What a disgrace this is!
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June 12, 2001
Heard on the Street
Executive Loans Float Away
After Internet Bubble Pops
By AARON ELSTEIN
WSJ.COM
By next month, Preview Systems will be just a memory. So will a loan of
$937,000 that the Sunnyvale, Calif., software maker made to its chief
executive, Vincent Pluvinage.
As part of his exit package, Preview Systems agreed in April to forgive the
loan that Mr. Pluvinage received to buy company shares before the initial
public offering of stock in December 1999. Investor excitement about
Preview Systems' software, used to transmit music over the Internet, lifted
the company's shares as high as $94 on Dec. 8, 1999, the day it went
public at $21 a share.
Now, with only a few dozen Preview Systems employees remaining and its
technology sold for $5 million, the shares were up one cent to $3.19 at
4 p.m. in Nasdaq Stock Market trading Monday.
Mr. Pluvinage and Preview Systems directors defend his package, which
puts Mr. Pluvinage among a choice group of managers. Besides Preview
Systems, companies that have allowed senior executives to walk away
from dot-com wreckage with a significant consolation prize include
PlanetRx.com, Webvan Group Inc., Priceline.com and
MotherNature.com.
Pay consultants say loan relief will become increasingly common at
troubled Internet and software companies, which a few years ago dangled
the prospect of riches to lure experienced managers. The collapse of those
stocks demolished many pipe dreams, and loan forgiveness is a way to
soften the blow.
"A lot of these companies didn't generate
anywhere near the value people anticipated,
so forgiving loans is a way to settle things up
with the CEO," says David Swinford,
managing director at Pearl Meyer & Partners,
a New York compensation-consulting firm.
Preview Systems' Mr. Pluvinage says
shareholders will benefit from his decision to
close the company and return $66 million of
remaining cash to investors. Shareholders
stand to get at least $3.25 a share, according
to regulatory filings.
"The easy thing to do would have been to
keep the company going and drain all its capital," says Mr. Pluvinage, a
43-year-old native of Belgium. "I could have also sold my stock earlier and
made more money than I will get now. My severance package is in
shareholders' best interests."
Some Preview Systems shareholders disagree. "It infuriates me that the
company has forgiven the loan," says Bob Chapman, manager of Chapman
Capital, an El Segundo, Calif., hedge fund that owns 1.03 million Preview
Systems shares, or a 5.9% stake, according to regulatory filings. "I'm sure
a lot of shareholders would like to have gotten a deal like that."
As long as Mr. Pluvinage stays with Preview Systems through its
dissolution in July, his severance package, including salary, retention
bonuses and the loan forgiveness, will be worth more than $1.7 million,
according to regulatory filings.
The company's chairman, Gerard Langeler, says the board decided to
forgive Mr. Pluvinage's loan -- used to buy 250,000 shares -- because the
CEO and other top officers agreed not to sell any stock after restrictions
on insider selling were lifted.
"We asked Mr. Pluvinage not to sell his shares last year, even though it
would have been economically advantageous for him to have done so,"
Mr. Langeler says.
PlanetRx.com, Memphis, Tenn., forgave a $700,000 loan made to its
CEO, Michael Beindorff, according to an April 30 regulatory filing. The
loan provided for forgiveness as long as he remained CEO, says company
spokeswoman Kristen Hutzell.
"Generally, it was incentive to join the management team at PlanetRx.com,
which was regarded as a higher-risk position than was his previous
position," she says. PlanetRx has presented shareholders a liquidation plan
for approval on Tuesday.
Another example: Webvan. The Foster City, Calif., company agreed to
lend former CEO George Shaheen $6.7 million at a 6.2% annual interest
rate to buy 1.25 million shares before its IPO in 1999. The loan was part
of a package to lure him away from Andersen Consulting, now called
Accenture, where he had been CEO, and was to be repaid over an
unspecified time from gains that Mr. Shaheen realized from selling his
stock.
But Webvan stock fell to 12 cents a share by the time Mr. Shaheen
resigned April 13, and Webvan effectively forgave the loan. He repaid the
$6.7 million obligation with $150,000 of Webvan stock. A spokesman
says Mr. Shaheen would have paid back the loan in cash had his stock
appreciated in value.
Priceline.com, the "name-your-own-price" retailer, was one of the first
dot-com companies to forgive a loan. It forgave a $3 million loan held by
former Chief Financial Officer Heidi Miller, who joined the retailer from
Citigroup Inc., when she left the Norwalk, Conn., company last year. Just
last month, Priceline said it would record a $5.8 million charge against the
current fiscal quarter's earnings, partly because it is accelerating
loan-forgiveness for former CEO Daniel Schulman. A spokesman declines
to comment on the transaction.
Dot-com casualties are hardly the first to forgive loans to outgoing CEOs.
Mattel Inc., for example, forgave a $4.2 million loan to CEO Jill Barad as
she exited from the company, the toy maker disclosed in May 2000.
But dot-coms may be more creative in how they're using forgiveness these
days. TheStreet.com Inc., a New York-based financial-news site, says in
a recent filing that it forgave a $60,000 loan and $45,000 of tax liabilities
for its editor-in-chief, Dave Kansas, in lieu of a bonus last year.
A spokesman says the money was loaned last September, because the
holder of Mr. Kansas's mortgage demanded more collateral after
TheStreet.com stock that was backing a loan for his Manhattan apartment
plunged. At 4 p.m. in Nasdaq Stock Market trading Monday,
TheStreet.com shares were up 18 cents to $1.84, far off the 1999
post-IPO high of $71.25.
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