Spectrum Pharmaceutecals Inc (SPPI)

[JavaPunk]

AVII77

See my post 2033 for additional color on this topic.

a quick recap:

1) When an employee / director exercise employee stock options, upon exercise the person realizes "Ordinary Income" (not capital gains) so Raj had to pay ordinary income taxes on the profit amount from the options. The profit is the current market price minus the exercise price on the options (for example $20 market price minus $5 exercise price = a $15 profit subject to Ordinary Income Tax). Most employees sell enough shares to pay the taxes and the employee keeps the net shares or the cash (if they sell all the shares)

2) Raj waited until Jan 1 2018 so he would pay his Ordinary Income tax at the 37% rate than the 39.4% rate (for 2017) (benefit of Trump's new tax law)

3) if Raj would have sold shares into the market to pay his taxes, that would have been dilutive to SPPI. If he would have sold shares into the market to pay taxes, SPPI;s broker (stock plan administrator) would have sold enough shares to pay the taxes then the broker would have sent that money to SPPI so SPPI could pay the taxes for Raj to the IRS (Ordinary Income Taxes Withholding)

4) SPPI could have then used its own cash to buy back the same number of shares Raj sold to pay taxes from SPPI's own cash so that the Raj exercise and sell (for taxes) would not be dilutive. - BUT SPPI did not do this. - they used the short cut below to prevent dilution

5) they simply agreed to not issue the shares that would have been sold to pay taxes and then SPPI pays the withholding taxes for RAJ (SPPI sends a check to the IRS). (this is a quasi buy-back but really just accounting adjustments)

6) Raj gets the SAME number of NET shares if he sells shares to pay taxes or if he does a net withholding (SPPI pays the taxes and does not issue the shares) -- SO Raj DOES pay the taxes because his net shares are the same but SPPI does a quasi simultaneous buy-back.

7) if Raj pays his ordinary taxes when the stock is at $20 - then that is his new Tax / Cost Basis for the new shares and he pays capital gains on all profit above $20 per shares (SPPI will not be involved on the capital gain tax). For example if Raj sells these shares at $90 and his Cost Basis is $20 then he owes long term (if holds for 1 year) Capital Gains Tax on the profit of $70 per share (the Capital Gains Tax is around 20% vs the 37% on Ordinary Income Tax)

most of this is simply tax/accounting adjustments - most companies do this for their Directors and Executive Officers.