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Technology Stocks : IATV-ACTV Digital Convergence Software-HyperTV -- Ignore unavailable to you. Want to Upgrade?

To: SCOTT HEIMAN who wrote (3720)	5/17/1999 1:19:00 PM
From: Mike Fredericks	Read Replies (1) \| Respond to of 13157

Scott- You're not coming across as a "know-it-all hard ass," so don't worry. In the meantime I have sent the below message to ACTV via their main fax number (the one listed on their web page.) If someone has a better fax number please let me know... I checked the annual report, but found nothing. ------------------------ BEGIN MESSAGE ------------------------ May 17, 1999 To: "Ted O.", or anyone in Investor Relations ACTV, Inc. Dear Sir or Madam, My name is Michael Fredericks, and I am a shareholder in ACTV. I have read over the matters which are coming up for vote at the annual shareholders meeting, and I have concerns with the executive compensation plan (item #2 on the ballot.) My understanding is that the executives receive compensation equal to 2% of the increase in market capitalization of the stock. I have serious concerns that this plan will prevent ACTV from ever becoming profitable. Since it is quite possible that I am misunderstanding the plan, I am writing to you for clarification. Scenario 1: Assign a P/E to ACTV (once it becomes profitable). I am going to select, for my example, a P/E of 100, which I do not think is unreasonable for a Technology stock that is just becoming profitable. At a smaller P/E (say 50), ACTV would have to earn $0.33 to justify the current stock price. I think that this P/E would be very low. If ACTV has a P/E of 100, then every penny of earnings would contribute $1.00 to the stock price. With 33 Million shares outstanding, that $1.00 increase would be a $33 Million increase in Market Capitalization. 2% of $33 Million is $660,000. A charge of $660,000 would be a 2 cent per share charge against earnings. So, for every penny in earnings, the company would be required to give the executives 2 pennies in compensation. In my mind, this will prevent ACTV from ever generating a profit, as any profit that would be generated would be more than paid out in compensation to the executives. If the P/E is higher than 100 (reasonable for a technology stock) then we would be paying the executives an even greater multiple of earnings than just double. Scenario 2: Assume that the stock price stays flat. Assume also that Liberty Media Group chooses to exercise some of the options they purchased. ACTV would then issue more shares of stock to sell to Liberty. Since the number of shares increased but the stock price remained flat, the market capitalization increases. Hence, the executives would be entitled to compensation. In my mind, this type of plan would reward the executives for diluting the stock. I was shocked and astounded to read that the company paid out several million dollars in executive compensation last quarter when the company only brought in a shade over $400,000 in revenues. (Not profits, but revenues.) I am dismayed that the money from the equity investment made in ACTV by Liberty has gone, in large part, straight to the pockets of the executives rather than towards improving the company. It is my hope that I am completely misunderstanding the compensation plan and its potential future impacts. I hope that you can clear up my misunderstandings. If it turns out that I am correct, I hope that you could offer an explanation for why the company has chosen this plan instead of sticking solely to a traditional options-based compensation plan, and how the company expects to maximize shareholder value (i.e. stock price) given the compensation plan. I am also curious as to what happens if the stock price drops between Q1 and Q2. Do the executives return any of the compensation they received in Q1? If the stock drops from 15 back to 5 by the end of Q2 and then runs back from 5 to 15 in Q3, do the executives get rewarded a second time for the same rise in stock price? Why is the compensation credited quarterly instead of annually? If you could please respond at your earliest convenience via fax at (XXX)-XXX-XXXX or via e-mail at fred@cs.umd.edu, I would greatly appreciate it. Unfortunately I do not have access to a phone at work or I would also provide a phone number where I could be reached. Thank you very much for your time, and I really do hope that I am misunderstanding this compensation plan. Michael Fredericks