EXHIBIT 99.1
THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING
SECURITIES THAT HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933.
The date of this document is July 14, 2000
________________________________
OPTIONS GRANTED UNDER THE
LAN MEDIA CORPORATION
1998 STOCK OPTION/STOCK ISSUANCE PLAN
ASSUMED BY
SBE, INC.
________________________________
TO OUR OPTIONEES:
As a result of the merger (the "Merger") on July 14, 2000 of Telecom
Acquisition Sub, Inc., a Delaware corporation and a wholly owned subsidiary of
SBE, Inc., a Delaware corporation ("SBE"), with and into LAN Media Corporation,
a California corporation ("LAN Media"), LAN Media became a wholly owned
subsidiary of SBE. As part of the Merger, options originally granted to you by
LAN Media under the LAN Media Corporation 1998 Stock Option Plan/Stock Issuance
LAN Media Plan (the "LAN Media Plan") have been assumed by SBE. We are pleased
with this opportunity to provide you with information regarding the options
granted to you by LAN Media (the "LAN Media Options") under the LAN Media Plan.
We believe that your LAN Media Option is an important part of the benefits
provided to you and hope you will take the time to review this information
carefully.
Each LAN Media Option assumed by SBE has been converted into an option to
purchase that number of shares of SBE common stock determined by multiplying the
number of shares of LAN Media common stock as to which such LAN Media Option
remains unexercised by 0.0799 and rounding down to the nearest whole number.
The exercise price per share for each LAN Media Option will be equal to the
exercise price of the LAN Media Option divided by 0.0799 rounded up to the
nearest cent. The other terms of each LAN Media Option will remain unchanged.
We have divided this discussion of the LAN Media Plan into three parts. The
first part of this document describes the terms of the LAN Media Plan, which
provides for the grant of both incentive stock options (tax advantaged options)
and nonstatutory stock options (options that do not have tax advantages). The
second and third parts of this document describe the tax consequences relating
to your LAN Media Option. No additional stock options will be granted pursuant
to the LAN Media Plan after July 14, 2000. However, all options outstanding
under the LAN Media Plan that have not been exercised, and that have not expired
according to their terms, will continue in full force and effect pursuant to the
terms of the LAN Media Plan.
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The following information and attached materials may not answer all the
questions you have about the LAN Media Plan or about SBE's assumption of the LAN
Media Options. The Manager of Human Resources will be happy to answer further
questions.
You should have previously received a copy of the LAN Media Plan and an option
grant form describing the terms of your LAN Media Option. If you wish to
exercise your LAN Media Option, you will need to complete an option exercise
form. You may always obtain copies of the exercise form from the Manager of
Human Resources.
INFORMATION ABOUT SBE
An important part of your LAN Media Option is understanding SBE, its
products, operations and financial condition. Like any stockholder of SBE, you
can keep yourself informed about SBE by reviewing reports and other documents
that SBE prepares for stockholders and the general public. If you become a
stockholder of SBE you will be entitled to attend stockholder meetings and to
vote in the election of directors and on other matters brought before the
stockholders.
If you have not already received a copy of SBE's current annual report as a
stockholder of SBE, this information should be delivered to you with these
materials. Whether or not you have already received this information, you may
always request a copy from SBE.
The federal securities laws require SBE to provide information about its
business and financial status in annual reports, commonly known as "10-Ks" and
quarterly reports, commonly known as "10-Qs." These reports are filed with the
Securities and Exchange Commission (the "Commission"). In addition, if certain
important corporate events occur during the year, SBE may file reports commonly
known as "8-Ks." SBE also prepares and files with the Commission a proxy
statement in connection with its annual meeting of stockholders. The proxy
statement provides further information about SBE and its officers, directors and
major stockholders. From time to time SBE may also file other documents with
the Commission as required by Sections 13(a), 13(c), 14 and 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
All of these documents constitute part of the information required by the
securities laws to be provided or made available to you in connection with your
LAN Media Option; that is, these documents are incorporated by reference into
these materials, which constitute the prospectus for the LAN Media Plan.
For a copy of these documents, all of which are available without charge and
upon written or oral request, please contact the Manager of Human Resources, who
will be happy to assist you.
If you are already a stockholder of SBE you should receive copies of SBE's proxy
statement, reports to stockholders and other stockholder communications. You
may always request copies of this information, which is provided without charge,
by contacting the Manager of Human Resources.
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PART I
TERMS OF THE LAN MEDIA PLAN
Part I provides general information about the LAN Media Plan. Parts II and
III of describe the various tax consequences to you of your participation in the
LAN Media Plan.
1. WHO DETERMINED WHETHER I RECEIVED AN OPTION AND THE TERMS OF MY OPTION
AND HOW MANY SHARES OF COMMON STOCK IT COVERED?1.
The decision to grant an option to any particular individual was made by
LAN Media's Board of Directors (the "LAN Media Board") or by a committee of the
LAN Media Board generally after review of input from management. The LAN Media
Plan provided for the grant of options to employees, officers, directors, and
consultants of LAN Media covering an aggregate of two million (2,000,000) shares
of LAN Media's common stock. When the LAN Media Board (or committee) granted
your LAN Media Option, it had the discretion to determine the terms of the
option, including the number of shares the option covered.
The Board of Directors of SBE (the "SBE Board") or a committee composed of
at least two members of the SBE Board (the "Committee") now administers the LAN
Media Options and has the power to interpret them. You may obtain additional
information about the administration of the LAN Media Options by calling the
Manager of Human Resources at (925) 355-2000.
2. IS MY LAN MEDIA OPTION AN INCENTIVE STOCK OPTION OR A NONSTATUTORY STOCK
OPTION? WHAT IS THE DIFFERENCE?
At the time the LAN Media Board granted you your LAN Media Option, the LAN
Media Board determined whether the option was an incentive stock option or a
nonstatutory stock option. In general, potentially favorable tax treatment is
provided to the holders of stock options that qualify as INCENTIVE stock options
under the Internal Revenue Code.
Upon the exercise of an INCENTIVE stock option, an optionee is typically
not subject to tax except for the possible imposition of alternative minimum
tax. (See Question 26.) Upon the exercise of a NONSTATUTORY stock option,
however, an optionee generally is taxed based on the difference between the
exercise price of the option and the fair market value of the stock on the date
of exercise. (See Question 22.) The deferral of the recognition of tax until
the time of sale of the stock, as well as the possible treatment of the "spread"
as capital gain, are the principal advantages of INCENTIVE stock options.
However, INCENTIVE stock options have certain limitations on their exercise
price, terms, transferability and duration.
The rules governing the tax effects of INCENTIVE stock options and NONSTATUTORY
stock options are complex and you should carefully read the tax information
provided below.
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3. WHAT IS THE EXERCISE PRICE OF MY LAN MEDIA OPTION?
The exercise price for each share of SBE common stock now covered by your
LAN Media Option, as assumed by SBE, is the exercise price per share of LAN
Media stock under the option immediately before the Merger divided by 0.0799,
rounded up to the nearest cent.
4. WHEN CAN I EXERCISE MY LAN MEDIA OPTION?
When the LAN Media Board granted your LAN Media Option, it also determined
certain terms of the option, including the date or dates after which the option
may be exercised. You should check your option agreement to determine the
date(s) on which your shares become exercisable, or "vest." Although you can
exercise your option at any time once a portion of the option has vested, you
may exercise your option only for the number of shares that have actually vested
at the time of exercise. If your option agreement so provides, you can exercise
your LAN Media Option as to shares not yet vested, subject to SBE's right to
repurchase "unvested" shares. LAN Media Options may generally have a term of up
to 10 years, so you must exercise your option before it expires at the end of
the 10-year period. For example, if your option was granted on November 1, 1999
and has a full 10-year term, it must be exercised BEFORE November 1, 2009.
The terms of exercise of LAN Media Options are not required to be the same
for every optionee. Please be sure to review your option grant carefully to be
sure you understand its specific terms and conditions.
5. HOW DO I EXERCISE MY LAN MEDIA OPTION?
You may exercise your LAN Media Option by completing an option exercise
form and delivering the form, together with payment of the exercise price (see
Question 6 below), to the Manager of Human Resources. You can obtain option
exercise forms from the Manager of Human Resources.
6. DO I HAVE TO PAY THE EXERCISE PRICE WITH CASH?
You may always pay the exercise price with cash. However, your LAN Media
Option may provide that the exercise price may also be paid with other
consideration (for example, by delivery to SBE of other unencumbered common
stock of SBE with a value equal to the aggregate option exercise price, provided
that you have already owned such stock for a period of at least six months, or
according to other arrangements).
You should review the terms of your LAN Media Option, which describes
specifically the manner in which the exercise price may be paid.
If SBE stock qualifies as margin stock, you may be able to execute a cashless
exercise through a broker. (See Question 7 below.)
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7. I HAVE HEARD ABOUT CASHLESS EXERCISE PROGRAMS THROUGH BROKERS. HOW DO
THESE WORK?
Cashless exercise programs involve the delivery to a broker of a copy of
your signed and completed option exercise form and your irrevocable instructions
to SBE to deliver stock to be received upon exercise of the option to the broker
rather than to you. Under Regulation T the broker can then deliver cash to SBE
in payment of the exercise price, and, in some cases, withholding taxes. SBE
then delivers the stock certificate to the broker. After the stock is delivered
to the broker the stock can be maintained as margin stock in an account
designated by you or sold pursuant to your instructions. You should contact the
Manager of Human Resources to determine if such a program is available.
Officers and directors should ensure that their cashless exercises are
properly structured in order to avoid any violation of the prohibition against
short sales by insiders found in Section 16(c) of the Exchange Act.
8. WILL I CONTINUE TO RECEIVE OPTIONS UNDER THE LAN MEDIA PLAN AS LONG AS I
CONTINUE PROVIDING SERVICES TO SBE?
No. The SBE Board will not grant any additional options under the LAN
Media Plan. However, you may be eligible to receive an option under an SBE
stock option plan administered by the SBE Board (or a committee appointed by the
Board). Whether or not you receive options will depend on many factors, such as
your performance, SBE's overall performance, the SBE Board's then-current policy
and the number of shares remaining in the SBE stock option plan. You should
note that SBE's assumption of your LAN Media Option does not alter any right to
terminate your employment at any time and for any reason, with or without cause,
or your service as a consultant according to the terms of your service
agreement.
9. CAN THE TERMS OF MY LAN MEDIA OPTION BE CHANGED?
Subsequent to the Merger, the terms of the LAN Media Options may be
modified by the SBE Board. Usually, options are only amended to take into
account changes in the tax or securities laws. These changes may be presented
to SBE stockholders for approval at SBE's annual meeting if tax, securities or
other laws require approval of the changes.
Any changes to the terms of your LAN Media Option would not impair your
rights under your option without your consent. If certain changes occur to
SBE's capitalization, e.g., a stock split or stock dividend of its common stock,
the exercise price of and number of shares subject to your LAN Media Option will
be appropriately adjusted.
Unless otherwise provided in your option agreement, the following
adjustments will be made to your LAN Media Option in the event of a
shareholder-approved transaction involving a merger or consolidation of SBE that
results in the transfer of ownership of more than 50% of the outstanding voting
shares of SBE stock, or the sale, transfer or disposition of all or
substantially all of the assets of SBE in complete liquidation or dissolution of
SBE (a "corporate transaction"):
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Following a corporate transaction, any successor corporation may either
assume your outstanding LAN Media Option under the LAN Media Plan, or replace
your outstanding option with similar rights pursuant to a cash incentive program
maintained by the successor corporation that preserves the spread existing on
the unvested shares subject to your LAN Media Option at the time of the
corporate transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to those unvested shares. If the successor
corporation assumes your LAN Media Option or replaces it with similar cash
rights AND your service is involuntarily terminated by the successor corporation
(including your constructive termination under some circumstances, but not
including termination due to "misconduct" (as defined in the LAN Media Plan),
death or disability) within eighteen (18) months after the corporate
transaction, then, if your LAN Media Option so provides, your assumed stock
option or the cash right replacement of your option will become fully vested and
exercisable, and will terminate unless it is exercised at or prior to the
earlier of (i) the expiration of the option, or (ii) the expiration of the
one-year (1-year) period following your involuntary termination. If your
service is not terminated within eighteen (18) months after the corporate
transaction, then your option will continue pursuant to its terms.
If the successor corporation does not assume your LAN Media Option or
replace it with a similar cash right, then your LAN Media Option will become
fully vested and exercisable immediately prior to the corporate transaction and
will terminate if not exercised at or prior to the effective time of the
corporate transaction.
10. WHAT HAPPENS IF I LEAVE SBE OR GO ON A LEAVE OF ABSENCE?
Whether you leave SBE voluntarily or your employment or engagement as a
director or consultant of LAN Media is terminated by SBE for any reason other
than "misconduct" (as defined in the LAN Media Plan), your right to exercise any
VESTED portion of your LAN Media Option generally will terminate three months
after your last day of employment or service. However, the terms of your LAN
Media Option may provide that it will terminate sooner than three months after
termination of employment or your engagement as a director or consultant or that
it may be exercised more than three months after such termination. (If the
option is an INCENTIVE stock option it generally must be exercised within three
months of the date of termination or it will become a nonstatutory stock
option.) You should check the terms of your LAN Media Option.
Usually, you will not be able to exercise any UNVESTED portion of your LAN
Media Option once you have terminated your employment or service with SBE.
If you take a leave of absence, the SBE Board has the unilateral right to
determine whether such leave of absence will be treated as a termination of your
services with SBE. Alternatively, the SBE Board may determine to suspend or
otherwise delay the time or times at which shares subject to your option vest
during your leave. See Question 4 above.
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If your employment or service is terminated due to your "misconduct" (as
defined in the LAN Media Plan), your outstanding LAN Media Option shall
terminate immediately and shall cease to remain outstanding.
11. WHAT IF I LEAVE SBE BECAUSE OF DISABILITY?
If your employment or engagement as a consultant or director is terminated
because of your disability, you should review the terms of your LAN Media
Option. Generally, your right to exercise any VESTED portion of your LAN Media
Option will terminate twelve (12) months after your last day of employment or
consulting or directorship as determined between you and SBE. For this purpose,
disability means the inability to engage in any substantial gainful activity by
reason of any medically determinable mental or physical impairment, as
determined by the SBE Board based on medical evidence it deems warranted under
the circumstances. You should contact the Manager of Human Resources of SBE if
you have any questions regarding what constitutes a disability.
12. WHAT ARE THE RIGHTS OF MY HEIRS UPON MY DEATH?
Your estate, persons having rights to your option by will or by the laws of
descent and distribution, or your designated beneficiary have the right to
exercise your LAN Media Option as to any vested portion if you were still
employed by SBE or engaged as a consultant or director at the time of death or,
if so provided in your LAN Media Option, you died after your employment or
engagement as a consultant or director was terminated for any reason, but prior
to the expiration or termination of your option. Your option will specify the
date by which the option must be exercised, which usually will be twelve months
after your death.
13. CAN A RELATIVE OR FRIEND EXERCISE MY LAN MEDIA OPTION?
No, only you may exercise your LAN Media Option during your lifetime. You
may not transfer your option during your lifetime (except, in the case of a
nonstatutory stock option, pursuant to a qualified domestic relations order
(generally issued by a state court pursuant to a dissolution of marriage)), but
can provide for the transfer of the option upon your death, either (i) in your
will or (ii) by submitting a third-party designation in a form approved by SBE
to become effective upon your death. Under certain circumstances, your spouse
may have community property rights in the option.
14. CAN I SELL THE STOCK I RECEIVE FROM EXERCISING MY LAN MEDIA OPTION RIGHT
AWAY?
Generally, yes. The stock you receive upon exercise of your option is
freely tradable in most cases and will not bear any restrictive legends unless
you are an officer or director of SBE. (But see Question 20 if you are an
officer or director of SBE). If you exercise an incentive stock option, an
immediate sale will have certain tax consequences of which you should be aware,
See Question 26. HOWEVER, if the terms of the option permit you to exercise
your LAN Media Option before it is vested you MAY NOT SELL SHARES OF STOCK which
SBE still has the right to repurchase. See Question 32 for special tax rules
which apply to this situation.
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15. IF I AM AWARE OF IMPORTANT NON-PUBLIC INFORMATION, CAN I SELL MY STOCK
BEFORE THIS NEWS IS DISCLOSED TO THE PUBLIC? FOR EXAMPLE, IF I KNOW SBE IS
HAVING SIGNIFICANT PROBLEMS OR THAT SBE IS ABOUT TO ACQUIRE A COMPETITOR, CAN I
SELL MY STOCK BEFORE SBE PUTS OUT A PRESS RELEASE?
No. If you are aware of important inside information, you must not sell
shares of SBE's stock, whether received upon exercise of your LAN Media Option
or otherwise, before dissemination of the information to the public. Basically,
"inside information" is information that is both very important (material) and
non-public (not disclosed through press releases, newspaper articles or
otherwise to the public which buys and sells securities). Whether information
is material will depend on the specific circumstances. A general test is
whether dissemination of the information to the public would be likely to affect
the market price of SBE's stock or would be likely to be considered important by
people who are considering whether to buy or sell SBE's stock. Certainly if the
information makes you want to buy or sell, it would probably have the same
effect on others. Material information may include projections, estimates or
proposals.
If you are contemplating selling your stock and think you might have
"inside information," you must discuss your possible sale with Timothy J. Repp
at (925) 355-7610. If, after this discussion, it is determined that the
information is in fact inside information, you must wait to sell your stock
until after the information has been made public.
16. DO I PAY A COMMISSION WHEN I EXERCISE MY LAN MEDIA OPTION OR SELL THE
STOCK?
You pay no commission on the exercise of your LAN Media Option. Generally,
to sell your stock must take the stock certificate to a stockbroker, who can
arrange for its sale. You can expect to be charged a commission if you use a
stockbroker. SBE will not buy from you, sell on your behalf or assist you in
selling stock which you have purchased pursuant to your LAN Media Option.
Officer and directors are subject to restrictions on the sale of their stock
(See Question 20 below).
17. HOW CAN I MAKE A GIFT OF THE STOCK I RECEIVE UPON EXERCISING MY LAN
MEDIA OPTION?
You may make a gift of stock by delivering the stock certificate, with the
transfer block on the back filled in and signed with the signature guaranteed by
a bank or stock broker (or by delivering the stock certificate together with an
"assignment separate from certificate" filled in, signed and the signature
similarly guaranteed) to the recipient of the gift. The recipient may then send
the certificate and associated paperwork to SBE's transfer agent to have the
certificate transferred to the recipient's name. If you have a brokerage
account, your broker will generally be willing to take care of the mechanics of
transfer. Please note that a gift of stock acquired upon exercise of an
incentive stock option may result in a "disqualifying disposition" for tax
purposes. See Question 26. The Manager of Human Resources can give you the
name and address of SBE 's transfer agent.
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18. DOES SBE PAY DIVIDENDS ON ITS COMMON STOCK?
SBE currently is not paying dividends on its common stock and presently
intends to continue this policy in order to retain earnings for use in its
business.
19. DOES THE LAN MEDIA PLAN HAVE ANY OF THE SAME BENEFITS AS A QUALIFIED
RETIREMENT PLAN (INCLUDING A 401(K) PLAN) AND WILL MY PARTICIPATION IN THE LAN
MEDIA PLAN AFFECT MY PARTICIPATION IN A 401(K) PLAN?
The LAN Media Plan is not a qualified retirement plan and, therefore, does
not have the same tax deferral benefits, nor is the LAN Media Plan subject to
any provisions of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"). Your participation in the LAN Media Plan does not affect
your ability to participate in any 401(k) plan of SBE.
20. DO SPECIAL RULES APPLY TO ME IF I AM AN OFFICER OR DIRECTOR OF SBE?
Yes. If you are an officer or director of SBE you should be aware of tax
and securities laws which apply to grants of options to you and to your
transactions in stock received upon the exercise of options. In addition, you
must comply with SBE's policy permitting officers and directors to sell shares
only during certain "window" periods described in a separate memorandum. In
general, the "window" period commences on the third business day after general
public release of SBE's annual or quarterly revenues and ends with the fourth
week prior to the end of the quarter following the quarter for which information
has been released. Furthermore, you must check with the Chief Financial Officer
of SBE before selling any shares and your sale also must be made in accordance
with the applicable requirements of Rule 144 issued under the Securities Act of
1933, as amended (e.g., selling through a broker, possibly filing Form 144 with
the Securities and Exchange Commission, and not selling more shares than is
permitted under the Rule).
One of the laws that will apply to you as a director, and may apply to you
if you are an officer, are the short swing trading rules under Section 16 of the
Exchange Act. If you are an officer, SBE will have told you whether you are
subject to Section 16. If you are subject to Section 16 and need a reminder
about how Section 16 operates, you should review the Insiders' Handbook, which
you should have received, or ask Timothy J. Repp at (925) 355-7610 for another
copy of the Handbook.
Under the Securities and Exchange Commission regulations, an insider's purchases
of stock under an option granted under the LAN Media Plan are treated as
transactions exempt from Section 16(b). Accordingly, you may sell the stock you
acquire immediately (subject to compliance with the requirements as to window
periods, etc. discussed above), and, as the purchase and sale will not be
matched, no Section 16(b) liability will be found. Of course, if you have made
or make non-exempt purchases of stock within six months, any sale of the stock
would result in a matchable 16(b) transaction and the forfeiture of any
resulting profit. See Question 32.
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PART II
TAX ISSUES RELATING TO YOUR PARTICIPATION IN THE LAN MEDIA PLAN
The information in this Part II and the examples in Part III respond to
questions you may have about the federal tax consequences of your LAN Media
Option. You should understand, however, that this tax information is not
complete. For example, it does not address state or local tax laws or the
application of laws if you are subject to tax laws in other countries.
Furthermore, because tax laws and regulations may change, and interpretations of
these laws and regulations can change the way the laws and regulations apply to
you, this information may need to be updated after the issuance of this
prospectus. Therefore, you should consult with a tax advisor if you have
questions relating to the tax consequences of your LAN Media Option and the sale
of shares under your option.
21. DO I HAVE TO PAY TAX WHEN I RECEIVE OR EXERCISE A NONSTATUTORY STOCK
OPTION?
When you were granted your NONSTATUTORY stock option, neither you nor LAN
Media had to pay tax (or received a deduction) upon grant of the option. If you
exercise your NONSTATUTORY stock option when the market price of the stock is
higher than the exercise price of your option, you generally will be required to
pay tax on the "profit," that is, the difference between the exercise price and
the market price of the stock on the date of exercise. Your profit on the
exercise will be characterized as ordinary income.
For exceptions to these general rules with respect to early exercise
programs, and, in some cases, officers and directors see Question 32.
22. WILL SBE WITHHOLD THE AMOUNT OF TAXES DUE ON EXERCISE OF A NONSTATUTORY
STOCK OPTION?
When an employee exercises a nonstatutory stock option, SBE is required by
the Internal Revenue Service (the "IRS") to withhold United States federal
income and employment taxes from the profit or to otherwise ensure that the tax
due will be paid to the IRS. Additional amounts usually will be withheld for
state taxes. Generally, if SBE complies with its tax-reporting obligation
relating to your exercise, it can take a business expense deduction on the
amount of the profit you received upon exercise of your nonstatutory option.
Your LAN Media Option may provide you with the choice of paying your withholding
obligation by withholding shares valued at the withholding amount from the
shares that would otherwise be delivered to you on exercise of the option or
permitting you to deliver shares you already own that have a value equal to the
withholding amount. However, if you are an officer or director, unless a number
of specific conditions are met, generally stock withholding will be treated as a
"sale" for Section 16 purposes. Please speak to Timothy J. Repp at (925)
355-7610 before you exercise your LAN Media Option if you wish to avail yourself
of this procedure.
With respect to nonemployees (such as consultants and non-employee
directors), SBE is not obligated to withhold U.S. federal income and employment
taxes on any profit.
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23. HOW MUCH TAX DO I PAY WHEN I SELL STOCK RECEIVED PURSUANT TO THE
EXERCISE OF A NONSTATUTORY STOCK OPTION?
If you exercise your nonstatutory stock option when the exercise price is
lower than the market price, you generally will pay tax on the difference
between the two. Upon the sale of your stock (or other taxable transfer) you
generally will recognize a gain or loss equal to the difference between the
sales price and the market price at the time of exercise. Your gain or loss
will be characterized as:
- long-term if the asset was held for more than twelve (12) months, or
- short-term if the asset was held for twelve (12) months or less.
For exceptions to these general rules with respect to early exercise
programs and, in some cases, officers and directors, see Question 32.
In addition, if stock of SBE qualifies as small business stock, additional
tax benefits may be available upon disposition of your stock. See Question 33.
24. WHAT IS THE DIFFERENCE BETWEEN ORDINARY INCOME AND CAPITAL GAINS AND
LOSSES FOR FEDERAL INCOME TAX PURPOSES?
The maximum marginal tax rate applicable to ordinary income and short-term
capital gains is 39.6%. Currently, the maximum marginal tax rate is 20% for
long-term capital gains (shares held for more than twelve (12) months). Even
lower rates may apply to taxpayers in the 15% marginal income tax bracket.
Additionally, capital gains and losses are subject to certain other provisions
of the Internal Revenue Code not applicable to ordinary income. Consult a tax
advisor for more information regarding the rates that apply to you.
25. DO I HAVE TO PAY TAX WHEN I RECEIVE OR EXERCISE AN INCENTIVE STOCK
OPTION?
If you were granted an incentive stock option under the LAN Media Plan,
neither you nor LAN Media had to pay a tax (or received a deduction) upon grant
of your option. Except for the possible application of the alternative minimum
tax (see Question 31), you pay no tax upon exercise of an incentive stock option
until you dispose of the stock you acquire.
For exceptions to these general rules with respect to early exercise
programs and, in some cases, officers and directors, see Question 32.
26. HOW IS MY PROFIT TAXED WHEN I DO DISPOSE OF THE STOCK RECEIVED ON
EXERCISE OF AN INCENTIVE STOCK OPTION? WHAT IF I LOSE MONEY?
How your profit or loss is characterized will depend on how much time
passed after both the date the incentive stock option was granted and the date
you exercised the option.
You should be aware that transfer of legal title to the stock received upon
exercise of an incentive stock option in a transaction that is not a sale may
still be taxable as a disposition of the stock. Such transfers include most
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gifts, but do not include a transfer into joint ownership with right of
survivorship if you remain one of the joint owners, a pledge or a transfer by
bequest or inheritance, certain tax-free exchanges, or certain transfers to a
spouse or former spouse incident to a divorce.
If the date on which you dispose of the stock is at least two years from
the date on which the incentive stock option was granted AND more than one year
from the date on which you exercised the option, your entire gain or loss is
characterized as long-term capital gain or loss.
If you dispose of your stock less than two years from the date on which the
option was granted OR less than one year from the date on which you exercised
your option, a portion of your profit will be characterized as ordinary income
and the transfer will be a "disqualifying disposition."
The portion of your profit which is characterized as ordinary income upon a
disqualifying disposition is equal to the LESSER OF:
(A) the difference between the market price of the stock on the date you
exercised the option and the exercise price of the option (the "spread"), or
(B) the difference between the sales price and the exercise price of the
option (your "profit").
Any profit you make over the amount characterized as ordinary income is
characterized as capital gain, which will be taxed at a rate determined by the
length of time it was held from the date of exercise.
For an example of how these rules are applied, see Example A in Part III.
If you lose money on the sale of the stock, you will be able to report the
loss as a capital loss, which will be long-term or short-term depending on the
length of time the stock was held from the date of exercise.
Different rules will apply if, under the Internal Revenue Code, you would
not be entitled to report a loss on the sale of your stock if you were to lose
money on the sale. For example, if you sell your stock to your spouse at a
loss, you are not entitled to report the sale as a loss and any subsequent tax
consequences on the further disposition of the stock are determined under
special rules that govern such situations. If you sell your stock to your
spouse, whether or not at a loss, you will be taxed on the difference between
the market price of the stock on the date of exercise and the exercise price.
Other dispositions of stock, as described in the Internal Revenue Code, may have
similar consequences.
27. IS THERE ANY WITHHOLDING ON THE EXERCISE OF MY INCENTIVE STOCK OPTION OR
THE SALE OF THE STOCK ACQUIRED ON EXERCISE?
Currently, there is no withholding required upon the exercise of an
incentive stock option or on the sale of stock acquired on exercise (even if
part of your profit is ordinary income). SBE is generally required to report to
the IRS any ordinary income recognized by you as a result of a sale which is a
disqualifying disposition described in Question 26. SBE may be required in the
future to withhold taxes at the time you exercise an incentive stock option or
dispose of stock acquired on exercise of the option.
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28. DO I HAVE TO COMPLETE ANY SBE FORMS AFTER I SELL MY STOCK?
Yes. If you dispose of stock received pursuant to an INCENTIVE stock
option less than two years after the date the option was granted to you OR less
than one year after you exercise your option, you should complete and deliver to
the Manager of Human Resources the form provided to you (or which is available
from the Manager of Human Resources) within fifteen days of the date on which
you disposed of the stock.
29. WHAT ARE THE TAX CONSEQUENCES IF I USE SHARES I ALREADY OWN TO PAY THE
EXERCISE PRICE OF MY NONSTATUTORY STOCK OPTION?
If you pay the exercise price of your nonstatutory stock option with shares
of SBE which you already own you will have a tax-free exchange of the previously
held shares of stock for an equivalent number of the shares of stock received
under the LAN Media Option. If you receive additional shares in the exchange,
you will pay taxes on ordinary income equal to the difference between the market
value (on the date of exercise) of such additional shares and the amount of
cash, if any, you paid upon exercise.
The tax basis and capital-gain holding period of the equivalent shares
received under the option in the tax-free exchange will be the same as the tax
basis and holding period of the shares used to pay the exercise price. The tax
basis of the additional shares you receive will equal the amount of ordinary
income you had to report and the amount of any cash paid on exercise, and your
holding period for the additional shares will begin on the date of exercise.
For an example of how these rules are applied, see Example B in Part III.
30. WHAT ARE THE TAX CONSEQUENCES IF I USE SHARES I ALREADY OWN TO PAY THE
EXERCISE PRICE OF AN INCENTIVE STOCK OPTION?
If you pay the exercise price of an incentive stock option, in whole or in
part, with SBE shares you already own, you are deemed to have made a tax-free
exchange of the previously-held shares for an equivalent number of shares
received under the option.
However, ordinary income could be recognized (see Question 26) if the
already owned shares were acquired upon exercise of an incentive stock option or
under an employee stock purchase plan as defined in Section 423 of the Internal
Revenue Code and the exchange were treated as a disposition. The exchange will
be treated as a disqualifying disposition if the already owned shares are
exchanged less than two years of the grant of the option relating to the already
owned shares or less than one year after the exercise of such option. The tax
basis, holding periods and consequences of a subsequent disposition of shares
received upon exercise will depend on whether the shares disposed of are
equivalent shares or additional shares received at the time of exercise
("additional shares").
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For purposes of calculating any capital gain or loss upon a subsequent taxable
disposition, your basis in the EQUIVALENT SHARES will be equal to your basis in
the shares surrendered plus any ordinary income recognized by reason of the
exchange, and the holding period of the surrendered shares will carry over to
the equivalent shares. However, for purposes of calculating any ordinary income
on a subsequent disqualifying disposition, the amount treated as having been
paid for the equivalent shares will be equal to their fair market value on the
date of exercise and the holding period for such shares will begin on the date
of exercise.
It appears that your basis in any ADDITIONAL SHARES, for purposes of calculating
any capital gain upon a later disposition, will be the amount of cash, if any,
used to pay any part of the exercise price of such option. For purposes of
calculating any ordinary income upon a disqualifying disposition of the
additional shares the amount treated as having been paid for the additional
shares will be the amount of cash, if any, used to pay any part of the exercise
price of such option. The holding period for the additional shares will begin
on the date of exercise for all purposes.
In the event of a disqualifying disposition of shares acquired upon exercise of
an incentive stock option with stock, the shares with the lowest basis will be
treated as having been disposed of first.
For an example of how these rules are applied, see Example C in Part III.
31. WHAT ARE THE TAX CONSEQUENCES OF MY EXERCISE OF AN INCENTIVE STOCK
OPTION IF I AM SUBJECT TO THE ALTERNATIVE MINIMUM TAX?
The alternative minimum tax is a separately computed tax equal to 26% of so
much of your "alternative minimum taxable income" up to $175,000 as exceeds a
specified exemption amount and 28% on additional alternative minimum taxable
income. The alternative minimum tax is imposed only if and to the extent you
would pay more tax if your taxes are computed pursuant to the alternative
minimum tax rules than the tax you would pay if computed in the regular manner.
The alternative minimum tax takes into account what are called tax preference
items and other adjustments that are not taken into account when calculating
taxes in the regular manner. One of the adjustments is the inclusion in taxable
income of the difference between the exercise price of an incentive stock option
and the market price of the stock on the date of exercise, if that amount
constitutes a profit. If you pay alternative minimum tax upon exercise of an
incentive stock option, you are entitled to a credit against regular tax (but
not alternative minimum tax) in later years. When you sell the stock, you are
allowed, for purposes of calculating your alternative minimum tax in the year of
sale, to decrease the profit by the adjustment amount previously included in
your alternative minimum taxable income in the year of exercise.
If you are subject to a risk of forfeiture (see Question 32) the amount of
the adjustment will be calculated using market prices on the dates the
forfeiture lapses rather than the date you exercise the option, and the
adjustment must be made in the year in which the risk of forfeiture disappears.
It may be possible, however, to make a valid election under Section 83(b) of the
Internal Revenue Code within 30 days of the date of exercise to have the market
price on the date of exercise be the price used in the calculation of your
alternative minimum tax and to make the adjustment in the year of exercise.
However, if a Section 83(b) election is made, there may be implications for
purposes of calculating ordinary income, if any, in the event of a disqualifying
disposition (see Question 32).
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32. ARE THERE ANY SPECIAL TAX RULES WHICH APPLY TO ME IF SBE HAS THE RIGHT
TO REPURCHASE MY STOCK AFTER I EXERCISE MY OPTION OR IF I AM SUBJECT TO SECTION
16?
Yes. Generally, if SBE has the right to repurchase your stock after you
exercise your LAN Media Option it is because, under the terms of your option,
you were allowed to exercise all of your option, even the unvested portion. In
this situation SBE will retain a right to repurchase any shares which are
unvested under the option until they vest.
If SBE has the right to repurchase your stock after you exercise your LAN
Media Option, your stock is subject to what is called a "risk of forfeiture."
Stock received upon exercise of an option within six months of the date of
grant of the option may also be subject to a risk of forfeiture if you are
subject to Section 16 of the Exchange Act. You should consult with a tax
advisor if this applies to you. You are subject to Section 16 only if you are
an officer, director or 10% stockholder of SBE. See Question 20.
If there is a risk of forfeiture, the amount of ordinary income you must
report and the time at which you must report your income may be different than
described above.
The special tax rules applicable to nonstatutory stock options and incentive
stock options where a "risk of forfeiture" is present are as follows:
NONSTATUTORY STOCK OPTION.
In the case of stock issued pursuant to a NONSTATUTORY stock option and
subject to a risk of forfeiture, you do not recognize ordinary income on the
date of exercise but instead recognize ordinary income on the date(s) the risk
of forfeiture with respect to the shares disappears (e.g., the date SBE no
longer has the right to repurchase the stock). The amount of such ordinary
income is the excess, if any, of the market price of the stock on the date(s)
the risk of forfeiture disappears, over the exercise price paid for such shares.
When you later sell your shares, any additional gain or any loss will be
characterized as capital gain or loss and taxed at a rate determined by how long
you held the shares from the date on which you recognized ordinary income.
For an example of how these rules are applied, see Example D in Part III.
If you want to avoid this result, you can file what is called a Section
83(b) election within 30 days after the exercise of the option and report
ordinary income equal to the difference, if any, between the market price and
the exercise price on the date of exercise. When you later sell your shares,
any additional gain or any loss will be characterized as capital gain or loss,
which will be long-term, or short-term depending on the length of time the
shares are held from the date you exercised your option. You should be aware,
however, that if you file an 83(b) election, the value of the shares may not
increase enough to justify the early tax payment. In addition, if you
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subsequently forfeit your profit from the shares because, for example, you leave
SBE and SBE repurchases the shares at cost, there will be no offsetting tax
deduction (that is, you will not be able to report the amount you paid in taxes
as a loss on the stock) and will not get a refund of any of the tax paid.
INCENTIVE STOCK OPTION.
If stock you receive pursuant to the exercise of an INCENTIVE stock option
is subject to a risk of forfeiture and you dispose of the stock after the risk
of forfeiture lapses in a disqualifying disposition (see Question 26) the amount
of ordinary income you must report is calculated differently. In this case, the
amount of ordinary income generally is equal to the lesser of:
(A) the excess, if any, of the market price of the stock on the date or
date(s) the risk of forfeiture disappears over the exercise price paid for such
stock, or
(B) the profit, if any, on the sale of the stock.
If your profit is more than the amount that must be reported as ordinary
income, then the remainder of the profit is characterized as capital gain, which
will be long-term or short-term depending on how long the stock was held after
the date on which the risk of forfeiture disappeared.
For an example of how these rules are applied, see Example E in Part III.
If you wish to avoid this result, you may be able to make the 83(b)
election discussed earlier in this question. If the election is filed, your
ordinary income should be calculated in the manner described in Question 26.
Please contact the Manager of Human Resources for further information and
the form of election if you think you should be filing an 83(b) election.
Remember that this must be done within 30 days after you exercise your option.
Filing an 83(b) election also may affect your alternative minimum tax liability,
if any (see Question 31).
33. DO SPECIAL RULES APPLY IF STOCK OF SBE QUALIFIES AS SMALL BUSINESS
STOCK?
Yes. The Revenue Reconciliation Act of 1993 reduces the capital gain tax
if you acquired "qualified small business stock" after August 10, 1993 and hold
it for at least five years. Gain eligible for the 50% exclusion may not exceed
the greater of $10 million or 10 times your basis in the stock. One-half of
your gain on the sale of the stock generally will be excluded from your taxable
income, thus reducing your effective tax rate on such gain to a maximum of 14%
since the remaining 50% of the gain is capital gain, taxed at a maximum rate of
28%. However, one half of the excluded gain (i.e., one-quarter of the total
gain) will be a tax preference for purposes of the alternative minimum tax.
In order to constitute qualified small business stock, SBE must satisfy a
number of requirements at the time the stock is issued (which would be the
exercise date in the case of shares purchased by exercising a stock option).
Generally, it must be a domestic C corporation (with certain exceptions) with
aggregate gross assets that do not exceed $50 million. All corporations that
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are members of the same parent-subsidiary controlled group are treated as one
corporation in determining whether the qualified small business requirements
have been met. In addition, at least 80% of SBE's assets must be used in the
active conduct of one or more qualified trades or businesses. Some of these
requirements must continue to be satisfied during the entire time you own the
shares. You should consult with SBE and your professional tax advisor to
explore the availability of this special capital gain tax treatment for shares
of SBE's stock.
34. WHAT HAPPENS IF THE VESTING OF MY OPTIONS ACCELERATES UPON A CHANGE OF
CONTROL?34. What Happens if the Vesting of my Options Accelerates upon a
Change of Control?
If there is a change in control of SBE, payments received by certain
persons that are contingent upon the change in control may constitute "parachute
payments" under Section 280G of the Code. Generally, Section 280G imposes tax
penalties on both SBE and on certain officers, significant stockholders and
highly compensated individuals of SBE in the event that an individual receives
payments in connection with the occurrence of a change of ownership or effective
control of SBE, or on a change in the ownership of a substantial portion of
SBE's assets, equal to or in excess of three times the individual's "base
amount." (The term "base amount" is roughly equivalent to the individual's
average annual taxable compensation from SBE for the preceding five year period
or such shorter period of time as the individual has actually provided services
to SBE.)
If, by reason of such change in control, the exercisability of outstanding
options is accelerated, the value of the acceleration is added to other
contingent payments, if any, in determining whether the person has received
"excess parachute payments." In general, if a person receives excess parachute
payments, an excise tax equal to 20% of the amount of such excess parachute
payments is imposed on the person, and SBE does not receive a deduction for such
amount.
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PART III
EXAMPLES
EXAMPLE A (QUESTION 26): DISQUALIFYING DISPOSITIONS
Assume the following:
- On May 1, 1999, you are granted an incentive stock option for 10
shares at an exercise price of $8.00 per share.
- On May 1, 2000, you exercise the option when the market price is
$10.00 per share.
- On October 1, 2000, you sell the stock when the market price is
$9.00 per share for a $10.00 aggregate gain.
Because you did not hold the stock until a date which is at least two years
after the date of grant and one year from the date of exercise, all or a portion
of your gain is ordinary income. The amount of ordinary income PER SHARE in
this case is equal to the LESSER of:
(a) (b)
market price on date of exercise $10.00 or sale price $9.00
exercise price - $8.00 exercise price - $8.00
------- -----
$2.00 $1.00
As $1.00 is less than $2.00, the amount of ordinary income is equal to
$1.00 per share, or $10.00 in the aggregate.
EXAMPLE B (QUESTION 29): STOCK FOR STOCK EXERCISES OF A NONSTATUTORY STOCK
OPTION
Assume that on April 1, 1999 you bought 10 shares of stock on the open
market when the market price was $6.00 per share. On April 1, 2000, when the
market price is $10.00 per share, you exercise a nonstatutory stock option to
purchase 20 shares at an exercise price of $9.00 per share for an aggregate
exercise price of $180.00. Using all of your previously-owned shares to pay
$100.00 of the exercise price (10 shares x $10.00 market price), you pay $80.00
cash for the remainder of the exercise price. On the date of exercise you are
deemed to have a tax-free exchange of the 10 previously-owned shares for 10
equivalent new shares. You will also recognize ordinary income of $20.00, equal
to the market price of the 10 additional new shares you receive, $100.00, minus
the amount of cash you paid on exercise, $80.00.
If you sell all 20 shares which you received upon exercise of the option
for $11.00 per share on June 1, 2000, you will recognize a $5.00 per share gain
on the 10 equivalent new shares ($11.00 per share - $6.00 per share (purchase
price of original shares)) which will be long-term capital gain because you are
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allowed to add the period which you held the original 10 shares to the period
you held the 10 equivalent new shares (for a total holding period of 14 months).
You will also recognize a $10.00 aggregate gain on the 10 additional new shares,
calculated as follows: $110.00 (10 shares x $11.00 market price) minus the sum
of (a) $80.00 (the amount of cash paid for the shares) and (b) $20.00 (the
amount of income recognized upon exercise of the option). This gain will be
characterized as short-term capital gain because you held the stock for only 2
months.
EXAMPLE C (QUESTION 30): STOCK FOR STOCK EXERCISES OF AN INCENTIVE STOCK
OPTION
Assume you purchased 18 shares on the open market for $6.00 per share on
April 1, 1999. On May 1, 2000, when the market price is $10.00 per share, you
exercise an incentive stock option to purchase 20 shares at an exercise price of
$9.00 per share for an aggregate exercise price of $180.00, using your 18
previously owned shares to pay the exercise price. On the date of exercise, you
are deemed to have made a tax-free exchange of the 18 previously owned shares
for 18 equivalent new shares and to have acquired 2 additional new shares.
Because the previously-owned shares delivered in payment of the exercise
price were shares not acquired upon exercise of an incentive stock option or
under an employee stock purchase plan (as defined in Section 423 of the Internal
Revenue Code), no disqualifying disposition occurred in the exchange and no
ordinary income was recognized at the time of the exchange. However, you will
recognize an adjustment to your alternative minimum taxable income of $10.00 per
additional share or $20.00 for the 2 additional shares. Therefore the basis in
the 18 equivalent new shares is the same as the basis of the original shares:
$6.00 per share. However, for purposes of calculating ordinary income on a
disqualifying disposition, the amount treated as having been paid for such
equivalent new shares is equal to their fair market value on the date of
exercise ($10.00 per share). The basis in the 2 additional new shares is $0 per
share.
If you sell 15 of the shares on December 1, 2000 at $11.00 per share, such
shares are deemed to be sold in a disqualifying disposition because the
disposition is less than one year after the date of exercise. Since the
additional new shares have a lower basis ($0 per share) than the equivalent new
shares ($6.00 per share), they will be treated as having been disposed of first.
Therefore you will be considered to have sold the 2 additional new shares and 13
of the equivalent new shares.
You will recognize no ordinary income with respect to the equivalent new
shares since there is no difference between their fair market value on the date
of exercise and the amount treated as having been paid for such shares.
However, you will recognize capital gain with respect to the equivalent new
shares in the amount of $65.00 (13 shares times $5.00 per share ($11.00 sale
price minus $6.00 basis)). Such capital gain will be long-term since the
holding period for such equivalent new shares includes the holding period for
the original shares exchanged therefor and is, thus, 20 months.
You will recognize ordinary income with respect to the additional new
shares in the amount of $20.00 (2 shares times $10.00 per share ($10 fair market
value on the date of exercise minus $0 basis in these shares)). You will
recognize capital gain on such additional new shares in the amount of $2.00 (2
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shares times $1.00 per share ($11.00 sale price minus $10.00 recognized as
ordinary income)). Such capital gain will be short-term since the holding
period for such additional new shares begins on the date of exercise and is
therefore only 7 months.
EXAMPLE D (QUESTION 32): RISKS OF FORFEITURE AND NONSTATUTORY STOCK OPTIONS
Assume that on April 1, 1999 you are granted a nonstatutory option to
purchase 20 shares of stock for $8.00 per share. The terms of the option
provided that you may exercise the option immediately, but SBE has the right to
repurchase all of the stock at the price you paid for it if you leave SBE before
July 1, 1999, 15 shares if you leave before October 1, 1999, 10 shares if you
leave before January 1, 2000, and 5 shares if you leave before April 1, 2000.
On May 20, 1999 you exercise your option with respect to all of the shares when
the market price is $10.00. Normally you would owe tax on $40.00, the
difference between the aggregate exercise price and the aggregate market price
on the date of exercise. However, because all the shares are subject to a risk
of forfeiture you do not calculate the tax on May 20 but on each day that a risk
of forfeiture disappears. For example, assume that on July 1, 1999 the market
price is $11.00 per share. On that date the risk of forfeiture disappears with
respect to 5 shares because SBE no longer has the right to repurchase 5 of your
20 shares. Accordingly, tax is calculated as follows:
Number of shares no longer subject to vesting: 5
Exercise price of option: $ 8.00
Market price on July 1: $11.00
Amount on which tax is due: $ 3.00 per share on 5
shares.
On October 1, 1999, January 1, 2000, and April 1, 2000 you may owe additional
tax depending on the market price of the stock on those days.
If the market price of the stock is higher on the date the risk of
forfeiture lapses with respect to any block of shares than it is on the exercise
date, you will end up paying more ordinary income tax with respect to such block
of shares as a result of your exercise of the option than you would have if the
stock you received upon exercise had not been subject to a risk of forfeiture
and you owed tax only on the difference between the exercise price and the
market price on the date of exercise.
EXAMPLE E (QUESTION 32): RISKS OF FORFEITURE AND INCENTIVE STOCK OPTIONS
Assume that on April 1, 1999 you received an incentive stock option for 15
shares at an exercise price per share of $10.00. The terms of the option
provided that only 5 shares vested initially with the remainder of the shares
vesting at a rate of 5 shares per quarter, and further provided that you may
exercise the option immediately, but if you leave SBE, SBE has the right to
repurchase all the shares that are not yet vested. On May 1, 1999, you exercise
the option when the stock is worth $10.00 per share. You do not have to pay any
tax at the time of exercise. On July 1, 1999, when 5 unvested shares vest, the
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market price is $11.00 per share and on October 1, 1999, when the last 5
unvested shares vest, the market price is $9.00 per share. On November 1, 1999,
you sell the 15 shares when the market price is $12.00 per share for a total
gain of $30.00 (15 X $2.00). Because you did not hold the stock for more than
one year from the date of exercise and two years from the date of grant, the
sale is a disqualifying disposition.
To calculate the ordinary income from the disqualifying disposition, you
first calculate the excess, if any, of the market price of the stock on the date
of exercise, or, if later, the date(s) the risk of forfeiture disappeared, over
the exercise price of $10.00 (the spread). The lesser of this amount or your
actual gain on the purchase and sale represents the ordinary income you must
recognize.
EXERCISE DATE: May 1, 1999
Number of shares not subject to
vesting on exercise date: 5
Exercise price per share: $10.00
Market price per share on May 1, 1999: $10.00
Spread per share on exercise date: -0-
Actual gain per share on purchase and sale: $2.00
Lesser of spread on exercise date and gain: -0-
Ordinary income per share on which tax is due: -0-
VESTING DATE: July 1, 1999
Additional number of shares
no longer subject to vesting: 5
Exercise price per share: $10.00
Market price per share on July 1, 1999: $11.00
Spread per share on July 1, 1999: 1.00
Actual gain per share on purchase and sale: $ 2.00
Lesser of spread when risk of forfeiture
disappears and actual gain: $ 1.00
Ordinary income per share on which tax is due: $ 1.00 per share
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VESTING DATE: October 1, 1999
Additional number of shares no longer
subject to vesting: 5.00
Exercise price per share: $10.00
Market price per share on October 1, 1999: $ 9.00
Spread per share on October 1, 1999: -0-
Actual gain per share on purchase and sale: $2.00
Lesser of spread when risk of forfeiture
disappears and actual gain: -0-
Ordinary income per share on which tax is due: -0-
There is an excess of the market price of the stock on the later of the
exercise date or the date the risk of forfeiture lapsed, over the exercise price
only with respect to the 5 shares which vest on July 1, 1999. Therefore, $5.00
of gain (5 shares x $1.00 per share) will be treated as ordinary income. The
remainder of the gain ($30.00 - $5.00 = $25.00) will be short-term capital gain.
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QUESTION INDEX
QUESTION PAGE
1. Who determined whether I received an option and the terms of my
option and how many shares of common stock it covered? 11
2. Is my LAN Media Option an incentive stock option or a nonstatutory
stock option? What is the difference? 11
3. What is the exercise price of my LAN Media Option? 12
4. When can I exercise my LAN Media Option? 12
5. How do I exercise my LAN Media Option? 12
6. Do I have to pay the exercise price with cash? 12
7. I have heard about cashless exercise programs through brokers.
How do these work? 13
8. Will I continue to receive options under the LAN Media Plan as
long as I continue providing services to SBE? 13
9. Can the terms of my LAN Media Option be changed? 13
10. What happens if I leave SBE or go on a leave of absence? 14
11. What if I leave SBE because of disability? 15
12. What are the rights of my heirs upon my death? 15
13. Can a relative or friend exercise my LAN Media Option? 15
14. Can I sell the stock I receive from exercising my LAN Media Option
right away? 15
15. If I am aware of important non-public information, can I sell my
stock before this news is disclosed to the public? For example, if
I know SBE is having significant problems or that SBE is about to
acquire a competitor, can I sell my stock before SBE puts out a press
release? 16
16. Do I pay a commission when I exercise my LAN Media Option or sell
the stock? 16
17. How can I make a gift of the stock I receive upon exercising my LAN
Media Option? 16
18. Does SBE pay dividends on its common stock? 17
19. Does the LAN Media Plan have any of the same benefits as a qualified
retirement plan (including a 401(k) plan) and will my participation
in the LAN Media Plan affect my participation in a 401(k) plan? 17
20. Do special rules apply to me if I am an officer or director of
SBE? 17
21. Do I have to pay tax when I receive or exercise a nonstatutory stock
option? 18
22. Will SBE withhold the amount of taxes due on exercise of a nonstatutory
stock option? 18
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TABLE OF CONTENTS
(continued)
23. How much tax do I pay when I sell stock received pursuant to the
exercise of a nonstatutory stock option? 19
24. What is the difference between ordinary income and capital gains and
losses for federal income tax purposes? 19
25. Do I have to pay tax when I receive or exercise an incentive stock
option? 19
26. How is my profit taxed when I do dispose of the stock received on
exercise of an incentive stock option? What if I lose money? 19
27. Is there any withholding on the exercise of my incentive stock option
or the sale of the stock acquired on exercise? 20
28. Do I have to complete any SBE forms after I sell my stock? 21
29. What are the tax consequences if I use shares I already own to pay
the exercise price of my nonstatutory stock option? 21
30. What are the tax consequences if I use shares I already own to pay
the exercise price of an incentive stock option? 21
31. What are the tax consequences of my exercise of an incentive stock
option if I am subject to the alternative minimum tax? 22
32. Are there any special tax rules which apply to me if SBE has the
right to repurchase my stock after I exercise my option or if I am
subject to Section 16? 23
33. Do Special Rules Apply if Stock of SBE Qualifies as Small Business
Stock? 24
34. What Happens if the Vesting of my Options Accelerates upon a Change
of Control? 25
Example A (Question 26): Disqualifying Dispositions 26
Example B (Question 29): Stock for Stock Exercises of a Nonstatutory
Stock Option 26
Example C (Question 30): Stock for Stock Exercises of an Incentive
Stock Option 27
Example D (Question 32): Risks of Forfeiture and Nonstatutory Stock
Options 28
Example E (Question 32): Risks of Forfeiture and Incentive Stock
Options 28
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An extra section break has been inserted above this paragraph. Do not delete
this section break if you plan to add text after the Table of
Contents/Authorities. Deleting this break will cause Table of
Contents/Authorities headers and footers to appear on any pages following the
Table of Contents/Authorities.
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