The controversy over loans to corporate executives gathered steam Friday and put Sun Microsystems ( SUNW) and consumer electronics company SonicBlue ( SBLU) on the defensive. In a Securities and Exchange Commission filing, Sun said it made loans to senior executives totaling $6.27 million between 1999 and 2001, of which $5.35 million was still outstanding as of Thursday. "Obviously in this era, where there's a lot of accounting scrutiny, it's not necessarily a positive," says Brent Bracelin, an analyst at Pacific Crest Securities. "But the reality is, if you talk to large institutional shareholders, Sun has adopted very conservative accounting practices.
Executive loans are the kind of thing you don't want to see, but to start to question Sun's accounting practices would be a very big stretch." Bracelin added that the total size of the loans outstanding pales in comparison to Sun's $12 billion plus in annual revenues. Sun said it made the loans to help executives meet margin loan obligations and to assist them in paying taxes associated with vesting restricted stock and exercising stock options. Other executives used the loans to pay for homes due to job-related moves. While such loans aren't unusual, accountants say they can become a problem if they aren't paid back in a timely manner. Jonathan Schwartz, Sun's executive vice president for software, received loans totaling $4 million, which were still outstanding as of Thursday. In October 2001, Schwartz received a $1 million loan from Sun payable in full on or before Oct. 29, 2005, at an interest rate of 4.82% per year. Then in May, Sun approved an additional $3 million loan to help Schwartz meet margin calls. Patricia Sueltz, executive vice president of enterprise services, received a loan of $850,000 in 1999, which has not yet been repaid and Eva Sage-Gavin, senior vice president of Global Talent Organization, borrowed $500,000, which is still outstanding. Meanwhile, Robert Long, a member of Sun's board of directors, received two loans, both of which have been paid in full. Masood Jabbar, former executive vice president of global sales and operations, and Mark Canepa, executive vice president of network storage products, also received loans, which have since been paid back. Separately, SonicBlue said Friday that it might ask its board members and management team to repay loans made to them to buy stock. Former Chairman and Chief Executive Kenneth Potashner, who was fired Thursday, had reportedly insisted on early repayment of loans made to directors of the company. "We're going to have to look at those loans in light of today's circumstances and evaluate what the 'correct' thing to do (is)," said Ballard, adding that the loans are not yet due and have not been forgiven. Ballard said the loans are not illegal and that everything has been fully disclosed. He also noted that Potashner's termination was not the result of allegations he had made about the loans "nor was it the result of any concern about the validity or accuracy of our financial statements." Shares of Sun rose about 1% to $4.16 Friday but SonicBlue shed 9% to 40 cents. TSC staff writer K.C. Swanson contributed to this story.