EarthLink Loaned $4.6 Mln to Execs With Margin Calls
Washington, March 19 (Bloomberg) -- EarthLink Inc. lent $4.6 million to top officers, including Chief Executive Charles Betty, to help them retain ownership of company shares pledged as collateral for loans, a regulatory filing said.
The Atlanta-based company, which provides customers with access to the Internet, extended the loans to four officers last year, according to a proxy statement filed with the Securities and Exchange Commission.
Betty received $3 million, the filing said, while President Michael McQuary borrowed $450,000. The company lent $1 million to Brinton O.C. Young, executive vice president of marketing and corporate strategy; and $100,000 to Jon Irwin, executive vice president of member experience.
The funds permitted the executives to meet margin calls on shares of EarthLink stock that they held, the SEC filing said. An EarthLink spokesman declined further comment.
Insiders at other technology companies also have been hit with margin calls, in part because the Nasdaq Stock Market fell about 57 percent over the past 12 months. Some executives have had their stock sold by brokerages at fire-sale prices to meet margin calls.
In general, brokerages provide margin loans to customers who wish to borrow money to purchase stocks. When buying $5,000 worth of stock in General Electric Co., for example, a customer must initially pay $2,500 and can then borrow the remaining $2,500 of the purchase price.
Other Cases
If the value of the shares decline below a certain level, the broker will issue a margin call. The customer must then pay down the margin loan or provide additional collateral. Otherwise, the broker will sell the shares, which originally served as security for the loan.
Some corporate executives have used their company stock as collateral for margin loans when they invest in other securities. One example is Barry Hertz, chief executive of Track Data Corp. who lost much of his company stake last year after pledging it as collateral for money-losing bets on other stocks.
EarthLink helped its executives avoid the loss of their stakes by lending them money that could be used to repay margin loans. That provides additional time for company shares to regain some of their value. Companies such as Conseco Inc. and drkoop.com Inc. have made similar loans to executives who faced margin calls.
EarthLink stock lost 81 percent of its value during 2000, declining to $5.03 as of Dec. 31 from $26.41 at the beginning of the year. The stock has since regained some of the lost ground, rising 38 cents to $10.75 a share today.
The $3 million loan for Betty is more than six times the $486,728 total of his salary and annual bonus in 2000. According to the SEC filing, the loans all come due before the end of 2001.
Exercised Options
As of Feb. 28, Betty owned 639,154 EarthLink shares outright. He also had options that he owned or would soon be able to exercise for the purchase of another 482,441 shares, the proxy statement said.
The proxy statement also showed that Betty generated $13.8 million in paper profits through the exercise of options on 809,559 shares last year. For instance, he exercised options to purchase 70,697 shares for $1.49 each on Feb. 18, 2000, when the stock closed at $19.81. If he had immediately sold these shares, Betty could have realized profits of $1.29 million.
However, Betty didn't report any sales of EarthLink shares to the SEC last year, according to insider data compiled by the Washington Service. That suggests he held on to stock acquired with options, missing the chance to sell when EarthLink shares traded at higher levels.
Mar/19/2001 17:29 ET |
