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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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wass 12/4/2012 | 11:33:22 PM
re: Exec Payoffs Dog Zhone/Tellium Merger These stories just amaze me. The rich get richer and get away with everything. I bet those engineers that worked their butts off aren't getting their credit card debt paid off or their other loans or any money they lost when they exercised options.
ThurstonHowell3rd 12/4/2012 | 11:33:21 PM
re: Exec Payoffs Dog Zhone/Tellium Merger You are correct my boy... now hush up and fetch me another drink... and don't forget the umbrella...
snarfulent 12/4/2012 | 11:33:21 PM
re: Exec Payoffs Dog Zhone/Tellium Merger In all fairness, I think it's a bit of a stretch to characterize this as "the rich get richer". As I understand it, these guys borrowed money to pay the strike price on their options, which _everybody_ knew would be worth gazillions, of course. Then it wasn't worth gazillions, and these guys didn't have the cash to pay off the loans. So these transactions effectively just served the purpose of putting them back where they started, which involves both forgiving a loan and covering the income tax cost of forgiving that loan.

Of course, there may be less "important" employees at this company who did something similar, but didn't get "made whole" again (I'm speculating, I have nothing to do with this company).
sevenbrooks 12/4/2012 | 11:33:20 PM
re: Exec Payoffs Dog Zhone/Tellium Merger
I don't know about Tellium but ex-employees at Calix were asked to repay loans that were given to purchase stock options when they left.

seven
diag_eng 12/4/2012 | 11:33:18 PM
re: Exec Payoffs Dog Zhone/Tellium Merger It seems financial risks associated with startups only affects VC's and working stiffs like me. Execs seem to be exempt because they determine the terms of a deal.

I'm going to encourage my sons to forego careers in high tech and open a cash business, ala an ice cream stand. :)

The working man is a sucker ...

bo knows optics 12/4/2012 | 11:33:18 PM
re: Exec Payoffs Dog Zhone/Tellium Merger Tellium Management took a gamble on paying less tax and maximizing gains. They lost the bet.
Nice to know you don't have to be responsible for your actions anymore, the investors will just bail you out. I'm sure they were all well advised on the risk/reward ratio.
newbee2002 12/4/2012 | 11:33:18 PM
re: Exec Payoffs Dog Zhone/Tellium Merger "Despite the risk, Zhone CEO Mory Ejabat decided to go ahead with the merger"

What risk????
The other choice that Ejabat has is to file for Chapter 11.
LR is amazing!
zoinks! 12/4/2012 | 11:33:16 PM
re: Exec Payoffs Dog Zhone/Tellium Merger These guys are part of the "old boys network" and know how to take care of each other ... Mory knows exactly what he's doing and what risks he is taking, if any.

Zoinks!
dljvjbsl 12/4/2012 | 11:33:16 PM
re: Exec Payoffs Dog Zhone/Tellium Merger At the company I work for, people who are laid off are expected to repay immediately any company loan they have that was issued to pay for stock. If they cannot pay forthwith, the amount is deducted from their severance payment.

Even more amazing is that this is also done for shares that are being purchased over time and which they have not acquired. They are required to purchase the full amount of shares to which they initially agreed. They are compelled to do this even though they are laid off and need the money for much more important things than speculative stocks.
rbkoontz 12/4/2012 | 11:33:11 PM
re: Exec Payoffs Dog Zhone/Tellium Merger This deal is everything that is wrong with our industry! On one hand, we have Tellium, a failed start-up that went public during the boom without a sound business, failed, and still has $150M of IPO cash. On the other hand, we have, Zhone, Mory's next-gen access machine that has managed to piss away $500M of investor money.

Zhone is now out of cash and no one in their right mind would give Mory another dime. Tellium has the choice of shutting down and giving the cash back to shareholders (as ASC did) or getting "bought" by another failed start-up. That's an easy decision for the theives who are leading this Tellium outfit when they can pull in "up to $56M" in compensation for selling the company!

THIS IS AN OUTRAGE! The only ones getting screwed here are the investors in Tellium who might like to get their $1.34 per share in cash back rather than let Mory's ego to win consume it like his first $500M investment.

Light Reading editors, I am disappointed in the simple factual reporting in this article and am looking for some investigative reporting into this debacle - as you have done in so many other cases. Or are you beholden to Mory's ego as well?
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