Scrapping a revised management incentive scheme may leave Tellium's top guns facing financial ruin

September 18, 2002

4 Min Read
Tellium Execs in Trouble?

Bernie Ebbers and Scott Sullivan aren't the only top executives in the dog house over loans they took from their company.

Top executives at Tellium Inc. (Nasdaq: TELM), a maker of optical switching gear, could also be in hot water now that its board of directors has officially rejected a revision to its management incentive program that would have forgiven the $30 million in loans the company made to them.

Back in the spring and summer of 2000, Tellium gave 12 executives loans to exercise their options at a strike price of $2.14. With interest, the balance of the loan totaled $32.9 million as of July 25, 2002. Harry Carr, chairman and chief executive officer, owes $15.9 million; Krishna Bala, cofounder and chief technical officer, owes $2.9 million; and Michael Losch, chief financial officer, owes $2.1 million.

Since executives used their restricted shares of stock as collateral for the loans, they now face considerable personal financial peril, because Tellium’s stock, now at less than $0.50 a share, is way below the strike price they paid.

In order to head off this threat, Tellium revised its management incentive plan back in May to effectively cancel the loans.

“Recognizing that these loans were diverting the employees' attention from our business and that these employees needed a positive incentive program that promoted retention, motivation and performance, our board of directors decided to make changes to our management incentive program, including changes relating to the loans,” says Tellium’s September 3, 2002, 8-K filing to the Securities and Exchange Commission (SEC).

The new plan would have been a sweet deal for these execs, essentially freeing them of financial risk. It had three main provisions. For one, it would have allowed participating employees to use their vested or unvested shares of restricted stock to be applied against their loans.

Secondly, the due dates of the loans would have been extended beyond each participating employee's “current and future mortgage, home equity loan and any other similar forms of debt.” In other words, the loans would have had indefinite due dates.

Finally, if the company were acquired, each participating employee who had loans outstanding would have received a cash bonus that would not only have paid off the loan itself, but would also have paid for the taxes that resulted from receiving the bonus.

However, Tellium’s 8-K goes on to say that the board decided not to go through with the revisions, because it became apparent that implementing the plan would cause certain “issues” to arise.

The document gives little insight into why the company decided to reject the new plan. But one theory for the quick change of heart is that the new incentive plan deterred potential buyers. If the company were to implement this plan it would likely cost an acquirer at least $50 million -- $32.9 million to forgive the loans, plus the additional cash for the taxes. At the low end, the company is likely only worth about $250 million. It has $206.1 million in cash, and its market capitalization is currently at $50.7 million. All told, a $50 million expense to retain executives might be a hard sell to potential buyers.

For months analysts have speculated that Tellium has been looking for a buyer. And it's not hard to see why. In July, the company reported only $3.1 million in revenues for the second quarter of 2002 (see Tellium Reports Q2). It continues to suffer from a dearth of customers. Earlier this summer it cut its staff by 37 percent (see Dude, Where's My Carr?).

The company has even been rumored to be dedicating top sales officials to the task of finding a buyer. Two executives, Darren Beers, vice president of North American sales, and Jack Kurtz, vice president of Europe, Asia, and government sales, have supposedly been reassigned. Instead of looking for potential customers, they are rumored to be working with potential acquirers.

Tellium may also be losing some executives. According to a source close to the company, Nicholas DeVito, vice president of business development, left the company last week. It is not known whether he was one of the vice presidents who had borrowed money from the company to exercise his options.

Tellium had not responded to Light Reading's requests for an interview by press time.

— Marguerite Reardon, Senior Editor, Light Reading

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