UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the
Securities
Exchange Act of 1934
Filed by the Registrant
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Filed by a Party other than the Registrant
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Check the appropriate box:
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Preliminary Proxy Statement
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
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Definitive Proxy Statement
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Definitive Additional Materials
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Soliciting Material Pursuant to §240.14a-12
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ZHONE TECHNOLOGIES, INC.
(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
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Payment of Filing Fee (Check the appropriate box):
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No fee required.
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Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
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Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it
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Fee paid previously with preliminary materials.
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
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ZHONE TECHNOLOGIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
May 12, 2010
10:00 a.m. Pacific Time
To our stockholders:
You are cordially invited to attend our 2010 annual meeting
of stockholders, which will be held at Zhone’s principal executive offices, located at 7001 Oakport Street, Oakland, California 94621 on May 12, 2010 at 10:00 a.m. Pacific Time. We are holding the annual meeting for the following purposes:
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To elect three members of the Board of Directors to serve for three year terms as Class III Directors.
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To ratify the appointment of KPMG LLP as Zhone’s independent registered public accounting firm for the fiscal year ending December 31, 2010.
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To transact other business that may properly come before the annual meeting or any adjournments or postponements of the meeting.
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These items are fully described in the proxy statement, which is part of this notice. We have not received notice of other matters that may
be properly presented at the annual meeting.
Only stockholders of record at the close of business on March 16, 2010, the
record date, will be entitled to vote at the annual meeting.
Your vote is very important. Whether or not you expect to attend the annual meeting in person, please complete, sign, date and return the enclosed proxy card or vote electronically via
the Internet or over the telephone as soon as possible to ensure that your shares are represented at the annual meeting.
If your shares are held in “street name,” which means your shares are held of record by a broker, bank or other
nominee, you must provide your broker, bank or other nominee with instructions on how to vote your shares. For specific instructions on voting procedures, please refer to the section entitled “Voting Procedures” beginning on page 1 of the
proxy statement and the instructions on the proxy card.
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By Order of the Board of Directors
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/s/ Kirk Misaka
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Kirk Misaka
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Chief Financial Officer,
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Treasurer and Secretary
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Oakland, California
April 1, 2010
YOUR VOTE IS IMPORTANT.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON,
PLEASE
SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD OR SUBMIT
YOUR PROXY ELECTRONICALLY VIA THE
INTERNET OR OVER THE TELEPHONE BY FOLLOWING THE ENCLOSED INSTRUCTIONS.
TABLE OF CONTENTS
ZHONE TECHNOLOGIES, INC.
7001 Oakport Street
Oakland, California 94621
PROXY STATEMENT
Zhone’s Board
of Directors solicits your proxy for use at the annual meeting of stockholders to be held on May 12, 2010 at 10:00 a.m. Pacific Time at Zhone Technologies, Inc., 7001 Oakport Street, Oakland, California 94621, and at any adjournments or
postponements of the meeting, for the purposes set forth in the “Notice of Annual Meeting of Stockholders.” We made copies of this proxy statement available to stockholders beginning on or about April 1, 2010.
On March 11, 2010, we filed a Certificate of Amendment with the Delaware Secretary of State to amend our Certificate of Incorporation
to effect a reverse stock split at an exchange ratio of one-for-five. All of the stock information in this proxy statement reflects this reverse stock split.
VOTING RIGHTS AND PROCEDURES
Record
Date and Shares Entitled to Vote
Only stockholders of record at the close of business on the record date, March 16,
2010, will be entitled to vote at the annual meeting. These stockholders are entitled to cast one vote for each share of common stock held as of the record date on all matters properly submitted for the vote of stockholders at the annual meeting. As
of the record date, there were approximately 30,300,743 shares of Zhone common stock outstanding and entitled to vote at the annual meeting.
Stockholder of Record: Shares Registered in Your Name
If on March 16, 2010 your shares are registered
directly in your name with Zhone’s transfer agent, Computershare, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we
request that you fill out and return the enclosed proxy card or vote by proxy on the Internet or over the telephone as instructed below to ensure your vote is counted.
Beneficial Owner: Shares Registered in the name of a Broker or a Bank
If
on March 16, 2010 your shares are registered not in your name, but rather in an account at a brokerage firm, bank, dealer or similar organization, then you are the beneficial owner of shares held in “street name” and these proxy
materials are being forwarded to you by the organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the annual meeting. As a beneficial owner, you have the right to direct your
broker or other agent regarding how to vote the shares in your account. You are also invited to attend the annual meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request
and obtain a “legal proxy” from your broker or other agent authorizing you to vote your shares in person.
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Quorum and Vote Required
A quorum of stockholders is necessary to hold a valid annual meeting. The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of common stock entitled to vote at the annual meeting is necessary to constitute a quorum at the annual meeting. In the election of directors, the three nominees who receive the highest number of affirmative votes will be
elected as directors. All other proposals require the affirmative vote of a majority of the votes cast at the annual meeting.
Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present, but they will not be counted as votes cast on any matter. Generally, broker non-votes occur when shares held by a broker in
“street name” for a beneficial owner are not voted with respect to a particular proposal because the broker has not received voting instructions from the beneficial owner. Because abstentions and broker non-votes will not be considered
votes cast, they will have no effect on the outcome of any proposal.
Voting Procedures
Your vote is important. Whether or not you plan to attend the annual meeting in person, please complete, sign, date and return the enclosed
proxy card, vote by proxy on the Internet, or by proxy over the telephone as soon as possible to ensure that your vote is recorded promptly. Voting by proxy does not deprive you of your right to attend the annual meeting and to vote your shares in
person.
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record, you may vote in person at the annual meeting or vote by proxy using the enclosed proxy card, vote by
proxy on the Internet or vote by proxy over the telephone. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person even if you have already voted
by proxy.
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To vote in person, come to the annual meeting and we will give you a ballot when you arrive.
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To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided. If you return
your signed proxy card to us before the annual meeting, we will vote your shares as you direct.
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To vote on the Internet, go to www.envisionreports.com/zhne to complete an electronic proxy card. Follow the steps outlined on the secured website.
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To vote over the telephone, dial toll-free 1-866-641-4276 using a touch-tone phone and follow the recorded instructions. You will be asked to provide
the company number and control number from the enclosed proxy card. Your vote must be received by 10:00AM PST on May 12, 2010 to be counted.
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Beneficial Owner: Shares Registered in the Name of Broker or Bank
If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from Zhone.
Your broker, bank or other nominee may allow you to deliver your voting instructions over the Internet or by telephone. Please see the voting instruction card from your broker, bank or other nominee that accompanies this proxy statement. If you
complete and submit your proxy card, the persons named as proxies will vote the shares represented by your proxy card in accordance with your instructions.
If you submit a proxy card but do not fill out the voting instructions on the proxy card, the persons named as proxies will vote the shares represented by your proxy
“FOR”
the election of
the director nominees (Proposal 1), and
“FOR”
the ratification of the appointment of KPMG as Zhone’s independent registered public accounting firm (Proposal 2). If any other matters are properly presented for voting at the
annual meeting, or any
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adjournments or postponements of the annual meeting, the proxy card will confer discretionary authority on the individuals named as proxies to vote the shares represented by the proxies in
accordance with their best judgment. We have not received notice of other matters that may properly be presented for voting at the annual meeting.
Revocation.
You may revoke your proxy at any time before your proxy is voted at the annual meeting by taking any of the following actions: (1) submitting another proxy card bearing a
later date, (2) delivering written notice of revocation to Zhone’s Corporate Secretary at 7001 Oakport Street, Oakland, California 94621, or (3) attending the annual meeting and voting in person, although attendance at the annual
meeting will not, by itself, revoke a proxy. If your shares are held in “street name,” you must contact your broker, bank or other nominee to revoke any prior instructions.
Proxy Solicitation Costs
We will bear the entire
cost of this solicitation of proxies, including the preparation, assembly, printing, and mailing of this proxy statement and any additional solicitation material that we may provide to stockholders. In addition, we have retained Georgeson Inc. to
act as a proxy solicitor in conjunction with the annual meeting. We have agreed to pay Georgeson $2,000, plus reasonable out-of-pocket expenses, for proxy solicitation services. The original solicitation of proxies by mail may be supplemented by
solicitation by mail, telephone, fax, personal interviews or other methods of communication by our directors, officers and employees. We will not pay any additional compensation to directors, officers or other employees for such services, but may
reimburse them for reasonable out-of-pocket expenses in connection with such solicitation.
Admission to the
Annual Meeting
Only Zhone stockholders, as of the close of business on March 16, 2010, and other persons holding
valid proxies for the annual meeting are entitled to attend the annual meeting. You should be prepared to present valid government issued photo identification for admittance. In addition, if you are not a stockholder of record but hold shares in
“street name,” you will need to provide proof of ownership by bringing either a copy of the voting instruction card provided by your broker or a copy of a brokerage statement showing your share ownership as of March 16, 2010. If you
do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the annual meeting. The annual meeting will be held at our principal executive offices, located at 7001 Oakport Street, Oakland,
California 94621. For directions, please call (510) 777-7000.
Important Notice Regarding the Availability of Proxy Materials for the
Stockholder Meeting To Be Held on May 12, 2010
Electronic copies of our proxy statement and our annual report are
available at the Investor Relations section of our website at www.zhone.com.
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Stockholders Sharing the Same Address
The rules promulgated by the Securities and Exchange Commission, or the SEC, permit companies, brokers, banks or other intermediaries to
deliver a single copy of an annual report, proxy statement or notice of Internet availability of proxy materials to households at which two or more stockholders reside. This practice, known as “householding,” is designed to reduce
duplicate mailings, save significant printing and postage costs, and conserve natural resources. Stockholders sharing an address who have been previously notified by their broker, bank or other intermediary, and have consented to householding,
either affirmatively or implicitly by not objecting to householding, will receive only one copy of our annual report, proxy statement and any notice of Internet availability of proxy materials. If you would like to opt out of or into this practice
for future mailings, and receive separate or multiple annual reports, proxy statements and notices of Internet availability of proxy materials for stockholders sharing the same address, please contact your broker, bank or other intermediary. You may
also obtain a separate annual report, proxy statement or any notice of Internet availability of proxy materials without charge by sending a written request to Zhone Technologies, Inc., Attention: Investor Relations, 7001 Oakport Street, Oakland,
California 94621, or by calling us at (510) 777-7013. We will promptly send additional copies of the annual report or proxy statement or any notice of Internet availability of proxy materials upon receipt of such request. Householding does not
apply to stockholders with shares registered directly in their name.
Recommendation of the Board
The Zhone Board of Directors unanimously recommends that you vote
“FOR”
the election of the director nominees (Proposal
1), and
“FOR”
the ratification of the appointment of KPMG as Zhone’s independent registered public accounting firm (Proposal 2).
YOUR VOTE IS IMPORTANT.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING IN PERSON,
PLEASE SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD OR SUBMIT YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR OVER THE TELEPHONE BY FOLLOWING THE ENCLOSED INSTRUCTIONS.
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CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS
We are dedicated to maintaining the highest standards of business integrity. It is our belief that adherence to sound principles of
corporate governance, through a system of checks, balances and personal accountability is vital to protecting Zhone’s reputation, assets, investor confidence and customer loyalty. Above all, the foundation of Zhone’s integrity is our
commitment to sound corporate governance. Our corporate governance principles and Code of Conduct and Ethics can be found at
www.zhone.com
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Board Independence
The Board of Directors has affirmatively determined that each
member of the Board, other than Mr. Ejabat, is independent under the criteria established by The Nasdaq Stock Market, or Nasdaq, for independent board members. In addition, each member of the committees of the Board is an independent director
in accordance with Nasdaq standards. At the conclusion of the regularly scheduled Board meetings, the independent directors have the opportunity to and regularly meet outside of the presence of our management.
Board Structure and Committee Composition
As of the date of this proxy statement, our Board of Directors has six directors and the following three committees: (1) Audit Committee, (2) Compensation Committee, and (3) Corporate
Governance and Nominating Committee. The membership during the last year and the function of each of the committees are described below. Each of the committees operates under a written charter which can be found on the “Corporate
Governance” section of our website at
www.zhone.com
. During the year ended December 31, 2009, the Board held nine meetings. During this period, all of the directors attended or participated in at least 75% of the aggregate of the
total number of meetings of the Board and the total number of meetings held by all committees of the Board on which each such director served. We endeavor to schedule our annual meeting of stockholders at a time and date to maximize attendance by
directors taking into account the directors’ schedules. One of our directors attended last year’s annual meeting of stockholders.
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Director
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Audit Committee
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Compensation
Committee
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Corporate
Governance and
Nominating
Committee
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Michael Connors
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Robert Dahl
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Chair
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Morteza Ejabat
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James H. Greene, Jr.
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Member
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Member
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C. Richard Kramlich
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Member
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Member
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Steven Levy(1)
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Member
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James Timmins
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Member
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Number of Meetings in 2009
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5
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1
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1
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Mr. Levy resigned as a director on February 12, 2010.
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Audit Committee
The Audit Committee reviews the professional
services provided by our independent registered public accounting firm, the independence of such independent registered public accounting firm from our management, and our annual and quarterly financial statements. The Audit Committee also reviews
such other matters with respect to our accounting, auditing and financial reporting practices and procedures as it may find appropriate or may be brought to its attention. The Audit Committee contains at least one “audit committee financial
expert” as defined by the rules of the SEC. The Board of Directors has determined that Robert Dahl meets the qualifications
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of an “audit committee financial expert.” Stockholders should understand that this designation is a disclosure requirement of the SEC related to the experience and understanding of
Mr. Dahl with respect to certain accounting and auditing matters. The designation does not impose upon Mr. Dahl any duties, obligations or liabilities that are greater than are generally imposed on him as a member of the Audit Committee
and the Board, and his designation as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board. The responsibilities and
activities of the Audit Committee are described in greater detail in “Audit Committee Report.”
During 2009, the
members of the Audit Committee included Messrs. Dahl (Chair), Timmins and Levy. On February 12, 2010, Mr. Levy resigned from his position as a member of the Board and all of its committees. As a result of Mr. Levy’s resignation,
the Audit Committee currently does not comply with the independent audit committee requirements for continued listing on Nasdaq. Specifically, Nasdaq Listing Rule 5606 requires that the Audit Committee be comprised of at least three independent
directors. On March 2, 2010, Nasdaq sent us written notice regarding our noncompliance with the requirement to have three independent directors on the Audit Committee. However, consistent with Listing Rule 5605(c)(4)(A), Nasdaq gave us a cure
period to regain compliance as follows:
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Until the earlier of our next annual stockholders’ meeting or February 12, 2011; or
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If the next annual stockholders’ meeting is held before August 11, 2010, then we must evidence compliance no later than August 11, 2010.
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We plan to conduct a thorough recruitment and evaluation process to find a suitable replacement for
Mr. Levy prior to the end of the cure period.
Compensation Committee
The Compensation Committee is responsible for establishing and monitoring policies governing the compensation of executive officers. In
carrying out these responsibilities, the Compensation Committee is responsible for reviewing the performance and compensation levels for executive officers, establishing salary and bonus levels for these individuals, and approving stock option
grants for these individuals under our stock option plans. The objectives of the Compensation Committee are to correlate executive officer compensation with our business objectives and financial performance, and to enable us to attract, retain and
reward executive officers who contribute to the long-term success of the company. The Compensation Committee seeks to reward executive officers in a manner consistent with our annual and long-term performance goals, and to recognize individual
initiative and achievement among executive officers. For additional information concerning the Compensation Committee, see the “Compensation Discussion and Analysis.”
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee develops and reviews corporate governance principles applicable to the company, identifies individuals qualified to serve as directors, selects or
recommends nominees to the Board of Directors for the election of directors, and advises the Board with respect to Board and committee composition. The Corporate Governance and Nominating Committee is also responsible for reviewing with the Board
from time to time the appropriate skills and characteristics required of Board members in the context of the current size and make-up of the Board. This assessment includes issues of diversity of professional experience, viewpoint, age, skills (such
as understanding of manufacturing, technology, finance and marketing), and international background. These factors, and any other qualifications considered useful by the Corporate Governance and Nominating Committee, are reviewed in the context of
an assessment of the perceived needs of the Board at a particular point in time. As a result, the priorities and emphasis of the Corporate Governance and Nominating Committee and of the Board may change from time to time to take into account changes
in business and other trends, and the portfolio of skills and experience of current and prospective Board members. Therefore,
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while focused on the achievement and the ability of potential candidates to make a positive contribution with respect to such factors, the Corporate Governance and Nominating Committee has not
established any specific minimum criteria or qualifications that a nominee must possess.
In selecting or recommending
candidates for election to the Board, the Corporate Governance and Nominating Committee considers nominees recommended by directors, management and stockholders using the same criteria to evaluate all candidates. The Corporate Governance and
Nominating Committee reviews each candidate’s qualifications, including whether a candidate possesses any of the specific qualities and skills desirable in certain members of the Board. Evaluations of candidates generally involve a review of
background materials, internal discussions and interviews with selected candidates as appropriate. Upon the identification of a qualified candidate, the Corporate Governance and Nominating Committee would select, or recommend for consideration by
the full Board, the nominee for the election of directors. The Corporate Governance and Nominating Committee may engage consultants or third party search firms to assist in identifying and evaluating potential nominees. To recommend a prospective
nominee for the Corporate Governance and Nominating Committee’s consideration, stockholders should submit the candidate’s name and qualifications to Zhone’s Corporate Secretary in writing to the following address: Zhone Technologies,
Inc., Attention: Corporate Secretary, 7001 Oakport Street, Oakland, California 94621. When submitting candidates for nomination to be elected at the annual meeting of stockholders, stockholders must also follow the notice procedures and provide the
information required by our bylaws.
Board Leadership Structure
Morteza Ejabat serves as both our Chairman of the Board and Chief Executive Officer. The independent Board members have determined that the
most effective Board leadership structure for Zhone at the present time is for the Chief Executive Officer to also serve as Chairman of the Board, a structure that has served Zhone well for many years. The independent Board members believe that
because the Chief Executive Officer is ultimately responsible for the day-to-day operation of the company, most capable of effectively identifying strategic priorities and leading the discussion and execution of strategy, and because the performance
of the company is an integral part of Board deliberations, the Chief Executive Officer is the director best qualified to act as Chairman of the Board. Independent directors and management have different perspectives and roles in strategy
development. The independent directors bring experience, oversight and expertise from outside the company and industry, while the Chief Executive Officer brings company-specific experience and expertise. The Board believes that the combined role of
Chairman and Chief Executive Officer promotes strategy development and execution, and facilitates information flow between management and the Board, which are essential to effective governance. The Board retains the authority to modify this
structure to best address the company’s unique circumstances, and to advance the best interests of stockholders, as and when appropriate. The Board does not have a lead independent director, however, at the conclusion of the regularly scheduled
Board meetings, the independent directors have the opportunity to and regularly meet outside of the presence of our management.
Board’s Role in Risk Oversight
The Board has an active role, as a whole and also at the committee
level, in overseeing management of the company’s risks. The Compensation Committee is responsible for overseeing the management of risks relating to our executive compensation plans and arrangements. The Audit Committee oversees management of
financial risks and discusses our policies with respect to risk assessment and risk management. The Corporate Governance and Nominating Committee manages risks associated with the independence of the Board and potential conflicts of interest.
The Board’s role in the Company’s risk oversight process includes receiving regular reports from members of senior
management on areas of material risk to the Company, including operational, financial, legal and regulatory, and strategic and reputational risks. The full Board (or the appropriate committee in the case of risks that are under the purview of a
particular committee) receives these reports from the appropriate “risk owner”
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within the organization to enable it to understand our risk identification, risk management and risk mitigation strategies. When a committee receives the report, the Chairman of the relevant
committee reports on the discussion to the full Board during the committee reports portion of the next Board meeting. This enables the Board and its committees to coordinate the risk oversight role, particularly with respect to risk
interrelationships.
Communications with the Board
Any stockholder wishing to communicate with any of our directors regarding corporate matters may write to the director, c/o Corporate
Secretary, Zhone Technologies, Inc., 7001 Oakport Street, Oakland, California 94621. The Corporate Secretary will forward these communications directly to the director(s). However, certain correspondence such as spam, junk mail, mass mailings,
product complaints or inquiries, job inquiries, surveys, business solicitations or advertisements, or patently offensive or otherwise inappropriate material may be forwarded elsewhere within the company for review and possible response.
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PROPOSAL 1:
ELECTION OF DIRECTORS
Overview
In accordance with our certificate of incorporation, we divide our Board of Directors into three classes,
with Class I consisting of one member, Class II consisting of two members, and Class III consisting of three members. We elect one class of directors to serve a three year term at each annual meeting of stockholders. At this year’s annual
meeting of stockholders, we will elect three Class III directors to hold office until the 2013 annual meeting. At next year’s annual meeting of stockholders, we will elect one Class I director to hold office until the 2014 annual meeting, and
the following year, we will elect two Class II directors to hold office until the 2015 annual meeting. We are actively searching for a Class I director, as Steven Levy resigned as a director on February 12, 2010. Thereafter, elections will
continue in a similar manner at subsequent annual meetings. Each elected director will continue to serve until his successor is duly elected or appointed.
The Board of Directors unanimously nominated Morteza Ejabat, Michael Connors and James Timmins as Class III nominees for election to the Board. Unless proxy cards are otherwise marked, the persons named
as proxies will vote all proxies received
“FOR”
the election of Messrs. Ejabat, Connors and Timmins. If any director nominee is unable or unwilling to serve as a nominee at the time of the annual meeting, the persons named as
proxies may vote either (1) for a substitute nominee designated by the present Board to fill the vacancy or (2) for the balance of the nominees, leaving a vacancy. Alternatively, the Board may reduce the size of the Board. The Board has no
reason to believe that any of the nominees will be unable or unwilling to serve if elected as a director.
The following table
sets forth for each nominee to be elected at the annual meeting and for each director whose term of office will extend beyond the annual meeting, the age of each nominee or director, the positions currently held by each nominee or director with the
company, the year in which each nominee’s or director’s current term will expire, and the class of director of each nominee or director.
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Name
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Age
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Position
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Term
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Class
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Morteza Ejabat
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60
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Chief Executive Officer, President and Chairman of the Board of Directors
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2010
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III
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Michael Connors
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68
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Director
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2010
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III
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Robert Dahl
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69
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Director
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2011
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James H. Greene, Jr.
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59
|
|
Director
|
|
2012
|
|
II
|
|
C. Richard Kramlich
|
|
74
|
|
Director
|
|
2012
|
|
II
|
|
James Timmins
|
|
54
|
|
Director
|
|
2010
|
|
III
|
All of our directors
bring to the Board a wealth of executive leadership experience derived from their service as executives or managing directors of large corporations or venture capital firms. They also bring extensive board experience. The process undertaken by the
Corporate Governance and Nominating Committee in recommending qualified director candidates is described above under “Corporate Governance Principles and Board Matters—Board Structure and Committee Composition—Corporate Governance and
Nominating Committee.” Certain individual qualifications and skills of our directors that contribute to the Board’s effectiveness as a whole are described in the following paragraphs.
Class III Directors with Terms Expiring at this Annual Meeting
Morteza Ejabat
is a co-founder of Zhone and has served as Chairman of the Board of Directors, President and Chief Executive Officer
since June 1999. Prior to co-founding Zhone, from June 1995 to June 1999, Mr. Ejabat was President and Chief Executive Officer of Ascend Communications, Inc., a provider of telecommunications equipment which was acquired by Lucent Technologies,
Inc. in June 1999. Previously,
9
Mr. Ejabat held various senior management positions with Ascend from September 1990 to June 1995, most recently as Executive Vice President and Vice President, Operations. Mr. Ejabat
holds a B.S. in Industrial Engineering and an M.S. in Systems Engineering from California State University at Northridge, and an M.B.A. from Pepperdine University. As our co-founder, Mr. Ejabat has significant knowledge of all facets of our
company, including day-to-day operations. We believe that Mr. Ejabat’s long history with our company, combined with his leadership experience and expertise in running large telecommunications companies, makes him particularly well suited
to be our Chairman.
Michael Connors
has served as a director of Zhone since November 2003 following the consummation
of Zhone’s merger with Tellium, Inc. Dr. Connors had been a member of Tellium’s board of directors since June 2000. From 1992 to 1998, Dr. Connors held the office of President of AOL Technologies, an Internet service provider,
where he led the creation and growth of AOLnet and the development of AOL software and services. Dr. Connors is currently a director of The Connors Foundation. Dr. Connors earned a B.S. in Engineering, an M.S. in Statistics and a Ph.D. in
Operations Research from Stanford University. We believe Dr. Connors is well suited to serve on our Board of Directors given his extensive knowledge of the communications industry based on his experience as President of AOL Technologies and
director of Tellium.
James Timmins
has served as a director of Zhone since July 2002. Mr. Timmins has been a
managing director of Teknos Associates, LLC since November 2008. From 2005 to 2008, he served as managing director for Pagemill Partners LLC, an investment banking and venture firm. From 1998 to 2005, Mr. Timmins was a general partner and
managing director for NIF Ventures, the U.S. venture capital operation of The Daiwa Securities Group of Japan, an investment banking firm. From 1991 to 1998, Mr. Timmins was a partner at Redwood Partners, an investment firm. From 1987 to 1990,
Mr. Timmins was a principal at Hambrecht & Quist, an investment banking firm. Mr. Timmins also serves as a director of WaveSplitter Technologies, Inc., a private company which supplies optical components and modules for advanced
optical networks. Mr. Timmins holds a B.A. in History and Philosophy from the University of Toronto, and an M.B.A. from Stanford University. We believe Mr. Timmins’ considerable expertise in investment banking and venture capital well
qualifies him to serve on our Board.
Class I Director with Term Expiring 2011
Robert Dahl
has served as a director of Zhone since June 1999. Since January 1998, Mr. Dahl has served as a partner of Riviera
Ventures LLP, a private investment firm. Previously, Mr. Dahl held various senior management positions of large corporations, including Ascend Communications, Inc., American President Companies, Ungermann Bass Corporation, ROLM Corporation,
Measurex Corporation and Fairchild Camera and Instrument Corporation. Mr. Dahl also served as a director of NorCal Community Bancorp from 1998 to 2008. He currently serves as director of The Dahl Family Foundation. Mr. Dahl holds a B.S. in
Finance from the University of California at Berkeley and is a retired certified public accountant. Mr. Dahl has gained extensive knowledge of finance from his experience as senior manager of a number of large corporations, and we believe this
is particularly valuable to our Board’s discussion of financial matters.
Class II Directors with Terms
Expiring 2012
James H. Greene, Jr
. has served as a director of Zhone since November 1999. Since January 1996,
Mr. Greene has been a member of KKR Management, L.L.C., the general partner of KKR & Co. L.P., or KKR, a global asset management firm. Mr. Greene currently serves as a director of two public companies, Avago Technologies, Inc. and
Shoppers Drug Mart. In addition, Mr. Greene’s present board membership includes a number of privately held companies, including Aricent Inc., SunGard Data Systems, Inc., Western New York Energy, L.L.C., Greene Van Arsdale Foundation and
TASC, Inc. Mr. Greene holds a B.S. in Economics from the University of Pennsylvania. We believe Mr. Greene’s qualifications to serve on our Board of Directors include his extensive experience in merger and acquisition and other
corporate finance activities, which is invaluable to our Board’s discussion of business transactions.
10
C. Richard Kramlich
has served as a director of Zhone since November 1999. Since June
1978, Mr. Kramlich has been a general partner of New Enterprise Associates, or NEA, a venture capital firm. Mr. Kramlich’s present board memberships include two public companies, Sierra Monitor Corporation and Silicon Valley
Bancshares, as well as a number of privately held companies. Mr. Kramlich holds a B.S. in History from Northwestern University and an M.B.A. from Harvard University. We believe Mr. Kramlich is well suited to serve on our Board given his
extensive experience as general partner of a prominent venture capital firm and his active involvement with numerous public and private companies.
There are no family relationships among any of our executive officers, directors or director nominees. Messrs. Greene and Kramlich are associated with our major stockholders as described above and as set
forth in the section entitled “Ownership of Securities.” We have entered into letter agreements with each of KKR-ZT L.L.C. and New Enterprise Associates VIII, L.P., each dated as of November 13, 2003, relating to the nomination of
designees to the Board of Directors. Under the terms of these letter agreements, at any annual or special meeting called or in any other action taken for the purpose of electing directors to the Board, Zhone agrees to nominate as directors
(1) two nominees designated by KKR and (2) one nominee designated by New Enterprise Associates VIII, L.P. KKR’s right to designate one nominee to the Board terminates at such time that KKR holds less than 50% of the shares issued to
it in connection with the merger with Tellium, and KKR’s right to designate any remaining nominee terminates at such time that KKR holds less than 25% of the shares issued to it in connection with the merger with Tellium. NEA’s right to
designate its nominee terminates at such time that NEA holds less than 50% of the shares issued to it in connection with the merger with Tellium. On May 24, 2006, KKR waived its rights under its letter agreement by reducing the number of
nominees that it has the right to designate from two to one, provided however that KKR may revoke this waiver at any time, thereby reinstating KKR’s right to designate two nominees to the Board.
Recommendation of the Board
The Board of Directors unanimously recommends that you vote “
FOR
” the election of Messrs. Ejabat, Connors and Timmins.
11
PROPOSAL 2:
RATIFICATION OF APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Overview
The Audit Committee has selected KPMG LLP as Zhone’s independent registered public accounting firm for the fiscal year
ending December 31, 2010. KPMG has served as our independent registered public accounting firm since the year ended December 31, 2000. Representatives of KPMG are expected to be present at the annual meeting, will have an opportunity to
make a statement if they so desire and will be available to respond to appropriate questions.
Stockholder ratification of the
selection of KPMG as our independent registered public accounting firm is not required by our bylaws or otherwise. However, we are submitting the selection of KPMG to the stockholders for ratification as a matter of good corporate practice. If the
selection is not ratified, the Audit Committee will reconsider whether or not to retain KPMG, and may retain that firm or another without re-submitting the matter to the stockholders. Even if the selection is ratified, the Audit Committee may, in
its discretion, direct the appointment of a different firm at any time during the year if it determines that such a change would be in the best interests of the company and its stockholders.
Principal Accountant Fees and Services
The following is a summary of the fees billed by KPMG for professional services rendered for the fiscal years ended December 31, 2009 and December 31, 2008:
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Fee Category
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|
2009 Fees
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|
2008 Fees
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|
Audit Fees
|
|
$
|
973,000
|
|
$
|
1,016,000
|
|
Audit-Related Fees
|
|
|
—
|
|
|
—
|
|
Tax Fees
|
|
|
48,000
|
|
|
92,500
|
|
All Other Fees
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
1,021,000
|
|
$
|
1,108,500
|
|
|
|
|
|
|
|
|
Audit Fees.
This category includes the
audit of our annual financial statements, the audit of management’s assessment of our internal control over financial reporting and KPMG’s own audit of our internal control over financial reporting, review of financial statements included
in our Form 10-Q quarterly reports, and services that are normally provided by the independent registered public accounting firm in connection with statutory and regulatory filings or engagements.
Audit-Related Fees.
This category consists of assurance and related services provided by KPMG that are reasonably related to
the performance of the audit or review of our financial statements, and are not reported above as “Audit Fees.” These services include accounting consultations in connection with acquisitions, and consultations concerning financial
accounting and reporting standards.
Tax Fees.
This category consists of professional services rendered by KPMG,
primarily in connection with tax compliance, tax planning and tax advice activities. These services include assistance with the preparation of tax returns, claims for refunds, value added tax compliance, and consultations on state, local and
international tax matters.
All Other Fees.
This category consists of fees for products and services other than
the services reported above.
12
Pre-Approval Policy of the Audit Committee
The Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered
public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, is detailed as to the particular service or category of services, and
is generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public
accounting firm in accordance with this pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. All of the audit-related fees, tax fees and other fees
billed in each of the last two fiscal years, as described above, were pre-approved by the Audit Committee.
Recommendation of the Board
The Board of Directors recommends that you vote
“FOR”
the ratification of the appointment of KPMG as Zhone’s independent registered public accounting firm.
13
OWNERSHIP OF SECURITIES
Beneficial Ownership Table
The following table sets forth information known to us regarding ownership of Zhone common stock on March 16, 2010 by (1) each person who beneficially owned more than 5% of Zhone common stock,
(2) each current director and director nominee, (3) each of the named executives identified in the Summary Compensation Table set forth below under the heading “Executive Compensation,” and (4) all directors, named
executives and their affiliates as a group. We are not aware of any arrangements, including any pledge of our common stock, that could result in a change in control.
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Name of Beneficial Owner (1)
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|
Number of Shares
Beneficially Owned (2)
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|
|
Percent
Owned (3)
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|
|
New Enterprise Associates entities
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|
4,781,274
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(4)
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|
15.8
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%
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|
KKR entities
|
|
1,791,875
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(5)
|
|
5.9
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%
|
|
Morteza Ejabat
|
|
2,053,652
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(6)
|
|
6.6
|
%
|
|
Kirk Misaka
|
|
354,248
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(7)
|
|
1.2
|
%
|
|
Robert Dahl
|
|
50,406
|
(8)
|
|
*
|
|
|
Michael Connors
|
|
63,238
|
(9)
|
|
*
|
|
|
James H. Greene, Jr.
|
|
22,061
|
(10)
|
|
*
|
|
|
C. Richard Kramlich
|
|
4,819,589
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(11)
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|
15.9
|
%
|
|
James Timmins
|
|
19,819
|
(12)
|
|
*
|
|
|
Michael Fischer
|
|
74,964
|
(13)
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|
*
|
|
|
David Misunas
|
|
81,096
|
(14)
|
|
*
|
|
|
Michael Scheck
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|
150,469
|
(15)
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|
*
|
|
|
All directors, named executives and their affiliates as a group (12 persons)(17)
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|
9,481,416
|
(16)
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|
31.15
|
%
|
|
(1)
|
Under the rules of the SEC, a person is the beneficial owner of securities if that person has sole or shared voting or investment power. Except as indicated in the
footnotes to this table and subject to applicable community property laws, to our knowledge, the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned. Unless otherwise
indicated, the address for each person or entity named below is c/o Zhone Technologies, Inc., 7001 Oakport Street, Oakland, California 94621.
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|
(2)
|
In computing the number of shares beneficially owned by a person named in the table and the percentage ownership of that person, shares of common stock that such person
had the right to acquire within 60 days after March 16, 2010 are deemed outstanding, including without limitation, upon the exercise of options and warrants. These shares are not, however, deemed outstanding for the purpose of computing the
percentage ownership of any other person.
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|
(3)
|
For each person included in the table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person by the sum of
(a) 30,300,746 shares of common stock outstanding on March 16, 2010 plus (b) the number of shares of common stock that such person had the right to acquire within 60 days after March 16, 2010.
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|
(4)
|
Consists of (a) 363,427 shares held by New Enterprise Associates VIII, L.P., (b) 258,836 shares held by New Enterprise Associates 8A, L.P., (c) 1,788,067
shares held by New Enterprise Associates 9, L.P., (d) 2,370,944 shares held by New Enterprise Associates 10, L.P. Each separate New Enterprise Associates entity disclaims beneficial ownership over shares with respect to which it is not the
direct holder, except to the extent of its pecuniary interest therein. The address of the entities affiliated with New Enterprise Associates is 1119 St. Paul Street, Baltimore, Maryland 21202.
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(5)
|
Consists of 1,791,875 shares held by KKR-ZT, L.L.C., an entity affiliated with Kohlberg Kravis Roberts & Co. L.P. KKR 1996 GP LLC is the sole
general partner of KKR Associates 1996 L.P., which is the sole general partner of KKR 1996 Fund L.P., which is the senior member of KKR-ZT, L.L.C. KKR 1996 GP LLC is a limited liability company, the managing members of which are Messrs. Henry R.
Kravis and
|
14
|
|
George R. Roberts, and the other members of which are Messrs. Paul E. Raether, Michael W. Michelson, Perry Golkin, Johannes Huth, Todd A. Fisher, Alexander Navab and James H. Greene, Jr. Each of
such individuals may be deemed to share beneficial ownership of any shares beneficially owned by KKR 1996 GP LLC. Each of such individuals disclaims ownership in such shares. The address of the entities affiliated with KKR 1996 GP LLC is 2800 Sand
Hill Road, Suite 200, Menlo Park, California 94025.
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|
(6)
|
Consists of (a) 482,812 shares held by Mr. Ejabat, (b) 14,100 shares held by Mr. Ejabat as Trustee of the Salmeh Ejabat Trust, (c) 14,100
shares held by Mr. Ejabat as Trustee of the Ashlee Ann Ejabat Trust, (d) 717,188 shares held by Mr. Ejabat as Trustee of the Morteza Ejabat Trust Under Declaration of Trust Dated May 18, 1998, and (e) 825,452 shares subject
to options exercisable by Mr. Ejabat within 60 days after March 16, 2010.
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|
(7)
|
Consists of (a) 36,489 shares held by Mr. Misaka and (b) 317,759 shares subject to options exercisable by Mr. Misaka within 60 days after
March 16, 2010.
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|
(8)
|
Consists of (a) 41,052 shares held by Mr. Dahl as Trustee of the Dahl Family Trust Dated October 31, 1989, as amended on May 3, 1990, (b) 1,563
shares of restricted stock which vest monthly until May 16, 2011 and annually until May 15, 2012, as described under “Executive Compensation—Director Compensation” below, and (c) 7,791 shares subject to options
exercisable by Mr. Dahl within 60 days after March 16, 2010.
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|
(9)
|
Consists of (a) 26,542 shares held by Dr. Connors, (b) 16,667 shares held by Suaimhneas LLC, of which Dr. Connors is the sole manager and his adult
children are the owners, and (c) 20,029 shares subject to options exercisable by Dr. Connors within 60 days after March 16, 2010.
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|
(10)
|
Consists of (a) 12,624 shares held by Mr. Greene, (b) 1,563 shares of restricted stock which vest monthly until May 16, 2011 and annually until
May 15, 2012, as described under “Executive Compensation—Director Compensation” below, and (c) 7,874 shares subject to options exercisable by Mr. Greene within 60 days after March 16, 2010. Mr. Greene is a
member of KKR 1996 GP LLC, which is the sole general partner of KKR Associates 1996 L.P., which is the sole general partner of KKR 1996 Fund L.P., which is the senior member of KKR-ZT, L.L.C. Mr. Greene may be deemed to share beneficial
ownership in the shares beneficially owned by KKR 1996 GP LLC. Mr. Greene disclaims beneficial ownership in such shares.
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|
(11)
|
Consists of (a) all of the shares, shares subject to options and shares subject to warrants described in footnote 4 by virtue of Mr. Kramlich’s position
as a general partner of New Enterprise Associates, (b) 20,942 shares held by Mr. Kramlich, and (c) 17,373 shares subject to options exercisable by Mr. Kramlich within 60 days after March 16, 2010. Mr. Kramlich disclaims
beneficial ownership of all shares that would be deemed to be beneficially owned through his relationship with New Enterprise Associates and its affiliated entities, except to the extent of his proportionate interest therein.
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|
(12)
|
Consists of (a) 2,446 shares held by Mr. Timmins, and (b) 17,373 shares subject to options exercisable by Mr. Timmins within 60 days after
March 16, 2010.
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|
(13)
|
Consists of (a) 1,200 shares held by Mr. Fischer, and (b) 73,764 shares subject to options exercisable by Mr. Fischer within 60 days after
March 16, 2010.
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|
(14)
|
Consists of (a) 23,378 shares held by Mr. Misunas, and (b) 4,747 shares held by David and Laura Misunas, (c) 52,971 shares subject to options
exercisable by Mr. Misunas within 60 days after March 16, 2010.
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|
(15)
|
Consists of (a) 6,101 shares held by Mr. Scheck, (b) 8 shares held by Michael and Wendy Scheck, (c) 76 shares held by the Michael W. Scheck and
Wendy Lee Scheck Living Trust, and (d) 144,284 shares subject to options exercisable by Mr. Scheck within 60 days after March 16, 2010.
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|
(16)
|
Includes 1,487,796 shares subject to options exercisable within 60 days after March 16, 2010.
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|
(17)
|
Excludes Mr. Levy who resigned as a director on February 12, 2010.
|
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and holders of more than 10% of Zhone common stock to file reports of ownership and changes in
ownership with the SEC. These persons are required to furnish us with copies of all forms that they file. Based solely on our review of copies of these forms in our possession and in reliance upon written representations from our directors and
executive officers, we believe that all of our directors, executive officers and 10% stockholders complied with the Section 16(a) filing requirements during 2009.
15
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
This compensation discussion and analysis summarizes the company’s philosophy and objectives regarding the compensation of its executive officers, including how the company determines the elements
and amounts of compensation. The Compensation Committee of the Board is responsible for determining, establishing and approving each element of compensation including salary and all bonus, incentive, equity and other compensation for the
company’s executive officers.
Summary of 2009 Compensation
In determining the compensation of our named executive officers for 2009, we evaluated our company’s overall performance and their
individual contributions to that performance. In keeping with our corporate objectives to conserve cash, none of our named executive officers received raises in base salary for 2009. Additionally, for 2009, a voluntary salary reduction was initiated
by the executive officers. For 2009, Mr. Ejabat’s salary was reduced by 20% and the salaries of all other named executives were reduced by 15%. The salary reduction initiated in 2009 remains in effect in 2010.
Due to our performance in 2009 and the overall difficulty of the economy, no bonuses were paid to any employees, including the named
executive officers for 2009.
Philosophy and Objectives
Zhone operates in the highly competitive and rapidly changing telecommunications industry. Our compensation program for executive officers is
designed to focus their activities and energies on the achievement of our short term and long term objectives and to attract and retain executive officers who possess the skills, knowledge and experience required to effectively manage the company.
The Compensation Committee seeks to attract, retain and motivate executive officers through a total compensation package that consists primarily of:
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|
•
|
|
annual variable cash incentive arrangements and
|
|
|
•
|
|
long-term, equity based incentives in the form of stock options.
|
Additional components of our compensation program for executive officers include the participation in benefit plans that are generally
available to all employees, severance provisions and, on a case-by-case basis, change in control benefits.
The Compensation
Committee’s executive compensation determinations are based on a review of many factors including market information consisting of executive compensation data for our peer group of companies, which are discussed below, the company’s
financial and strategic achievements over the past year, expectations for the current year, and the compensation practices of companies in the company’s industry. Each of these factors is weighed to determine whether the company’s
compensation structure:
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|
•
|
|
is competitive in the industry;
|
|
|
•
|
|
motivates executive officers to achieve the company’s business objectives; and
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|
|
•
|
|
sufficiently aligns the interests of the executive officers with the long-term interests of the stockholders.
|
The Compensation Committee’s goal is to set executive officer total compensation at levels that are generally comparable to executives
with similar roles and responsibilities at our peer group of companies,
16
consistent with our goals, and appropriate in light of the executive’s experience level and expected contribution. The Compensation Committee typically targets total compensation for
executive officers at or above the median of the market data from our peer group of companies, although actual compensation for an executive officer may be higher or lower than the targeted position depending on such factors as the individual
performance of the executive, our actual financial performance during the year, intensity of competition and general market conditions, the experience level, responsibilities and expected future contribution of the executive, and the importance of
each position. The Compensation Committee typically does not rely solely upon rigid, pre-determined formulas for determining executive compensation and may consider any factor that is deemed pertinent to its executive compensation decisions.
Role of Chief Executive Officer and Chief Financial Officer in Determining Executive Compensation and Benchmarking Data
We generally have followed a consistent process over the years for determining executive compensation for executive
officers. At the conclusion of each fiscal year, our Chief Executive Officer and Chief Financial Officer, with the assistance of the Human Resources Department, consider the compensation of executives in similar positions to theirs at our peer
group, which is discussed below, using information gathered from proxy statements and other SEC filings. Mr. Ejabat and Mr. Misaka then provide recommendations to the Compensation Committee for adjustments to their base salaries, bonus
opportunities and equity levels.
Our Chief Executive Officer and our Chief Financial Officer attend some of the Compensation
Committee meetings, but the Compensation Committee also regularly holds executive sessions not attended by any members of management or non-independent directors. The Compensation Committee discusses Mr. Ejabat’s compensation package with
him, but makes decisions with respect to Mr. Ejabat’s compensation without him present. The Compensation Committee has the ultimate authority to make decisions with respect to the compensation of our executive officers, but may, if it
chooses, delegate any of its responsibilities to subcommittees. The Compensation Committee has delegated to Mr. Ejabat the authority to grant long-term incentive awards to employees below the level of executive officer under guidelines set by
the Compensation Committee. The Compensation Committee also has authorized Mr. Ejabat to make salary adjustments and short-term incentive decisions for all employees other than certain officers under guidelines approved by the Compensation
Committee. The Compensation Committee has not delegated any of its authority with respect to the compensation of executive officers. Although neither the Compensation Committee nor the Board of Directors is required to ratify the actions of
Mr. Ejabat with regard to the authority delegated to him, as a matter of good corporate practice, Mr. Ejabat periodically provides a report to the Board regarding grants of long-term incentive awards to employees authorized by him. The
Compensation Committee reviews this information in light of its own current experience, access to compensation information and experience at other companies and on other boards. The Compensation Committee historically has given considerable weight
to Mr. Ejabat’s and Mr. Misaka’s recommendations based on their direct knowledge of their performance and contributions to the company. The Compensation Committee considers these factors, as well as any other factors it may deem
relevant to its executive compensation determinations, and sets the compensation for the company’s executive officers.
In determining the compensation of the executive officers for fiscal 2009, Mr. Ejabat, Mr. Misaka and the Compensation Committee considered external market data and publicly available information from a peer group of comparable
companies compiled as described above. This market data focused on, among other things, the cash components of compensation for executives.
The peer group represents companies in our industry against which we compete directly for talent. The peer group was chosen primarily because they are our primary business competitors and because we
consider the scope and complexity of their business operations to be closely related to ours. Additional considerations included market capitalization, revenue, number of employees and geographic locations where they operate.
17
Qualitative assessments of the peer group data were then made taking into account such factors as market capitalization, business complexity, revenue, number of employees, geographic location and
other factors. For fiscal 2009, our peer group was comprised of the following companies:
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•
|
|
Sycamore Networks, Inc.
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|
|
•
|
|
Westell Technologies, Inc.
|
Each of these companies possessed one or more attributes discussed above that the Compensation Committee considers relevant to our executive compensation determinations.
Historically, the Compensation Committee has targeted total direct compensation for executive officers at approximately the median of the
competitive market data at time of hire and gradually made adjustments to levels above the median as the executive demonstrates performance and assumes additional responsibilities over time. The Compensation Committee believes this methodology has
proven effective as a means of addressing competitive concerns at time of hire while also providing flexibility to allow for future increases when circumstances dictate that additional compensation is necessary to retain or recognize the
contributions and performance of the executive officer.
Mr. Ejabat, Mr. Misaka and the Compensation Committee use
the peer group and market data as an indication of current market practices, but recognize that additional factors must be considered in setting the compensation for our executive officers. Accordingly, actual target compensation for named executive
officers may vary from market and peer group data based on a variety of factors such as our actual financial performance during the prior year, the experience level, responsibilities and expected future contribution of the executive, the importance
of each position in our company relative to our peer companies, general market conditions, and issues relating to recruitment and retention of key executives. In any given year, other considerations may be relevant to the Compensation
Committee’s executive compensation determinations.
For 2009, we believe that the compensation of our
executive officers was consistent with the foregoing compensation philosophy.
18
Role of Compensation Consultants
In performing its duties, the Compensation Committee may obtain input, as it deems necessary, from outside professional consulting firms
retained directly by the Compensation Committee or through the assistance of the Human Resources Department. The Compensation Committee did not retain an outside professional consulting firm to conduct a competitive review and assessment of the
company’s executive compensation program for fiscal 2009.
Elements of Compensation Allocation
The Compensation Committee believes that each element of our compensation program is essential to attracting and retaining experienced and
motivated executive officers who are able to successfully manage our operations, strategic direction and financial performance, particularly given the intensely competitive and rapidly changing telecommunications industry in which we operate.
In evaluating the overall mix of compensation for named executive officers, the Compensation Committee typically does not
rely on pre-determined formulas for weighting different elements of compensation for allocating between long-term and short-term compensation, but instead strives to develop comprehensive compensation packages that emphasize attainment of our
short-term and long-term objectives and are reflective of the executive’s abilities, experience level and contributions. Although there are no set formulas of allocating among components, the Compensation Committee generally endeavors to
provide executives with meaningful levels of variable incentives, and long term equity-based incentives in particular, so that executives with the highest levels of responsibility have the greatest amount of compensation at risk.
Base Salaries
In general, base salaries for employees, including executive officers, are established based on the scope of their responsibilities, individual contribution, prior experience, sustained performance and
anticipated level of difficulty of replacing the employee with someone of comparable experience and skill. Decisions regarding salary increases take into account the executive officer’s current salary and the amounts paid to the executive
officer’s peers outside the company. In addition to considering the competitive pay practices of our peer group of companies, we also consider the amounts paid to executive officer’s peers internally by conducting an internal pay equity
analysis which compares the pay of each executive officer to other members of the management team. Base salaries are reviewed periodically, but are not automatically increased if the Compensation Committee believes that other elements of
compensation are more appropriate in light of our stated objectives. This strategy is consistent with our intent of offering compensation that is contingent on the achievement of performance objectives. For 2009, none of our named executives
received a raise in his base salary. Additionally, for 2009 a voluntary salary reduction was initiated by the named executives. For 2009, Mr. Ejabat’s salary was reduced by 20% and the salaries of all other named executives were reduced by
15%. For 2010, the salary reductions will remain in effect.
Performance Bonuses
Our incentive cash compensation awards emphasize pay-for-performance by providing our employees with the opportunity to receive performance
bonuses only upon the attainment of financial and other corporate performance objectives, as well as individual performance objectives. Upon an evaluation of our overall performance, the performance of the business unit that the executive officer
leads and an assessment of the executive officer’s performance against expectations, the Compensation Committee uses discretion in determining the bonus for each individual executive officer. For 2009, the Compensation Committee did not
establish any objective performance goals and instead made bonus determinations based solely in their discretion. Based on the Compensation Committee’s subjective assessment of our performance, and each named executive’s performance it
determined not to award incentive bonuses to our named executives for 2009.
19
Sales Management Compensation Plan
Each sales employee has the opportunity to earn commissions on his or her sales based on a commission rate that is determined each year
according to the following formula:
Basic commission rate = target rate of commission / annual quota base
In addition, if the annual quota base is exceeded by the individual, the basic commission rate is doubled. Each individual’s target
rate of commissions is negotiated individually with and approved by our Chief Executive Officer. Each individual’s annual quota base is based on our sales goals for the individual’s region of responsibility, and is not an indication of the
individual’s expected performance. Messrs. Fischer and Scheck are the only named executives that participate in this program. Messrs. Fischer and Scheck’s target rate of commissions and annual quota base for 2009 were as follows:
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|
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|
|
|
|
|
|
Target Rate of Commissions
|
|
Annual Quota Base
|
|
Mr. Fischer
|
|
$
|
127,500
|
|
$
|
61,000,000
|
|
Mr. Scheck
|
|
$
|
148,750
|
|
$
|
86,000,000
|
Mr. Scheck’s target rate of commissions is higher than Mr. Fischer’s due to his longer tenure and greater sales experience. In 2009, Mr. Fischer earned $103,024 in commissions which represented 80.8% of his target
sales commissions. In 2009, Mr. Scheck earned $123,093 in commissions which represented 82.8% of his target sales commissions. Messrs. Fischer and Scheck’s target for bookings in 2009 were set at a level our executive management team
believed could only be met if Messrs. Fischer and Scheck were able to obtain bookings at a rate above our budget for bookings.
Long-Term Equity Incentives
The goal of our long-term, equity-based incentive awards is to align the
interests of employees with stockholders and to provide each employee with an incentive to manage Zhone from the perspective of an owner with an equity stake in the business. Because vesting is based on continued employment, our equity-based
incentives also facilitate the retention of employees through the term of the awards. In determining the size of the long-term equity incentives to be awarded to employees, we take into account a number of internal factors, such as the relative job
scope, individual performance history, prior contributions , the size of prior grants and competitive market data for our peer group of companies. Based upon these factors, the Compensation Committee determines the size of the long-term equity
incentives at levels it considers appropriate to create a meaningful opportunity for reward predicated on the creation of long-term stockholder value. The Compensation Committee does not apply any set formula or consider any specific weighting of
these factors in setting the awards for a year. Rather, the level of awards is determined solely in the discretion of the Compensation Committee, taking into account those factors and the recommendations of management.
To reward and retain employees in a manner that best aligns employees’ interests with stockholders’ interests, we use stock
options as the primary incentive vehicle for long-term compensation opportunities. We believe that stock options are an effective tool for meeting our compensation goal of increasing long-term stockholder value by tying the value of the stock
options to our future performance. Because employees are able to profit from stock options only if our stock price increases in value over the stock option’s exercise price, we believe the options provide effective incentives to employees to
achieve increases in the value of our stock. To minimize the potential dilution to our stockholders, we strive to limit the total number of stock options granted pursuant to our annual refresh program to 2% of the total number of shares of Zhone
common stock outstanding. In addition, our stock option programs are broad-based, and in 2009, an aggregate of approximately 600,000 stock options were granted to substantially all of our employees under our annual refresh grant program.
Consistent with the process in place in prior years, annual grants of options are typically approved by the Board of Directors at its
regularly scheduled meeting in August and have a grant date effective as of the first day of the September following the Board’s meeting. While the vast majority of stock option awards to our
20
employees have been made pursuant to our annual grant program, the Compensation Committee retains discretion to make stock option awards to employees at other times, including in connection with
the hiring of an employee, the promotion of an employee, to reward an employee, for retention purposes or for other circumstances recommended by management or the Compensation Committee. The exercise price of any such grant is the fair market value
of our common stock on the grant date. The Compensation Committee has not granted, nor does it intend in the future to grant, equity compensation awards to employees in anticipation of the release of material nonpublic information that is likely to
result in changes to the price of our common stock, such as a significant positive or negative earnings announcement. Similarly, the Compensation Committee has not timed, nor does it intend in the future to time, the release of material nonpublic
information based on equity award grant dates.
Retirement Savings
Our employees are eligible to participate in our 401(k) plan. Each employee may make before-tax contributions of up to 60% of their base
salary, up to the limits imposed by the Code. We provide this plan to help our employees save some amount of their cash compensation for retirement in a tax efficient manner. We currently do not provide a matching contribution under our 401(k) plan,
nor do we offer other retirement benefits. In 2009, a one time discretionary non elective employer contribution from the forfeiture account was made. The contribution was made to all eligible participants. The contribution was 2% of eligible
compensation subject to a maximum contribution of $2,000. The contribution was delivered to each eligible participant’s account in January 2010.
Health and Welfare Benefits
The establishment of competitive
benefit packages for our employees is an important factor in attracting and retaining highly qualified personnel. Executive officers are eligible to participate in all of our employee benefit plans, such as medical, dental, vision, group life and
disability insurance, in each case on the same basis as other employees. We believe that these health and welfare benefits help ensure that the company has a productive and focused workforce.
Tax Deductibility of Executive Compensation
Limitations on the deductibility of compensation may occur under Section 162(m) of the Code, which generally limits the tax deductibility of compensation paid by a public company to its chief
executive officer and certain other highly compensated executive officers to $1 million, unless such compensation is performance based and certain specific and detailed criteria are satisfied. Although deductibility of compensation is preferred, tax
deductibility is not a primary objective of our compensation programs, particularly in light of the company’s substantial net operating losses. We believe that achieving our compensation objectives set forth above is more important than the
benefit of tax deductibility, and we reserve the right to maintain flexibility in how we compensate our executive officers that may result in limiting the deductibility of amounts of compensation from time to time.
Relationship Between Compensation and Risk
In early 2010, management assessed our compensation policies and programs for all employees for purposes of determining the relationship of such policies and programs and the enterprise risks faced by
Zhone. After that assessment, management determined that none of our compensation policies or programs create risks that are reasonably likely to have a material adverse effect on Zhone. Management reported the results of its assessment to the
Compensation Committee.
21
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on its review and
discussions with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in Zhone’s proxy statement for the 2010 annual meeting.
Respectfully Submitted by the Compensation Committee
James H. Greene, Jr.
C. Richard Kramlich
Compensation Committee Interlocks and Insider
Participation
The members of the Compensation Committee for the 2009 fiscal year were James H. Greene, Jr. and
C. Richard Kramlich. All members of the Compensation Committee during 2009 were independent directors, and none of them were our officers or employees or former officers or employees. During 2009, none of our executive officers served on the
compensation committee (or equivalent), or the board of directors, of another entity whose executive officer(s) served on our Compensation Committee or Board of Directors.
Summary Compensation Table
The following table
sets forth the compensation earned during the years ended December 31, 2009, 2008 and 2007 by our Chief Executive Officer and Chief Financial Officer, as well as our three other most highly compensated senior managers. We refer to these
executive officers and senior managers throughout these compensation tables and in our beneficial ownership table above as our “named executives.”
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|
|
Name and
Principal Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($) (1)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
(2)
|
|
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All Other
Compensation
($) (3)
|
|
|
Total
($)
|
|
Morteza Ejabat(4)
|
|
2009
|
|
666,346
|
|
—
|
|
—
|
|
361,000
|
|
—
|
|
—
|
|
708
|
(5)
|
|
1,028,054
|
|
Chief Executive Officer, President and Chairman of the Board of Directors
|
|
2008
|
|
825,000
|
|
—
|
|
—
|
|
385,387
|
|
|
|
|
|
768
|
(5)
|
|
1,211,155
|
|
|
2007
|
|
825,000
|
|
—
|
|
—
|
|
636,500
|
|
—
|
|
—
|
|
768
|
(5)
|
|
1,462,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kirk Misaka
|
|
2009
|
|
312,356
|
|
—
|
|
—
|
|
152,000
|
|
—
|
|
—
|
|
708
|
(6)
|
|
465,064
|
|
Chief Financial Officer, Treasurer and Secretary
|
|
2008
|
|
365,000
|
|
—
|
|
—
|
|
153,143
|
|
—
|
|
—
|
|
768
|
(6)
|
|
518,911
|
|
|
2007
|
|
365,000
|
|
—
|
|
—
|
|
268,000
|
|
—
|
|
—
|
|
768
|
(6)
|
|
633,768
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Fischer
|
|
2009
|
|
127,760
|
|
—
|
|
—
|
|
36,100
|
|
103,024
|
|
—
|
|
5,208
|
(7)
|
|
272,092
|
|
Vice President, North American Sales
|
|
2008
|
|
150,000
|
|
—
|
|
—
|
|
30,480
|
|
129,272
|
|
—
|
|
5,268
|
(7)
|
|
315,020
|
|
|
2007
|
|
150,000
|
|
—
|
|
—
|
|
40,200
|
|
129,163
|
|
—
|
|
5,268
|
(7)
|
|
324,630
|
|
|
|
|
|
|
|
|
|
|
|
|
David Misunas
|
|
2009
|
|
235,336
|
|
—
|
|
—
|
|
24,700
|
|
—
|
|
—
|
|
662
|
(8)
|
|
260,698
|
|
Vice President, Business Development
|
|
2008
|
|
275,000
|
|
—
|
|
—
|
|
25,317
|
|
|
|
|
|
768
|
(8)
|
|
301,085
|
|
|
2007
|
|
275,000
|
|
—
|
|
—
|
|
43,550
|
|
—
|
|
—
|
|
768
|
(8)
|
|
319,318
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Scheck
|
|
2009
|
|
127,760
|
|
—
|
|
—
|
|
36,100
|
|
123,093
|
|
—
|
|
5,208
|
(9)
|
|
292,161
|
|
Vice President, International Sales
|
|
2008
|
|
150,000
|
|
—
|
|
—
|
|
60,159
|
|
203,822
|
|
|
|
5,268
|
(9)
|
|
419,249
|
|
|
2007
|
|
150,000
|
|
—
|
|
—
|
|
90,450
|
|
203,171
|
|
—
|
|
5,268
|
(9)
|
|
448,889
|
|
(1)
|
This column represents the grant date fair value of the stock options granted to each of the named executives in the respective fiscal year, calculated in accordance
with SFAS 123R. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions used in the calculation of these amounts, refer
to note 7 to the financial statements included in the company’s annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.
|
22
|
(2)
|
The amounts in this column represent sales commissions paid under the sales management compensation plan.
|
|
(3)
|
Unless otherwise indicated, the aggregate amount of perquisites and other personal benefits, securities or property provided to each named executive, valued on the
basis of aggregate incremental cost to the company, was less than $10,000.
|
|
(4)
|
See also “Executive Compensation—Potential Payments Upon Termination” and “Certain Relationships and Related Transactions” for additional
information concerning Mr. Ejabat.
|
|
(5)
|
This amount consists of Zhone’s payment of life insurance premiums on behalf of Mr. Ejabat.
|
|
(6)
|
This amount consists of Zhone’s payment of life insurance premiums on behalf of Mr. Misaka.
|
|
(7)
|
This amount consists of (a) Zhone’s payment of life insurance premiums on behalf of Mr. Fischer, and (b) an automobile allowance in the amount of
$4,500.
|
|
(8)
|
This amount consists of Zhone’s payment of life insurance premiums on behalf of Mr. Misunas.
|
|
(9)
|
This amount consists of (a) Zhone’s payment of life insurance premiums on behalf of Mr. Scheck, and (b) an automobile allowance in the amount of
$4,500.
|
Grants of Plan-Based Awards in 2009
The following table sets forth summary information regarding grants of plan-based awards made to our named executives during the year ended
December 31, 2009. All stock options granted to our named executives were granted under the Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan. The exercise price per share of each stock option is equal to the per share
fair market value of our common stock as determined under the Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Grant
Date
|
|
Estimated
Possible
Payouts Under
Non-Equity
Incentive Plan
Awards
Target
($)
|
|
All Other Stock
Awards: Number
of Shares of
Stock or
Units
(#)
|
|
All Other Option
Awards: Number
of Securities
Underlying
Options
(#) (1)
|
|
Exercise
or Base
Price of
Option
Awards
($/Sh)
(2)
|
|
Grant
Date Fair
Value of
Stock and
Option
Awards
($) (3)
|
|
Morteza Ejabat
|
|
9/1/2009
|
|
—
|
|
—
|
|
190,000
|
|
$
|
2.70
|
|
361,000
|
|
Kirk Misaka
|
|
9/1/2009
|
|
—
|
|
—
|
|
80,000
|
|
$
|
2.70
|
|
152,000
|
|
Michael Fischer
|
|
9/1/2009
|
|
—
|
|
—
|
|
19,000
|
|
$
|
2.70
|
|
36,100
|
|
David Misunas
|
|
9/1/2009
|
|
—
|
|
—
|
|
13,000
|
|
$
|
2.70
|
|
24,700
|
|
Michael Scheck
|
|
9/1/2009
|
|
—
|
|
—
|
|
19,000
|
|
$
|
2.70
|
|
36,100
|
|
(1)
|
The vesting terms of the stock options are outlined in the table below entitled “Outstanding Equity Awards at 2009 Fiscal Year-End.”
|
|
(2)
|
Reflects the fair market value per share of our common stock on the grant date as determined under the Zhone Technologies, Inc. Amended and Restated 2001 Stock
Incentive Plan.
|
|
(3)
|
Reflects the grant date fair value of the stock options as calculated in accordance with SFAS No. 123R. Pursuant to SEC rules, the amounts shown exclude the impact
of estimated forfeitures related to service-based vesting conditions. For additional information on the valuation assumptions used in the calculation of these amounts, refer to note 7 to the financial statements included in the company’s annual
report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.
|
23
Outstanding Equity Awards at 2009 Fiscal Year-End
The following table lists all outstanding equity awards held by our named executives as of December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Name
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
|
Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
|
Option
Exercise
Price
($)
|
|
Option
Expiration
Date
(1)
|
|
Morteza Ejabat
|
|
59,374
|
|
130,626
|
|
—
|
|
1.65
|
|
9/2/2015
|
|
|
|
193,541
|
|
521,084
|
|
—
|
|
0.50
|
|
11/17/2015
|
|
|
|
11,875
|
|
178,125
|
|
—
|
|
2.70
|
|
9/1/2016
|
|
|
|
|
|
|
|
|
Kirk Misaka
|
|
617
|
|
—
|
|
—
|
|
1.05
|
|
5/14/2013
|
|
|
|
25,000
|
|
55,000
|
|
—
|
|
1.65
|
|
9/2/2015
|
|
|
|
67,618
|
|
202,860
|
|
—
|
|
0.50
|
|
11/17/2015
|
|
|
|
5,000
|
|
75,000
|
|
—
|
|
2.70
|
|
9/1/2016
|
|
|
|
|
|
|
|
|
Michael Fischer
|
|
3,750
|
|
8,250
|
|
—
|
|
1.65
|
|
9/2/2015
|
|
|
|
17,766
|
|
47,834
|
|
—
|
|
0.50
|
|
11/17/2015
|
|
|
|
1,187
|
|
17,813
|
|
—
|
|
2.70
|
|
9/1/2016
|
|
|
|
|
|
|
|
|
David Misunas
|
|
4,062
|
|
8,938
|
|
—
|
|
1.65
|
|
9/2/2015
|
|
|
|
12,293
|
|
33,098
|
|
—
|
|
0.50
|
|
11/17/2015
|
|
|
|
812
|
|
12,188
|
|
|
|
2.70
|
|
9/1/2016
|
|
|
|
|
|
|
|
|
Michael Scheck
|
|
10,340
|
|
—
|
|
—
|
|
1.05
|
|
7/2/2012
|
|
|
|
8,437
|
|
18,563
|
|
—
|
|
1.65
|
|
9/2/2015
|
|
|
|
32,372
|
|
87,158
|
|
—
|
|
0.50
|
|
11/17/2015
|
|
|
|
1,187
|
|
17,813
|
|
|
|
2.70
|
|
9/1/2016
|
|
(1)
|
All options have a term of seven years from the date of grant and vest and become exercisable in 48 equal monthly installments over the course of four years.
|
24
Option Exercises and Stock Vested in 2009
None of the named executives exercised any stock options or vested in any stock awards during 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
Stock Awards
|
|
Name
|
|
Number of Shares
Acquired on Exercise
(#)
|
|
Value Realized on
Exercise
($)
|
|
Number of Shares
Acquired on Vesting
(#)
|
|
Value Realized on
Vesting
($)
|
|
Morteza Ejabat
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Kirk Misaka
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Michael Fischer
|
|
—
|
|
—
|
|
—
|
|
—
|
|
David Misunas
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Michael Scheck
|
|
—
|
|
—
|
|
—
|
|
—
|
Pension Benefits
None of our named executives participates in or has account balances in qualified or non-qualified defined benefit plans sponsored by us.
Nonqualified Deferred Compensation
None of our
named executives participates in or has account balances in non-qualified defined contribution plans or other deferred compensation plans maintained by us.
Equity Compensation Plan Information
The
following table provides information as of December 31, 2009 with respect to shares of our common stock that may be issued under existing equity compensation plans. The table does not include information with respect to shares subject to
outstanding options granted under equity compensation arrangements assumed by us in connection with mergers and acquisitions of the companies that originally granted those options.
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(a)
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(b)
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(c)
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Plan Category
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Number of securities
to be issued upon exercise
of outstanding options,
warrants
and rights (1)
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Weighted average exercise
price of outstanding options,
warrants and
rights
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Number of securities
remaining
available
for future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
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Equity compensation plans approved by security holders
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4,072,523
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(2)
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$
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1.35
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795,200
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(3)(4)
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Equity compensation plans not approved by security holders
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333
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(5)
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$
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7.58
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0
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Total
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4,072,857
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$
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1.35
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795,200
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(1)
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This column includes unvested restricted stock and does not reflect options assumed in mergers and acquisitions where the plans governing the options will not be used
for future awards. As of December 31, 2009, a total of 436,237 shares of Zhone common stock were issuable upon exercise of outstanding options under those assumed arrangements. The weighted average exercise price of those outstanding options is
$34.35 per share.
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(2)
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Excludes purchase rights currently accruing under the Zhone Technologies, Inc. 2002 Employee Stock Purchase Plan.
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(3)
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Includes shares available for future issuance under the Zhone Technologies, Inc. 2002 Employee Stock Purchase Plan. As of December 31, 2009, 152,100 shares of
common stock were available for future issuance under the plan.
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25
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(4)
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Under the Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan, the number of shares available for issuance under the plan will be increased
automatically on January 1 of any year in which the number of shares available for issuance is less than 5% of the total number of outstanding shares on such date. In any such case, the increase is equal to an amount such that the aggregate
number of shares available for issuance under the plan equals the lesser of (a) 5% of the total number of outstanding shares on such date, (b) 1,000,000 shares, or (c) such other number of shares as determined by the Board.
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(5)
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This amount represents shares of Zhone common stock issuable upon exercise of outstanding options under the 2002 Stock Incentive Plan. In February 2006, the Board
amended a number of our equity compensation plans, including the 2002 Stock Incentive Plan, to provide that no further awards would be made under those plans.
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Potential Payments Upon Termination
With the
exception of Morteza Ejabat, we do not have employment, severance or change of control agreements with the named executives. On November 8, 2007, we entered into an amended and restated employment agreement with Mr. Ejabat. This amendment
and restatement clarified the language of the employment agreement entered into on October 20, 1999, and made certain changes intended to ensure compliance with Section 409A of the Code. The amended and restated agreement had an initial
term expiring on October 20, 2008, and on each anniversary thereof the term will automatically be extended for one additional year unless either party delivers notice to the other party of its intention not to extend the term. No notice to
either party was delivered in 2009. During the term, Mr. Ejabat will serve as Chief Executive Officer of the company, with such duties and responsibilities as are commensurate with the position, and reports directly to our Board of Directors.
Mr. Ejabat’s annual salary will be determined on at least an annual basis by the Compensation Committee. During each year of the term, the Board will review Mr. Ejabat’s performance, and may, in its sole discretion, pay
Mr. Ejabat a bonus in addition to his annual salary. Mr. Ejabat is also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements generally
available to our other officers. Under Mr. Ejabat’s amended and restated employment agreement, he will receive certain compensation in the event that his employment is terminated by us without “cause” or by Mr. Ejabat for
“good reason.” For purposes of Mr. Ejabat’s amended and restated employment agreement, “cause” is generally defined to include: (1) his willful or continued failure to substantially perform his duties with the
company, (2) his conviction of, guilty plea to, or entry of a nolo contendere plea to a felony, (3) his willful or reckless misconduct that has caused or is reasonably likely to cause demonstrable and material financial injury to the
company, (4) his willful and material breach of certain sections in the amended and restated employment agreement pertaining to disclosure and assignment of inventions, confidentiality and nonsolicitation, or (5) his failure to cure the
adverse effects of his willful and material breach of any of such sections of the amended and restated employment agreement within the required time. For purposes of Mr. Ejabat’s amended and restated employment agreement, “good
reason” is generally defined to include the occurrence of any of the following events without his consent: (1) a material diminution in his base compensation, (2) a material diminution in his authority, duties or responsibilities,
(3) a material change in the geographic location at which he must perform his duties, or (4) any other action or inaction that constitutes a material breach by the company of its obligations under the amended and restated employment
agreement. Specifically, in those events, Mr. Ejabat would be entitled to receive a lump sum payment equal to his annual salary as in effect immediately prior to the date of termination. Assuming a hypothetical termination of
Mr. Ejabat’s employment by us without “cause” or by Mr. Ejabat for “good reason” on December 31, 2009, the last day of our 2009 fiscal year, we would have been obligated to pay Mr. Ejabat a lump sum
payment of $660,000.
26
Director Compensation
Directors who are employees of the company, such as Mr. Ejabat, do not receive any additional compensation for their services as
directors. With respect to non-employee directors, each non-employee director is eligible to receive an annual cash retainer of $20,000, but may elect to receive an equivalent amount of fully vested shares of Zhone common stock, in lieu of the cash
retainer, based on the fair market value of the shares on the date the cash retainer would otherwise be paid. To align the interests of directors with the long-term interests of stockholders, each non-employee director is also entitled to receive an
annual equity grant in the form of a stock option to purchase 50,000 shares at an exercise price equal to the fair market value of Zhone common stock on the date of grant. In lieu of this stock option, each non-employee director may elect to receive
the annual equity grant in the form of 15,000 shares of restricted stock. The annual equity grant of stock options vests in 48 equal monthly installments over the course of four years. The annual equity grant of restricted stock also vests in four
equal annual installments over the course of four years. In addition, the chair of the Audit Committee receives a $4,000 cash payment per committee meeting attended, and each of the other committee members receives a $2,000 cash payment per
committee meeting attended. Non-employee directors are entitled to reimbursement of reasonable out-of-pocket expenses incurred attending Board and committee meetings, and in connection with Board related activities.
The following table sets forth the compensation earned during the year ended December 31, 2009 by each of our non-employee directors.
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Name
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Fees Earned
or Paid
($) (1)
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Stock
Awards
($) (2)
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Option
Awards
($) (3)
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Non-Equity
Incentive Plan
Compensation
($)
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Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
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All Other
Compensation
($) (4)
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Total
($)
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Michael Connors(5)
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20,000
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—
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9,500
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—
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—
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716
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30,216
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Robert Dahl(6)(7)
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40,000
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4,200
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—
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—
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—
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—
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44,200
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James H. Greene, Jr.(8)
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20,000
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4,200
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—
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—
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—
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—
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24,200
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C. Richard Kramlich(9)
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20,000
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—
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9,500
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—
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—
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—
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29,500
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Steven Levy(10)(12)
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30,000
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—
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9,500
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—
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—
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1,301
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40,801
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James Timmins(11)
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30,000
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—
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9,500
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—
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—
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—
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39,500
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(1)
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As described below, a director may elect to receive an equivalent amount of fully vested shares of Zhone common stock, in lieu of an annual cash retainer. The amounts
in this column include the annual retainer paid in cash and include the value of fully vested shares of Zhone common stock received in lieu of a specified portion of the non-employee director’s regular cash retainer based on the fair market
value of the shares on May 14, 2009, the date the regular annual cash retainer would otherwise have been paid. Based on each director’s prior election, Dr. Connors and Mr. Kramlich each received 14,285 shares with a grant date
fair value of $20,000, as calculated in accordance with SFAS 123R.
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(2)
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This column represents the grant date fair value of the stock awards granted to each of the non-employee directors who elected to receive their annual awards in the
form of restricted stock during 2009, as calculated in accordance with SFAS 123R. For stock awards, the grant date fair value is calculated using the closing price on the grant date as if these awards were vested and issued on the grant date. For
additional information on the valuation assumptions used in the calculation of these amounts, refer to note 7 to the financial statements included in the company’s annual report on Form 10-K for the year ended December 31, 2009, as filed
with the SEC.
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(3)
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This column represents the grant date fair value of the option awards granted to each of the non-employee directors who elected to receive their annual awards in the
form of stock options during 2009, as calculated in accordance with SFAS 123R. For additional information on the valuation assumptions used in the calculation of these amounts, refer to note 7 to the financial statements included in the
company’s annual report on Form 10-K for the year ended December 31, 2009, as filed with the SEC.
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27
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(4)
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Unless otherwise indicated, the aggregate amount of perquisites and other personal benefits, securities or property provided to each non-employee director, valued on
the basis of aggregate incremental cost to the company, was less than $10,000.
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(5)
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As of December 31, 2009, Dr. Connors had a total of 59,500 options.
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(6)
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In order to facilitate the role of Mr. Dahl as chair of the Audit Committee and to provide us with greater access to the chair, from time to time, we provide
Mr. Dahl with access to approximately 240 square feet of office space. Mr. Dahl owns and maintains separate phone, fax, server and computer systems. We do not incur any incremental costs in connection with the provision of this office
space.
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(7)
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As of December 31, 2009, Mr. Dahl had a total of 22,000 options and 2,687 shares of restricted stock.
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(8)
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As of December 31, 2009, Mr. Greene had a total of 22,235 options and 2,687 shares of restricted stock.
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(9)
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As of December 31, 2009, Mr. Kramlich had a total of 52,000 options.
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(10)
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As of December 31, 2009, Mr. Levy had a total of 40,000 options.
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(11)
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As of December 31, 2009, Mr. Timmins had a total of 52,000 options.
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(12)
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Mr. Levy resigned as a director on February 12, 2010.
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28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Review and Approval of Related Party Transactions
All relationships and transactions in which the company and our directors and executive officers or their immediate family members are
participants are reviewed by our Audit Committee or another independent body of the Board of Directors, such as the independent and disinterested members of the Board. As set forth in the Audit Committee charter, the members of the Audit Committee,
all of whom are independent directors, review and approve related party transactions for which such approval is required under applicable law, including SEC and Nasdaq rules. In the course of its review and approval or ratification of a disclosable
related party transaction, the Audit Committee or the independent and disinterested members of the Board may consider:
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•
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the nature of the related person’s interest in the transaction;
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•
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the material terms of the transaction, including, without limitation, the amount and type of transaction;
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•
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the importance of the transaction to the related person;
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•
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the importance of the transaction to the company;
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•
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whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the company; and
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•
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any other matters the Audit Committee deems appropriate.
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As required under SEC rules, transactions that are determined to be directly or indirectly material to the company or a related person are
disclosed in the company’s proxy statement.
Related Party Transactions
In the ordinary course of business, our executive officers and non-employee directors are reimbursed for travel related expenses when
incurred for business purposes. Consistent with this policy, we reimburse Mr. Ejabat for the direct operating expenses incurred in the use of his private aircraft when used for business purposes. The amount reimbursed to Mr. Ejabat for
this expense was $345,276 during the year ended December 31, 2009.
29
AUDIT COMMITTEE REPORT
The Audit Committee has been established for the purpose of overseeing the accounting and financial reporting processes of the company and
audits of Zhone’s financial statements and internal control over financial reporting. Zhone’s Audit Committee is made up solely of independent directors, as defined in the applicable Nasdaq and SEC rules, and it operates under a written
charter adopted by the Board of Directors. The composition of the Audit Committee, the attributes of its members and its responsibilities, as reflected in its charter, are intended to be in accordance with applicable requirements for corporate audit
committees. As described more fully in the charter, the purpose of the Audit Committee is to assist the Board in its general oversight of Zhone’s financial reporting, internal controls and audit functions. Management is responsible for the
preparation, presentation and integrity of Zhone’s financial statements, accounting and financial reporting principles, internal controls, and procedures designed to assure compliance with accounting standards, applicable laws and regulations.
KPMG LLP, Zhone’s independent registered public accounting firm, is responsible for performing an independent audit of Zhone’s consolidated financial statements in accordance with generally accepted auditing standards and expressing
opinions on management’s assessment of the effectiveness of Zhone’s internal control over financial reporting and the effectiveness of Zhone’s internal control over financial reporting. The Audit Committee periodically meets with
KPMG, with and without management present, to discuss the results of their examinations, their evaluations of Zhone’s internal controls and the overall quality of Zhone’s financial reporting. The Audit Committee members are not
professional accountants or auditors, and their functions are not intended to duplicate or to certify the activities of management and the independent registered public accounting firm, KPMG. The Audit Committee serves a board level oversight role,
in which it provides advice, counsel and direction to management and KPMG on the basis of the information it receives, discussions with management and KPMG, and the experience of the Audit Committee’s members in business, financial and
accounting matters.
In performing its oversight role, the Audit Committee reviewed and discussed the audited financial
statements with management and KPMG. The Audit Committee also discussed with KPMG the matters required to be discussed by SAS 114 (Codification of Statements on Auditing Standards, AU § 380), as may be modified or supplemented, including the
quality and acceptability of Zhone’s accounting principles as applied in its financial reporting. The Audit Committee has received the written disclosures and the letter from KPMG required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), as may be modified or supplemented, and has discussed with KPMG its independence from Zhone. In reliance on these reviews and discussions, and the reports of KPMG, the Audit Committee recommended to
the Board, and the Board approved, the inclusion of the audited financial statements in Zhone’s annual report on Form 10-K for the year ended December 31, 2009 for filing with the SEC.
Respectfully Submitted by the Audit Committee
Robert Dahl (Chairman)
James Timmins
30
OTHER MATTERS
We have not received notice of other matters that may be properly presented at the annual meeting other than those listed on the Notice of
Annual Meeting of Stockholders and discussed above. If other matters should properly come before the meeting, however, the persons named in the accompanying proxy will vote all proxies in their discretion.
Stockholder Proposals for Inclusion in Next Year’s Proxy Statement.
Stockholders of Zhone may submit proposals on matters
appropriate for stockholder action at meetings of our stockholders in accordance with Rule 14a-8 promulgated under the Securities Exchange Act of 1934. To be eligible for inclusion in the proxy statement relating to our 2011 annual meeting of
stockholders, proposals of stockholders must be received at our principal executive offices no later than December 2, 2010 (120 calendar days prior to the anniversary of the date of the proxy statement for our 2010 annual meeting) and must
otherwise satisfy the conditions established by the SEC for stockholder proposals to be included in the proxy statement for that meeting.
Stockholder Proposals for Presentation at Next Year’s Annual Meeting.
If a stockholder wishes to present a proposal, including a director nomination, at our 2011 annual meeting of stockholders
and the proposal is not intended to be included in our proxy statement relating to that meeting, the stockholder must give advance notice in writing to our Corporate Secretary prior to the deadline for such meeting determined in accordance with our
bylaws. Our bylaw notice deadline with respect to the 2011 annual meeting of stockholders is February 11, 2011 (90 calendar days prior to the anniversary of our 2010 annual meeting). If a stockholder gives notice of a proposal outside of the
bylaw notice deadline, the stockholder will not be permitted to present the proposal to the stockholders for a vote at our 2011 annual meeting. However, in the event that the 2011 annual meeting is advanced by more than 30 days or delayed by more
than 60 days from the anniversary of the 2010 annual meeting, to be timely, notice by the stockholder must be received by the later of (1) the close of business 90 days prior to the 2011 annual meeting or (2) the 10th day following the day
on which public announcement of the date of the 2011 annual meeting is first made. A stockholder’s notice must set forth the information required by our bylaws with respect to each matter the stockholder proposes to bring before the annual
meeting.
Notices
. All notices of proposals by stockholders, whether or not included in our proxy statement, should be
delivered to Zhone Technologies, Inc., Attn: Corporate Secretary, 7001 Oakport Street, Oakland, California 94621.
31
Ú
IF YOU HAVE NOT VOTED VIA THE INTERNET
OR
TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
Ú
Proxy — ZHONE TECHNOLOGIES, INC.
ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 2010
THIS PROXY IS SOLICITED ON
BEHALF OF THE ZHONE BOARD OF DIRECTORS
The undersigned revokes all previous proxies, acknowledges receipt of the notice of annual meeting
of stockholders and the accompanying proxy statement, and hereby appoints Morteza Ejabat and Kirk Misaka, jointly and severally, with full power of substitution to each, as proxies of the undersigned, to represent the undersigned and to vote all
shares of common stock of Zhone Technologies, Inc. that the undersigned is entitled to vote, either on his or her own behalf or on behalf of an entity or entities, at the annual meeting of stockholders of Zhone Technologies, Inc. to be held on
May 12, 2010 at 10:00 a.m. Pacific Time at 7001 Oakport Street, Oakland, California 94621, and at any adjournments or postponements thereof, with the same force and effect as the undersigned might or could do if personally present.
THE SHARES REPRESENTED BY THIS PROXY CARD WILL BE VOTED AS INSTRUCTED BY THE STOCKHOLDER. IF NO INSTRUCTIONS ARE SPECIFIED, THE SHARES WILL BE VOTED
IN ACCORDANCE WITH THE RECOMMENDATIONS OF THE BOARD OF DIRECTORS. IF ANY OTHER BUSINESS IS PROPERLY PRESENTED AT THE ANNUAL MEETING, OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF, THIS PROXY CARD WILL CONFER DISCRETIONARY AUTHORITY ON THE INDIVIDUALS
NAMED AS PROXIES TO VOTE THE SHARES REPRESENTED BY THE PROXIES IN ACCORDANCE WITH THEIR BEST JUDGMENT.
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SEE REVERSE
SIDE
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TO BE SIGNED AND DATED ON REVERSE SIDE
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SEE REVERSE
SIDE
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Electronic Voting Instructions
You can vote by Internet or telephone!
Available 24 hours a day, 7 days a week!
Instead of
mailing your proxy, you may choose one of the two voting methods outlined below to vote your proxy.
VALIDATION DETAILS ARE LOCATED BELOW IN THE TITLE BAR.
Proxies submitted by the Internet or telephone must be received by 10:00 A. M., PDT, on May 12, 2010.
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Vote by Internet
•Log on to the Internet and go to
www.envisionreports.com/ZHNE
•Follow the steps outlined on the secured
website.
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Vote by telephone
•Call toll free 1-800-652-VOTE (8683) within the USA, US territories & Canada any time on a touch tone
telephone. There is
NO CHARGE
to you for the call.
•Follow the instructions provided by the recorded message.
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Using a
black ink
pen, mark your votes with an
X
as shown in this example. Please do not write outside the designated areas.
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x
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Ú
IF YOU HAVE NOT VOTED VIA THE INTERNET
OR
TELEPHONE, FOLD ALONG THE PERFORATION, DETACH AND RETURN THE BOTTOM PORTION IN THE ENCLOSED ENVELOPE.
Ú
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A
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Proposals — The Zhone Board of Directors unanimously recommends that stockholders vote “FOR” the listed nominees.
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1. Election of Directors:
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For
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Withhold
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For
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Withhold
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For
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Withhold
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+
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01 - Morteza Ejabat
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¨
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¨
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02 - Michael Connors
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¨
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¨
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03 - James Timmins
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¨
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¨
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B
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Issues —The Zhone Board of Directors unanimously recommends that stockholders vote “FOR” Proposal 2.
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For
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Against
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Abstain
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2. Ratification of Appointment of KPMG LLP as Zhone’s Independent Registered Public Accounting Firm for the
fiscal year ending December 31, 2010.
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¨
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¨
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¨
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Change of Address
— Please print new address below.
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D
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Authorized Signatures — This section must be completed for your vote to be counted. — Date and Sign Below
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Please sign your name(s) EXACTLY as your name(s) appear(s) on this proxy card. If shares are held jointly, each joint holder must sign. When signing as trustee, executor,
administrator, guardian, attorney or corporate officer, please print your full title.
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Date (mm/dd/yyyy) — Please print date below.
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Signature 1 — Please keep signature within the box.
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Signature 2 — Please keep signature within the box.
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/ /
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<STOCK#>
Zhone Technologies (MM) (NASDAQ:ZHNED)
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Zhone Technologies (MM) (NASDAQ:ZHNED)
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