A good buy? The net worth is somewhere between 0.50 and 0.69.
One has to consider the flood of newly issued shares resulting in a R/S and the troubled operating history of both Zhone and Tellium.
It is correct that Tellium traded below net cash but this changes when you factor in the 200 Mil newly issued shares bringing the total to 320Mio and the tangible net worth downto $0.50/share (the net book value is indicated at .69 for the combined entity). Secondly Telm is still bound to give away $56 Mio in bonuses and to help out employees on their underwater stock purchases (see below).
I actually hoped for better news, ie. a liquidation and the return the cash (1.20~1.50) to shareholders which it didn't.
Zhone has run out of cash per its Q2 2003 numbers (having just 1.6 of the 500Mio it got) and has a working capital deficit. It does have some revenues (likely some 75M this year) but is still bleeding cash.
It failed to complete an IPO in 2000 (when the going was good and stock like RSTN, AVNX, CORV etc all got their deals) and needed to cut costs later:
cost cutting again lightreading.com
Withdrawal lightreading.com
cust cutting lightreading.com
files IPO lightreading.com after having spent away much VC money.
"The company had no revenue for 1999 listed in the S-1 filed with the SEC, but it reports $60.5 million for the nine months ending September 30. Losses in 1999 were $30 million and ballooned to over $127 million in the last nine months. The company has been quickly burning through its cash, with only $124 million left from the $500 million raised, according to the S-1."
The other case of a cash rich carcass buying new business was Avanex being in a comparable situation which made the stock soaring after it acquired Alcatel Optronics and GLW businesses, also issuing a total of 45% shares to the former stockholders. Avnx since is up about 4fold but they bought a sound business on the cheap (which I simply can't see in the case of Zhone).
The difference though is that AVNX remained (not issuing more than 50% of its stock, while the Telm transaction is being classifed as reverse merger (see below). Secondly the AVNX carcass appears not to be as dirty as TELM.
All said, I think it is a way to provide Zhone shareholders an exit strategy by turning their soured investment into a traded stock which they can then dump on the open market.
Because this requires volume and perhaps a better trading price it is well possible that the deal goes up for a while...but the fundamentals don't convince me.
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From the S-4:
On July 28, 2003, The Nasdaq Stock Market notified Tellium that the proposed merger between Tellium and Zhone may result in a reverse merger of Tellium. As a result, Tellium may be required to submit an initial listing application and satisfy all of the initial Nasdaq National Market or Nasdaq SmallCap Market inclusion criteria, including a minimum bid price of $5 or $4 per share, respectively. On August 13, 2003, the last sale price of Tellium’s common stock was $0.90 per share.
In order to meet the listing requirements of the Nasdaq National Market or the Nasdaq SmallCap Market, Tellium has agreed to effect a reverse stock split with respect to the Tellium common stock, if necessary, according to a ratio between (and including) one-for-ten and one-for-four. Tellium’s stockholders have previously approved a reverse stock split of Tellium’s common stock within such range. Tellium and Zhone expect that a reverse stock split will be implemented prior to the merger with the exact ratio of the reverse stock split, between the ranges described above, to be agreed to by Tellium and Zhone.
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The combined company could become subject to claims brought by Tellium’s current executive officers regarding agreements they signed in July 2002 that were subsequently voided by Tellium’s board of directors. A resolution of these claims in their favor would have a material adverse effect on the combined company’s business.
On various dates between April and June 2000, Tellium loaned funds to members of its management team on a full-recourse basis to enable them to exercise previously granted stock options with average exercise prices of $2.14 per share. Individuals receiving loans included executive officers, vice presidents and other employees. Upon exercise of the stock options, each of these individuals received restricted stock that vested over four years, and pledged the restricted shares to secure payment of their loans to Tellium which generally become due in full in April through June 2005. Tellium’s stock price has fallen substantially below $2.14 per share, causing these loans to be under-collateralized while the individuals remain personally liable for payment on the loans when they come due. This circumstance posed personal financial problems for the individuals involved and undercut the intended incentivizing effect of the restricted stock program.
In an effort to restructure Tellium’s management incentive arrangements, in July 2002, Tellium’s board of directors authorized changes to this restricted stock and management loan program for the 12 participating individuals (then consisting of three executive officers (Messrs. Carr, Bala and Losch), five vice presidents, three other employees and one former vice president). These changes included the repurchase by Tellium of the shares of restricted stock and related reduction of the loans, modifications of the terms of the remaining loans and establishment of new incentive compensation arrangements which would include a bonus program applicable in the event of a change of control of Tellium and providing for bonuses in an amount sufficient to repay, on an after-tax basis, the then remaining balance of the loans.
Tellium attempted to implement these board-approved changes, and in late July 2002 repurchase agreements and other implementing documents were signed. However, certain problems arose in the implementation of the changes and the board subsequently determined that the documented changes did not reflect its intentions and the scope of what it had authorized and that Tellium should not go forward with changes in the restricted stock and loan program at that time. Accordingly, the board determined that it should not ratify and approve the implementing documents that had been executed and that the documents and the transactions provided for by them were void and unenforceable against Tellium. The board also determined to continue to consider changes to Tellium’s management incentive compensation arrangements, including the management loan arrangements. As previously disclosed, Tellium was not aware of what position the executives who signed implementing agreements in July 2002 would take with respect to the board’s action to void those agreements and was, therefore, unable to assess at that time whether those developments would have a material adverse effect on Tellium.
During January 2003, Tellium’s board of directors approved a set of changes to Tellium’s management compensation arrangements, including changes in the restricted stock and loan program for the individuals involved in that program, other than with respect to the executive officers of the company. As of May 13, 2003, all of the continuing and former non-executive senior managers participating in the program had executed agreements incorporating the board-approved changes to the program. As a result of these changes, the shares of restricted stock securing their loans were acquired by Tellium and their loans were cancelled, and other changes in compensation arrangements for such individuals were made. The board continued to consider whether changes in Tellium’s management compensation program for its executive officers, including the restricted stock and loan arrangements with Messrs. Carr, Bala and Losch, should be made. At the time discussions regarding the merger commenced, this matter was still under consideration by the board. No changes in the loan and restricted stock arrangements between Tellium and these individuals have subsequently been made and no changes are intended to be made before completion of the merger. See “The Merger—Background of the Merger.” Consequently, these executives currently hold approximately 7.8 million shares of restricted stock of Tellium which secure recourse loans owed to Tellium with an approximate balance of principal and accrued interest at July 31, 2003 of $21.5 million. An additional 0.9 million shares also serve as collateral to secure these loans and are held by donees of these executives.
Tellium is not in a position to assess the effect that these circumstances could have on it (or the combined company upon completion of the merger), but the effect could be material. If the implementing documents were given effect as executed, then, upon a change of control (including upon consummation of the merger):
• Tellium (or the combined company) could be obligated to pay bonuses to these executives and to extend the maturity of their management loans. Tellium may not be able to deduct these payments for income tax purposes.
• 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.
• After repayment of the loans in full, it is anticipated that (1) the net cash outlay by Tellium would equal the amount paid in respect of the executive’s taxes, which could be up to approximately $34 million, (2) the net cash received by the executives would be zero and (3) the shares held as collateral would be released to the executives free of any encumbrance associated with the management loans.
Tellium believes that the agreements signed in July 2002 are void and unenforceable against it and intends to vigorously defend any attempt to enforce these agreements.
Zhone currently intends that, upon completion of the merger, the combined company will consider proposing to Messrs. Carr, Bala and Losch, a package of changes to their restricted share and loan arrangements similar in structure to that offered to and implemented with the non-executive senior managers of Tellium in May 2003. See “The Merger—Interests of Directors and Executive Officers of Tellium in the Merger—Potential Compensation Arrangements After the Merger.” |
