Zhone Technologies Annual Report 2004

the fair value of its reporting unit was performed at the Company level using a combination of the income, or
discounted cash flows, approach and the market approach, which utilizes comparable companies’ data. At
November 2004 and 2003, the Company performed the annual goodwill impairment test using the market
approach, reflecting the fact that the Company’s stock was publicly traded following the consummation of the
Tellium merger. No impairment charges have been recorded since the adoption of SFAS No. 142.
At December 31, 2004 and 2003, the Company had goodwill with a carrying value of $157.2 million and
$100.3 million, respectively.
Changes in the carrying amount of goodwill since the adoption of SFAS No. 142 were as follows (in
thousands):
Year ended December 31,
2004 2003
Beginning balance ....................................... $100,337 $ 70,828
Goodwill acquired ....................................... 57,193 29,786
Adjustments ............................................ (298) (277)
Ending balance ......................................... $157,232 $100,337
In accordance with SFAS No. 144, the Company reviews long-lived assets, including intangible assets other
than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of
any impairment is measured as the difference between the carrying value and the fair value of the impaired asset.
During the second quarter of 2004, the Company recorded an impairment charge of $0.2 million relating to
the Gluon acquired workforce, because the majority of the former Gluon employees were no longer employed by
the Company.
During the fourth quarter ended December 31, 2002, the Company identified impairment indicators, which
included a significant reduction in forecasted revenues and excess equipment and building capacity caused by the
restructuring during the year. The commercial real estate market in the San Francisco Bay Area also had been
negatively impacted by the downturn in the economy. Accordingly, the Company performed, with the assistance
of independent valuation experts, an impairment review of its other intangible assets and long-lived assets. The
results of the impairment review resulted in an impairment charge of $50.8 million, which consisted of the
following components: land, buildings and construction in process—$40.5 million, other property and
equipment—$9.8 million, and other assets—$0.5 million. The impairment charge resulted in the elimination of
historical accumulated depreciation and amortization for the long-lived assets that were written down. The
remaining balances are being depreciated and amortized over their remaining useful lives as determined by the
Company subsequent to the write-down.
The Company estimated the fair value of its long-lived assets based on a combination of the market, income
and replacement cost approaches. In the application of the impairment testing, the Company was required to
make estimates of future operating trends and resulting cash flows and judgments on discount rates and other
variables.
In the second quarter of 2002, the Company discontinued its wireless product line which included the analog
wireless design previously acquired from OptaPhone Networks. As a result, the Company recorded a noncash
impairment charge of $0.7 million because the estimated undiscounted future cash flows of these assets was less
than the carrying value of the purchased intangibles related to OptaPhone Networks.
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