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Exec Payoffs Dog Zhone/Tellium MergerExec Payoffs Dog Zhone/Tellium Merger

Exec compensation could cause a flap when Tellium merges with Zhone, according to an SEC filing

August 19, 2003

3 Min Read
Exec Payoffs Dog Zhone/Tellium Merger

The planned merger between Tellium Inc. (Nasdaq: TELM) and Zhone Technologies Inc. will likely result in hefty compensation for Tellium execs, and it could reopen a compensation flap that's been dormant for months (see Zhone Cashes In on Tellium and Zhone Cashes In on Tellium, Part II).

In a document filed Friday with the U.S. Securities and Exchange Commission (SEC), Tellium says the merger could have the combined company forking over more than $10 million in cash to CEO/chairman Harry J. Carr, CFO Michael J. Losch, and CTO Krishna Bala, who borrowed money from the company in 2000 to exercise stock options, securing the loans with restricted stock (see Tellium, Zhone File Merger Statement and Tellium Execs in Trouble?). And the total payment to the execs could wind up being even more.

The basic payments Zhone is prepared to give the execs, subject to shareholder approval, include the following, according to the filing:

  • $9.7 million to cover the tax liability the execs will incur from getting bonuses that pay off the old loans they have with the company;

  • $7.8 million to cover the combined company's repurchase of about 7.8 million shares of common stock owned by the execs. This money will be used to pay off the execs' old loans.

  • Up to $1 million reimbursement for expenses "incurred by Mr. Carr relating to any tax disputes concerning his compensation arrangement."

  • Options for the trio to purchase "approximately 7.8 million shares of common stock at an exercise price of $0.54 per share, which would vest over a period of one year, whether or not they continued in the employ of the combined company in any capacity."

The above seems to be a compromise against another possibility. Carr, Losch, and Bala last year sought to get board approval for a new compensation package, a clause of which stated that if the company were acquired, they would get bonuses to cover their loans and the taxes associated with the bonuses. The company's board didn't sign off on the final arrangement (see 2002 Top Ten: Fat Cats).

At the time, it looked as if the execs would be left liable for what they hadn't paid back to the company. Today, the total of their loans, with interest, represents about $21.5 million. The above arrangement would allow them to break even, as it were.

But there's now a chance last year's proposal will be put forward again by the execs. If it holds up with the new company, that could mean big payouts. The filing says: "Depending on the circumstances prevailing at the time and on the interpretation of the documents, the aggregate amount of the bonuses could be up to $56 million, including approximately $22 million representing the aggregate outstanding principal and interest due on the loans, and approximately $34 million representing the aggregate amount of income and excise tax incurred by the executives associated with the bonus."

Despite the risk, Zhone CEO Mory Ejabat decided to go ahead with the merger, and the filing indicates a long series of due diligence meetings with input from a variety of parties inside and outside the companies involved. It's not clear whether that indicates Ejabat's confidence that a favorable negotiation with the execs is achievable once the merger is accomplished.

Tellium spokespeople couldn't be reached by press time. A Zhone spokesman had nothing to add to what's in the filing.

— Mary Jander, Senior Editor, Light Reading

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