Zhone Technologies Annual Report 2004

Based on our current plans and business conditions, we believe that our existing cash, cash equivalents and
investments and available credit facilities will be sufficient to satisfy our anticipated cash requirements for at
least the next twelve months. However, we may require additional funds if our revenues or expenses fail to meet
our current projections or to support other purposes and may need to raise additional funds through debt or equity
financing or from other sources. There can be no assurances that additional funding will be available at all, or
that if available, such financing will be obtainable on terms favorable to us.
Contractual Commitments and Off-Balance Sheet Arrangements
At December 31, 2004, our future contractual commitments by fiscal year were as follows (in thousands):
Total 2005 2006 2007
2008
and beyond
Operating leases ..................... $ 1,928 $ 1,111 $ 471 $ 346 $—
Line of Credit ....................... 14,500 14,500 — — —
Debt ............................... 41,313 1,378 31,068 8,867 —
Inventory purchase commitments ........ 4,544 4,544 — — —
Total future contractual
commitments .................. $62,285 $21,533 $31,539 $9,213 —
The operating lease amounts shown above represent off-balance sheet arrangements to the extent that a
liability is not already recorded on our balance sheet. For operating lease commitments, a liability is generally
not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the
facility exit costs has been recorded on our balance sheet. Payments made under operating leases will be treated
as rent expense for the facilities currently being utilized. The debt and line of credit obligations have been
recorded on our balance sheet. The debt obligation amounts shown above represent the scheduled principal
repayments, including $31.1 million due in April 2006 in connection with our secured real estate loan, but not the
associated interest payments which may vary based on changes in market interest rates. At December 31, 2004,
the interest rate on our outstanding debt obligations ranged from 7.5% to 8%. Inventory purchase commitments
represent the amount of excess inventory purchase commitments that have been recorded on our balance sheet at
December 31, 2004.
We also had commitments under outstanding letters of credit totaling $0.4 million at December 31, 2004.
We have recorded restricted cash of $0.3 million on our balance sheet related to amounts outstanding under these
letters of credit.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) enacted Statement of Financial
Accounting Standards 123—revised 2004 (SFAS 123R), “Share-Based Payment” which replaces Statement of
Financial Accounting Standards No. 123 (SFAS 123), “Accounting for Stock-Based Compensation” and
supersedes APB Opinion No. 25 (APB 25), “Accounting for Stock Issued to Employees.” SFAS 123R requires
the measurement of all share-based payments to employees, including grants of employee stock options, using a
fair value-based method and the recording of such expense in our consolidated statements of income. The
accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005.
We are required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See
Note 1 in our Notes to Consolidated Financial Statements for the pro forma net loss and net loss per share
amounts, for fiscal 2002 through fiscal 2004, as if we had used a fair value-based method similar to the methods
required under SFAS 123R to measure compensation expense for employee stock incentive awards. We are
evaluating the requirements under SFAS 123R and, although we have not yet determined whether the adoption of
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