BYLINE: Cara Anna, AMERICAN-STATESMAN STAFF
DATE: 09-22-2002
PUBLICATION: The Austin American-Statesman
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PAGE: A1

Corporate reform is all the rage these days, thanks to failed companies, shrinking retirement accounts and CEOs in handcuffs. But while a new corporate-governance law has banned some questionable practices -- companies can no longer lend money to their executives and directors, for example -- a review of Austin companies' recent federal filings shows loans are far from the only way that companies and their executives and directors can do business.

Filings with the Securities and Exchange Commission revealed a number of consulting agreements, rental and insurance payments and side deals with outside companies controlled by directors.

Biotechnology company Introgen Therapeutics Inc., for example, pays $175,000 a year to EJ Financial Enterprises Inc., a financial consulting company in Lake Forest, Ill. EJ Financial is owned entirely by John Kapoor, Introgen's chairman of the board.

It isn't clear why Introgen set up the consulting deal with Kapoor, who already owns 16 percent of the company and is also compensated as chairman. Neither Kapoor nor Introgen officials would comment.

Corporate-governance experts decry such arrangements. "The bottom line is, you don't want to see any (financial) relationship between the company and its outside directors," said Patrick McGurn, vice president at Institutional Shareholder Services, a proxy advice firm in Rockville, Md.

Any relationship can color the way a director makes company decisions, McGurn said, because a director could have personal interests in mind as well. "Nothing's permissible," he said.

One of a board's biggest responsibilities is to say "no" to bad or unethical ideas, said Paula Ivey, an Austin-based ethics consultant and a former director of corporate ethics at Compaq Computer Corp.

"When someone is on a board, they're on the board to provide good corporate governance," she said. But if a director has lucrative side deals with the company, "they won't be able to give unbiased advice -- it's as simple as that."

Public outcry over Enron Corp., WorldCom Inc. and other corporate scandals pushed Congress to pass a reform bill, which President Bush signed into law July 30. It toughens criminal penalties for securities law violations, requires executives to personally certify financial results and forces executives to quickly report stock transactions. It also restricts the services accounting firms may provide to audit clients -- a reform prompted by the disclosures that Arthur Andersen LLP overlooked Enron's financial shams to preserve its lucrative consulting fees from Enron.

Some provisions of the law will be phased in by July 30, 2003. But one immediate effect was the ban on company loans to its executives and members of its board of directors, a potentially risky practice. (The law doesn't undo the loans or require early repayment.)

Shareholder activists and some corporate-governance experts contend that a company isn't a bank and that it should not be lending money -- often at low or no interest and with other favorable terms -- to executives and directors. Some of these officers might not be able to repay the loans, and experts worry that an outstanding debt could impair their judgment about what is best for the long-term health of the company.

Loans are common, here and nationally. Since 1996, a dozen Austin technology companies made at least $10.8 million in loans to executives and board members. Most were handed out during the tech boom of 1998-2000, and almost all of the loans are outstanding.

Two loans were interest-free. Crossroads Systems Inc. even forgave a $100,000 loan to one executive just weeks before the corporate reform law took effect.

Consulting deals

Consulting agreements are another common practice.

Six Austin technology companies have had consulting agreements with directors or the companies they work for, at rates of $1,000 a day or more. At least three of the agreements are ongoing. Two companies have had rental deals with board members. One agreed to make insurance payments for a director's wife.

In several cases, the deals seem outsized when compared with the companies' financial standing.

For instance, Introgen, which develops cancer-fighting drugs, lost $14.8 million in the first six months of this year and had revenue of just $550,500. Introgen's $175,000 annual payment to Kapoor's company is equal to 31 percent of Introgen's revenue.

Another company, battery maker Valence Technology Inc., announced in February it had just $1.1 million on hand and would run out of money by the summer. In March, a co-founder stepped in with a $30 million bailout.

But at the time, former chairman and chief executive officer Lev Dawson owed Valence more than five times as much money as company had -- $5.9 million. Valence lent Dawson the money so he could exercise Valence stock options.

Kevin Mischnick, vice president of finance for Valence, said the loan enabled Dawson to buy company stock, thus aligning his interests with those of shareholders. Dawson's loans don't have to be repaid until September 2005.

Another company on a tight budget, SI Diamond Technology Inc., lent $150,000 to President Zvi Yaniv last year with no repayment terms. The money has been repaid, Yaniv said. SI Diamond last month reported that it had the resources for just eight to 12 weeks of operations.

For failed software company Concero Inc., a loan was one of the last transactions it made. The company, which is liquidating its assets after struggling to develop software for interactive television, lent $62,000 in January to an executive, John Velasquez. It didn't disclose the reason for the loan, and Chief Financial Officer Keith Thatcher wouldn't discuss the matter.

The company stopped operations in August. The loan is due in December.

Recruitment tool

Some companies say the recent economic boom increased the number and the size of insider deals. Loans to executives were needed to recruit high-tech talent in the late 1990s, they say.

"It was a pretty standard practice in the past, that you would pay their expenses to move," Vignette Corp. spokeswoman Alicia Sankar said. Companies had to, "in order to attract talent at that level."

Vignette gave out four such loans. A Vignette senior vice president, Bill Daniel, got a $500,000 loan in 1998 to help buy a home. Three other Vignette employees got loans for relocation of at least $250,000. This year, Vignette offered a $2 million home loan to Senior Vice President Jeanne Ulrich. Ulrich has not borrowed any of the money, the company said.

At Pervasive Software Inc., Senior Vice President David Dunnigan got a $200,000 loan for relocation in 1999 -- and a $137,500 home loan the following year.

Some loans were interest-free. Vignette's zero-interest loan to Daniel is due in 2004. Biotech company Luminex Corp. lent one unnamed company officer $400,000 at no interest -- and a payment date of 2011. Luminex would not comment.

McGurn, the corporate-governance expert, said such loans are akin to "cash payments."

During the summer, Crossroads Systems forgave a $100,000 loan to Allen Sockwell, a vice president, as part of a severance agreement. The 1999 loan's terms said payment was due in full the day Sockwell left the company.

Crossroads forgave the loan when its cash on hand was shrinking rapidly. In July, the company had $3.9 million in cash, down from $50.7 million a year earlier.

Crossroads Systems Chief Financial Officer Reagan Sakai would not comment. Sakai has his own $99,999 company loan to repay in May.

Loans to help executives buy stock have also been popular. At least six Austin companies gave loans for buying company stock or exercising stock options.

Valence Technology gave two loans, for $3.3 million and $1.5 million, to chairman and CEO Dawson so he could exercise options.

TippingPoint Technologies Inc. lent $510,000 to vice president, general counsel and acting chief financial officer James Cahill and $142,800 to a vice president, Craig Cantrell. Both loans were to buy stock.

"Neither of the transactions provided any cash to the individuals, as the loans were used to purchase company stock as an inducement for employment," Cahill said.

But some local tech executives draw the line at loans for stock. "What you want to see is significant insider ownership, but with their own cash on the table," said Jack McDonald, chief executive of Perficient Inc.

Although Perficient made no recent loans, the company was one of two that had rental agreements with directors. From 1998 to 2000, Perficient paid $4,500 a month in rent to board member Steve Papermaster's Powershift Ventures. The space was used as an incubator for such startups such Perficient, McDonald said.

Changing times

Some companies are changing with the times. Consider the consulting deal between Luminex and director Sidney Alpert. The agreement paid Alpert $11,666 a month for unspecified services in 1999 and 2000, until Alpert left the board.

"He resigned because we felt there probably was a conflict," Luminex CFO Harriss Currie said.

The company was right, said McGurn of Institutional Shareholder Services. "If a guy wants to be a consultant, have him be a consultant."

Some corporate-governance experts don't think Congress will further restrict insider deals such as consulting agreements.

"It's a political question in a lot of ways," ethics consultant Ivey said. "(Congress) wouldn't have passed anything without all the attention. I don't think they will pass any further legislation than they have to."

canna@statesman.com; 445-3639

Under a watchful eye

Austin technology companies have made numerous loans to executives and directors -- a practice now banned as a result of outrage over corporate abuses. But local companies have plenty of other close relationships with their executives and board members that are not touched by the corporate-governance law that took effect July 30. Here's a rundown of selected loans, consulting agreements and other practices that are now being more heavily scrutinized by governance advocates.

Concero Inc.

Interactive TV software

$62,000 loan to an executive officer, John Velasquez. The company won't disclose reason for loan, which is due in December.

Crossroads Systems Inc.

Network storage routers

$244,999 in loans to three officers, including Chief Financial Officer Reagan Sakai. One loan for relocation was repaid, one was forgiven, and one provided to exercise stock options is due in May 2003.

Epic Edge Inc.

Internet consulting

$60,000 loan to interim Chief Executive Officer Jeff Sexton. Sexton won't say what loan, now repaid, was for.

Forgent Networks Inc.

Videoconferencing software

Consulting deal with Strategic Management Inc., whose principal, Gary Trimm, is on Forgent's board. Forgent won't disclose the amount of the deal.

Introgen Therapeutics Inc.

Cancer drugs

$175,000-a-year consulting deal with EJ Financial Enterprises, whose sole shareholder, John Kapoor, is Introgen's chairman.

Luminex Corp.

Biological testing products

$11,666-a-month consulting deal with board member Sidney Alpert, ended in 2000. $400,000 interest-free loan to unnamed officer for relocation, due 2011.

Multimedia Games Inc.

Electronic gaming machines

$2.2 million in loans to three officers and directors for stock purchases and tax liability. All due by April 2003, one repaid. Consulting deals with four directors.

NetSolve Inc.

Remote network management

$100,000 loan to Vice President Robert W. Kujawski. Company won't say what the loan, due August 2004, was for.

Perficient Inc.

E-business applications

$4,500-a-month rental deal until 2000 with Powershift Ventures, whose president, Steve Papermaster, is a board member. $274,000 in advisory fees to WWC Capital Group, whose co-founder, Michael Cromwell, is a board member.

Pervasive Software Inc.

Database management software

$688,000 in loans to three executives, including Chief Executive Officer Ron Harris, for relocation and exercise of stock options. All due by January 2006.

SI Diamond Technology Inc.

Nanotech and sign technology

$150,000 loan to president and chief operating officer Zvi Yaniv. Yaniv says the loan was for personal reasons and was repaid.

Silicon Laboratories Inc.

Communications chips

$56,500 loan to Vice President Edmund Healy for stock purchase, due June 2003.

TippingPoint Technologies Inc.

Network security

$652,800 in loans to two vice presidents for stock purchases. Both are due in 2004.

Valence Technology Inc.

Rechargeable batteries

$4.8 million in loans to chairman and chief executive officer Lev Dawson to exercise stock options. Both are due September 2005.

Vignette Corp.

Content-management software

$1.4 million in loans, including one $500,000 interest-free loan, to two senior vice presidents and two unnamed employees for homes or relocations. One is repaid; all are due by June 2004. $2 million home loan offered to Senior Vice President Jeanne Urich, but so far unused.

Source: Securities and Exchange Commission filings.