Zhone Technologies Annual Report 2004

Accrued liabilities related to this acquisition totaled $42.8 million, the most significant components of
which included management and employee severance related accruals of $22.8 million, an assumed line of
credit of $8.0 million, and facilities related exit costs of $2.4 million. Subsequent to the date of the
acquisition, the Company repaid the line of credit and made payments of $16.0 million to settle the tax
liabilities associated with the forgiveness of the pre-existing loans made to the senior management of
Tellium, as had been contemplated in the merger negotiations between the Company and Tellium.
Following the consummation of the acquisition, the Company discontinued the development efforts related
to the technology acquired from Tellium. As a result, the Company terminated substantially all of the former
Tellium employees and announced its intention to exit the Tellium headquarters facility. During 2004, the
Company recorded an adjustment to decrease goodwill by $0.3 million relating to the resolution of certain
liabilities associated with office closures and other costs, offset by additional severance incurred as a result
of the resolution of a contingent liability. A roll forward of the EITF 95-3 related activity was comprised as
follows (in thousands):
Severance
Facility Exit
Costs Total
Liability recorded at acquisition date ..................... $22,816 $ 2,372 $ 25,188
Cash payments ....................................... (19,574) — (19,574)
Balance at December 31, 2003 .......................... 3,242 2,372 5,614
Cash payments ....................................... (3,462) (1,639) (5,101)
Adjustments ......................................... 400 (83) 317
Balance at December 31, 2004 .......................... $ 180 $ 650 $ 830
The remaining costs accrued under EITF 95-3 are expected to be paid by the first half of 2005.
(d) NEC eLuminant Technologies
In February 2003, the Company acquired NEC eLuminant Technologies, Inc. (“eLuminant”), a
subsidiary of NEC USA, Inc., in exchange for total consideration of approximately $13.6 million consisting
of $10.1 million in stock, $3.2 million in assumed liabilities and $0.3 million in acquisition costs. The
Company issued approximately 4.2 million shares of Series B redeemable convertible preferred stock. The
value of the preferred stock issued was determined based on the results of a third party appraisal. The
purchase consideration was allocated to the fair values of the assets acquired as follows (in thousands):
Receivables and inventory .................................................... $ 4,652
Intangible assets ............................................................ 4,840
Goodwill .................................................................. 4,083
$13,575
Of the amount allocated to amortizable intangibles assets, $2.2 million was allocated to developed
technology, $1.7 million to customer list, and $1.0 million to patents and trademarks, which are being
amortized over an estimated useful life of three years.
eLuminant developed a family of multiplexers and digital loop carrier products. The primary reasons
for the acquisition of eLuminant were to gain access to its product portfolio, strengthen the Company’s
customer base and increase the Company’s workforce with experienced personnel. As of December 31,
2004, there were no accrued liabilities related to this acquisition.
44