Funding for startups

Did Founders Profit on Zhone Loans?

File this tidbit under: "It's good to be the king."

When the merger between Zhone Technologies Inc. and Tellium Inc. was finalized today (see Zhone Gets a Symbol (and Layoffs)), Zhone's founders, Mory Ejabat and Jeanette Symons may have collected on some high-interest short-term loans they made to their own company.

Ejabat and Symons loaned Zhone a total of $4 million between July and August 2003, according to Zhone's SEC filings. The loans were made presumably to help the company's cash position. In the end, though, the loans could have ended up helping Symons and Ejabat's cash position, too.

Each loan carried an interest rate of 12 percent a year, at a time when short-term rates are at historic lows. The loans were to mature on either December 31 or on the day that Zhone closed its merger with Tellium, whichever came first. The way the loan was structured, Ejabat and Symons both participated in the first $2 million installment and Symons loaned the second $2 million.

It's not clear exactly how much Symons and Ejabat made on interest from the loans. Assuming the 12 percent annual interest was paid for the period they held the loan -- about 4 months -- they could have earned about $160,000 in interest between them. The information on how much interest they have been paid on the loans has not yet been disclosed.

Zhone declined to comment beyond what was already disclosed in the SEC filings.

— Phil Harvey, Senior Editor, Light Reading

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inauniversefarfaraway 12/4/2012 | 11:15:02 PM
re: Did Founders Profit on Zhone Loans? Dear Morye,

A touch defensive perhaps?

12% is very advantageous, (even) with their balance sheet, it would not have been a stretch to beat that, especially given current rates.

Your comparison to the QQQ is hardly fair, as it does not account for risk. They might have gotten 20% with 20/20 foresight, but they had a sure thing with this "vehicle".

Pork barreling at it's best.

morye 12/4/2012 | 11:15:02 PM
re: Did Founders Profit on Zhone Loans? The SEC filings are all correct, however, in your previous article you were using total current assets and comparing with cash levels with previous quarters as if there was a big mystery regarding this merger or Zhone's accounting. Total current assets contains accout receivable and inventory. Account receivable is offset by account payable, thus your comparative figures were meaningless.

Now regarding the loan, first of all 12% interest is not that high. The fact of the matter is whoever they would have to borrow the 4 million from would have charged interest. Given the circumstances, I doubt they could have gotten anything lower given the fact the company was depeneding on the merger to go through. So the opportunity cost of the loan to the company was net even to positive. Now if you can find a lower priced loan please calculate the net gain for Mory based on that not the total interest paid.

Your 160k figure on 4 months interest is probably more like 120k that would make 60k for Mory and 60k for Janette. If in the same time frame they had bought the QQQ they would gotten 20% easily that would make it 200k a piece.
DoTheMath 12/4/2012 | 11:15:01 PM
re: Did Founders Profit on Zhone Loans? Mory:
Have you heard of the term "conflict of interest?" This deal smells and Light Reading naturally wants to write about it.

The Tellium deal stinks to high heavens, with all the loan forgiving for Tellium execs and the cash infusion to an utterly failing company (i.e yours). I hope the original Tellium shareholders get their day in court on this one.

Basically what you did is to steal Tellium from its former shareholders, and in the bargain gave them a worthless stake in your worthless business. Proof: if that deal is so good for original Tellium ex-shareholders, why don't you (personally) put in new money in Zhone at the valuation you are getting out of the poor suffering Tellium shareholders?
sevenbrooks 12/4/2012 | 11:15:01 PM
re: Did Founders Profit on Zhone Loans?
The loans are high, IF you believed in the company then:

a - take a low interest rate loan to show faith


b - take an equity stake to show faith

Either option was available. 12% could have been gotten from a credit card.

firstmile 12/4/2012 | 11:14:59 PM
re: Did Founders Profit on Zhone Loans? Phil,
This issue is now beaten to death, but here is another club for the clubbing.
The issue is also with your lead in to the story..."high-interest loans".
As others have said, this is the going rate for the loans. If you call up SVB and ask them for a bridge the rate will be 12% (not news). Also, they were probably able to save some legal fees and close the loan in a faster fashion.
If things don't work out at LR there is always
http://www.weeklyworldnews.com... :-)
whyiswhy 12/4/2012 | 11:14:58 PM
re: Did Founders Profit on Zhone Loans? Let's see: they knew the deal was pending, so the risk was high? Does not add up. BTW, the going rate for bridge loans can be much higher than 12%, but can also be lower. It's nearly impossible to say from outside what was a fair rate.

It is clear they SHOULD have transacted the deal through an outside entity to avoid the appearance of conflict.***

But hey, shame makes the game lame, right guys?


*** the typical thing would be a private kickback deal under the table, but then you have to share...
ThurstonHowell3rd 12/4/2012 | 11:14:52 PM
re: Did Founders Profit on Zhone Loans? Mory "my favorite Persian" Ejabat and Janette "Of course I know what I'm talking about" Simmons... GEEEE That's a news flash...

Its this dynamic duo that still has LU wondering outloud ... "I paid 23 BILLION for ASND and I got what???" and who could forget that hot hit of the 56k modem wars the MAX TNT... "Anyone got a match???"

Yea... these two having an original thought... now that would be news... these two screwing investors and employees alike... well that's just SOP... Alameda way baby...

Now where in the hell is Gilligan with that drink??
green 12/4/2012 | 11:14:52 PM
re: Did Founders Profit on Zhone Loans? thought the details are sligtly different, the story has a interesting parallel to how the common share holders got hosed at Nishan systems

whyiswhy 12/4/2012 | 11:14:51 PM
re: Did Founders Profit on Zhone Loans? Capitalism and Democracy are fundamental opposites and do not form an intrinsically stable combination.

Capitalism seeks the least equity for the masses, and Democracy seeks the greatest equity for the masses. The problem with Democracy is it can be bought a person at a time. The problem with capital is it is fungible, if it is allowed to be.

Does the US need a cultural revolution (of sorts)?

go_to_the_light 12/4/2012 | 11:14:51 PM
re: Did Founders Profit on Zhone Loans?
Cheated like a fox... LIKE A FOX!
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