Zhone Technologies Annual Report 2004

(f) Inventories
Inventories are stated at the lower of cost or market, with cost being determined using the first-in, firstout
(FIFO) method. In assessing the net realizable value of inventories, the Company is required to make
judgments as to future demand requirements and compare these with the current or committed inventory
levels. Once inventory has been written down to its estimated net realizable value, its carrying value cannot
be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in
forecasted demand occurs, or the Company experiences a higher incidence of inventory obsolescence due to
rapidly changing technology and customer requirements, the Company may incur significant charges for
excess inventory.
(g) Restructuring Charges
During 2002, the Company recorded charges of $4.5 million in connection with its restructuring
program in accordance with relevant guidance as summarized in SEC Staff Accounting Bulletin (“SAB”)
No. 100. The related reserves reflected many estimates, including those pertaining to severance and related
charges, facilities and lease cancellations and equipment write-offs. The Company assessed the reserve
requirements to complete each individual plan under its restructuring programs at the end of each reporting
period and recorded any adjustments as appropriate. Future restructuring charges, if any, will be recorded
under the provisions of SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”
or SFAS No. 112, “Employers Accounting for Post Employment Benefits.” As of December 31, 2004 and
2003, there were no liabilities associated with the Company’s restructuring programs.
(h) Cash and Cash Equivalents and Short Term Investments
The Company considers all cash and highly liquid investments purchased with an original maturity of
less than three months to be cash equivalents.
Short-term investments include securities with original maturities greater than three months and less
than one year. Short-term investments consisting principally of debt securities of domestic municipalities
and corporations have been classified as available-for-sale. Under this classification, the investments are
reported at fair value, with unrealized gains and losses excluded from results of operations and reported, net
of tax, as a component of other comprehensive loss in stockholders’ equity. Realized gains and losses and
declines in value judged to be other than temporary are included in results of operations. Gains and losses
from the sale of securities are based on the specific-identification method.
In accordance with EITF 03-1, the following summarizes the fair value and gross unrealized losses
related to available for sale securities, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position, at December 31, 2004 (in
thousands).
Less Than 12 Months
Fair Value Unrealized Loss
Corporate Bonds ............................................. $19,638 $(21)
(i) Fair Value of Financial Instruments
The carrying amounts of the Company’s financial instruments which include cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of
December 31, 2004 and 2003 due to the relatively short maturities of these instruments. The carrying value
of the Company’s debt obligations at December 31, 2004 and 2003 approximate fair value due to their
relatively short maturities, and the Company’s liquidity situation which would make default under these
obligations unlikely.
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