Dave,
When a corporate officer exercises options there is an immediate withholding tax due on the difference between the option price and the then-current stock price. Many insiders sell a portion of the shares exercised in order to provide for that withholding tax. Generally, the tax due at withholding would be 20%. This is only a portion of the ultimate tax due, since the individual is liable for the full tax, at ordinary income tax rates, when the tax return in filed for that year. That full tax will be the individual's ordinary income tax rate on that difference (between current share price and exercise price.) Since the maximum individual marginal tax rate is 39.6% the corporate officer may wish to sell enough shares to provide for that amount, and take half of the proceeds for the immediate withholding tax due.
In the case of e.Digital, assuming a share price of $2.16 at exercise for Falk (7/6) and $2.06 at exercise for Putnam (7/30) and an option price of $0.08, the respective gains are $2.08/share and $1.98/share and the taxes due (at the maximum rate) would be 39.6% or $0.82/share (Falk) and $0.78/share (Putnam).
To cover the taxes due, Putnam would need to sell $0.78/$2.28 shares or 34%, and Falk would have to sell $$0.82/$2.17 shares or 38%.
Looking at the insider trading table you provided, Putnam sold 40,000 of 109,840 shares exercised, or 36.4%, which is in line with the full tax due. Falk sold 60,000 of 269,684 shares exercised, or 22.2%, which only covers the immediate withholding tax due.
Keep in mind that once exercised the long-term holding period begins and the insider must then wait one year to obtain the more favorable capital gains tax rate (20%).
It appears to me that the sales were merely to cover the taxes due.
One final point, in general, the sale of shares by an insider indicates that no material facts are present which have not been released to the public. Thus, those who have speculated that contracts have been secretly signed with OEMs for the music player, but announcement of those contracts has been deferred, are incorrect. If Falk or Putnam knew more than they have disclosed, they would be prohibited from trading in the stock. (There may be an exception to this rule to cover shares sold for tax withholding after option exercise and I welcome correction on this point.)
Jim |
