/p>\n
As of September 26, 2001, options to purchase 42,632,475 of our shares
\nwere issued and outstanding, of which options to purchase approximately
\n27,324,038 of our shares, constituting approximately 64%, were held by employees
\neligible to participate in the offer.<\/p>\n
-23-<\/p>\n
THE OFFER<\/p>\n
1. Eligibility.
\n ———–<\/p>\n
Employees are “eligible employees” if they are employees of Redback or
\none of Redback’s subsidiaries who (i) were employees as of August 1, 2001 and
\ncontinue to be employees through the Replacement Date; and (ii) live or work in
\nthe United States, Brazil, the Canadian provinces of British Columbia or
\nOntario, France, Germany, Hong Kong, Japan, Korea, the Netherlands, the People’s
\nRepublic of China, Singapore, Taiwan or the United Kingdom. Members of our Board
\nof Directors are not eligible to participate in the replacement offer.<\/p>\n
In order to receive a New Option, you must remain an employee as of the
\nReplacement Date. If, for any reason, you do not remain an employee of Redback
\nor one of our subsidiaries or affiliates through the Replacement Date, we will
\nnot accept your tender of options and any Old Options you tendered will not be
\ncancelled as a result of this offer. Your rights to the Old Options will remain
\nintact for the time period set forth in your option agreement and will continue
\nto be governed in accordance with the terms and conditions of the plan under
\nwhich they were granted and the related option agreement. You are reminded that
\nunless expressly provided in your employment agreement or by the applicable laws
\nof a non-U.S. jurisdiction, your employment with Redback or one of our
\nsubsidiaries or affiliates, as the case may be, remains “at will” and can be
\nterminated by you or Redback, or one of our subsidiaries or affiliates, at any
\ntime, for any reason.<\/p>\n
If Redback does not extend the offer beyond the currently scheduled
\nOffer Expiration Date, the options tendered accepted for cancellation will be
\ncancelled on October 15, 2001 and the New Options will be granted on the same
\nday.<\/p>\n
All outstanding, unexercised options to purchase shares of Redback
\ncommon stock that (i) have an exercise price greater than six dollars and fifty
\ncents ($6.50) per share; (ii) were granted prior to August 1, 2001; and (iii)
\nwhich are held by eligible employees may be tendered for replacement. Options to
\npurchase common stock of Redback that have an exercise price at or below six
\ndollars and fifty cents ($6.50) per share or which were granted on or after
\nAugust 1, 2001 are not eligible to participate in the offer.
\n —<\/p>\n
2. Number of options; Expiration Date.
\n ———————————-<\/p>\n
Subject to the terms and conditions of the offer, we will replace
\noutstanding, unexercised options to purchase shares of Redback common stock that
\nare properly tendered in accordance with Section 4 of this Offer to Replace and
\nnot validly withdrawn before the Offer Expiration Date in accordance with
\nSection 5 of this Offer to Replace that (i) have an exercise price greater than
\n ————
\nsix dollars and fifty cents ($6.50) per share; (ii) were granted prior to August
\n —–
\n1, 2001; and (iii) are held by eligible employees. Options to purchase common
\nstock of Redback that have an exercise price at or below six dollars and fifty
\ncents ($6.50) per share or which were granted on or after August 1, 2001 are not
\neligible for replacement in the offer.<\/p>\n
-24-<\/p>\n
We will not accept partial tenders of options for any portion of the
\nunexercised shares subject to an individual option grant. Therefore, you may
\ntender only options for all or none of the outstanding, unexercised shares
\nsubject to each of your eligible options.<\/p>\n
In addition, if you participate in the offer, then all options received
\nduring the six (6) month period prior to the Cancellation Date must be tendered,
\neven if the option has an exercise price equal to or less than six dollars and
\nfifty cents ($6.50) per share. However, the following options are excluded from
\nthis requirement and may not be tendered: (i) options granted through the Salary
\nfor Stock Options Exchange Program; and (ii) options granted on or after August
\n1, 2001 (together, these constitute the “Excepted Options”). Please note that
\nthese exceptions represent a change from the terms we thought we would implement
\nand which we described to you in the memorandum from Pierre Lamond dated August
\n13, 2001.<\/p>\n
We currently expect to cancel all tendered options on October 15, 2001,
\nwhich means that if you participate in the offer, you will be required to tender
\nall options granted to you since April 15, 2001, unless they are Excepted
\nOptions.<\/p>\n
If you tender any option granted to you on a particular date, you will
\nalso be required to tender any other options granted to you on that same day,
\nexcept that you will not be required, and you may not elect, to tender any
\nExcepted Options.<\/p>\n
If your options are properly tendered and accepted for replacement, the
\noptions will be cancelled and, subject to the terms of this offer, you will be
\nentitled to receive one or more New Options to purchase shares of common stock.
\nThe number of shares subject to the New Options to be granted to each eligible
\nparticipating employee will be determined according to the exercise price of the
\nOld Options tendered. All monetary denominations referred to in this offer are
\nU.S. dollars unless stated otherwise. Subject to the terms of this offer and
\nsubject to any adjustments for stock splits, stock dividends and similar events
\n(and rounded down to the nearest whole share), the replacement ratios will be as
\nfollows:<\/p>\n
\n\n —————————————————————————————————-
\n Exercise Price per share of Old Option Number of Shares Subject Number of Shares Subject to
\n to Old Option New Option
\n —————————————————————————————————-
\n
\n $40.00 or less One (1) One (1)
\n —————————————————————————————————-
\n $40.01 – $80.00 Five (5) One (1)
\n —————————————————————————————————-
\n Above $80.00 Ten (10) One (1)
\n —————————————————————————————————-
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n New Options will be granted under our 1999 Plan and will be subject to
\nthe terms and conditions thereof, unless prevented by law or applicable
\nregulations. All New Options will be nonstatutory stock options and will have a
\nmaximum term of five (5) years, subject to earlier expiration upon certain
\nevents, such as termination of employment. In addition, all New Options will be
\nsubject to a new option agreement between you and us.<\/p>\n
-25-<\/p>\n
If you are a tax resident of a non-U.S. jurisdiction, certain other
\nterms and conditions may apply to your New Option in order to comply with the
\nlaws in that country or in order to preserve the possibility of favorable tax
\ntreatment. For example:<\/p>\n
. If you are an employee who is a tax resident of the United Kingdom,
\n your New Option will be subject to the execution of a joint election
\n between you and Redback, as described in Section 26.<\/p>\n
. Due to exchange control restrictions currently in place, if you are
\n an employee who is a tax resident of Brazil, Redback will at this
\n time require that you exercise your options by using only a full or
\n partial cashless exercise method, whereby you exercise your options
\n without remitting any cash, as described in Section 15.<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or
\n the People’s Republic of China, your options may be exercised only
\n —-
\n by using a cashless exercise method, whereby the options are
\n exercised without remitting any cash and under which you will effect
\n a same-day exercise of the option and sale of the shares, as
\n described in Sections 22 and 23.<\/p>\n
. If you are an employee who is a tax resident of Hong Kong and if
\n your New Options will vest in whole or in part within six (6) months
\n of the Replacement Date, you will be restricted from selling any
\n shares acquired upon the exercise of those options until a period of
\n six (6) months from the Replacement Date, as described in Section
\n 19.<\/p>\n
If, for any reason, you do not remain an employee of Redback or one of
\nour subsidiaries or affiliates through the Replacement Date, we will not accept
\nyour tender of options and any Old Options you tendered will not be cancelled as
\na result of this offer.<\/p>\n
The term “Offer Expiration Date” means 9:00 p.m., Pacific Time, on
\nOctober 12, 2001, unless and until we, in our sole discretion, have extended the
\nperiod of time during which the offer will remain open, in which event the term
\n“Offer Expiration Date” will refer to the latest time and date at which the
\noffer, as so extended, expires. See Section 27 of this Offer to Replace for a
\ndescription of our rights to extend, delay, terminate and amend the offer.<\/p>\n
We will publish a notice or otherwise inform you in writing if we
\ndecide to take any of the following actions:<\/p>\n
. we increase or decrease the amount of consideration offered for the
\n options,<\/p>\n
. we decrease the number of options eligible to be tendered in the
\n offer,<\/p>\n
. we increase the number of options eligible to be tendered in the
\n offer by an amount that exceeds 2% of the shares issuable upon
\n exercise of the options that are subject to the offer immediately
\n prior to the increase.<\/p>\n
-26-<\/p>\n
If the offer is scheduled to expire at any time earlier than the tenth
\n(10\/th\/) business day from, and including, the date that notice of the increase
\nor decrease is first published, sent or given in the manner specified in Section
\n27 of this Offer to Replace, we will extend the offer beyond the currently
\nscheduled Offer Expiration Date so that the offer is open at least ten (10)
\nbusiness days following the publication, sending or giving of notice.<\/p>\n
We will also notify you of any other material change in the information
\ncontained in this Offer to Replace.<\/p>\n
For purposes of the offer, a “business day” means any day other than a
\nSaturday, Sunday or federal holiday and consists of the time period from 12:01
\na.m. through 12:00 midnight, Eastern Time.<\/p>\n
3. Purpose of the offer.
\n ——————–<\/p>\n
We issued the options outstanding to:<\/p>\n
. provide our eligible employees with additional incentive and
\n to promote the success of our business, and<\/p>\n
. encourage our eligible employees to continue their employment
\n with us.<\/p>\n
One of the keys to our continued growth and success is the retention of
\nour most valuable asset, our employees. The offer provides an opportunity for us
\nto offer our eligible employees a valuable incentive to stay with Redback. Some
\nof our outstanding options, whether or not they are currently exercisable, have
\nexercise prices that are significantly higher than the current market price of
\nour shares. We believe these options are unlikely to be exercised in the
\nforeseeable future. By making this offer to replace outstanding options with New
\nOptions that will generally have an exercise price at or below the market value
\nof the shares of our common stock on the grant date, we intend to provide our
\neligible employees with the benefit of owning options that over time may have a
\ngreater potential to increase in value, create better performance incentives for
\nemployees and thereby maximize stockholder value.<\/p>\n
From time to time we engage in strategic transactions with business
\npartners, customers and other third parties. We may engage in transactions in
\nthe future with these or other companies which could significantly change our
\nstructure, ownership, organization or management or the make-up of our Board of
\nDirectors, and which could significantly affect the price of our shares. If we
\nengage in such a transaction or transactions before the date we grant the new
\noptions, our shares could increase (or decrease) in value, and the exercise
\nprice of the new options could be higher (or lower) than the exercise price of
\noptions you elect to have cancelled as part of this offer.<\/p>\n
Subject to the above, and except as otherwise disclosed in this offer
\nto replace or in our filings with the SEC, we presently have no plans or
\nproposals that relate to or would result in:<\/p>\n
-27-<\/p>\n
. any extraordinary corporate transaction, such as a merger,
\n reorganization or liquidation, involving our company or any of our
\n subsidiaries;<\/p>\n
. any purchase, sale or transfer of a material amount of our assets or
\n the assets of any of our subsidiaries;<\/p>\n
. any material change in our present dividend rate or policy, or our
\n indebtedness or capitalization;<\/p>\n
. any change in our present Board of Directors or management,
\n including but not limited to a change in the number or the term of
\n directors or to fill any existing board vacancies or to change any
\n executive officer’s material terms of employment;<\/p>\n
. any other material change in our corporate structure or business;<\/p>\n
. our common stock being delisted from a national securities exchange
\n or not being authorized for quotation in an automated quotation
\n system operated by a national securities association;<\/p>\n
. our common stock becoming eligible for termination of registration
\n pursuant to Section 12(g)(4) of the Securities Exchange Act;<\/p>\n
. the suspension of our obligation to file reports pursuant to Section
\n 15(d) of the Securities Exchange Act;<\/p>\n
. the acquisition by any person of an amount of our securities or the
\n disposition of our securities; or<\/p>\n
. any changes in our charter or bylaws, or any actions which may
\n impede the acquisition of control of us by any person.<\/p>\n
Neither we nor our Board of Directors makes any recommendation as to
\nwhether you should tender or not tender your options, nor have we authorized any
\nperson to make any such recommendation. You are urged to evaluate carefully all
\nof the information in this Offer to Replace and to consult your own investment
\nand tax advisors. You must make your own decision whether or not to tender your
\noptions for replacement.<\/p>\n
4. Procedures for tendering options.
\n ——————————–<\/p>\n
Proper Tender of Options.
\n ————————<\/p>\n
To validly tender your options through the offer, you must, in
\naccordance with the terms of offer and in compliance with the Instructions to
\nthe Election Form, properly complete, execute and deliver the Election Form,
\nalong with any other required documents, to us via facsimile (fax: 408-571-5175)
\nor hand delivery to Stock Administration (Attention Cindi Fisse or Kim<\/p>\n
-28-<\/p>\n
Gonsalves) at Redback Networks Inc., 250 Holger Way, San Jose, CA 95134
\n(telephone: 408-571-5000). Stock Administration must receive all of the required
\ndocuments before the Offer Expiration Date. The Offer Expiration Date is 9:00 PM
\nPacific Time on October 12, 2001, unless the offer is extended. The Election
\nForm must be signed and dated and you must check the box next to each option you
\nelect to tender for replacement. In addition, the Election Form must specify:<\/p>\n
. the name of the option holder who tendered the options,<\/p>\n
. the grant date of all options to be tendered,<\/p>\n
. the total number of unexercised option shares subject to each option
\n to be tendered,<\/p>\n
. the exercise price of all options to be tendered,<\/p>\n
. the vesting start date of all options to be tendered, and<\/p>\n
. the vesting schedule of each option to be tendered.<\/p>\n
For your convenience, we will supply to you a personalized Election
\nForm listing all of your eligible options and some of the other information
\nrequired to be included in your Election Form. You may, but you do not have to,
\nuse this form to indicate your participation in the offer. If you prefer, you
\nmay use the blank Election Form, attached as Exhibit (a)(3) to this Schedule TO.
\nIn either case, you are responsible for making sure that all information
\nsubmitted is accurate.<\/p>\n
The delivery of all documents, including Election Forms, any Notices to
\nWithdraw from the Offer and any other required documents, is at your risk, and
\nthe delivery will be deemed made only when actually received by Redback. We
\nintend to confirm the receipt of your Election Form within two (2) business
\ndays. If you have not received such a confirmation of receipt, it is your
\nresponsibility to ensure that your Election Form has been received by us. This
\nreceipt does not constitute acceptance of the options for exchange, but is
\nmerely an acknowledgement that your Election Form was received by us.<\/p>\n
Determination of Validity; Rejection of Options; Waiver of Defects; No
\n ———————————————————————-
\nObligation to Give Notice of Defects.
\n————————————<\/p>\n
We will resolve, in our sole discretion, all questions as to the form
\nof documents and the validity, form, eligibility, including time of receipt, and
\nacceptance of any tender of options. Our determination of these matters will be
\nfinal and binding on all parties. We reserve the right to reject any or all
\ntenders of options that we determine are not in appropriate form, that we
\ndetermine are unlawful to accept or upon the occurrence of any event listed in
\nSection 7 of this Offer to Replace. Otherwise, subject to the terms and
\nconditions of this offer, we will accept properly and timely tendered options
\nthat are not validly withdrawn. We also reserve the right to waive any of the
\nconditions of the offer or any defect or irregularity in any tender of any
\nparticular options or for any particular option holder. No tender of options
\nwill be deemed to have been properly made until all defects or irregularities
\nhave been cured by the tendering option holder or waived by us. Neither we<\/p>\n
-29-<\/p>\n
nor any other person is obligated to give notice of any defects or
\nirregularities in tenders, nor will anyone incur any liability for failure to
\ngive any notice. This is a one-time offer, and we will strictly enforce the
\noffer period, subject only to an extension which we may grant in our sole
\ndiscretion.<\/p>\n
Our Acceptance Constitutes an Agreement.
\n —————————————<\/p>\n
Your tender of options pursuant to the procedures described above
\nconstitutes your acceptance of the terms and conditions of the offer, subject to
\nyour right to withdraw from the offer prior to the Offer Expiration Date. Our
\nacceptance for replacement of your options tendered by you through the offer
\nwill constitute a binding agreement between us and you upon the terms and
\nsubject to the conditions of the offer.<\/p>\n
This agreement will survive your death or incapacity and all of your
\nobligations pursuant to this offer will be binding upon your heirs, personal
\nrepresentatives, successors and assigns.<\/p>\n
Subject to our rights to extend, terminate and amend the offer,
\ndiscussed in Section 27 of this Offer to Replace, we currently expect that we
\nwill accept and cancel promptly after the expiration of the offer all properly
\ntendered options that have not been validly withdrawn and will grant replacement
\noptions on the same day that we cancel the tendered options.<\/p>\n
5. Withdrawal Rights and Change of Election.
\n —————————————-<\/p>\n
You may only withdraw your tendered options or change your election in
\naccordance with the provisions of this Section.<\/p>\n
You may withdraw your tendered options at any time before 9:00 p.m.,
\nPacific Time, on October 12, 2001. If we extend the offer beyond that time, you
\nmay withdraw your tendered options at any time until the extended expiration of
\nthe offer. In addition, if we have not accepted your tendered options for
\nreplacement by 9:00 p.m., Pacific Time, on November 1, 2001, you may withdraw
\nyour tendered options at any time after November 1, 2001.<\/p>\n
To validly withdraw tendered options, you must deliver to Cindi Fisse
\nor Kim Gonsalves in Stock Administration via facsimile (fax: 408-571-5175) or
\nhand delivery at Redback Networks Inc., Stock Administration, 250 Holger Way,
\nSan Jose, CA 95134 (telephone: 408-571-5000), in accordance with the procedures
\nlisted in Section 4 above, a signed and dated Notice to Withdraw from the Offer,
\nwith the required information, while you still have the right to withdraw the
\ntendered options.<\/p>\n
To validly change your election regarding the tender of particular
\noptions, you must deliver a new Election Form to Stock Administration via
\nfacsimile (fax: 408-571-5175) or hand delivery to Cindi Fisse or Kim Gonsalves
\nat Redback Networks Inc., Stock Administration, 250 Holger Way, San Jose, CA
\n95134 (telephone: 408-571-5000), in accordance with the procedures listed in
\nSection 4 above. If you deliver a new Election Form that is properly signed and
\ndated, it will replace any previously submitted Election Form, which will be
\ndisregarded. The new Election Form must be<\/p>\n
-30-<\/p>\n
signed and dated and you must check the box next to each option you elect to
\ntender for replacement. In addition, the new Election Form must specify:<\/p>\n
. the name of the option holder who tendered the options,<\/p>\n
. the grant number of each option to be tendered,<\/p>\n
. the grant date of all options to be tendered,<\/p>\n
. the total number of unexercised option shares subject to each option
\n to be tendered,<\/p>\n
. the exercise price of all options to be tendered,<\/p>\n
. the vesting start date of all options to be tendered, and<\/p>\n
. the vesting schedule of each option to be tendered.<\/p>\n
Even if you change your election regarding the tender of certain option
\ngrants, your continued participation in the offer means that you must tender all
\ngrants received since April 15, 2001, unless they are Excepted Options.<\/p>\n
Except as described in the following sentences, the Notice to Withdraw
\nfrom the Offer and any new Election Form must be executed by the option holder
\nwho tendered the options to be withdrawn exactly as the option holder’s name
\nappears on the option agreement or agreements evidencing such options. If the
\noption holder’s name has legally been changed since the signing of the option
\nagreement, the option holder must submit proof of the legal name change. If the
\nsignature is by a trustee, executor, administrator, guardian, attorney-in-fact,
\nofficer of a corporation or another person acting in a fiduciary or
\nrepresentative capacity, the signer’s full title and proper evidence of the
\nauthority of such person to act in that capacity must be indicated on the
\nElection Form or Notice to Withdraw from the Offer.<\/p>\n
You may not rescind any withdrawal, and any options you withdraw will
\nthereafter be deemed not properly tendered for purposes of the offer, unless you
\nproperly re-tender those options before the Offer Expiration Date by following
\nthe procedures described in Section 4 of this Offer to Replace.<\/p>\n
Neither we nor any other person is obligated to give notice of any
\ndefects or irregularities in any Notice to Withdraw from the Offer or any new
\nElection Form, nor will anyone incur any liability for failure to give any
\nnotice. We will resolve, in our sole discretion, all questions as to the form
\nand validity, including time of receipt, of Notices to Withdraw from the Offer
\nand new Election Forms. Our determination of these matters will be final and
\nbinding.<\/p>\n
-31-<\/p>\n
6. Acceptance of options for replacement and issuance of New
\n ———————————————————
\nOptions.
\n——-<\/p>\n
Upon the terms and conditions of the offer and promptly following the
\nOffer Expiration Date, we will accept for replacement and cancel eligible
\noptions properly tendered and not validly withdrawn before the Offer Expiration
\nDate and will promptly grant New Options on the Replacement Date, unless
\nprevented by law or applicable regulations. New Options will be granted under
\nour 1999 Plan and will be subject to the terms and conditions thereof.<\/p>\n
Only options with an exercise price higher than six dollars and fifty
\ncents ($6.50) granted before August 1, 2001 are eligible options. Once the
\noptions are cancelled, you will no longer have any rights with respect to those
\noptions. Subject to the terms and conditions of this offer, if your options are
\nproperly tendered and accepted for replacement, they will be cancelled as of the
\ndate of our acceptance, which we anticipate to be October 15, 2001, and you will
\nbe granted New Options on the same day.<\/p>\n
Even if the options you tendered were incentive stock options, your New
\nOptions will be nonstatutory stock options. Thus, subject to the terms and
\nconditions of this offer, if your options are properly tendered by the Offer
\nExpiration Date of the offer, scheduled to be 9:00 p.m. Pacific Time on October
\n12, 2001 and accepted for replacement and cancelled on the Cancellation Date,
\nscheduled to be October 15, 2001, you will be granted New Options on October 15,
\n2001. If we extend the offer beyond October 12, 2001, the acceptance,
\ncancellation and replacement of options will be similarly delayed.<\/p>\n
It is possible that, prior to or after the grant of New Options, we
\nmight effect or enter into an agreement such as a merger or stock acquisition
\nwhereby Redback would be acquired by another company. If we are acquired prior
\nto the expiration of the offer, you may withdraw any options which you tendered
\nfor replacement and your options will be treated in accordance with the option
\nplan under which they were granted and with your old option agreement. Further,
\nif we are acquired prior to the expiration of the offer, we reserve the right to
\nwithdraw the offer, in which case your Old Options and your rights under them
\nwill remain intact for the time period set forth in your option agreement but
\nyou will receive no replacement options.<\/p>\n
If we are acquired after your Old Options have been accepted for
\nreplacement, cancelled and replaced with New Options, your New Options will be
\ngoverned by the terms of the 1999 Plan and your new option agreement. However,
\nif your old option agreement or another agreement with Redback provided that
\nyour Old Options were subject to a special “change of control” provision or
\nother acceleration provision, those provisions will still apply to you and to
\nyour New Options and will be reflected in your new option agreement. You should
\nbe aware that if you cease to be an employee of Redback or one of our
\nsubsidiaries or affiliates as a result of an acquisition or merger, or for any
\nother reason, your New Options may not have accrued as much vesting credit as
\nthe Old Options that were cancelled. As a result, you may not receive as much,
\nif any, benefit from your New Option as you would have received if you had
\nretained your Old Option.<\/p>\n
The number of shares subject to the New Options to be granted to each
\neligible participating employee will be determined according to the exercise
\nprice of the Old Options tendered. Subject to<\/p>\n
-32-<\/p>\n
the terms of this offer and subject to any adjustments for stock splits, stock
\ndividends and similar events (and rounded down to the nearest whole number), the
\nreplacement ratios will be as follows:<\/p>\n
\n\n ————————————— —————————- ——————————-
\n
\n Exercise Price per share of Old Option Number of Shares Subject Number of Shares Subject to
\n to Old Option New Option
\n ————————————— —————————- ——————————-
\n $40.00 or less One (1) One (1)
\n ————————————— —————————- ——————————-
\n $40.01 – $80.00 Five (5) One (1)
\n ————————————— —————————- ——————————-
\n Above $80.00 Ten (10) One (1)
\n ————————————— —————————- ——————————-
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n New Options will be granted under our 1999 Plan, unless prevented by
\nlaw or applicable regulations. All New Options will be nonstatutory stock
\noptions and will have a maximum term of five (5) years. In addition, all New
\nOptions will be subject to a new option agreement between you and us. The form
\nthat is generally applicable to you will be dependent upon the jurisdiction in
\nwhich you work. The forms are attached as exhibits to the Schedule TO filed with
\nthe SEC in connection with this Offer to Replace.<\/p>\n
If you are a tax resident of a non-U.S. jurisdiction, certain other
\nterms and conditions may apply to your New Option in order to comply with the
\nlaws in that country or in order to preserve the possibility of favorable tax
\ntreatment. For example:<\/p>\n
. If you are an employee who is a tax resident of the United Kingdom,
\n your New Option will be subject to the execution of a joint election
\n between you and Redback, as described in Section 26.<\/p>\n
. Due to exchange control restrictions currently in place, if you are
\n an employee who is a tax resident of Brazil, Redback will at this
\n time require that you exercise your options by using only a full or
\n partial cashless exercise method, whereby you exercise your options
\n without remitting any cash, as described in Section 15.<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or
\n the People’s Republic of China, your options may be exercised only
\n by using a cashless exercise method, whereby the options are
\n exercised without remitting any cash and under which you will effect
\n a same-day exercise of the option and sale of the shares, as
\n described in Sections 22 and 23.<\/p>\n
. If you are an employee who is a tax resident of Hong Kong and if
\n your New Options will vest in whole or in part within six (6) months
\n of the Replacement Date, you will be restricted from selling any
\n shares acquired upon the exercise of those options until a period of
\n six (6) months from the Replacement Date, as described in Section
\n 19.<\/p>\n
-33-<\/p>\n
We will not accept partial tenders of your eligible option grants.
\nHowever, you may tender the remaining portion of an option which you have
\npartially exercised. Accordingly, you may tender one or more of your option
\ngrants, but you may only tender all of the unexercised shares subject to that
\noption or none of those shares.<\/p>\n
If you tender any option granted to you on a particular date, you will
\nalso be required to tender any other options granted to you on that same day,
\nexcept that you will not be required, nor may you elect, to tender any Excepted
\nOptions.<\/p>\n
For example and except as otherwise described below, if you hold (i) an
\noption to purchase 1,000 shares at $10.00 per share, 700 of which you have
\nalready exercised, (ii) an option to purchase 1,000 shares at an exercise price
\nof $20.00 per share, all 1,000 of which remain unexercised; and (iii) an option
\nto purchase 2,000 shares at an exercise price of $40.00 per share, all 2,000 of
\nwhich remain unexercised; and each of the three grants was granted to you on
\ndifferent dates, you may tender:<\/p>\n
. none of your options,<\/p>\n
. the first option grant covering the 300 remaining unexercised
\n shares,<\/p>\n
. the second option grant covering all 1,000 shares,<\/p>\n
. the third option covering all 2,000 shares,<\/p>\n
. two of the three option grants covering all unexercised shares
\n subject to those two grants, or<\/p>\n
. all three of the option grants covering all 3,300 unexercised shares
\n (300 + 1,000 + 2,000).<\/p>\n
You may not tender the first option grant covering only 150 shares (or
\nany other partial amount) or less than all of the shares under the second and
\nthird option grants.<\/p>\n
However, if each of those grants were granted to you on the same day,
\nyou must treat those grants as if they were one grant; therefore, you must
\ntender all or none of the unexercised shares subject to all the options granted
\non that day and you may only tender either:<\/p>\n
. none of your options, or<\/p>\n
. all three of the option grants covering all 3,300 unexercised shares
\n (300 + 1,000 + 2,000).<\/p>\n
In addition, if you participate in the offer, then all options received
\nduring the six (6) month period prior to the Cancellation Date must be tendered,
\neven if the option has an exercise price equal to or less than six dollars and
\nfifty cents ($6.50) per share, unless the options are Excepted Options (which
\nmay not be tendered under any circumstances). Excepted Options are options which
\nwere<\/p>\n
-34-<\/p>\n
granted (i) on or after August 1, 2001; or (ii) through the Salary for
\nStock Options Exchange Program.<\/p>\n
For example, if you hold (i) an option with an exercise price of $6.58,
\ngranted to you on July 13, 2001; (ii) an option with an exercise price of $5.25,
\ngranted to you on July 27, 2001 but which is not an Excepted Option; and (iii)
\nan option with an exercise price of $5.80, granted to you on August 15, 2001
\n(and which is therefore an Excepted Option since it was granted after August 1,
\n2001):<\/p>\n
. You may elect to tender none of your options.
\n ———<\/p>\n
. You may elect to tender all outstanding, unexercised shares subject
\n ———
\n to the first option, in which case you are required to also tender
\n ——–
\n all outstanding, unexercised shares subject to the second option
\n (because it was granted within six (6) months prior to the
\n Cancellation Date but is not an Excepted Option), but you are not
\n required, and may not elect, to tender the third (because it was
\n ————-
\n granted after August 1, 2001 and so is an Excepted Option).<\/p>\n
. You may not elect to tender only the second option, since it does
\n ————-
\n not meet the eligibility requirements (it does not have an exercise
\n price above $6.50 per share).<\/p>\n
. You may not elect to tender the third option (it is not eligible,
\n ————-
\n and it may not be tendered under any circumstances, since it was
\n granted after August 1, 2001).<\/p>\n
Within two (2) business days of the receipt of your Election Form or
\nyour Notice to Withdraw from the Offer, Redback intends to e-mail you a
\nConfirmation of Receipt. However, this is merely a notice of confirmation, and
\nis not an acceptance of the options for replacement. For purposes of the offer,
\nwe will be deemed to have accepted options for replacement that are validly
\ntendered and not properly withdrawn as of the time when we give oral or written
\nnotice to the Vice President and General Counsel, or to the option holders of
\nour acceptance for replacement of such options, which notice may be made by a
\nfinal amendment on Schedule TO publicly filed with the SEC or by press release.
\nSubject to our rights to extend, terminate and amend the offer, discussed in
\nSection 27 of this Offer to replace, we currently expect that we will accept
\npromptly after the expiration of the offer all properly tendered options that
\nare not validly withdrawn. Options accepted for replacement will be cancelled on
\nthe Cancellation Date, which we presently expect to be October 15, 2001 and
\nreplaced with New Options on the Replacement Date, which we expect to be the
\nsame day.<\/p>\n
7. Conditions of the offer.
\n ———————–<\/p>\n
Notwithstanding any other provision of the offer, we will not be
\nrequired to accept any options tendered for replacement, and we may terminate or
\namend the offer, or postpone our acceptance and cancellation of any options
\ntendered for replacement, in each case, subject to Rule 13e-4(f)(5) under the
\nSecurities Exchange Act of 1934, as amended, if at any time on or after
\nSeptember 6, 2001, and prior to the Offer Expiration Date, any of the following
\nevents has occurred, or has been determined by us to have occurred, and, in our
\nreasonable judgment in any case and<\/p>\n
-35-<\/p>\n
regardless of the circumstances giving rise to the event, including any action
\nor omission to act by us, the occurrence of such event or events makes it
\ninadvisable for us to proceed with the offer or with such acceptance and
\ncancellation of options tendered for replacement:<\/p>\n
. there shall have been threatened or instituted or be pending any
\n action or proceeding by any governmental, regulatory or
\n administrative agency or authority that directly or indirectly
\n challenges the making of the offer, the acquisition of some or all
\n of the tendered options pursuant to the offer, or the issuance of
\n New Options, or otherwise relates in any manner to the offer, or
\n that, in our reasonable judgment, could materially and adversely
\n affect our business, condition, income, operations or prospects or
\n materially impair (such as by increasing the accounting or other
\n costs of the offer to Redback) the contemplated benefits of the
\n offer to Redback, where the contemplated benefits include the
\n opportunity for us to align employee and stockholder interests and
\n offer eligible employees a valuable incentive to stay with Redback
\n and to achieve high levels of performance;<\/p>\n
. there shall have been any action threatened, pending or taken, or
\n approval withheld, or any statute, rule, regulation, judgment, order
\n or injunction threatened, proposed, sought, promulgated, enacted,
\n entered, amended, enforced or deemed to be applicable to the offer
\n or Redback, by any court or any authority, agency or tribunal that,
\n in our reasonable judgment, would or might directly or indirectly:<\/p>\n
(1) make the acceptance for replacement of, or issuance of New
\n Options for, some or all of the tendered options illegal or
\n otherwise restrict or prohibit consummation of the offer or
\n that otherwise relates in any manner to the offer;<\/p>\n
(2) delay or restrict our ability, or render us unable, to accept
\n for replacement, or issue New Options for, some or all of the
\n tendered options;<\/p>\n
(3) materially impair (such as by increasing the accounting or
\n other costs of the offer to Redback) the contemplated benefits
\n to Redback of the offer, where the contemplated benefits
\n include the opportunity for us to align employee and
\n stockholder interests and offer eligible employees a valuable
\n incentive to stay with Redback and to achieve high levels of
\n performance; or<\/p>\n
(4) materially and adversely affect Redback’s business, condition,
\n income, operations or prospects or materially impair the
\n contemplated benefits to Redback of the offer;<\/p>\n
. there shall have occurred:<\/p>\n
(1) any general suspension of trading in, or limitation on prices
\n for, securities on any national securities exchange or in the
\n over-the-counter market;<\/p>\n
-36-<\/p>\n
(2) the declaration of a banking moratorium or any suspension of
\n payments in respect of banks in the United States, whether or
\n not mandatory;<\/p>\n
(3) the commencement of a war, armed hostilities or other
\n international or national crisis directly or indirectly
\n involving the United States; or<\/p>\n
(4) any limitation (whether or not mandatory) by any governmental,
\n regulatory or administrative agency or authority on, or any
\n event that, in our reasonable judgment, might affect the
\n extension of credit to us by banks or other lending
\n institutions in the United States.<\/p>\n
. a tender or exchange offer for some or all of our shares, or a
\n merger or acquisition proposal for Redback, shall have been
\n proposed, announced or made by another person or entity or shall
\n have been publicly disclosed;<\/p>\n
. any significant decrease in the market price of the shares of
\n Redback’s common stock or any change in the general political,
\n market, economic or financial conditions in the United States or
\n abroad that could, in our reasonable judgment, have a material
\n adverse effect on Redback’s business, condition (financial or
\n otherwise), operations or prospects or that of Redback’s
\n subsidiaries or on the trading in Redback’s common stock; or<\/p>\n
. any change or changes shall have occurred in Redback’s business,
\n condition, assets, income, stock price, operations, prospects or
\n stock ownership that, in our reasonable judgment, is or may be
\n material to Redback or may materially impair the contemplated
\n benefits of the offer to Redback.<\/p>\n
The conditions to the offer are for Redback’s benefit. We may assert
\nthem in our sole discretion regardless of the circumstances giving rise to them
\nbefore the Offer Expiration Date. We may waive them, in whole or in part, at any
\ntime and from time to time prior to the Offer Expiration Date, in our sole
\ndiscretion, whether or not we waive any other condition to the offer. Our
\nfailure at any time to exercise any of these rights will not be deemed a waiver
\nof any such rights. The waiver of any of these rights with respect to particular
\nfacts and circumstances will not be deemed a waiver with respect to any other
\nfacts and circumstances. Any determination we make concerning the events
\ndescribed in this Section 7 will be final and binding upon all persons.<\/p>\n
8. Price range of shares underlying the options.
\n ——————————————–<\/p>\n
The shares underlying your options are currently traded on the Nasdaq
\nNational Market under the symbol “RBAK”. The following table shows, for the
\nperiods indicated, the high and low sales prices per share of our common stock
\nas reported by the Nasdaq National Market, as adjusted for stock dividends and
\nstock splits.
\n High Low
\n ——- ——
\nFiscal Year 2001
\n Quarter ended June 30, 2001…………………. $ 25.09 $ 8.14<\/p>\n
-37-<\/p>\n
Quarter ended March 31, 2001……………. $ 56.375 $ 11.61<\/p>\n
Fiscal Year 2000
\n Quarter ended December 31, 2000…………. $ 167.125 $ 36.9375
\n Quarter ended September 30, 2000………… $ 179.625 $ 109.9375
\n Quarter ended June 30, 2000…………….. $ 181.00 $ 50.50
\n Quarter ended March 31, 2000……………. $ 198.50 $ 78.50<\/p>\n
Fiscal Year 1999
\n Quarter ended December 31, 1999…………. $ 93.50 $ 52.50
\n Quarter ended September 30, 1999………… $ 71.81 $ 28.50
\n Quarter ended June 30, 1999…………….. $ 33.03 $ 16.25<\/p>\n
As of September 4, 2001, the last reported sale price during regular
\ntrading hours of our common stock, as reported by the Nasdaq National Market,
\nwas $4.04 per share.<\/p>\n
We recommend that you evaluate current market quotes for our common
\nstock, among other factors, before deciding whether or not to tender your
\noptions.<\/p>\n
9. Source and amount of consideration; terms of New Options
\n ——————————————————–<\/p>\n
Consideration.
\n ————-<\/p>\n
We will replace all eligible outstanding options which were properly
\ntendered, accepted for replacement and cancelled with New Options to purchase
\nshares of common stock under our 1999 Plan. The number of shares subject to the
\nNew Options to be granted to each eligible participating employee will be
\ndetermined according to the exercise price of the Old Options tendered. Subject
\nto any adjustments for stock splits, stock dividends and similar events (and
\nrounded down to the nearest whole number), the replacement ratios will be as
\nfollows: (i) an Old Option to purchase stock with an exercise price of $40.00
\nper share or less will be replaced with a New Option for the same number of
\nshares; (ii) an Old Option to purchase stock with an exercise price between
\n$40.01 per share and $80.00 per share will be replaced with a New Option
\ncovering one (1) share for every five (5) shares covered by the Old Option; and
\n(iii) an Old Option to purchase stock with an exercise price above $80.00 per
\nshare will be replaced with a New Option covering one (1) share for every ten
\n(10) shares covered by the Old Option. If we receive and accept tenders of all
\neligible outstanding options from eligible employees, subject to the terms and
\nconditions of this offer we will grant New Options to purchase a total of
\napproximately 15,083,819 shares of common stock. The shares issuable upon
\nexercise of these New Options would equal approximately 9.5% of the total shares
\nof our common stock outstanding as of September 26, 2001.<\/p>\n
Terms of New Options.
\n ——————–<\/p>\n
The New Options will be granted under our 1999 Plan. For each New
\nOption granted, a new option agreement will be entered into between Redback and
\nthe option holder who tendered such option in the offer. You should read the
\nforms of stock option agreement, attached as Exhibits (a)(9)<\/p>\n
-38-<\/p>\n
through (a)(15) to the Schedule TO filed with the SEC in connection with this
\nOffer to Replace. The form of stock option agreement that is generally
\napplicable to you will be determined by the jurisdiction in which you work. The
\nterms and conditions of the New Options will vary in certain respects from the
\nterms and conditions of the options tendered for replacement.<\/p>\n
You should note that the term of all New Options will be a maximum of
\nfive (5) years, subject to earlier expiration of the option upon the occurrence
\nof certain events, such as your termination of employment. You should also note
\nthat all New Options will be nonstatutory stock options, even if the options
\ntendered for replacement were incentive stock options. The New Options will not
\nbe eligible for the favorable tax treatment applicable to incentive stock
\noptions under applicable U.S. tax law. Please read “U.S. Federal Income Tax
\nConsequences” later in this Section, as well as Section 14 of this Offer to
\nReplace for a discussion of the potential tax consequences for United States
\nemployees. If you are subject to the tax laws of more than one country, you
\nshould be aware that there may be other tax and social insurance consequences
\nwhich may apply to you. You should be certain to consult your own advisors to
\ndiscuss these consequences.<\/p>\n
In addition to the terms above, if you are a tax resident of a non-U.S.
\njurisdiction, certain other terms and conditions may apply to your New Option in
\norder to comply with the laws in that country or in order to preserve the
\npossibility of favorable tax treatment. For example:<\/p>\n
. If you are an employee who is a tax resident of the United Kingdom,
\n your New Option will be subject to the execution of a joint election
\n between you and Redback, as described in Section 26.<\/p>\n
. Due to exchange control restrictions currently in place, if you are
\n an employee who is a tax resident of Brazil, Redback will at this
\n time require that you exercise your options by using only a full or
\n partial cashless exercise method, whereby you exercise your options
\n without remitting any cash, as described in Section 15.<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or
\n the People’s Republic of China, your options may be exercised only
\n by using a cashless exercise method, whereby the options are
\n exercised without remitting any cash and under which you will effect
\n a same-day exercise of the option and sale of the shares, as
\n described in Sections 22 and 23.<\/p>\n
. If you are an employee who is a tax resident of Hong Kong and if
\n your New Options will vest in whole or in part within six (6) months
\n of the Replacement Date, you will be restricted from selling any
\n shares acquired upon the exercise of those options until a period of
\n six (6) months from the Replacement Date, as described in Section
\n 19.<\/p>\n
In addition, you should note that for participants who are subject to
\nthe tax laws of Canada and Singapore, the New Options may have a higher exercise
\nprice than some or all of the options tendered for replacement. For U.S.
\nemployees, employees in Brazil, France, Germany, Hong Kong, Japan, Korea, the
\nNetherlands, the People’s Republic of China, Taiwan and the United Kingdom, as<\/p>\n
-39-<\/p>\n
well as for the Executive Officers of Redback, the exercise price of the New
\nOptions will not be higher than four dollars and seventeen cents ($4.17) per
\nshare; this means that only replacement options for options required to be
\ntendered because they were granted within the six (6) months prior to the
\nCancellation Date risk having an exercise price higher than the tendered
\noptions. The following description summarizes the material terms of our 1999
\nPlan and the options granted under the Plan.<\/p>\n
1999 Plan.
\n ———<\/p>\n
The maximum number of shares available for issuance through the
\nexercise of options, granted under our 1999 Plan is 18,000,000 shares, plus an
\nannual increase to be added each year beginning January 1, 2002 equal to
\n10,000,000 shares. In addition, shares issued under the Redback Networks Inc.
\n1997 Stock Plan which are forfeited become available for grant under the 1999
\nPlan. Our 1999 Plan permits the granting of options intended to qualify as
\nincentive stock options under the Internal Revenue Code and options that do not
\nqualify as incentive stock options, referred to as nonstatutory stock options,
\nas well as awards of restricted stock.<\/p>\n
Administration.
\n ————–<\/p>\n
The 1999 Plan is administered by a committee appointed by the Board of
\nDirectors (the “Administrator”). Subject to the other provisions of the 1999
\nPlan, the Administrator has the power to determine the terms and conditions of
\nthe options granted, including the exercise price, the number of shares subject
\nto the option and the exercisability of the options.<\/p>\n
Term.
\n —-<\/p>\n
Options granted under the 1999 Plan generally have a maximum term of
\nten (10) years. However, pursuant to the terms of this offer, all New Options
\nwill have a maximum term of five (5) years, subject to earlier expiration of the
\noption upon the occurrence of certain events, such as the termination of your
\nemployment.<\/p>\n
Termination of Employee Status.
\n ——————————<\/p>\n
The effect on your New Options of the termination of your status as an
\nemployee of Redback or one of our subsidiaries or affiliates will be set forth
\nin your new option agreement. Generally, your options will expire following the
\ntermination of your employment, and you will have the opportunity to exercise
\nthe vested portion of your option within the time frame permitted by your stock
\noption agreement, but in no event later than the expiration of the maximum term
\nof your option (which, for your New Option, will be five (5) years).<\/p>\n
If your termination of employment is due to any reason other than death
\nor your total and permanent disability, the time period in which you may
\nexercise your options, to the extent that they were exercisable immediately
\nbefore such termination, is generally a period of three (3) months from the date
\nof termination.<\/p>\n
-40-<\/p>\n
In the event that the termination of your employment is by reason of
\ndeath, your options will generally become fully exercisable and your executors,
\n —————–
\nadministrators, legatees or distributees of your estate, may exercise any option
\nheld by you at the date of your employment termination within the time frame
\npermitted by your stock option agreement, which is generally a period of twelve
\n(12) months after your death.<\/p>\n
In the event that the termination of your employment is by reason of
\nyour permanent or total disability, the vesting of your options will generally
\naccelerate by a period of twelve (12) months and you may exercise any options
\nheld by you at the date of your employment termination, to the extent
\nexercisable with the additional twelve (12) months vesting credit, within the
\ntime frame permitted by your stock option agreement, which is generally a period
\nof six (6) months following such termination.<\/p>\n
Please note that if your Old Options were subject to any special
\nacceleration provisions included in your old option agreement or in another
\nagreement with Redback, your New Options will be subject to the same provisions,
\nand will be set forth in your new option agreement.<\/p>\n
Generally, except as described above, if you cease to be an employee of
\nRedback or one of our subsidiaries or affiliates, all unvested portions of your
\n ——–
\nNew Options will be cancelled and you will lose all rights with respect to them.
\nThis applies even if your Old Option would have been fully vested. As a result,
\nyou may not have the opportunity to exercise as much of your New Options as you
\nwould have been able to exercise under the Old Options, since your New Options
\nmay not be as fully vested, or may not be vested at all. You should be sure to
\nconsider this when deciding whether or not to participate in the offer.<\/p>\n
The expiration of your option under the circumstances specified in this
\nsection will result in the cessation of your interests in our 1999 Plan. In
\naddition, your option may expire, together with our stock option plans and all
\nother outstanding options issued to other employees, following the occurrence of
\ncertain corporate events, as described in “Adjustments Upon Certain Events,”
\nbelow.<\/p>\n
Termination of Employee Status Before the Replacement Date.
\n ———————————————————-<\/p>\n
In order to receive a New Option, you must remain an employee as of the
\nReplacement Date. If, for any reason, you do not remain an employee of Redback
\nor one of our subsidiaries or affiliates through the Replacement Date, we will
\nnot accept your tender of options and any Old Options you tendered will not be
\ncancelled as a result of this offer. Your rights to the Old Options will remain
\nintact for the time period set forth in your option agreement and will continue
\nto be governed in accordance with the terms and conditions of the plan under
\nwhich they were granted and the related option agreement. You are reminded that
\nunless expressly provided in your employment agreement or by the applicable laws
\nof a non-U.S. jurisdiction, your employment with Redback or one of our
\nsubsidiaries or affiliates, as the case may be, remains “at will” and can be
\nterminated by you or Redback, or one of our subsidiaries or affiliates, at any
\ntime, for any reason.<\/p>\n
Exercise Price.
\n ————–<\/p>\n
-41-<\/p>\n
Generally, the Administrator determines the exercise price at the time
\nthe option is granted. Under the terms of the offer, and in order to comply with
\ncertain applicable laws and to preserve the possibility of favorable tax
\ntreatment, the exercise price per share of the New Options may vary for
\ndifferent employees and will be set as follows:<\/p>\n
. Except for Executive Officers of Redback, the exercise price per
\n share of the New Options for eligible employees who are tax
\n residents of the United States, Brazil, France, Germany, Hong Kong,
\n Japan, Korea, the Netherlands, the People’s Republic of China,
\n Taiwan or the United Kingdom will be the lower of: (i) four dollars
\n ——–
\n and seventeen cents ($4.17) per share, which was the closing price
\n of a share of Redback common stock on August 29, 2001; and (ii) 100%
\n of the fair market value of Redback common stock on the Replacement
\n Date, as determined by the closing price reported by the Nasdaq
\n National Market on the Replacement Date.<\/p>\n
. The exercise price per share for eligible employees who are tax
\n residents of Canada or Singapore will be 100% of the fair market
\n value of Redback common stock on the Replacement Date, as determined
\n by the closing price reported by the Nasdaq National Market on the
\n Replacement Date.<\/p>\n
. The exercise price per share for Executive Officers will be four
\n dollars and seventeen cents ($4.17) per share, which was the closing
\n price of a share of Redback common stock on August 29, 2001.<\/p>\n
For example, if the fair market value of Redback common stock on the
\nReplacement Date, which we expect to be October 15, 2001, is $4.00 per share,
\nthen the exercise price per share of the New Options would be:<\/p>\n
. For all non-Executive Officer eligible employees other than tax
\n residents of Canada and Singapore: $4.00 per share.<\/p>\n
. For all non-Executive Officer eligible employees who are tax
\n residents of Canada or Singapore: $4.00 per share.<\/p>\n
. For all Executive Officers of Redback: $4.17 per share.<\/p>\n
Similarly, if the fair market value of Redback common stock on the
\nReplacement Date is $4.50 per share, then the exercise price per share of the
\nNew Options would be (i) $4.17 per share for non-Executive Officer eligible
\nemployees other than tax residents of Canada and Singapore; (ii) $4.50 per share
\nfor eligible employees who are tax residents of Canada or Singapore; and (iii)
\n$4.17 per share for all Executive Officers of Redback.<\/p>\n
Accordingly, we cannot predict the exercise price of the New Options
\nfor most employees. If you are subject to the tax laws of Canada or Singapore,
\nthe New Options may have a higher exercise price than some or all of your
\ncurrent options because the exercise price of your New Options will not be set
\nuntil the Replacement Date. If you are subject to the tax laws in the United<\/p>\n
-42-<\/p>\n
States, Brazil, France, Germany, Hong Kong, Japan, Korea, the Netherlands, the
\nPeople’s Republic of China, Taiwan or the United Kingdom, your New Options will
\nbe priced no higher than four dollars and seventeen cents ($4.17) per share.
\nThis still means that the exercise price of the New Options could be higher than
\nthe exercise price of certain of your tendered options, such as those options
\nrequired to be tendered if you participate in the offer (that is, most options
\ngranted within the six (6) months prior to the Cancellation Date). For both U.S.
\nand non-U.S. residents, we recommend that you evaluate current market quotes for
\nour shares, among other factors, before deciding whether or not to tender your
\noptions.<\/p>\n
Notwithstanding the foregoing, in accordance with the terms of the 1999
\nPlan, under no circumstances will you be granted options at a per share exercise
\nprice that is less than thirty percent (30%) of the fair market value of Redback
\ncommon stock on the Replacement Date. Therefore, if the per share exercise price
\nof Redback common stock increases substantially (to $13.90 per share or higher)
\non the Replacement Date, the exercise price of your New Options will be greater
\nthan four dollar and seventeen cents ($4.17) per share. The exercise price per
\nshare of your New Options will instead be equal to thirty percent (30%) of the
\nfair market value of the common stock on the Replacement Date.<\/p>\n
Please note that the exercise prices for the New Options represent a
\nchange from the terms we thought we would implement and which we described to
\nyou in the memorandum from Pierre Lamond dated August 13, 2001 and in our 10-Q
\nfiled with the SEC on August 14, 2001.<\/p>\n
Vesting and Exercise.
\n ——————–<\/p>\n
Each stock option agreement specifies the term of the option and the
\ndate when the option becomes exercisable. The terms of vesting are determined by
\nthe Administrator and are set out in your option agreement. Options granted by
\nus generally vest at a rate of 25% of the shares subject to the option after
\ntwelve (12) months, and then 1\/48th (equal to 2.0833%) of the shares subject to
\nthe option vest each month thereafter, provided the employee remains
\ncontinuously employed by Redback. The vesting schedule of the New Options
\ngranted through the offer will re-start as of August 8, 2001, but will be
\n ——–
\notherwise identical to the vesting schedule of the Old Options and will be set
\nout in your new option agreement. You will not receive credit for vesting
\naccrued on the Old Options prior to the Cancellation Date. As a result, you will
\nhave to wait for a longer period before you may purchase common stock under your
\nNew Options than if you kept your Old Options.<\/p>\n
For example, if you tendered an Old Option granted in July 2000 which
\nvested 25% on the first anniversary of the Old Option grant date and 1\/48th
\n(equal to 2.0833%) monthly thereafter, the New Option you receive in replacement
\nwill be completely unvested on the Replacement Date and will vest 25% on the
\nfirst anniversary of August 8, 2001, and 1\/48th (equal to 2.0833%) monthly
\nthereafter, as shown in the following example:<\/p>\n
An option to purchase 1,000 shares of Redback common stock granted on
\nJuly 14, 2000 at an exercise price of $155.00 per share which vested as to 25%
\nof the shares subject to the option on the first anniversary of the grant date
\nand 1\/48th (equal to 2.0833%) monthly thereafter would, at the<\/p>\n
-43-<\/p>\n
time it is tendered for cancellation under this offer, have vested as to
\napproximately 29% of the shares, as follows:<\/p>\n
– July 14, 2000: 0% of 1,000 shares subject to the option vested<\/p>\n
– July 14, 2001: 25% of 1,000 vested = 250 shares vested<\/p>\n
– August 14, 2001: 27.0833% of 1,000 vested = 270 shares vested
\n (250 from above, plus an additional 1\/48th of the shares
\n (equal to 2.0833%) vested for the month, which is
\n approximately 20 shares)<\/p>\n
– September 14, 2001: 29.167% of 1,000 vested = 291 shares
\n vested (270 from above, plus an additional 1\/48th of the
\n shares (equal to 2.0833%) vested for the month, which is
\n approximately 21 shares)<\/p>\n
If this option was tendered and accepted for replacement, the New
\nOption would be for 100 shares (since the exercise price per share of the Old
\nOption was over $80.00). If the offer is not extended and the Replacement Date
\nis October 15, 2001, as expected, the New Option would vest as follows:<\/p>\n
– October 15, 2001: 0% of 100 shares subject to the option
\n vested<\/p>\n
– August 8, 2002: 25% of 100 vested = 25 shares vested<\/p>\n
– September 8, 2002: 27.0833% of 100 vested = 27 shares vested
\n (25 from above, plus an additional 1\/48th of the shares (equal
\n to 2.0833%) vested for the month, which is approximately 2
\n shares)<\/p>\n
– October 8, 2002: 29.167% of 100 vested = 29 shares vested (27
\n from above, plus an additional 1\/48th of the shares (equal to
\n 2.0833%) vested for the month, which is approximately 2
\n shares)<\/p>\n
– Vesting would continue in this pattern until 100% vested on
\n August 8, 2005<\/p>\n
However, regardless of the vesting schedule of the Old Option:<\/p>\n
. If you are a resident of Hong Kong and if your New Options will vest
\n in whole or in part within six (6) months of the Replacement Date,
\n you will be restricted from selling any shares acquired upon the
\n exercise of those options until a period of six (6) months from the
\n Replacement Date, as described in Section 19.<\/p>\n
. Due to exchange control restrictions currently in place, if you are
\n an employee who is a tax resident of Brazil, Redback will at this
\n time require that you exercise your options by using only a full or
\n partial cashless exercise method, whereby you exercise your options
\n without remitting any cash, as described in Section 15.<\/p>\n
. If you are an employee who is a tax resident of the Netherlands or
\n the People’s Republic of China, your options may be exercised only
\n by using a cashless exercise method, whereby the options are
\n exercised without remitting any cash and under which you will<\/p>\n
-44-<\/p>\n
effect a same-day exercise of the option and sale of the shares, as
\n described in Sections 22 and 23.<\/p>\n
Please be sure to see Sections 15, 19, 22 and 23 for more details.<\/p>\n
Payment of Exercise Price.
\n ————————-<\/p>\n
You may exercise your options, in whole or in part, by delivery of a
\nwritten notice to us which is accompanied by payment in full of the eligible
\nexercise price, as set forth in your stock option agreement. Due to exchange
\ncontrol restrictions currently in place, if you are an employee who is a tax
\nresident of Brazil, Redback will at this time require that you exercise your
\noptions by using only a full or partial cashless exercise method, whereby you
\nexercise your options without remitting any cash, as described in Section 15. If
\nyou are an employee who is a tax resident of the Netherlands or the People’s
\nRepublic of China, your options may be exercised only by using a cashless
\nexercise method, whereby the options are exercised without remitting any cash
\nand under which you will effect a same-day exercise of the option and sale of
\nthe shares, as described in Sections 22 and 23. For employees who are not
\nsubject to the tax laws in Brazil, the Netherlands or the People’s Republic of
\nChina, the permissible methods of payment of the option exercise price are
\ndetermined by the Administrator and are set forth in your stock option
\nagreement. These permissible methods generally are limited to<\/p>\n
. cash,<\/p>\n
. check, and<\/p>\n
. the surrender of shares of Redback common stock.<\/p>\n
However, in the sole discretion of the Administrator, the following
\nmethods are also permissible: (i) promissory note, (ii) proceeds of a loan
\nsecured with the shares (a margin loan), (iii) consideration received through a
\nsame day sale, or (iv) a combination of the foregoing methods.<\/p>\n
Adjustments Upon Certain Events.
\n ——————————-<\/p>\n
Events Occurring before the Replacement Date or Offer Expiration
\n —————————————————————-
\nDate.
\n—-<\/p>\n
If there is a change in our capitalization, such as a stock split,
\nreverse stock split, stock dividends or other similar event prior to the
\nReplacement Date, and the change results in an increase or decrease in the
\nnumber of issued shares without receipt of consideration by us, an appropriate
\nadjustment will be made to the price and replacement ratio applied to each
\nreplacement option.<\/p>\n
If we are acquired prior to the Offer Expiration Date, you may withdraw
\nany options which you tendered for replacement and your options will be treated
\nin accordance with the option plan under which they were granted and with your
\nold option agreement. Further, if we are acquired prior to the Offer Expiration
\nDate, we reserve the right to withdraw the offer, in which case your Old<\/p>\n
-45-<\/p>\n
Options and your rights under them will remain intact for the time period set
\nforth in your option agreement but you will receive no replacement options.<\/p>\n
Events Occurring after the Replacement Date.
\n ——————————————-<\/p>\n
If there is a change in our capitalization, such as a stock split,
\nreverse stock split, stock dividends or other similar event after your Old
\nOptions have been accepted for replacement, cancelled and replaced with New
\nOptions, and the change results in an increase or decrease in the number of
\nissued shares without receipt of consideration by us, the 1999 Plan provides
\nthat an appropriate adjustment will be made to the exercise price of each option
\nand the number of shares subject to each option.<\/p>\n
In the event there is a liquidation or dissolution of Redback, your
\noutstanding options will expire immediately prior to the consummation of the
\nliquidation or dissolution.<\/p>\n
If we are acquired after your Old Options have been accepted for
\nreplacement, cancelled and replaced with New Options, your New Options will be
\ngoverned by the terms of the 1999 Plan and your new option agreement. Under the
\nterms of the 1999 Plan, in the event we merge with another corporation or
\nexperience a reorganization, your options will be subject to the agreement of
\nmerger or reorganization. The agreement may provide for any one of the
\nfollowing: (i) your options will continue, if Redback is the surviving
\ncorporation; (ii) your options will be assumed or substituted for options to
\npurchase securities of the successor corporation; (iii) your options will
\naccelerate and become fully exercisable; or (iv) you will receive a settlement
\nof the full value of your options in cash or cash equivalents, following which
\nyour options will be cancelled.<\/p>\n
You should be aware that if you cease to be an employee of Redback or
\none of our subsidiaries or affiliates as a result of an acquisition or merger,
\nor for any other reason, you may not have the opportunity to exercise as much of
\nyour New Options as you would have been able to exercise under the Old Options,
\nsince your New Options may not be as fully vested, or may not be vested at all.
\nAs a result, you may not receive as much, or any, benefit from your New Option
\nas you would have received if you had retained your Old Option.<\/p>\n
The Administrator has the authority to provide, in the option
\nagreements, for additional acceleration of the exercisability of any options if
\nthere is a “Change of Control” as it is defined in the 1999 Plan. If your Old
\nOptions were not subject to a special Change of Control provision included in
\n —
\nyour old option agreement or in another agreement with Redback, your new option
\nagreement will not contain any Change of Control provision. Upon a Change of
\n ——–
\nControl, your options will simply be treated as they would be treated in
\naccordance with any acquisition or merger of Redback, as described above. If
\nyour Old Options were subject to special Change of Control provisions included
\n —-
\nin your old option agreement or in another agreement with Redback, your new
\noption agreement will contain the same provision.
\n —-<\/p>\n
In addition, if your Old Options were subject to any other acceleration
\nprovision included in either your old option agreement or in another agreement
\nwith Redback, your New Options will be subject to the same provisions.<\/p>\n
-46-<\/p>\n
If you do not participate in the offer, or only tendered some of your
\noptions, and there is a sale of all or substantially all of our assets or we
\nmerge with another company, any options you did not tender will simply be
\n —
\ntreated in accordance with the terms of the stock option plan and stock option
\nagreement under which they were granted.<\/p>\n
Transferability of Options.
\n ————————–<\/p>\n
New Options generally may not be transferred, other than by will or the
\nlaws of descent and distribution. In the event of your death, options generally
\nmay be exercised by a person who acquires the right to exercise the option by
\nbequest or inheritance or by the provisions of a Beneficiary Designation Form,
\nwhich you must file with Redback, as set forth in your option agreement.<\/p>\n
Registration of Option Shares.
\n —————————–<\/p>\n
36,599,505 shares of common stock issuable upon exercise of options
\nunder our 1999 Plan have been registered under the Securities Act on
\nregistration statements on Form S-8 filed with the SEC. All the shares issuable
\nupon exercise of all New Options to be granted before the offer will be
\nregistered under the Securities Act. Unless you are one of our affiliates, you
\nwill be able to sell your option shares free of any transfer restrictions under
\napplicable U.S. securities laws.<\/p>\n
U.S. Federal Income Tax Consequences.
\n ————————————<\/p>\n
You should refer to Section 14 of this Offer to Replace for a
\ndiscussion of the U.S. federal income tax consequences of the New Options and
\nthe options tendered for replacement, as well as the consequences of accepting
\nor rejecting the New Options under this offer to replace. If you are an eligible
\nemployee based outside of the United States, you should refer to Sections 15
\nthrough 26 of this Offer to Replace for a discussion of income tax consequences
\nof the New Options and the options tendered for replacement in certain non-U.S.
\ncountries. We strongly recommend that you consult with your own tax advisors to
\ndiscuss the tax and social insurance consequences of this transaction under the
\nlaws of the country in which you live and work.<\/p>\n
Our statements in this Offer to Replace concerning our 1999 Plan and
\nthe New Options are merely summaries and do not purport to be complete. The
\nstatements are subject to, and are qualified in their entirety by reference to,
\nall provisions of our 1999 Plan, and the forms of option agreement under the
\n1999 Plan, which are attached as exhibits to the Schedule TO as filed with the
\nSEC. The 1999 Plan, the forms of option agreement thereunder and the prospectus
\ndescribing the 1999 Plan are attached as exhibits to this Schedule TO. Please
\ncontact us at Redback Networks Inc., Stock Administration, 250 Holger Way, San
\nJose, CA 95134, Attention: Cindi Fisse (telephone: 408-571-5026) or Kim
\nGonsalves (telephone: 408-571-5113) (e-mail: stock@redback.com), to receive
\nadditional copies of our 1999 Plan, the forms of option agreement thereunder and
\nthe prospectus relating to the 1999 Plan. We will promptly furnish you copies of
\nthese documents at our expense.<\/p>\n
-47-<\/p>\n
10. Information concerning Redback.
\n ——————————<\/p>\n
Our principal executive offices are located at 250 Holger Way, San
\nJose, CA 95134, and our telephone number is (408) 571-5000. Questions regarding
\nthis option replacement program should be directed to Cindi Fisse (telephone:
\n408-571-5026) or Kim Gonsalves (telephone: 408-571-5113) at Redback at the above
\naddress or by e-mail at stock@redback.com.<\/p>\n
We are a provider of solutions for next-generation metro broadband and
\noptical networks. Our products, which consist of the Subscriber Management
\nSystem, SmartEdge(TM) and Network Management product families, combine
\npurpose-built networking hardware and software. Our Subscriber Management System
\nproducts are designed to connect and manage large numbers of subscribers across
\nhigh-speed access technologies. They bridge the operational gap between access
\nconcentrators used to gather together high-speed Internet users at one end of
\nthe network and routers at the other end of the network used to connect to the
\nInternet. We believe that our SmartEdge optical networking products simplify the
\narchitecture of today’s regional voice and data networks, as well as improve
\ntheir capacity and performance. Our Network Management products allow service
\nproviders to manage their networking equipment, as well as provision new
\nservices to customers across networks including both Redback and third party
\nequipment. Together, these products are designed to enable carriers and service
\nproviders to build and operate next-generation metro broadband and optical
\nnetworks. When deployed, these solutions are designed to deliver scalability,
\nreduce operational costs and expedite the management and deployment of new
\nservices within metro networks.<\/p>\n
We sell our products through a direct sales force, resellers and
\ndistribution partners. Through June 30, 2001, substantially all of our revenues
\nhave been derived from sales to providers of digital subscriber line services.
\nAlthough our products are used by many large carriers and service providers
\nworldwide, we anticipate that a small number of customers will continue to
\naccount for a majority of our revenues.<\/p>\n
The financial information included in our annual report on Form 10-K
\nfor the fiscal year ended December 31, 2000 filed with the SEC on April 2, 2001,
\nand in our quarterly report on Form 10-Q for the quarter ended June 30, 2001
\nfiled with the SEC on August 14, 2001, is incorporated herein by reference. See
\n“Additional Information” in Section 29 for instructions on how you can obtain
\ncopies of our SEC filings, including filings that contain our financial
\nstatements.<\/p>\n
11. Interests of directors and Executive Officers; transactions and
\n —————————————————————
\narrangements concerning the options.
\n———————————–<\/p>\n
A list of our directors and Executive Officers is attached to this
\nOffer to Redback as Schedule A. As of September 26, 2001, our directors and
\nExecutive Officers, as a group, beneficially owned options outstanding under our
\n1999 Plan to purchase a total of 3,183,681 of our shares, which represented
\napproximately 13% of the shares subject to all options outstanding under that
\nplan as of that date. Members of the Board of Directors are not eligible to
\n —
\nparticipate in the offer and therefore will not receive any replacement options
\ngranted under the 1999 Plan as a result of this offer.<\/p>\n
-48-<\/p>\n
Directors and Executive Officers, as a group, beneficially owned
\noptions outstanding under all of our stock plans and agreements to purchase a
\ntotal of 11,508,481 of our shares, which represented approximately 27% of the
\nshares subject to all options outstanding under the plans and agreements as of
\nthat date. As mentioned, options to purchase our shares owned by directors are
\nnot eligible to be tendered in the offer.<\/p>\n
Securities Ownership of Each of Our Directors, Executive Officers and
\n ———————————————————————
\n5% Stockholders
\n—————<\/p>\n
The following table sets forth information regarding the beneficial
\nownership of our common stock as of September 26, 2001, by:<\/p>\n
[_] each of our directors;<\/p>\n
[_] each of our Executive Officers;<\/p>\n
[_] each person or group of affiliated persons who is known to us to
\n beneficially own 5% or more of our common stock; and<\/p>\n
[_] all current directors and Executive Officers as a group.<\/p>\n
Beneficial ownership is determined in accordance with the rules of the
\nSecurities and Exchange Commission. In computing the number of shares
\nbeneficially owned by a person and the percentage ownership of that person,
\nshares of common stock subject to options held by that person that are currently
\nexercisable or exercisable within 60 days of September 26, 2001, are deemed
\nissued and outstanding. These shares, however, are not deemed outstanding for
\npurposes of computing percentage ownership of each other stockholder. Except as
\nindicated in the footnotes to this table and subject to applicable community
\nproperty laws, each stockholder named in the table has sole voting and
\ninvestment power with respect to the shares shown as beneficially owned by them.
\nThis table also includes shares owned by a spouse as community property.<\/p>\n
Percentage of ownership is based on 158,228,124 shares of common stock
\noutstanding on September 26, 2001. Unless otherwise indicated, the address of
\neach of the persons named below is: c\/o Redback Networks Inc., 250 Holger Way,
\nSan Jose, California 95134.<\/p>\n
-49-<\/p>\n
\n\n Beneficial Ownership<\/p>\n
Number of Shares of Percent of
\nName of Directors, Executive Officers & 5% Common Stock Shares
\n——————————————- Beneficially Owned as of Beneficially
\nStockholders September 26, 2001 Owned
\n———— ———————— ————-
\n
\nKevin DeNuccio, President, Chief Executive Officer and
\n Director (1)…………………………………….. 2,395,833 1.5%
\nGeorges Antoun, Senior Vice President of Marketing……. 0 *
\nRichard Bibb, Senior Vice President of Worldwide Sales
\n (2)…………………………………………….. 132,014 *
\nPankaj Patel, Senior Vice President of Engineering (3)… 1,299,894 *
\nLars Rabbe, Senior Vice President of Information
\n Technology (4)…………………………………… 103,591 *
\nDennis P. Wolf, Senior Vice President of Finance and
\n Administration, Chief Financial Officer and Corporate
\n Secretary (5)……………………………………. 43,749 *
\nPierre R. Lamond, Director, Chairman of the Board (6)…. 3,858,928 2.4%
\nGuarav Garg, Director (7)………………………….. 1,467,341 *
\nPromod Haque, Director (8)…………………………. 3,328,082 2.1%
\nVinod Khosla, Director (9)…………………………. 10,335,591 6.5%
\nWilliam L. Kurz, Director (10)……………………… 140,164 *
\nDaniel J. Warmenhoven, Director (11)………………… 340,000 *
\nAll directors and Executive Officers as a group (12
\n persons) (12)……………………………………. 23,445,187 14.5%
\nOther 5% Stockholders
\nFMR Corporation (13)………………………………. 14,312,469 9.0%
\n 82 Devonshire Street
\n Boston, MA 02109
\nEntities affiliated with Kleiner Perkins Caufield & Byers (14)………………………………………. 9,899,888 6.3%
\n 2750 Sand Hill Road
\n Menlo Park, CA 94025
\nEntities affiliated with Putnam Investments, Inc. (15)… 9,085,986 5.7%
\n One Post Office Square
\n Boston, MA 02109
\n<\/c><\/c><\/s><\/caption>\n<\/table>\n* Represents beneficial ownership of less than 1%.<\/p>\n
(1) Includes 500,000 shares and options to purchase 1,895,833 shares of our
\n common stock, which are presently exercisable or will become exercisable
\n within 60 days of September 26, 2001.<\/p>\n
(2) Includes 769 shares and options to purchase 131,245 shares of our common
\n stock, which are presently exercisable or will become exercisable within 60
\n days of September 26, 2001.<\/p>\n
(3) Includes 1,165,522 shares and options to purchase 134,372 shares of our
\n common stock, which are presently exercisable or will become exercisable
\n within 60 days of September 26, 2001.<\/p>\n
(4) Includes 469 shares and options to purchase 103,122 shares of our common
\n stock, which are presently exercisable or will become exercisable within 60
\n days of September 26, 2001.<\/p>\n
(5) Options to purchase shares of our common stock, which are presently
\n exercisable or will become exercisable within 60 days of September 26,
\n 2001.<\/p>\n
(6) Includes 11,810 shares and options immediately exercisable for 220,000
\n shares of our common stock owned individually by Mr. Lamond, 364,744 shares
\n owned by the Pierre R. and Christine E. Lamond Trust dated November 22,
\n 1985, 3,008,284 shares held by Sequoia Capital VII and 174,090 shares and
\n warrants to purchase 80,000 shares held by Sequoia Technology Partners VII.
\n Mr. Lamond disclaims beneficial ownership of the shares held by Sequoia
\n Capital VII and Sequoia Technology Partners VII, except to the extent of
\n his pecuniary interest therein.<\/p>\n
(7) Includes 1,374,842 shares and options to purchase 92,499 shares of our
\n common stock, which are presently exercisable or will become exercisable
\n within 60 days of September 26, 2001.<\/p>\n
(8) Includes 159,697 shares and options immediately exercisable for 100,000
\n shares of our common stock owned individually by Mr. Haque, 2,963,554
\n shares owned by Norwest Venture Partners VII, L.P. and 104,831 shares owned
\n by the Haque Family Partnership. Mr. Haque disclaims beneficial ownership
\n of the shares held by Norwest Venture Partners VII L.P., except to the
\n extent of his pecuniary interest therein.<\/p>\n
(9) Includes 331,552 shares and options immediately exercisable for 100,000
\n shares of our common stock owned individually by Mr. Khosla, 4,151 shares
\n owned by the Khosla Family Trust, 9,357,683 shares held Kleiner Perkins
\n Caufield & Byers VIII and 542,205 shares held by KPCB VIII Founders Fund
\n L.P. Mr. Khosla disclaims beneficial ownership of the shares held by
\n Kleiner Perkins Caufield & Byers VIII and KPCB VIII Founders Fund L.P.,
\n except to the extent of his pecuniary interest therein.<\/p>\n
(10) Includes 164 shares and options immediately exercisable for 140,000 shares
\n of our common stock.<\/p>\n
(11) Includes 300,000 shares and options immediately exercisable for 40,000
\n shares of our common stock.<\/p>\n
(12) Includes 20,583,871 shares, warrants to purchase 80,000 shares and options
\n to purchase 3,000,820 shares of our common stock, which are presently
\n exercisable or will become exercisable within 60 days of September 26,
\n 2001.<\/p>\n
(13) Includes 13,273,684 shares beneficially owned by Fidelity Management & Research Company, 807,585 shares beneficially owned by Fidelity Management
\n Trust Company and 231,200 shares beneficially owned by Fidelity
\n International Limited. The shares beneficially owned by Fidelity
\n Management & Research Company include 699,375 shares resulting from the
\n assumed conversion of $133,392,000 principal amount of Redback’s 5%
\n Convertible Subordinated Notes due April 1, 2007 and the shares
\n beneficially owned by Fidelity Management Trust Company include 40,885
\n shares resulting from the assumed conversion of $7,798,000 principal amount
\n of Redback’s 5% Convertible Subordinated Notes due April 1, 2007.<\/p>\n
(14) Includes 9,357,683 shares beneficially owned by KPCB VIII Associates, L.P.
\n and 542,205 shares beneficially owned by KPCB VIII Founders Fund, L.P.<\/p>\n
(15) Includes 7,262,264 shares beneficially owned by Putnam Investment
\n Management, LLC and 1,823,722 shares beneficially owned by The Putnam
\n Advisory Company, LLC.<\/p>\n
Securities Transactions of Each of Our Directors, Executive Officers
\n ——————————————————————–
\nand 5% Stockholders
\n——————-<\/p>\n
The following is a list of the stock and stock option transactions
\ninvolving our directors, Executive Officers and 5% stockholders within
\nthe sixty (60) days prior to and including September 6, 2001:<\/p>\n
. On July 25, 2001, we granted an option to purchase 80,000 shares of
\n our common stock to Pierre Lamond, our Chairman of the Board of
\n Directors. The exercise price of these options is $5.40 per share.<\/p>\n
. On July 25, 2001, we granted a warrant to purchase 80,000 shares of
\n our common stock to Sequoia Technology Partners, which is affiliated
\n with Pierre Lamond, our Chairman of the Board of Directors. The
\n exercise price of these options is $5.40 per share.<\/p>\n
-50-<\/p>\n
. On August 16, 2001, we granted an option to purchase 7,122 shares of
\n our common stock to Richard Bibb, our senior Vice President of
\n Worldwide Sales. The exercise price of these options is $1.75 per
\n share.<\/p>\n
. On August 16, 2001, we granted an option to purchase 12,686 shares
\n of our common stock to Pankaj Patel, our Senior Vice President of
\n Engineering. The exercise price of these options is $1.75 per share.<\/p>\n
. On August 16, 2001, we granted an option to purchase 8,190 shares of
\n our common stock to Lars Rabbe, our Senior Vice President of
\n Information Technology. The exercise price of these options is $1.75
\n per share.<\/p>\n
. On August 16, 2001, we granted an option to purchase 10,683 shares
\n of our common stock to Dennis Wolf, our Senior Vice President of
\n Finance and Administration and Chief Financial Officer. The exercise
\n price of these options is $1.75 per share.<\/p>\n
. On August 29, 2001, we granted a new hire option to purchase
\n 1,000,000 shares of our common stock to Georges Antoun, our Senior
\n Vice President of Marketing. The exercise price of these options is
\n $4.17 per share.<\/p>\n
. On August 29, 2001, we granted a new hire option to purchase
\n 6,500,000 shares of our common stock to Kevin DeNuccio, our
\n President, Chief Executive Officer and Director. The exercise price
\n of these options is $4.17 per share.<\/p>\n
. On August 29, 2001, we granted 500,00 restricted shares of our
\n common stock to Kevin DeNuccio, our President, Chief Executive
\n Officer and Director. The fair market value of these shares is $4.17
\n per share.<\/p>\n
. On August 31, 2001, Pierre Lamond, Chairman of our Board of
\n Directors, purchased 25,000 shares of our common stock on the open
\n market at a price of $4.00 per share.<\/p>\n
. On September 21, 2001, we granted an option to purchase 250,000
\n shares of our common stock to Pankaj Patel, our Senior Vice
\n President of Engineering. The exercise price of these options is
\n $2.07 per share.<\/p>\n
. On September 21, 2001, we granted an option to purchase 200,000
\n shares of our common stock to Dennis Wolf, our Senior Vice President
\n of Finance and Administration and Chief Financial Officer. The
\n exercise price of these options is $2.07 per share.<\/p>\n
Except as otherwise described above, there have been no transactions in
\noptions to purchase our common stock or in our common stock which were effected
\nduring the past sixty (60) days by Redback, or to our knowledge, by any of our
\nExecutive Officers, directors, affiliates or subsidiaries.<\/p>\n
12. Status of options acquired by us in the offer; accounting
\n ———————————————————
\nconsequences of the offer.
\n————————-<\/p>\n
Options issued under the Redback Networks Inc. 1997 Stock Plan and the
\n1999 Plan which we acquire through the offer will be cancelled and the shares
\nsubject to those options will be returned to the pool of shares available for
\nfuture grants of options under the 1999 Plan. To the extent these shares are not
\nfully reserved for issuance upon exercise of the New Options to be granted in
\nconnection with the offer, the shares will be available for future awards to
\nemployees and other eligible 1999 Plan participants without further stockholder
\naction, except as required by applicable law or the rules of the Nasdaq National
\nMarket or any other securities quotation system or any stock exchange on which
\nour shares are then quoted or listed.<\/p>\n
Options issued under Siara Systems, Inc. 1998 Equity Incentive Plan, as
\namended, the Abatis Systems Corporation Key Employee Stock Option Plan and the
\nRedback Networks Inc. 2001 Employee Option Plan which we acquire through the
\noffer will be cancelled.<\/p>\n
-51-<\/p>\n
As a result of our decision to make this offer to our employees, all
\nNew Options granted in association with this offer, as well as all eligible
\noptions that are not tendered in this offer and accepted for replacement, will
\nbe treated for financial reporting purposes as variable awards. Options granted
\nwithin the six (6) months prior to the Cancellation Date which are Excepted
\nOptions may also be treated as variable awards for financial reporting purposes.
\nIn addition, options granted to participants of this offer within the six (6)
\nmonths following the Cancellation Date may also be treated as variable awards
\nfor financial reporting purposes. This means that we will be required to record
\nnon-cash stock compensation charges or credits reflecting any increases and
\ndecreases in the price of Redback’s common stock. The higher the market value of
\nour common stock, the greater the non-cash stock compensation expense we will
\nrecord. We will have to continue to reflect the impact of increases and
\ndecreases in the price of Redback’s common stock in Redback’s statement of
\noperations until the options are exercised, forfeited or terminated. The New
\nOptions will have a maximum term of five (5) years, subject to earlier
\nexpiration of the option upon the occurrence of certain events, such as the
\noptionee’s termination of employment. Options which were eligible but not
\ntendered in this offer and accepted for replacement will retain their original
\nterm, which is generally ten (10) years, subject to earlier expiration of the
\noption upon the occurrence of certain events, such as the optionee’s termination
\nof employment.<\/p>\n
13. Legal matters; regulatory approvals.
\n ———————————–<\/p>\n
We are not aware of any license or regulatory permit that appears to be
\nmaterial to our business that might be adversely affected by our replacement of
\noptions and issuance of New Options as contemplated by the offer, or of any
\napproval or other action by any government or governmental, administrative or
\nregulatory authority or agency, domestic or foreign, that would be required for
\nthe acquisition or ownership of our options as contemplated herein. Should any
\nsuch approval or other action be required, we presently contemplate that we will
\nseek such approval or take such other action. We cannot assure you that any such
\napproval or other action, if needed, could be obtained or what the conditions
\nimposed in connection with such approvals would entail or whether the failure to
\nobtain any such approval or other action would result in adverse consequences to
\nour business. Our obligation under the offer to accept tendered options for
\nreplacement and to issue New Options for tendered options is subject to the
\nconditions described in Section 7 of this Offer to Replace.<\/p>\n
If we are prohibited by applicable laws or regulations from granting
\nNew Options during the period beginning immediately after the date we expect to
\ngrant the New Options (expected to be October 15, 2001), we will not grant any
\nNew Options. We are unaware of any such prohibition at this time, and we will
\nuse reasonable efforts to effect the grant, but if the grant is prohibited
\nthroughout the period we will not grant any New Options. Under such
\ncircumstances, we will not accept your tendered options for replacement and
\nthose options will not be cancelled.<\/p>\n
14. Material U.S. Federal Income Tax Consequences.
\n ———————————————
\n The following is a general summary of the material U.S. federal income
\ntax consequences of the replacement of options pursuant to the offer. This
\ndiscussion is based on the Internal Revenue Code, its legislative history,
\nTreasury Regulations thereunder and administrative and judicial<\/p>\n
-52-<\/p>\n
interpretations thereof as of the date of the offer, all of which are subject to
\nchange, possibly on a retroactive basis. This summary does not discuss all of
\nthe tax consequences that may be relevant to you in light of your particular
\ncircumstances, nor is it intended to be applicable in all respects to all
\ncategories of option holders.<\/p>\n
Option holders who replace outstanding options with New Options should
\nnot be required to recognize income for federal income tax purposes at the time
\nof the replacement. We believe that the replacement will be treated as a
\nnon-taxable exchange. We advise all option holders considering replacing their
\noptions to meet with their own tax advisors with respect to the federal, state,
\nlocal and foreign tax consequences of participating in the offer.<\/p>\n
Incentive Stock Options
\n ———————–<\/p>\n
If you tender incentive stock options and those options are accepted
\nfor replacement, the New Options will be granted as nonstatutory stock options.<\/p>\n
You should note that there is a risk that any eligible incentive stock
\noptions you have may be affected, even if you do not participate in the
\nreplacement. We do not believe that our offer to you will change any of the
\nterms of your eligible incentive stock options if you do not accept the offer.
\nWe believe that you will not be subject to current U.S. federal income tax if
\nyou do not elect to participate in the option replacement program. We also
\nbelieve that the option replacement program will not change the U.S. federal
\nincome tax treatment of subsequent grants and exercises of your incentive stock
\noptions (and sales of shares acquired upon exercises of such options) if you do
\nnot participate in this offer to replace options. However, the IRS may
\ncharacterize this offer to replace options as a “modification” of those
\nincentive stock options, even if you decline to participate. In 1991, the IRS
\nissued a private letter ruling in which another company’s option exchange
\nprogram was characterized as a “modification” of all of the incentive stock
\noptions that could be exchanged. This does not necessarily mean that our offer
\nto replace options will be viewed the same way. The company’s option exchange
\noffer was not the same type of program as our option replacement program, and so
\nmay be treated differently. Private letter rulings by the IRS contain the IRS’s
\nopinion regarding only the specific facts presented by a specific person or
\ncompany. The person or company receiving the letter may rely on it, but no other
\nperson or company may rely on the letter ruling, nor may they assume the same
\nopinion would apply to their situation, even if the facts at issue are similar.
\nWhile such letters do not provide certainty, they may indicate how the IRS will
\nview a similar situation. We therefore do not know if the IRS will assert the
\nposition that our offer constitutes a “modification” of incentive stock options
\neligible for tender. A successful assertion by the IRS of this position could
\nextend the options’ holding period to qualify for favorable tax treatment.
\nAccordingly, to the extent you dispose of your incentive stock option shares
\nprior to the lapse of the new extended holding period, your incentive stock
\noption could be taxed similarly to a nonstatutory stock option.<\/p>\n
-53-<\/p>\n
Nonstatutory Stock Options.
\n ————————–<\/p>\n
Under current law, an option holder will not realize taxable income
\nupon the grant of an option which is not qualified as an incentive stock option,
\nalso referred to as a nonstatutory stock option. However, when an option holder
\nexercises the option, the difference between the exercise price of the option,
\nand the fair market value of the shares subject to the option on the date of
\nexercise will be compensation income taxable to the option holder.<\/p>\n
We will be entitled to a deduction equal to the amount of compensation
\nincome taxable to the option holder if we comply with eligible reporting
\nrequirements.<\/p>\n
We recommend that you consult your own tax advisor with respect to the
\nfederal, state and local tax consequences of participating in the offer, as the
\ntax consequences to you of participation in the offer are dependent on your
\nindividual tax situation.<\/p>\n
15. Material Income Tax Consequences For Tax Residents of Brazil.
\n ————————————————————<\/p>\n
The following is a general summary of the material tax consequences of
\nthe replacement of eligible options and grant of New Options under the offer for
\ntax residents in Brazil. This discussion is based on Brazilian tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular circumstances, nor is it intended to be applicable in all
\nrespects to all categories of option holders. We advise all option holders
\nconsidering replacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the
\nresult of your tender of eligible options for replacement with New Options.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise and Sale of Shares.
\n —————————<\/p>\n
Due to Brazilian exchange control regulations, any New Options that may
\nbe granted to you will be modified as described in this Section. You must use
\nthe cashless exercise method to exercise your New Options. There are two methods
\nof cashless exercise: “full cashless” and “partial cashless.” If you elect the
\n“full cashless” method of exercise, upon exercise, a broker will sell all of<\/p>\n
-54-<\/p>\n
the shares of Redback that you are entitled to receive upon exercise, use the
\nproceeds to pay the exercise price (plus any applicable fees or taxes) and remit
\nthe balance to you in cash. Under the “partial cashless” method, upon exercise,
\na broker will sell enough shares of Redback Networks that you are entitled to
\nreceive upon exercise to cover the exercise price (plus any applicable fees or
\ntaxes) and hold the remaining Redback Networks shares on your behalf or deliver
\nthe shares to you.<\/p>\n
You will be subject to capital gains tax on the difference (or spread)
\nbetween the fair market value of the shares on the date of exercise and the
\nexercise price.<\/p>\n
If you acquire shares upon exercise, you will be subject to capital
\ngains tax on any additional gain that you realize when you subsequently sell the
\nshares. The additional gain equals the difference between the amount realized on
\nthe sale and the exercise price. You may be exempt from capital gains tax if the
\namount of the shares sold in the month of sale (in combination with other shares
\nsold for the month) does not exceed R$20,000.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your New Options to purchase shares, you may be
\nentitled to receive dividends. Any dividends paid on Redback Networks shares
\nwill be subject to income tax in Brazil and withholding tax in the United
\nStates. You may be entitled to a local tax credit in Brazil for U.S. tax
\nwithheld.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
No tax or social insurance withholding or reporting is required for
\noptions exercised on or after 1 April 2000.<\/p>\n
Exchange Control Information.
\n —————————-<\/p>\n
Due to exchange control regulations in Brazil, you will be limited to
\nexercising your New Options using the full or partial cashless exercise method.<\/p>\n
Please consult a tax advisor to determine the tax considerations and
\ntax consequences relevant to your participation in the offer.<\/p>\n
16. Material Income Tax Consequences For Tax Residents of British
\n ————————————————————-
\nColumbia, Canada and Ontario, Canada
\n————————————<\/p>\n
The following is a general summary of the material tax consequences of
\nthe replacement of eligible options and grant of New Options under the offer for
\ntax residents in Canada. This discussion is based on Canadian tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular<\/p>\n
-55-<\/p>\n
circumstances, nor is it intended to be applicable in all respects to all
\ncategories of option holders. We advise all option holders considering replacing
\ntheir options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the
\nresult of your tender of eligible options for replacement with New Options.
\nHowever, the manner in which the Canada Customs and Revenue Agency will treat
\nthis transaction is not certain. It is possible that: (i) a tax-neutral rollover
\nwould be available; (ii) the value of the new options would be required to be
\nincluded in your income; or (iii) the eligible options would be considered to be
\nrepriced options, resulting in the loss of the preferential 50% tax deduction
\nand stock option tax deferral treatment ordinarily available upon the exercise
\nof options.<\/p>\n
Tax Information.
\n —————<\/p>\n
For the purposes of this supplement, it is assumed that the New Options
\nwill meet the conditions to qualify for favorable tax treatment under Canadian
\ntax law. For this reason, the exercise price of any New Options granted to you
\npursuant to this offer will be the fair market value of the underlying shares on
\nthe Replacement Date.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
Subject to the deferral provisions discussed below, you will recognize
\ntaxable income upon the exercise of the New Options. You will include in income
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price. However, you can deduct one-half of this
\n“spread” and you will be subject to tax on the remaining one-half of the spread
\nat your applicable marginal tax rate.<\/p>\n
You may defer the taxation on the spread until the earlier of the time
\nthat you sell the shares purchased on exercise, die or become a non-resident of
\nCanada. In order to be eligible for this deferral, you must file an election
\nwith your employer by 15 January of the year following the year in which shares
\nare acquired under the 1999 Plan.<\/p>\n
You can only defer taxation on the spread up to the first C$100,000
\nworth of options that vest in any one year. For the purpose of calculating this
\nlimit, the value of an option equals the fair market value of the shares subject
\nto the option at the time the option was granted.<\/p>\n
-56-<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
If you acquire shares upon exercise, you will be subject to tax when
\nyou subsequently sell the shares. The taxable amount will generally be one-half
\nof the difference between the sale price and the fair market value of the shares
\non the date of exercise (less any brokerage fees). Income tax will be assessed
\non the taxable income at your marginal income tax rate.<\/p>\n
One-half of any loss arising on the sale of the shares (including any
\nbrokerage fees) may be deducted from any taxable capital gain for the year, the
\nprevious three taxation years, or any subsequent taxation year.<\/p>\n
Any amount on which taxation was deferred at exercise will become
\ntaxable at the time the shares are sold.<\/p>\n
Dividends.
\n ———<\/p>\n
If you acquire shares upon exercise, you may be entitled to receive
\ndividends. You will be subject to income tax at your marginal rate on any
\ndividends paid on the shares of Redback. You will generally be entitled to a
\nforeign tax credit equal to the amount of the dividend for United States federal
\ntax withheld at source.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
A T4 Form will be filed with the Canada Customs and Revenue Agency and
\na copy delivered to you prior to the last day of February in the year following
\nthe year in which you exercise your New Options. The T4 Form will indicate the
\namount of the benefit and any amount subject to the 50% deduction. You must
\nreport the stock option income, capital gains, dividend receipts, and any
\ndeductions, if applicable, in your annual income tax return. Your employer will
\nnot withhold taxes on these amounts and you are required to pay any additional
\namounts owing by you. For every year you have a balance of deferred stock option
\nbenefits outstanding you must file a Form T1212 with the Canada Customs and
\nRevenue Agency together with your annual tax return.<\/p>\n
The spread at exercise is subject to Canada Pension Plan Premiums to
\nthe extent you have not reached the maximum pensionable earnings of C$38,300 for
\n2001.<\/p>\n
Securities Information.
\n ———————-<\/p>\n
Any New Options which may be granted to you pursuant to the terms of
\nthe offer will be conditional on obtaining the necessary securities regulatory
\napprovals or exemptions from the applicable securities regulatory authorities.
\nAlthough we do not anticipate any difficulty in obtaining the necessary
\napprovals or exemptions, it is possible that we may not obtain all of the
\nexemptions which we will seek and\/or that the New Options will be subject to
\ncertain conditions imposed by the securities regulatory authorities.<\/p>\n
-57-<\/p>\n
Please consult a tax advisor to determine the tax considerations and
\ntax consequences relevant to your participation in the offer.<\/p>\n
17. Material Income Tax Consequences For Tax Residents of France.
\n ————————————————————<\/p>\n
The following is a general summary of the material tax consequences of
\nthe replacement of eligible options and grant of New Options under the offer for
\ntax residents in France. This discussion is based on French tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular circumstances, nor is it intended to be applicable in all
\nrespects to all categories of option holders. We advise all option holders
\nconsidering replacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the
\nresult of your tender of eligible options for replacement with New Options.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to income tax
\n(at your marginal rate) and social taxes on the difference between the fair
\nmarket value of the shares on the date of exercise and the exercise price (i.e.,
\nthe spread). This income is considered additional salary and therefore is
\nincluded in your overall income for the year in which you exercise your New
\nOptions.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
When you sell the shares that you acquire under the 1999 Plan, you will
\nbe subject to capital gains tax (currently 26%) on any additional gain (i.e.,
\nthe difference between the sale price and the fair market value of the shares at
\nthe time of exercise) that you realize when you sell your shares. This tax only
\napplies when the aggregate gross proceeds that you receive from the sale of any
\nstock in any calendar year exceeds a certain amount, which is set at FF50,000
\nfor 2001.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your New Options to purchase shares, you may be
\nentitled to receive dividends. Any dividends paid on Redback shares will be
\nsubject to tax in France and withholding<\/p>\n
-58-<\/p>\n
tax in the United States. You may be entitled to receive a tax credit against
\nthe French tax payable equal to the United States federal tax withheld at
\nsource.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Your employer is not required to withhold income taxes but is required to
\nwithhold and remit social taxes when you exercise your New Options. Your
\nemployer will also report the spread at exercise to the tax and labor
\nauthorities.<\/p>\n
Exchange Control Information.
\n —————————-<\/p>\n
You may hold shares purchased under the 1999 Plan outside of France
\nprovided that you declare all foreign accounts (both those currently open and
\nthose closed during the tax year) on a specific form in your income tax return.
\nYou must also declare to the customs and excise authorities any cash or
\nsecurities you import or export without the use of a financial institution when
\nthe value of cash or securities is equal to or exceeds FF50,000.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
18. Material Income Tax Consequences For Tax Residents of Germany.
\n ————————————————————-<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for tax
\nresidents in Germany. This discussion is based on German tax law as of the date
\nof the offer, which is subject to change, possibly on a retroactive basis. The
\ninformation may be out of date at the time you exercise your options or sell the
\nshares you acquire upon exercise. This summary is general in nature and does not
\ndiscuss all of the tax consequences that may be relevant to you in light of your
\nparticular circumstances, nor is it intended to be applicable in all respects to
\nall categories of option holders. We advise all option holders considering
\nreplacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
59<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to ordinary income
\ntaxes on the difference between the fair market value of the shares on the date
\nof exercise and the exercise price. The difference may also be subject to social
\ninsurance contributions if and to the extent to which your income in the month
\nduring which you exercise your New Options is below the relevant social security
\ncontribution limits.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
Any additional gain from the subsequent sale of the shares is not taxable
\nprovided: (1) you have owned the shares for more than 12 months; (2) you have
\nnot, within the last 5 years, held more than 10% of the stated capital of
\nRedback Networks; and (3) the shares are not held as a business asset.
\n(Effective 1 January 2002, the 10% limit will be lowered to 1% such that in
\norder to satisfy the foregoing conditions, you cannot have held 1% or more of
\nthe stated capital of Redback Networks.) If tax is due, it is payable on the
\ndifference between what you receive from the sale and your adjusted base cost.
\n(Effective 1 January 2002, only 50% of such gain will be subject to tax.) Your
\nadjusted base cost is based on the exercise price, plus any tax benefit you were
\ndeemed to have earned because of the exercise and on which you already paid tax
\nat exercise.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your New Options and purchase shares, you may be entitled
\nto receive dividends. Any dividends paid on Redback Networks shares will be
\nsubject to income tax in Germany and withholding tax in the United States.
\nHowever, only 50% of the value of the dividend distributed is subject to tax in
\nGermany. You must report such dividends on your annual tax return. You may
\ndeduct 50% of the U.S. federal withholding tax withheld on your German tax
\nreturn.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Under current laws, withholding and reporting for income tax and social
\ninsurance are required when you exercise your options. Your employer will
\nwithhold income tax and social insurance contributions from your wages at the
\ntime you exercise your option to the extent your wages are below the social
\nsecurity contribution limits. You will be responsible for paying any difference
\nbetween the actual tax liability and the amount withheld.<\/p>\n
Exchange Control Information.
\n —————————-<\/p>\n
You must report cross-border payments in excess of EURO12,500 monthly
\n(approximately US$11,053). This reporting is normally accomplished through the
\nGerman bank involved in the transaction, but you are responsible for making sure
\nthe report is filed. In addition, you must report any receivables or payables or
\ndebts in foreign currency exceeding an amount of DM3,000,000 on a monthly basis.
\nFinally, you must report on an annual basis your participation in Redback
\nNetworks in the unlikely event that it exceeds 10% of the total of the voting
\ncapital.<\/p>\n
60<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
19. Material Income Tax Consequences For Tax Residents of Hong Kong.
\n —————————————————————<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for
\nHong Kong tax residents. This discussion is based on Hong Kong tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular circumstances, nor is it intended to be applicable in all
\nrespects to all categories of option holders. We advise all option holders
\nconsidering replacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options.<\/p>\n
Securities Information.
\n ———————-<\/p>\n
Any New Options which may be granted to you pursuant to the offer will be
\nsubject to your execution of an undertaking not to sell shares obtained upon the
\nexercise of the New Options for a period of six (6) months from the grant date.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when New Options are granted to you under
\nthe 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to salaries tax on
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
When you sell the shares that you acquire under the 1999 Plan, you will not
\nbe subject to additional tax.<\/p>\n
-61-<\/p>\n
Dividends.
\n ———<\/p>\n
If you acquire shares upon exercise, you may be entitled to receive
\ndividends. Any dividends paid on Redback Networks shares will be subject to
\nUnited States federal withholding tax. You will not be subject to tax on
\ndividends in Hong Kong.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
When you exercise your New Options, your employer is not required to
\nwithhold income tax. However, your employer will report the gain resulting from
\nthe exercise of your New Options to the Hong Kong Inland Revenue Department in
\nthe course of its normal annual return of compensation.<\/p>\n
You will be responsible for reporting and paying any salaries taxes
\nresulting from the exercise of your New Options.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
20. Material Income Tax Consequences For Tax Residents of Japan.
\n ———————————————————–<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for
\nJapan tax residents. This discussion is based on Japanese tax law as of the date
\nof the offer, which is subject to change, possibly on a retroactive basis. The
\ninformation may be out of date at the time you exercise your options or sell the
\nshares you acquire upon exercise. This summary is general in nature and does not
\ndiscuss all of the tax consequences that may be relevant to you in light of your
\nparticular circumstances, nor is it intended to be applicable in all respects to
\nall categories of option holders. We advise all option holders considering
\nreplacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options; however,
\nthe tax laws in this area are not certain and so we cannot predict the tax
\nconsequences with certainty.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
-62-<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to income tax on
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price. Your income will likely be treated as
\n“remuneration income” and will be taxed at your marginal tax rate.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
When you sell your shares purchased under the 1999 Plan, you will be
\nsubject to tax on any gain on the subsequent sale of the shares at a flat rate
\nof 26% (i.e., 20% national income tax and a 6% local inhabitants tax).<\/p>\n
If you sell your shares through an authorized stockbroker or bank in Japan
\nand submit an election return form, you may elect to have the broker withhold
\n1.05% of the total amount received (regardless of the gain) from selling your
\nshares. If you make this election, only deemed gain at 5.25% of the sale of the
\nshares is subject only to the 20% national income tax; the 6% local inhabitants
\ntax would not apply. Please note that, although under the 2000 tax legislation
\nthis 1.05% taxation method was scheduled to be abolished as of 1 April 2001,
\nabolishment has been postponed until 31 March 2003.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your New Options to purchase shares, you may be entitled to
\nreceive dividends. If the dividend payments are made through a Japanese paying
\nagent, Japanese withholding tax will be imposed on the dividend amount net of
\nthe foreign withholding tax which will be payable in the United States.<\/p>\n
A foreign tax credit and domestic withholding tax credit will be allowed if
\nyou are a Japanese resident taxpayer and if you choose the aggregate taxation
\nmethod (Sogo Kazei) on such dividend income.<\/p>\n
If you choose the separate taxation method (Bunri Kazei), no tax credits
\nwill be allowed.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Although income from the exercise of stock options is classified as
\nremuneration income for individual income tax purposes, your employer is not, as
\na rule, required to withhold income tax or social security contributions when
\nyou exercise your options, as long as the employer is not directly involved in
\nthe operation (i.e., payment of income) or costs of the 1999 Plan. It is your
\nresponsibility to report and pay any taxes resulting from your participation in
\nthe 1999 Plan.<\/p>\n
Exchange Control Information.
\n —————————-<\/p>\n
If you intend to acquire shares whose value exceeds (Y)100,000,000 in a
\nsingle transaction, you must file a report with the Ministry of Finance through
\nthe Bank of Japan within 20 days from<\/p>\n
-63-<\/p>\n
the purchase of the shares (provided, however, if you acquire such shares
\nthrough a securities company in Japan, such requirement will not be imposed).
\nPlease note that the reporting requirements vary depending on whether or not the
\nrelevant payment is made through a bank in Japan.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
21. Material Income Tax Consequences For Tax Residents of Korea.
\n ———————————————————–<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for
\nKorea tax residents. This discussion is based on Korean tax law as of the date
\nof the offer, which is subject to change, possibly on a retroactive basis. The
\ninformation may be out of date at the time you exercise your options or sell the
\nshares you acquire upon exercise. This summary is general in nature and does not
\ndiscuss all of the tax consequences that may be relevant to you in light of your
\nparticular circumstances, nor is it intended to be applicable in all respects to
\nall categories of option holders. We advise all option holders to consult their
\nown tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Exchange.
\n —————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options; however,
\nthe tax laws in this area are not certain and so we cannot predict the tax
\nconsequences with certainty.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to income tax on
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price. The spread will be treated as salary or wages
\nand taxed at your marginal rate. No securities transaction tax will apply to the
\nexercise of your New Options.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
When you sell the shares that you acquire under the 1999 Plan, you will be
\nsubject to capital gains tax on any gain that you realize on such sale, which
\ngain will be equal to the difference<\/p>\n
-64-<\/p>\n
between the sale price and the fair market value of the shares at the time of
\nexercise. No securities transaction tax will apply to your subsequent
\ndisposition of shares acquired under the 1999 Plan.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your New Options to purchase shares, you may be entitled to
\nreceive dividends. Any dividends paid on Redback Networks shares will be subject
\nto income tax in Korea and withholding tax in the United States. You will be
\nentitled to a tax credit against your Korean income tax for the United States
\nfederal tax withheld. You must report the amount of the dividends on your income
\ntax return.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
When you exercise your New Options, your employer is not required to
\nwithhold or report income tax. It is your responsibility to report this income
\non your annual tax return and to pay all taxes owed. Your employer may be
\nrequired to withhold and make contributions to Korea’s social insurance fund in
\nconnection with the income that you recognize under the 1999 Plan.<\/p>\n
Exchange Control Restrictions.
\n —————————–<\/p>\n
If you remit funds to purchase shares upon the exercise of your New
\nOptions, you will be required have the remittance of funds “confirmed” by a
\nforeign exchange bank in Korea. To receive the confirmation, you will be
\nrequired to submit certain documentation to the bank. You should check with the
\nbank regarding the specific documentation they require and the time required to
\nobtain a confirmation prior to exercise. If you realize US$50,000 or more on the
\nsale of shares, you must repatriate the proceeds to Korea within six (6) months.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
22. Material Income Tax Consequences For Tax Residents of the Netherlands.
\n ———————————————————————<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for tax
\nresidents in the Netherlands. This discussion is based on the Netherlands tax
\nlaw as of the date of the offer, which is subject to change, possibly on a
\nretroactive basis. The information may be out of date at the time you exercise
\nyour options or sell the shares you acquire upon exercise. This summary is
\ngeneral in nature and does not discuss all of the tax consequences that may be
\nrelevant to you in light of your particular circumstances, nor is it intended to
\nbe applicable in all respects to all categories of option holders. We advise all
\noption holders considering replacing their options to meet with their own tax
\nadvisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
-65-<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options; however,
\nthe tax laws in this area are not certain and we cannot predict the tax
\nconsequences with certainty.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise and Sale of Shares.
\n —————————<\/p>\n
When you exercise your New Options, you will be subject to income tax on
\nthe difference between the proceeds of the sale of shares acquired upon exercise
\nand the exercise price, in accordance with a ruling obtained from the Dutch tax
\nauthorities which allows you to defer the payment of tax until the time of
\nexercise. As required by the terms of the ruling, you will only be able to
\nexercise the New Options granted to you using the full cashless exercise method
\nwhereby the options are exercised without remitting any cash. You will not be
\nentitled to receive and hold shares of our stock when you exercise your New
\nOptions. Under the cashless exercise method of exercise, the broker will
\nimmediately sell all of the shares that you are entitled to purchase. You will
\nreceive the cash proceeds from the sale, minus the exercise price and any taxes,
\nwithholding obligations, commissions and brokers’ fees associated with the
\ntransaction.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
The income recognized when you exercise your New Options will be
\ncompensation to you and your employer will withhold and report income tax and
\nsocial insurance contributions on that income. You will be responsible for
\npaying any difference between the actual tax liability and the amount withheld.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
23. Material Income Tax Consequences For Tax Residents of the People’s
\n ——————————————————————
\nRepublic of China.
\n—————–<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for tax
\nresidents in the People’s Republic of China. This discussion is based on Chinese
\ntax law as of the date of the offer, which is subject to change, possibly on a
\nretroactive basis. The information may be out of date at the time you exercise
\nyour options or sell the shares you acquire upon exercise. This summary is
\ngeneral in nature and does not discuss all of the tax consequences that may be
\nrelevant to you in light of your particular circumstances, nor is it intended to
\nbe applicable in all respects to all categories of option holders. We advice all
\noption holders to consult their own tax advisors.<\/p>\n
-66-<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options; however,
\nthe tax laws in this area are not certain and so we cannot predict the tax
\nconsequences with certainty.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise and Sale of Shares.
\n —————————<\/p>\n
Due to exchange control and securities law restrictions in China, any New
\nOptions granted to you will be modified. You will only be able to exercise the
\nNew Options granted to you using the full cashless exercise method whereby the
\noptions are exercised without remitting any cash. You will not be entitled to
\nreceive and hold shares of our stock when you exercise your New Options. Under
\nthe cashless exercise method of exercise, the broker will immediately sell all
\nof the shares that you are entitled to purchase. You will receive the cash
\nproceeds from the sale, minus the exercise price and any taxes, withholding
\nobligations, commissions and brokers’ fees associated with the transaction.<\/p>\n
When you exercise your New Options, you will be subject to income tax on
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price. The spread will be treated as additional salary
\nor wages from your employer. Individual income tax is due on a monthly basis. If
\nyou are a Chinese national, you will be entitled to a standard tax deduction of
\nRenminbi 800 per month, and if you are an expatriate, you will be entitled to a
\nstandard tax deduction of Renminbi 4,000 per month.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Redback Networks expects that you will comply fully with your tax and other
\nobligations in connection with the receipt of benefits under the 1999 Plan,
\nincluding paying individual income tax and stamp duties, if applicable. Redback
\nNetworks may be required to make deductions from the amounts payable to you
\nunder the 1999 Plan as a withholding agent under individual income tax and
\nsocial insurance legislation.<\/p>\n
Exchange Control Restrictions.
\n —————————–<\/p>\n
Exchange control restrictions may restrict or limit your ability to
\nwithdraw and\/or convert funds received upon the exercise of your New Options.
\nThis issue should be examined prior to exercise as you may be able to take steps
\nto mitigate these restrictions.<\/p>\n
-67-<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
24. Material Income Tax Consequences For Tax Residents of Singapore.
\n —————————————————————<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for
\nSingapore tax residents. This discussion is based on Singapore tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular circumstances, nor is it intended to be applicable in all
\nrespects to all categories of option holders. We advise all option holders
\nconsidering replacing their options to meet with their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Exchange.
\n —————<\/p>\n
We do not believe there will be a tax liability solely as the result of
\nyour tender of eligible options for replacement with New Options; however, the
\ntax laws in this area are not certain and we cannot predict the tax consequences
\nwith certainty.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
When you exercise your New Options, you will be subject to income tax on
\nthe difference between the fair market value of the shares on the date of
\nexercise and the exercise price, unless the 1999 Plan qualifies for the CSOP
\nScheme (as defined below) and\/or you apply for a deferral, as explained below.<\/p>\n
Company Stock Option Scheme (“CSOP Scheme”).
\n ——————————————-<\/p>\n
If the 1999 Plan qualifies for the CSOP Scheme, you will be exempt from tax
\non the first S$2,000 of your option spread and, thereafter, you will only be
\nsubject to tax on 75% of the remaining option spread. However, this exemption is
\nlimited to S$1 million of such gains accruing over a ten (10) year period
\ncommencing in the year you first enjoy the benefits of the tax exemptions under
\nthe CSOP Scheme. It is possible that a portion of the New Options may qualify
\nfor this scheme, but no assurances can be given this effect. In order to enhance
\nthe tax benefit that would be available if the New Options qualify under this
\nscheme, the New Options will be granted at the fair market value of the
\nunderlying shares on the grant date.<\/p>\n
-68-<\/p>\n
Qualified Employee Stock Option Plan Scheme (“QESOP Scheme”).
\n ————————————————————<\/p>\n
You may apply to the Inland Revenue of Singapore (the “IRAS”) for a
\ndeferral on the payment of tax due at exercise subject to an interest charge if
\nthe 1999 Plan qualifies under the QESOP Scheme. If the 1999 Plan also qualifies
\nunder the CSOP Scheme, you may apply for a deferral of the tax due on the non-
\nexempt portion of the option spread.<\/p>\n
In order to qualify for tax deferral under the QESOP Scheme, you would have
\nto satisfy the following conditions:<\/p>\n
(a) you must be employed in Singapore at the time the New Options are
\nexercised;<\/p>\n
(b) the New Options must be granted to you by the company for whom
\nyou are working at the time of exercise or by an associated company of that
\ncompany; and<\/p>\n
(c) the tax payable on the gain at exercise cannot be borne by your
\nemployer.<\/p>\n
You will not qualify for the tax benefits under the QESOP Scheme if:
\n —<\/p>\n
(a) you are an undischarged bankrupt;<\/p>\n
(b) IRAS records show that you are a delinquent taxpayer; or<\/p>\n
(c) the tax on the gain at exercise is less than $200.<\/p>\n
If you are a qualifying employee, and the 1999 Plan qualifies under the
\nQESOP Scheme, you may apply to the IRAS for a tax deferral at the time you file
\nyour income tax return for the tax year in which the gains are taxable (i.e.,
\nexercised). You would have to submit to the IRAS the “Application Form for
\nDeferment of Tax on Gains from Qualified ESOP,” together with your tax return
\nand your employer’s certification on the Application Form that the 1999 Plan
\nmeets the qualification requirements under the QESOP Scheme. It is possible that
\na portion of the New Options may qualify for the QESOP Scheme, although no
\nassurances can be given to this effect. In order to enhance the tax deferral
\nthat would be available if the New Options qualify under this scheme, the New
\nOptions will be granted at the fair market value of the underlying shares on the
\ngrant date.<\/p>\n
The maximum deferral period would be five years, starting on 1 January
\nafter the year of exercise.<\/p>\n
The interest rate chargeable would be pegged to the average prime rate of
\nthe big four banks in Singapore (DBS, OCBC, OUB and UOB) offered on 15 April of
\neach year and interest would be computed annually based on this rate using the
\nsimple interest method. The tax deferred and the corresponding amount of
\ninterest would be due when your deferral period ends. You may pay the deferred
\ntax earlier in one lump sum (together with the pro-rated amount of interest) to
\nthe IRAS before the end of the deferral period.<\/p>\n
69<\/p>\n
The deferral period would end and payment of the tax plus the corresponding
\ninterest would become due immediately on the occurrence of any of the following
\nevents:<\/p>\n
(a) in the case of a foreign employee (including a Singapore
\npermanent resident), when he or she:<\/p>\n
(i) terminates his or her employment in Singapore and leaves
\n Singapore;<\/p>\n
(ii) is posted overseas; or<\/p>\n
(iii) leaves Singapore for any period exceeding three months;<\/p>\n
(b) when the employee becomes bankrupt; and<\/p>\n
(c) when the employee dies (the deferred tax would be recovered from the
\ndeceased’s estate).<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
If you acquire shares upon exercise, you will not be subject to tax when
\nyou sell the shares, unless you are in the business of buying and selling
\nsecurities.<\/p>\n
Dividends.
\n ———<\/p>\n
If you acquire shares upon exercise, you may be entitled to receive
\ndividends. Any dividends paid on Redback Networks shares that are received in
\nSingapore may be subject to income tax in Singapore and withholding tax in the
\nUnited States. You may be entitled to a tax credit equal to the United States
\nfederal tax withheld, although the deduction may not exceed the tax that would
\nhave been paid in Singapore on the same income.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Your employer will not be required to withhold income tax or social
\ninsurance contributions at the time of the exercise of your New Options. Your
\nemployer will report the exercise of your New Options on your annual return
\noutlining all salary and benefits paid to you during the year. Your employer
\nwill give this return to you and you will be responsible for reporting and
\npaying any income taxes resulting from the exercise of your New Options.<\/p>\n
It is also your responsibility to report and pay taxes resulting from the
\nsale of your shares or the receipt of any dividends.<\/p>\n
Please consult a tax advisor to determine the tax considerations and tax
\nconsequences relevant to your participation in the offer.<\/p>\n
70<\/p>\n
25. Material Income Tax Consequences For Tax Residents of Taiwan.
\n ————————————————————<\/p>\n
The following is a general summary of the material tax consequences of the
\nreplacement of eligible options and grant of New Options under the offer for
\nTaiwan tax residents. This discussion is based on Taiwanese tax law as of the
\ndate of the offer, which is subject to change, possibly on a retroactive basis.
\nThe information may be out of date at the time you exercise your options or sell
\nthe shares you acquire upon exercise. This summary is general in nature and does
\nnot discuss all of the tax consequences that may be relevant to you in light of
\nyour particular circumstances, nor is it intended to be applicable in all
\nrespects to all categories of option holders. We advise all option holders to
\nconsult their own tax advisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the result
\nof your tender of eligible options for replacement with New Options.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
You will not be subject to tax when you exercise your New Options unless
\nyour employer (the subsidiary of Redback) reimburses Redback for the spread on
\nthe exercise of the New Options under the 1999 Plan. In this case, you will be
\ntaxed at your marginal income tax rate on the difference between the fair market
\nvalue of the underlying shares at exercise and the exercise price (i.e., the
\nprice you pay in order to exercise the option).<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
You will not be subject to tax when you sell the shares that you acquire
\nunder the 1999 Plan.<\/p>\n
Dividends.
\n ———<\/p>\n
If you exercise your options to purchase shares, you may be entitled to
\nreceive dividends. Any dividends paid on Redback Networks shares will not be
\nsubject to tax in Taiwan but will be subject to withholding tax in the United
\nStates.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Your employer will be required to withhold all income taxes if your
\nemployer (the subsidiary of Redback) reimburses Redback for the spread on the
\nexercise of the New Options under the 1999<\/p>\n
71<\/p>\n
Plan. However, you will be responsible for paying any difference between the
\nactual tax liability and the amount withheld.<\/p>\n
Exchange Control Restrictions.
\n —————————–<\/p>\n
Generally, no exchange control restrictions will apply in respect of
\nyour participation in the 1999 Plan unless the aggregate value of all your
\nforeign currency transactions exceed US$5million per year.<\/p>\n
Please consult a tax advisor to determine the tax considerations and
\ntax consequences relevant to your participation in the offer.<\/p>\n
26. Material Income Tax Consequences For Tax Residents of the United
\n —————————————————————-
\nKingdom
\n——-<\/p>\n
The following is a general summary of the material tax consequences of
\nthe replacement of eligible options and grant of New Options under the offer for
\ntax residents in the United Kingdom. This discussion is based on United Kingdom
\ntax law as of the date of the offer, which is subject to change, possibly on a
\nretroactive basis. The information may be out of date at the time you exercise
\nyour options or sell the shares you acquire upon exercise. This summary is
\ngeneral in nature and does not discuss all of the tax consequences that may be
\nrelevant to you in light of your particular circumstances, nor is it intended to
\nbe applicable in all respects to all categories of option holders. We advise all
\noption holders considering replacing their options to meet with their own tax
\nadvisors.<\/p>\n
If you are a citizen or resident of another country, the information
\ncontained in this summary may not be applicable to you. You are advised to seek
\nappropriate professional advice as to how the tax or other laws in your country
\napply to your specific situation.<\/p>\n
Option Replacement.
\n ——————<\/p>\n
We do not believe that there will be a tax liability solely as the
\nresult of your tender of eligible options for replacement with New Options.<\/p>\n
Grant.
\n —–<\/p>\n
You will not be subject to tax when the New Options are granted to you
\nunder the 1999 Plan.<\/p>\n
Exercise.
\n ——–<\/p>\n
Any New Options granted to you will be granted under a non-approved
\nstock option scheme. Consequently, you will be subject to income tax when you
\nexercise your New Options on the difference between the fair market value of the
\nunderlying shares on the date of exercise and the exercise price (i.e., the
\nspread). You will also be liable to pay employees’ National Insurance
\nContributions (“NICs”) on the spread at exercise if your earnings do not already
\nexceed the maximum limit for NIC purposes. The maximum limit is (pound)29,900
\nper year for the U.K. tax year 6 April 2001 to 5 April 2002.<\/p>\n
-72-<\/p>\n
To the extent that your eligible options were granted before 6 April
\n1999 and therefore not subject to NICs, you should be aware that any New Options
\nthat may be granted to you will be subject to NICs. In addition, new legislation
\nhas been enacted which allows an employer to transfer the employer’s NIC
\nliability to employees in connection with the exercise, assignment, release or
\ncancellation of options by entering into a joint election with each employee
\nproviding that the employee will meet the employer’s NIC liability in such
\ncircumstances. The employer’s NIC liability is currently equal to 11.9% of the
\nspread upon the exercise of any New Options. If you choose to exchange your
\neligible options for New Options, we and our subsidiaries will require that you
\nagree to absorb your employer’s NIC liability on the exercise of the New Options
\nand that you enter into a joint election to be made and submitted to the Inland
\nRevenue, which will provide that you will pay any NIC liability arising on the
\nexercise of the New Options that may be granted to you. You will not be entitled
\nto retain any New Options that may be granted to you if you do not enter into
\nthe joint election once it is approved by the Inland Revenue. It is our
\nunderstanding that you will be entitled to deduct the employer’s portion of the
\nNIC payments you make for the purposes of calculating the amount of the gain
\nsubject to income tax on the exercise of the New Options. If you do not enter
\ninto a joint election once the form of election is approved by Inland Revenue,
\nyour New Option shall become null and void without any liability to Redback
\nand\/or any of its subsidiaries and may not be exercised. You should take these
\nfactors into consideration when deciding whether to tender your eligible
\noptions.<\/p>\n
Sale of Shares.
\n ————–<\/p>\n
When you sell your shares, you will be subject to capital gains tax.
\nThe tax is due on any increase in the value of the shares between the date on
\nwhich you exercise your New Options and the date on which you sell the shares
\nacquired on exercise of such options. Any capital gains tax you may owe is
\nsubject to an annual personal exemption (currently (pounds)7,500 for the U.K.
\ntax year 6 April 2001 to 5 April 2002) and to taper relief calculated with
\nreference to the period of time during which you held the shares of Redback
\nNetworks following the exercise of your options.<\/p>\n
Dividends.
\n ———<\/p>\n
If you acquire shares upon exercise, you may be entitled to receive
\ndividends. Any dividends paid on Redback Networks shares will be subject to
\nincome tax in the UK and withholding tax in the U.S. You may be entitled to a
\nforeign tax credit for United States federal tax withheld at source. You must
\nreport any dividends you receive on your annual UK tax return.<\/p>\n
Withholding and Reporting.
\n ————————-<\/p>\n
Your employer is required to arrange for the payment of income tax and
\nNICs on the spread at exercise or to withhold funds on account of income tax and
\nNICs on the spread at exercise from the payroll, the proceeds of exercise and
\nsale, or otherwise, and to remit such amounts to the UK Inland Revenue on your
\nbehalf. Your employer will also report the details of any option grant and
\nexercise on its annual U.K. Inland Revenue tax return.<\/p>\n
-73-<\/p>\n
In addition to your employer’s reporting obligations, you must report
\ndetails of any liabilities arising from the exercise of your New Options and
\nfrom the sale or disposal of shares, together with details of dividend income,
\nto the Inland Revenue on your personal U.K. Inland Revenue tax return.<\/p>\n
You will be responsible for paying any taxes owed as a result of the
\nsale of the shares or the receipt of any dividends.<\/p>\n
Please consult a tax advisor to determine the tax considerations and
\ntax consequences relevant to your participation in the offer.<\/p>\n
27. Extension of offer; termination; amendment.
\n ——————————————<\/p>\n
We expressly reserve the right, in our sole discretion, at any time and
\nfrom time to time, and regardless of whether or not any event listed in Section
\n7 of this Offer to Replace has occurred or is deemed by us to have occurred, to
\nextend the period of time during which the offer is open and thereby delay the
\nacceptance for replacement of any options by giving oral or written notice of
\nsuch extension to the option holders or making a public announcement thereof.<\/p>\n
We also expressly reserve the right, in our reasonable judgment, prior
\nto the Offer Expiration Date to terminate or amend the offer and to postpone our
\nacceptance and cancellation of any options tendered for replacement upon the
\noccurrence of any of the events listed in Section 7 of this Offer to Replace, by
\ngiving oral or written notice of such termination or postponement to you or by
\nmaking a public announcement thereof. Our reservation of the right to delay our
\nacceptance and cancellation of options tendered for replacement is limited by
\nRule 13e-4(f)(5) promulgated under the Securities Exchange Act of 1934, as
\namended, which requires that we must pay the consideration offered or return any
\ntendered options promptly after termination or withdrawal of a tender offer.<\/p>\n
Subject to compliance with applicable law, we further reserve the
\nright, in our sole discretion, and regardless of whether any event listed in
\nSection 7 of this Offer to Replace has occurred or is deemed by us to have
\noccurred, to amend the offer in any respect, including, without limitation, by
\ndecreasing or increasing the consideration offered in the offer to option
\nholders or by decreasing or increasing the number of options being sought in the
\noffer.<\/p>\n
Amendments to the offer may be made at any time and from time to time
\nby public announcement of the amendment. In the case of an extension, the
\namendment must be issued no later than 6:00 a.m., Pacific Time, on the next
\nbusiness day after the last previously scheduled or announced Offer Expiration
\nDate. Any public announcement made through the offer will be disseminated
\npromptly to option holders in a manner reasonably designated to inform option
\nholders of the change. Without limiting the manner in which we may choose to
\nmake a public announcement, except as required by applicable law, we have no
\nobligation to publish, advertise or otherwise communicate any such public
\nannouncement other than by making a press release to the Dow Jones News Service.<\/p>\n
If we materially change the terms of the offer or the information
\nconcerning the offer, or if we waive a material condition of the offer, we will
\nextend the offer beyond the currently scheduled<\/p>\n
-74-<\/p>\n
Offer Expiration Date to the extent required by Rules 13e-4(d)(2) and 13e-
\n4(e)(3) under the Securities Exchange Act of 1934, as amended. These rules
\nrequire that the minimum period during which an offer must remain open following
\nmaterial changes in the terms of the offer or information concerning the offer,
\nother than a change in price or a change in percentage of securities sought,
\nwill depend on the facts and circumstances, including the relative materiality
\nof such terms or information.<\/p>\n
We will publish notice or otherwise inform you in writing if we decide
\nto take any of the following actions:<\/p>\n
. we increase or decrease the amount of consideration offered for the
\n options,<\/p>\n
. we decrease the number of options eligible to be tendered in the
\n offer, or<\/p>\n
. we increase the number of options eligible to be tendered in the
\n offer by an amount that exceeds 2% of the shares issuable upon
\n exercise of the options that are subject to the offer immediately
\n prior to the increase.<\/p>\n
If the offer is scheduled to expire at any time earlier than the tenth
\n(10\/th\/) business day from, and including, the date that notice of such increase
\nor decrease is first published, sent or given in the manner specified in this
\nSection, we will extend the offer beyond the currently scheduled Offer
\nExpiration Date so that the offer is open at least ten (10) business days
\nfollowing the publication, sending or giving of notice.<\/p>\n
For purposes of the offer, a “business day” means any day other than a
\nSaturday, Sunday or federal holiday and consists of the time period from 12:01
\na.m. through 12:00 midnight, Eastern Time.<\/p>\n
28. Fees and expenses.
\n —————–<\/p>\n
We will not pay any fees or commissions to any broker, dealer or other
\nperson for soliciting tenders of options pursuant to this Offer to Replace.<\/p>\n
29. Additional information.
\n ———————-<\/p>\n
This Offer to Replace is part of a Tender Offer Statement on Schedule
\nTO that we have filed with the SEC. This Offer to Replace does not contain all
\nof the information contained in the Schedule TO and the exhibits to the Schedule
\nTO. We recommend that you review the Schedule TO, including its exhibits, and
\nthe following materials which we have filed with the SEC before making a
\ndecision on whether to tender your options:<\/p>\n
1. Redback’s Quarterly Report on Form 10-Q for our quarter ended
\nJune 30, 2001, filed with the SEC on August 14, 2001 (file number 000-25853);<\/p>\n
-75-<\/p>\n
2. Redback’s Annual Report on Form 10-K for our fiscal year
\nended December 31, 2000, filed with the SEC on April 2, 2001 (file number 000-
\n25853);<\/p>\n
3. the description of our shares contained in our Registration
\nStatement on Form 8-A, filed with the SEC on June 15, 2001 (file number 000-
\n25853); and<\/p>\n
4. the description of our shares contained in certain of our
\nRegistration Statements on Form S-8, filed with the SEC on February 6, 2001,
\nMarch 15, 2000 and May 21, 1999 (file numbers 333-55076, 333-32554 and 333-
\n79043, respectively).<\/p>\n
These filings, our other annual, quarterly and current reports, our
\nproxy statements and our other SEC filings may be examined, and copies may be
\nobtained, at the following SEC public reference rooms:<\/p>\n
\n
\n 450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
\n Room 1024 Suite 1300 Suite 1400
\n Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
\n<\/c><\/c><\/s><\/table>\n You may obtain information on the operation of the public reference
\nrooms by calling the SEC at 1-800-SEC-0330.<\/p>\n
Our SEC filings are also available to the public on the SEC’s Internet
\nsite at http:\/\/www.sec.gov.<\/p>\n
Our common stock is quoted on the Nasdaq National Market under the
\nsymbol “RBAK” and our SEC filings can be read at the following Nasdaq address:<\/p>\n
Nasdaq Operations
\n 1735 K Street, N.W.
\n Washington, D.C. 20006<\/p>\n
Each person to whom a copy of this Offer to Replace is delivered may obtain a
\ncopy of any or all of the documents to which we have referred you, other than
\nexhibits to such documents (unless such exhibits are specifically incorporated
\nby reference into such documents) at no cost, by writing to or calling us at
\nRedback Networks Inc., 250 Holger Way, San Jose, CA 95134, Attention: Cindi
\nFisse (telephone: 408-571-5026) or Kim Gonsalves (telephone: 408-571-5113) or by
\ne-mailing us at stock@redback.com.<\/p>\n
As you read the foregoing documents, you may find some inconsistencies
\nin information from one document to another. If you find inconsistencies between
\nthe documents, or between a document and this Offer to Replace, you should rely
\non the statements made in the most recent document.<\/p>\n
The information contained in this Offer to Replace about Redback should
\nbe read together with the information contained in the documents to which we
\nhave referred you.<\/p>\n
-76-<\/p>\n
30. Miscellaneous.
\n ————-<\/p>\n
This Offer to Replace and our SEC reports referred to above include
\n“forward-looking statements.” When used in this Offer to Replace, the words
\n“anticipate,” “believe,” “estimate,” “expect,” “intend” and “plan” as they
\nrelate to Redback or our management are intended to identify these
\nforward-looking statements. All statements by us regarding our expected future
\nfinancial position and operating results, our business strategy, our financing
\nplans and expected capital requirements, forecasted trends relating to our
\nservices or the markets in which we operate and similar matters are
\nforward-looking statements. The documents we filed with the SEC, including our
\nannual report on Form 10-K for the fiscal year ended December 31, 2000 filed on
\nApril 2, 2001 with the SEC and our quarterly report on Form 10-Q for the quarter
\nended June 30, 2001 filed with the SEC on August 14, 2001, discuss some of the
\nrisks that could cause our actual results to differ from those contained or
\nimplied in the forward-looking statements. These risks include, but are not
\nlimited to:<\/p>\n
. Our business is difficult to evaluate because we have a limited
\n operating history, which may affect our stock price and our ability
\n to sell products and services;<\/p>\n
. We have a history of losses and expect to incur future losses,
\n including significant product development, sales and marketing, and
\n general and administrative expenses;<\/p>\n
. A decline in the demand for broadband access services would
\n seriously harm our sales and operating results;<\/p>\n
. Our quarterly operating results have and are expected to continue to
\n fluctuate significantly, which may cause our stock to be volatile or
\n decline;<\/p>\n
. Our lengthy and variable sales cycle makes it difficult for us to
\n predict if or when a sale will be made, which make it difficult to
\n predict the timing of our revenue and could adversely affect our
\n operating results;<\/p>\n
. Our sales would suffer if one or more of our key customers
\n substantially reduced its orders for our products, which may affect
\n our ability to generate revenue and our stock price;<\/p>\n
. Our operating results suffer due to risks associated with mergers
\n and acquisitions generally, and future acquisitions could materially
\n adversely affect our operating results as a result of dilutive
\n issuances of equity securities and the incurrence of additional
\n debt;<\/p>\n
. We may be required to spend additional time and money on integration
\n matters related to our acquisition of Merlin Systems, Inc. and its
\n employees that could otherwise be spent on developing our business
\n and services;<\/p>\n
-77-<\/p>\n
. We are a party to a securities class action litigation and remain at
\n risk for additional litigation, which could seriously harm our
\n business;<\/p>\n
. Our gross margin may continue to decline in the future due to
\n several factors, including but not limited to a shift in emphasis
\n from sales of higher margin, lower volume products to sales of lower
\n margin, higher volume products, competition for market share in
\n international markets, and our ability to introduce new products,
\n competitive product enhancements and upgrades;<\/p>\n
. Our operating results will suffer if we fail to commercialize new
\n product lines, and we cannot be certain that our current products or
\n any future products will achieve widespread market acceptance;<\/p>\n
. There are a limited number of potential customers for our products
\n and if our products do not anticipate and meet specific customer
\n requirements and demands, our sales and operating results would be
\n adversely affected;<\/p>\n
. Our failure to meet the demands of current and future broadband
\n access markets would impair our operating results and business
\n prospects by reducing sales, and we may be unable to effectively
\n address evolving demands in these markets;<\/p>\n
. Any failure to remain competitive in our industry would impair our
\n operating results and business prospects by reducing our ability to
\n attract customers;<\/p>\n
. Interruptions affecting our contract manufacturers or suppliers
\n could disrupt production, compromise our product quality and
\n adversely affect our sales;<\/p>\n
. Interruptions in delivery of power could disrupt normal business
\n operations and adversely affect our delivery schedules, which could
\n materially and adversely affect our sales and operating results;<\/p>\n
. If we fail to match production with product demand, we may need to
\n incur additional costs such as increased storage or obsolescence
\n costs for excess inventory;<\/p>\n
. If we fail to attract or retain employees or properly manage our
\n growth, we may not be able to timely develop, sell or support our
\n products;<\/p>\n
. We have recently hired a new chief executive officer, and therefore
\n our operations may be materially affected;<\/p>\n
. If we become subject to employment related claims, we could incur
\n substantial costs in defending against these claims;<\/p>\n
. Our business may suffer slower or less growth due to further
\n government regulation of the communications industry, which may slow
\n or end the growth of the broadband<\/p>\n
-78-<\/p>\n
access services industry and materially harm our business, results
\n of operations and financial condition;<\/p>\n
. Our international presence exposes us to typical foreign market
\n risks not faced by wholly-domestic companies, including, among
\n others, foreign currency fluctuations, language and cultural
\n barriers, unexpected regulatory requirements and protectionist laws,
\n and political, legal and economic instability in foreign markets;<\/p>\n
. Undetected software and hardware errors could have a material
\n adverse effect on our operating results, which may cause us to incur
\n significant warranty and repair costs, divert the attention of our
\n engineering personnel from our product development efforts and cause
\n significant customer relations problems;<\/p>\n
. If we have insufficient proprietary technology rights or if we fail
\n to protect those we have, our business would be materially impaired;<\/p>\n
. If we fail to obtain additional capital at the times, in the amounts
\n and upon the terms required, our business could suffer;<\/p>\n
. We have insufficient cash flow to meet our debt service obligations
\n and we may be unable to repurchase our convertible notes which could
\n seriously harm our financial condition; and<\/p>\n
. Provisions of our charter documents may have anti-takeover effects
\n that could prevent a change in our control, which may affect our
\n stock price.<\/p>\n
For a complete description of the above-mentioned risks, please see the
\nSEC filings referred to in Section 29 of this Offer to Replace, entitled
\n“Additional Information,” above.<\/p>\n
We are not aware of any jurisdiction where the making of the offer is
\nnot in compliance with applicable law. If we become aware of any jurisdiction
\nwhere the making of the offer is not in compliance with any valid applicable
\nlaw, we will make a good faith effort to comply with such law. If, after such
\ngood faith effort, we cannot comply with such law, the offer will not be made
\nto, nor will tenders be accepted from or on behalf of, the option holders
\nresiding in such jurisdiction.<\/p>\n
We have not authorized any person to make any recommendation on our
\nbehalf as to whether you should tender or not tender your options through the
\noffer. You should rely only on the information in this document or documents to
\nwhich we have referred you. We have not authorized anyone to give you any
\ninformation or to make any representations in connection with the offer other
\nthan the information and representations contained in this document, the
\nElection Form and the Notice to Withdraw from the Offer. If anyone makes any
\nrecommendation or representation to you or gives you any information, you must
\nnot rely upon that recommendation, representation or information as having been
\nauthorized by us.<\/p>\n
Redback Networks Inc. September 6, 2001<\/p>\n
-79-<\/p>\n
SCHEDULE A<\/p>\n
INFORMATION CONCERNING THE EXECUTIVE OFFICERS*
\n AND DIRECTORS OF REDBACK NETWORKS INC.<\/p>\n
The Executive Officers and directors of Redback Networks Inc. and their
\npositions and offices as of September 26, 2001, are set forth in the following
\ntable:<\/p>\n
\n\n Name Position and Offices Held
\n—————————– ————————————–
\n
\n Kevin DeNuccio President, Chief Executive Officer and Director<\/p>\n Georges Antoun Senior Vice President of Marketing<\/p>\n
Richard Bibb Senior Vice President of Worldwide Sales<\/p>\n
Pankaj Patel Senior Vice President of Engineering<\/p>\n
Lars Rabbe Senior Vice President of Information Technology<\/p>\n
Dennis P. Wolf Senior Vice President of Finance and Administration, Chief
\n Financial Officer and Corporate Secretary<\/p>\n
Pierre R. Lamond Director, Chairman of the Board<\/p>\n
Guarav Garg Director<\/p>\n
Promod Haque Director<\/p>\n
Vinod Khosla Director<\/p>\n
William L. Kurz Director<\/p>\n
Daniel J. Warmenhoven Director
\n<\/c><\/s><\/caption>\n<\/table>\n
The address of each Executive Officer and director is: c\/o Redback
\nNetworks Inc., 250 Holger Way, San Jose, CA 95134.<\/p>\n
_______________________<\/p>\n
* Executive Officers are those persons defined as “officers” for purposes
\nof Section 16(b) of the Securities Exchange Act of 1934, as amended.<\/p>\n
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