Zhone Technologies, Inc. Reports Fourth Quarter and Year-End 2004 Fina

    Business Editors

    OAKLAND, Calif.--(BUSINESS WIRE)--Jan. 26, 2005--Zhone Technologies, Inc. (Nasdaq:ZHNE), the first company dedicated to building total-delivery solutions for voice, data and content services worldwide, today reported its results for the fourth quarter ended December 31, 2004.
    Revenue for the fourth quarter of 2004 was $28.1 million, compared with $23.3 million for the fourth quarter of 2003. Net loss for the fourth quarter of 2004, calculated in accordance with Generally Accepted Accounting Principles ("GAAP"), was $3.8 million compared with a net loss of $6.4 million applicable to common stockholders for the fourth quarter of 2003. Pro forma Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) calculated on a non-GAAP basis was $0.5 million for the fourth quarter of 2004, compared to a pro forma EBITDA non-GAAP loss of $6.2 million for the fourth quarter of 2003. A reconciliation between net loss calculated on a GAAP basis and pro forma EBITDA on a non-GAAP basis is provided in a table immediately following the Unaudited Condensed Consolidated Statements of Operations.
    Revenue for the year ended December 31, 2004 was $97.2 million, compared with $83.1 million for the year ended December 31, 2003. Net loss for the year ended December 31, 2004 calculated in accordance with GAAP was $35.6 million, compared with a net loss of $29.9 million applicable to common stockholders for year ended December 31, 2003. Pro forma EBITDA calculated on a non-GAAP basis was a loss of $11.0 million for the year ended December 31, 2004, compared to a non-GAAP pro forma EBITDA loss of $22.0 million for the year ended December 31, 2003.
    "For the first time in company history, we achieved positive pro forma EBITDA for the quarter and expect to do the same for 2005," said Mory Ejabat, Chairman and Chief Executive Officer of Zhone. "We continue to see strong revenue growth from our SLMS and optical transport products and increasing interest in our triple-play, IPTV and gigabit ethernet solutions in the future."
    Zhone will hold a conference call today, January 26, 2005, at approximately 2:00 p.m. Pacific Time to review its fourth quarter results. The call is open to the public by dialing 800-659-1942 for U.S. callers and 617-614-2710 for international callers and entering the passcode 68510488.
    Zhone has also scheduled this event to be broadcast live via webcast. To access this webcast please go to the Investor Relations section of the Zhone website at www.zhone.com/about/investors/. A replay of the webcast will be available on the website for at least 30 days. Additional investor information can be accessed at www.zhone.com or by calling Zhone's Investor Relations Department at 510-777-7013.

    Non-GAAP Financial Measures

    Non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles and may be different from non-GAAP financial measures used by other companies. Non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. The company's management refers to these non-GAAP financial measures in making operating decisions because they provide meaningful supplemental information regarding the company's operational performance, including the company's ability to provide cash flows to invest in research and development and fund acquisitions and capital expenditures. In addition, these non-GAAP financial measures facilitate management's internal comparisons to the company's historical operating results and comparisons to competitors' operating results. We include these non-GAAP financial measures in our earnings announcement because we believe they are useful to investors in allowing for greater transparency to supplemental information used by management in its financial and operational decision-making. Investors are encouraged to review the reconciliation of the non-GAAP financial measures used in this news release to their most directly comparable GAAP financial measure as provided with the financial statements attached to this news release.

    Forward-looking statements

    This press release contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Specifically, statements regarding growth, profitability, expected EBITDA in 2005, revenue from SLMS and optical transport products, and interest in triple-play solutions, are all forward-looking statements. These forward-looking statements are based on current expectations, forecasts and assumptions, and are subject to certain risks and uncertainties. As a result, actual results could differ materially from those projected in or contemplated by the forward-looking statements. Factors that could cause actual results to differ include, without limitation, our ability to generate sufficient revenue to achieve or sustain profitability, the economic slowdown in the telecommunications industry that has restricted the ability of our customers to purchase our products, the pace of spending in the telecommunications industry, commercial acceptance of our SLMS products, intense competition in the communications equipment market from large equipment companies as well as private companies that have announced plans for products that address the same networks needs as our products, and higher than anticipated expenses that we may incur. More detailed information about these risk factors, and additional risk factors, are set forth in Zhone's periodic filings with the Securities and Exchange Commission available at www.sec.gov, including, but not limited to, those risks and uncertainties listed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K filed for the year ended December 31, 2003 and our quarterly reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004 and September 30, 2004. Stockholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Zhone expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

    About Zhone Technologies, Inc. (Zhone)

    Zhone (Nasdaq:ZHNE) designs and manufactures network equipment for network operators worldwide. Zhone's products allow network operators to deliver a rich array of voice, data, video, and entertainment services over their existing networks while simultaneously retooling for converged packet based voice (VoIP) and video (IPTV) over copper or fiber access lines.
    Zhone's advanced networking solutions include the Single Line Multi-Service architecture (SLMS(TM)), Multi-Access Line Concentrator (MALC(TM)), Raptor(TM) ATM/IP DSLAMs, FiberSLAM(TM) Optical Line Terminal, Zhone Residential Gateways (ZRG(TM)), GigaMux(TM) Optical Transport Systems and Zhone Management System (ZMS(TM)). With over one million subscriber interfaces shipped and deployments at over 300 carriers including among some of the world's largest networks, Zhone has enabled network operators to reinvent their businesses. For more information, please visit www.zhone.com.

    Zhone, the Zhone logo, and all Zhone product names are trademarks of Zhone Technologies, Inc. Other brand and product names are trademarks of their respective holders. Specifications, products, and/or product names are all subject to change without notice. Copyright (C) 2005 Zhone Technologies, Inc. All rights reserved.

ZHONE TECHNOLOGIES, INC. Unaudited Condensed Consolidated Statements of Operations (In thousands, except per share data)

Three Months Ended Year Ended ------------------- ------------------- Dec. 31, Dec. 31, Dec. 31, Dec. 31, 2004 2003 2004 2003 --------- --------- --------- --------- Net revenue $28,102 $23,289 $97,168 $83,138 Cost of revenue 15,763 18,153 55,095 51,166 Stock-based compensation 29 70 210 (85) --------- --------- --------- --------- Gross profit 12,310 5,066 41,863 32,057 --------- --------- --------- --------- Operating expenses: Research and product development 5,904 6,784 23,210 22,495 Sales and marketing 5,288 2,797 21,958 15,859 General and administrative 1,567 2,172 10,416 5,324 Purchased in-process research and development -- -- 8,631 -- Litigation settlement -- -- -- 1,600 Stock-based compensation 131 1,905 1,396 1,238 Amortization and impairment of intangible assets 2,862 2,053 10,132 7,942 --------- --------- --------- --------- Total operating expenses 15,752 15,711 75,743 54,458 --------- --------- --------- --------- Operating loss (3,442) (10,645) (33,880) (22,401) Other income (expense), net (339) (588) (1,561) (2,552) --------- --------- --------- --------- Loss before income taxes (3,781) (11,233) (35,441) (24,953) Income tax provision (benefit) 62 (4,812) 205 (7,778) --------- --------- --------- --------- Net loss (3,843) (6,421) (35,646) (17,175) Accretion on preferred stock -- -- -- (12,700) --------- --------- --------- --------- Net loss applicable to holders of common stock $(3,843) $(6,421) $(35,646) $(29,875) ========= ========= ========= ========= Basic and diluted net loss per share applicable to holders of common stock $(0.04) $(0.15) $(0.42) $(1.87) Weighted average shares outstanding used to compute basic and diluted net loss per share applicable to holders of common stock 93,978 43,251 85,745 15,951

Reconciliation between GAAP net loss and non-GAAP pro forma EBITDA as follows: GAAP net loss $(3,843) $(6,421) $(35,646) $(29,875) Purchased in-process research and development -- -- 8,631 -- Litigation settlement -- -- -- 1,600 Stock-based compensation 160 1,975 1,606 1,153 Interest expense (net) 770 699 2,679 3,544 Income taxes 62 (4,812) 206 (7,778) Depreciation 470 345 1,394 1,381 Amortization and impairment of intangible assets 2,862 2,053 10,132 7,942 --------- --------- --------- --------- Non-GAAP pro forma EBITDA $481 $(6,161) $(10,998) $(22,033) ========= ========= ========= =========

Revenue by product line: SLMS 9,799 6,521 29,351 20,927 Legacy and Service 13,614 16,768 58,917 62,211 Optical Transport 4,689 -- 8,900 -- --------- --------- --------- --------- $28,102 $23,289 $97,168 $83,138 ========= ========= ========= =========

ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES Unaudited Condensed Consolidated Balance Sheets (In thousands)

December 31, December 31, 2004 2003 ------------ ------------

Assets Current assets: Cash, cash equivalents and short-term investments $65,216 $98,256 Accounts receivable 19,243 11,001 Inventories 37,352 24,281 Prepaid expenses and other current assets 3,949 3,905 ------------ ------------ Total current assets 125,760 137,443 Property and equipment, net 22,967 22,585 Goodwill 157,232 100,337 Other acquisition-related intangible assets 17,847 12,877 Restricted cash 758 622 Other assets 663 1,013 ------------ ------------ Total assets $325,227 $274,877 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $14,155 $17,797 Line of credit 14,500 4,800 Current portion of long-term debt 1,378 1,351 Accrued and other liabilities 23,938 31,194 ------------ ------------ Total current liabilities 53,971 55,142 Long-term debt, less current portion 39,935 32,040 Other long-term liabilities 1,537 816 ------------ ------------ Total liabilities 95,443 87,998 ------------ ------------ Stockholders' equity: Common stock 94 77 Additional paid-in capital 862,261 787,567 Other stockholders' equity (1,168) (5,008) Accumulated deficit (631,403) (595,757) ------------ ------------ Total stockholders' equity 229,784 186,879 ------------ ------------ Total liabilities and stockholders' equity $325,227 $274,877 ============ ============

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CONTACT: Zhone Technologies, Inc. Investor Relations, 510-777-7013 (Investors) investor-relations@zhone.com Jessica Mullens, 510-777-7020 (Media) jmullens@zhone.com

KEYWORD: CALIFORNIA INDUSTRY KEYWORD: HARDWARE TELECOMMUNICATIONS NETWORKING EARNINGS CONFERENCE CALLS SOURCE: Zhone Technologies, Inc.

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