The "definitive" (?) compensation plan post.
From today's 10-Q:
3. ACTV, Inc.'s balance sheets at March 31, 1999 and December 31, 1998 reflect expense accruals of $4,138,509 and $2,000,062, respectively, related to the Company's stock appreciation rights (SAR) plan. No SARs were exercised for cash during the first quarter of 1999.
Translation: Everyone is holding onto their rights, not exercising them. The company took a charge against earnings, but did not have to pay out the cash.
Open Question: Anyone who understands accounting principles and can explain how they're taking charges against earnings that they aren't paying out in cash, etc., please explain.
The accrual at March 31, 1999 is based on the closing market price of the Company's common stock of $11-3/8 on that date for all employees holding stock appreciation rights (SARs), with the exception of Messrs. Samuels, Reese, and Crowley. These executive officers agreed to limit their compensation and the corresponding liability to the Company related to all of their vested stock appreciation rights based on a common stock price of $3-15/16, and further agreed to be paid in unregistered common stock in lieu of cash for all of their vested SARs.
Translation: The stock went up to 11 1/4 at the end of Q1, but the executives agreed to be paid as if the stock had only run up to a shade under $4. Additionally, they aren't paid in cash, they are paid in stock. I am having difficulty reconciling this with the 2% of increase in market cap compensation that they are supposed to receive that we are voting on next week.
As a result of these agreements, the Company's stock appreciation
rights expense for the first quarter of 1999 was approximately $3.2 million less than it would have been otherwise.
Translation: The $3.4 million expense last quarter must have been for the options that the other employees of IATV owned... the stock did quadruple in Q1, so everyone's stock options became worth a pretty penny... but nobody exercised them, which means that the folks at IATV are probably happy.
More importantly, the executives had a chance to legally take $3.2 million this last quarter, but they turned it down. I'm going to assume that they did this because they have the best interests of the company at heart... probably means that we can trust them on this compensation plan that they aren't going to let themselves be paid several times what IATV earns in any given quarter, because they are not foolish and they want the stock to go up too... after all, Samuels owns gobs of stock and he would love to be able to sell that stock someday at $100 or more.
So, here are my conclusions:
1) I stand by my earlier numbers, that if the execs truly received 2% of the market cap increase as a cash bonus that IATV would never turn a profit.
2) However, the executives went and capped their existing rights at 3 15/16 when they didn't have to do it. I don't know how this affects future rights, but the execs did turn down several million dollars in Q1.
3) Thus, I feel that it is safe to trust the execs in that they are not going to allow their bonuses to be so exorbitant as to cripple the company (which was my major concern and why I wouldn't let this issue drop).
4) However, I still voted against item #2. I have a bad feeling about it, even though everything I read today makes me think that the feeling is unwarranted. I am going to assume, however, that the provision will pass. Even if it does pass, I do not think that the compensation plan will limit the appreciation of stock value. I am concerned that they capped their existing rights at 3 15/16, but at the end of Q1, maybe they got new rights at 11 1/4? Will they cap those? Or did the previous action already cap them? If everything is already capped, why is there a 2% bonus provision that we're voting on?
5) Regardless of anything else, it's pretty clear that they are going to take their entire bonus in stock instead of cash, meaning that all IATV would suffer in any one quarter should be dilution, which is better than taking a huge cash charge....
[Example: Stock runs from 10 to 20. There are 37 Million shares (according to 10Q) so Market cap increases $370MM. 2% of that is $7.4MM. $7.4MM in stock at 20 is 370K shares of stock, or in this case a 1% dilution. So if earnings before the bonus had been $0.10, they would now be $0.099, which is hardly a noticable difference. If they'd taken the $7.4MM in cash instead, it would have been a $0.20 charge against earnings which would have changed a $0.10 profit into a ($0.10) loss. Having them take the entire bonus in stock makes it much better.]
I would have to say that, at this point, I am 90% clear on what's going on. I still don't understand all the accounting stuff, but then again, I'm a computer geek, not an accountant.
It's late, so I'm going to quit rambling here... if anyone has any questions about anything I posted, please ask them... I probably won't know the answer but someone here should. Bottom line, I'm not anywhere near as worried about the compensation plan as I was this afternoon... still wish I had gotten straight answers sooner, but at least I got them ;-).
-Mike
P.S. Art- I told you I wanted to be wrong... don't tell my wife I ever said that though ;-). |
