SUMMARY

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its Annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions under “Where You Can Find More Information.”

The Annual Meeting

Proposals

At the annual meeting, holders of our common stock will be asked to approve the following proposals:

 

1.

To approve the Share Issuance in connection with the Merger;

 

2.

To approve, on a non-binding, advisory basis, certain compensation payable or that may become payable to Zhone’s named executives in connection with the Merger;

 

3.

To elect two members of the Zhone Board of Directors to serve for three-year terms as Class III Directors;

 

4.

To ratify the appointment of KPMG LLP as Zhone’s independent registered public accounting firm for the fiscal year ending December 31, 2016; and

 

5.

To approve the adjournment of the annual meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes at the time of the annual meeting to approve the Share Issuance.

Record Date, Quorum and Required Vote (page 33)

Only stockholders of record at the close of business on the record date, July 25, 2016, will be entitled to vote at the annual meeting. These stockholders are entitled to cast one vote for each share of common stock held as of the record date on all matters properly submitted for the vote of stockholders at the annual meeting. As of the record date, there were approximately 34,371,266 shares of Zhone common stock outstanding and entitled to vote at the annual meeting.

A quorum of stockholders is necessary to hold a valid annual meeting. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of common stock entitled to vote at the annual meeting is necessary to constitute a quorum at the annual meeting. In the election of directors, the two nominees who receive the highest number of affirmative votes will be elected as directors. All other proposals require the affirmative vote of a majority of the votes cast at the annual meeting.

Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present, but they will not be counted as votes cast on any matter. Generally, broker non-votes occur when shares held by a broker in “street name” for a beneficial owner are not voted with respect to a particular proposal because the broker does not have discretionary voting power with respect to that proposal and has not received voting instructions from the beneficial owner. Because abstentions and broker non-votes will not be considered votes cast, they will have no effect on the outcome of any proposal.

Admission to the Annual Meeting (page 35)

Only Zhone stockholders, as of the close of business on July 25, 2016, and other persons holding valid proxies for the annual meeting are entitled to attend the annual meeting. You should be prepared to present valid

 

government issued photo identification for admittance. In addition, if you are not a stockholder of record but hold shares in “street name,” you will need to provide proof of ownership by bringing either a copy of the voting instruction card provided by your broker or a copy of a brokerage statement showing your share ownership as of July 25, 2016. If you do not provide photo identification or comply with the other procedures outlined above, you will not be admitted to the annual meeting. The annual meeting will be held at our principal executive offices, located at 7195 Oakport Street, Oakland, California 94621. For directions, please call (510) 777-7000.

Revocation (page 34)

You may revoke your proxy at any time before your proxy is voted at the annual meeting by taking any of the following actions: (1) submitting another proxy card bearing a later date, (2) delivering written notice of revocation to Zhone’s Corporate Secretary at 7195 Oakport Street, Oakland, California 94621, or (3) attending the annual meeting and voting in person, although attendance at the annual meeting will not, by itself, revoke a proxy. If your shares are held in “street name,” you must contact your broker, bank or other nominee to revoke any prior instructions.

Adjournments (page 35)

Although it is not currently expected, the annual meeting may be adjourned for the purpose of soliciting additional proxies if the holders of a sufficient number of shares of common stock are not present at the annual meeting, in person or by proxy, to constitute a quorum or if we believe it is reasonably likely that the Share Issuance will not be approved at the annual meeting when convened on September 8, 2016, or when reconvened following any adjournment. Any adjournment may be made for up to than 30 days without notice (other than by an announcement at the annual meeting) by the affirmative vote of a majority of the votes cast on the proposal to approve the adjournment, whether or not a quorum exists.

Proxy Solicitation Costs (page 35)

We will bear the entire cost of this solicitation of proxies, including the preparation, assembly, printing, and mailing of this proxy statement and any additional solicitation material that we may provide to stockholders. The original solicitation of proxies by mail may be supplemented by solicitation by mail, telephone, fax, personal interviews or other methods of communication by our directors, officers and employees. We will not pay any additional compensation to directors, officers or other employees for such services, but may reimburse them for reasonable out-of-pocket expenses in connection with such solicitation. Zhone does not currently intend to retain any proxy solicitation firm to assist in soliciting proxies.

Questions and Additional Information (143)

If you have any questions, or need assistance in submitting your proxy or voting your shares, please contact us at Zhone Technologies, Inc., Attention: Investor Relations, 7195 Oakport Street, Oakland, California 94621, or by calling us at (510) 777-7013. Electronic copies of our proxy statement and our annual report are available at the Investor Relations section of our website at www.zhone.com.

The Merger (page 37)

On April 11, 2016, Zhone entered into the Merger Agreement with DASAN, DNS and Merger Sub. Under the Merger Agreement, on and subject to the terms and conditions set forth therein, Zhone has agreed to acquire DNS from DASAN through the Merger of Merger Sub with and into DNS, with DNS surviving as a wholly owned subsidiary of Zhone, in exchange for shares of Zhone common stock to be issued to DASAN. As a result of the Merger, DASAN will receive shares of Zhone common stock in an amount equal to 58% of the issued and outstanding shares of Zhone common stock immediately following the Merger, and Zhone’s then-existing stockholders will retain 42% of such shares.

 

The Merger will become effective upon the filing of an agreement of merger with respect to the Merger with the Secretary of State of the State of California, together with the officer’s certificate required by the California General Corporation Law, or CGCL, or on such other date and time as may be agreed to by us and DASAN. We use the term Effective Time in this proxy statement to refer to the time the Merger becomes effective.

In connection with the Merger, Zhone will change its name to “DASAN Zhone Solutions, Inc.” and we expect that shares of Zhone common stock will commence trading on the Nasdaq Capital Market under the ticker symbol DZSI on the first trading day following the Merger.

Parties to the Merger (page 37)

Zhone Technologies, Inc.

7195 Oakport Street

Oakland, California 94621

(510) 777-7000

Zhone Technologies, Inc., which we refer to as “we,” “our,” “us” or “Zhone,” was incorporated in Delaware in June 1999. Zhone designs, develops and manufactures communications network equipment for enterprises and telecommunications operators worldwide. Zhone’s products enable both enterprises and network service providers to deliver high speed fiber access, while transporting voice, video and data to the end user. Zhone’s products include both legacy solutions and next-generation solutions based on a Single Line Multi-Service (SLMS) architecture.

Dragon Acquisition Corporation

7195 Oakport Street

Oakland, California 94621

(510) 777-7000

Dragon Acquisition Corporation, which we refer to as Merger Sub, is a California corporation and wholly owned subsidiary of Zhone. Merger Sub was formed solely for purposes of facilitating Zhone’s acquisition of DNS and has not carried on any activities to date, except for activities incidental to its formation and activities undertaken in connection with the transactions contemplated by the Merger Agreement. Pursuant to the Merger Agreement, at the Effective Time Merger Sub will merge with and into DNS, and DNS will continue as the surviving corporation.

DASAN Networks, Inc.

Dasan Tower, 49 Daewangpangyo-ro 644beon-gil, Bundang-gu, Seongnam-si

Gyeonggi-do, Korea

DASAN Networks, Inc., which we refer to as DASAN, is a publicly traded company organized under the laws of the Republic of Korea. DASAN is a global network solutions provider that develops and manufactures network equipment for fixed and mobile broadband services.

Dasan Network Solutions, Inc.

5000 Research Court, Suite #700

Suwanee, Georgia 30024

Dasan Network Solutions, Inc., which we refer to as DNS, is a wholly owned subsidiary of DASAN incorporated under the laws of California. DNS focuses on the provision of services to telecommunications network operators in the United States.

 

Issuance of Zhone Common Stock in the Merger (page 37)

Pursuant to the terms and conditions set forth in the Merger Agreement, at the Effective Time, all issued and outstanding shares of DNS capital stock, all of which are held by DASAN, will be canceled and converted into the right to receive, in the aggregate, that number of validly issued, fully paid and nonassessable shares of Zhone common stock as is determined by dividing (i) the number of shares of Zhone common stock issued and outstanding immediately prior to the Effective Time by (ii) 0.42, rounded to the nearest whole share, and subtracting from such quotient the number of shares of Zhone common stock issued and outstanding immediately prior to the Effective Time. As a result of the Merger, DASAN will receive shares of Zhone common stock in an amount equal to 58% of the issued and outstanding shares of DASAN Zhone common stock immediately following the Merger, and Zhone’s then-existing stockholders will retain 42% of such shares.

Reasons for the Merger; Recommendation of the Board (page 47)

After careful consideration of various factors described in the section entitled “The Merger—Reasons for the Merger,” the Zhone Board of Directors has unanimously determined that the Merger and the Merger Agreement are advisable and in the best interests of Zhone and its stockholders and unanimously approved the Merger and the Merger Agreement. The Board of Directors unanimously resolved that the Share Issuance be submitted for consideration by Zhone stockholders at a meeting of our stockholders and unanimously recommended that Zhone stockholders vote “FOR” the proposal to approve the Share Issuance.

In considering the recommendation of the Board of Directors with respect to the proposal to approve the Share Issuance, you should be aware that our directors, executive officers and senior managers may have interests in the Merger that are different from, or in addition to, yours. The Board of Directors was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement and the Merger, and in recommending that the Share Issuance be approved by our stockholders. See the section entitled “The Merger—Interests of Our Directors, Executive Officers and Senior Managers in the Merger.”

Opinion of Our Financial Advisor (page 53 and Annex C)

Zhone retained Cowen and Company, LLC (which we refer to as Cowen) to act as its financial advisor in connection with the Merger. In connection with the Merger, Cowen delivered its opinion to the Zhone Board of Directors, to the effect that and subject to the various assumptions and limitations set forth therein, as of April 11, 2016, the merger consideration to be paid by Zhone in the Merger was fair, from a financial point of view, to Zhone. The full text of the written opinion of Cowen, dated April 11, 2016, is attached as Annex C to this proxy statement and is incorporated herein by reference. Zhone encourages holders of Zhone common stock to read the opinion in its entirety for the assumptions made, procedures followed, other matters considered and limits of the review by Cowen. The summary of the written opinion of Cowen set forth herein is qualified in its entirety by reference to the full text of such opinion. Cowen’s analyses and opinion were prepared for and addressed to the Zhone Board of Directors and are directed only to the fairness, from a financial point of view, of the merger consideration to be paid by Zhone in the Merger. Cowen’s opinion is not a recommendation to any Zhone stockholder or any other person as to how to vote with respect to the Share Issuance or to take any other action in connection with the Merger or otherwise.

 

Interests of Our Directors, Executive Officers and Senior Managers in the Merger (page 61)

When considering the recommendations of the Board of Directors, you should be aware that Zhone’s directors, executive officers and senior managers may have interests in the Merger that are different from, or in addition to, those of Zhone stockholders generally. These interests may present such persons with actual or potential conflicts of interest. The Board of Directors was aware of these interests during its deliberations on the merits of the transactions and in deciding to recommend that our stockholders vote in favor of the Share Issuance at the annual meeting. These interests include:

 

•

A plan to enter into agreements with Zhone executive officers to compensate them for the successful consummation of the Merger, comprising compensation of $1,000,000 for James Norrod and $500,000 for Kirk Misaka;

 

•

New employment agreements to be entered into with the executive officers of DASAN Zhone (including Messrs. Norrod and Misaka) at the time of the Merger;

 

•

A new non-employee director compensation program for the non-employee directors of DASAN Zhone following the Merger; and

 

•

A plan to accelerate the unvested equity awards held by the Zhone directors who will be resigning in connection with the Merger.

See also “– Board and Management of DASAN Zhone Following the Merger” below.

Board and Management of DASAN Zhone Following the Merger (page 64)

The Merger Agreement contains certain provisions relating to the governance of DASAN Zhone following completion of the Merger, which reflect the merger of equals structure of the proposed transaction. In connection with the Merger, DASAN Zhone will adopt amended and restated bylaws in the form included as Annex B to this proxy statement to implement certain governance matters for a two-year period following the completion of the Merger, which we refer to as the DASAN Zhone Bylaws.

Under the Merger Agreement and the DASAN Zhone Bylaws, for a period of two years from the consummation of the Merger, the Board of Directors of DASAN Zhone will have seven members, consisting of four directors appointed by DASAN and three directors appointed by Zhone. DASAN has informed us that it intends to designate Min Woo Nam, Il Yung Kim, Seong Gyun Kim and Sung-Bin Park as its appointees to the DASAN Zhone Board of Directors upon the consummation of the Merger. Mr. Nam is currently the Chief Executive Officer and Chairman of the Board of DASAN. Mr. Il Yung Kim is currently a consultant of DASAN and will serve as the Co-Chief Executive Officer of DASAN Zhone following the consummation of the Merger as described below. Mr. Seong Gyun Kim is the Chief Financial Officer and a director of Finetex EnE, Inc., a nanofiber technology company listed on KOSDAQ. Mr. Park is a co-founder and Managing Director of TransLink Capital (a U.S.-based venture capital firm), and is also a founder and Chief Executive Officer of SPK Inc. (which provides Korean business development services to U.S.-based start-ups) and Spark and Associates (a consulting firm providing big data analytics services). We anticipate that the Zhone designees to the Board of Directors of DASAN Zhone will be existing directors James Norrod, Michael Connors and C. Richard Kramlich.

Under the Merger Agreement, DASAN Zhone is required to appoint two Co-Chief Executive Officers, consisting of James Norrod (Zhone’s current Chief Executive Officer) and Il Yung Kim (who has been designated by DASAN) upon the consummation of the Merger. Under the DASAN Zhone Bylaws, for a period of one year from the consummation of the Merger, neither Mr. Norrod nor Mr. Kim may be removed from the office of Co-Chief Executive Officer of DASAN Zhone without the affirmative vote of at least two-thirds of the non-executive directors of the Board of Directors. Kirk Misaka (Zhone’s current Chief Financial Officer) will serve as the Chief Financial Officer of DASAN Zhone and Eric Presworsky (Zhone’s current Vice President, Chief Technology Officer) will serve as the Vice President, Chief Technology Officer of DASAN Zhone.

 

Go-Shop Period; Restrictions on Solicitation of Acquisition Proposals (page 74)

Under the terms of the Merger Agreement, during the period beginning on the date of the Merger Agreement and continuing until 11:59 p.m., Pacific time, on May 26, 2016, Zhone and its representatives (as defined in the Merger Agreement) were permitted to initiate, solicit and encourage acquisition proposals (as defined in the section entitled “The Merger Agreement—Go Shop Period; Restriction on Solicitation of Acquisition Proposals”) from third parties and provide non-public information to and participate in discussions and engage in negotiations with third parties with respect to acquisition proposals, subject to the terms of the Merger Agreement.

From and after May 27, 2016, which we refer to as the no-shop start date, Zhone has agreed not to solicit or enter into an agreement regarding an acquisition proposal, and, subject to certain exceptions, is not permitted to enter into discussions or negotiations concerning, or provide non-public information to a third party in connection with, any acquisition proposal. However, Zhone may, prior to obtaining stockholder approval with respect to the Share Issuance, engage in discussions or negotiations and provide non-public information to a third party which has made an unsolicited written bona fide acquisition proposal that was not solicited after the no-shop start date if Zhone’s Board of Directors determines in good faith, after consultation with outside legal counsel and financial advisors, that such acquisition proposal constitutes, or could reasonably be expected to lead to, a superior proposal (as defined in the section entitled “The Merger Agreement—Go Shop Period; Restriction on Solicitation of Acquisition Proposals”) and where the Zhone Board of Directors reasonably determines in good faith, after consultation with outside legal counsel, that failure to take such actions would reasonably be expected to be inconsistent with its fiduciary duties under applicable law.

Under certain circumstances and after following certain procedures and adhering to certain restrictions, we are permitted to terminate the Merger Agreement if our Board of Directors of directors approves, and concurrently with the termination of the Merger Agreement, we enter into, a definitive agreement providing for the implementation of a superior proposal (it being understood that such termination will not be effective and we will not enter into any such agreement unless we pay a $2.5 million termination fee to DASAN (as described below) concurrently with such termination).

Conditions to the Merger (page 76)

Completion of the Merger depends upon the satisfaction or waiver of a number of conditions, including, among others, that:

 

•

the Share Issuance must have been approved by the requisite majority of Zhone stockholders;

 

•

no governmental entity, court of competent jurisdiction or arbitrator must have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, executive order, decree, judgment, injunction or arbitration award or finding or other order (whether temporary, preliminary or permanent), in any case, which is then in effect and prevents or prohibits consummation of the Merger or any other transactions contemplated by the Merger Agreement;

 

•

any waiting period (and any extension thereof) applicable to the consummation of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder, which we refer to as the HSR Act, and the antitrust or competition laws of any other applicable jurisdiction must have expired or been terminated;

 

•

the shares of DASAN Zhone common stock, including the shares of Zhone common stock issuable to DASAN in connection with the Merger, must have been approved for listing on Nasdaq;

 

•

any review, investigation or other proceeding by the Committee on Foreign Investment in the United States, which we refer to as CFIUS, must have been favorably concluded (which condition was satisfied in June 2016);

 

•

Zhone’s and Merger Sub’s and DASAN’s and DNS’ respective representations and warranties in the Merger Agreement must be true and correct in the manner described under the section entitled “The Merger Agreement—Conditions to the Merger”;

 

•

Zhone and Merger Sub and DASAN and DNS must have performed or complied, in all material respects, with their respective agreements and covenants required by the Merger Agreement to be performed or complied with on or prior to the Effective Time;

 

•

Zhone must have obtained certain consents, approvals and authorizations of third parties;

 

•

Zhone, DASAN and the escrow agent must have executed and delivered the Escrow Agreement;

 

•

DASAN and certain officers, directors and stockholders of Zhone must have executed and delivered the Lock-Up Agreement;

 

•

Zhone and DASAN must have executed and delivered certain other ancillary agreements, including the Stockholder Agreement, the Registration Rights Agreement and the Loan Agreement;

 

•

Dasan Network Solutions, Inc. (Korea), a wholly owned subsidiary of DNS which we refer to as DNS Korea, must have net cash on hand of not less than 13 Billion Won; and

 

•

from the date of the Merger Agreement through the Effective Time, there must not have occurred any change, effect or circumstance that has had or would reasonably be expected to have a material adverse effect on either DNS or Zhone.

Termination of the Merger Agreement (page 78)

Zhone and DASAN may mutually agree to terminate the Merger Agreement and abandon the Merger at any time prior to the Effective Time, even after we have obtained the requisite vote of our stockholders to approve the Share Issuance.

Termination by either Zhone or DASAN (page 78)

In addition, Zhone, on the one hand, or DASAN, on the other hand, may terminate the Merger Agreement by written notice to the other at any time prior to the Effective Time, even after we have obtained the requisite vote of Zhone stockholders to approve the Share Issuance, if:

 

•

the Merger shall not have been consummated by December 31, 2016, provided that such right to terminate the Merger Agreement shall not be available to Zhone if Zhone or Merger Sub, or to DASAN, if DASAN or DNS, as applicable, has breached in any material respect its obligations under the Merger Agreement in any manner that has caused or resulted in the failure to consummate the Merger on or before December 31, 2016;

 

•

any governmental entity shall have issued an order, decree or ruling or taken any other action in each case permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by the Merger Agreement, and such order, decree, ruling or other action has become final and non-appealable; or

 

•

the requisite vote of Zhone stockholders to approve Share Issuance has not been obtained at the duly held stockholders’ meeting or any adjournment or postponement thereof, provided that such right to terminate the Merger Agreement is not available to Zhone if the failure to obtain the requisite vote of Zhone stockholders shall have been caused by the action or failure to act of Zhone and such action or failure to act constitutes a material breach by Zhone of the Merger Agreement.

 

Termination by Zhone (page 78)

Zhone may also terminate the Merger Agreement by written notice to DASAN at any time prior to the Effective Time, even after we have obtained the requisite vote of Zhone stockholders to approve the Share Issuance, if:

 

•

Zhone has received a superior proposal and the Zhone Board of Directors reasonably determines in good faith, after consultation with outside legal counsel, that it is necessary to terminate the Merger Agreement and enter into an agreement to effect such superior proposal in order to comply with its fiduciary duties under applicable law, provided that Zhone may not so terminate the Merger Agreement unless (1) it has first compiled with all restrictions described under the heading “The Merger Agreement—Go Shop Period; Restrictions on Solicitation of Acquisition Proposals,” (2) five business days have elapsed following delivery to DNS of a written notice of such determination and during such period, Zhone has negotiated in good faith with DASAN and DASAN has not submitted a binding offer that the Zhone Board of Directors has determined in its good faith judgment to be at least as favorable to Zhone stockholders as such superior proposal and (3) prior to such termination, Zhone shall have paid the termination fee to DASAN (as described under “The Merger Agreement—Termination Fees and Expenses” below); or

 

•

DASAN or DNS shall have breached any of their respective representations, warranties, covenants or agreements contained in the Merger Agreement such that the closing conditions relating to DASAN and DNS’ representations, warranties, covenants or agreements would not be satisfied and that such breach is not cured within 20 days (or prior to December 31, 2016, if sooner), provided that neither Zhone nor Merger Sub is in material breach of its obligations or its representations and warranties under the Merger Agreement and that Zhone shall provide written notice to DASAN at least 20 days prior to such termination stating the intention to terminate and the basis for such termination.

Termination by DASAN (page 79)

DASAN may also terminate the Merger Agreement by written notice to Zhone at any time prior to the Effective Time, even after we have obtained the requisite vote of Zhone stockholders to approve the Share Issuance, if:

 

•

Zhone or Merger Sub shall have breached any of their respective representations, warranties, covenants or agreements contained in the Merger Agreement such that the closing conditions relating to Zhone’s and Merger Sub’s representations, warranties, covenants or agreements would not be satisfied and that such breach is not cured within 20 days (or prior to December 31, 2016, if sooner), provided that neither DASAN nor DNS is in material breach of its obligations or its representations and warranties under the Merger Agreement and that DASAN shall provide written notice to Zhone at least 20 days prior to such termination stating the intention to terminate and the basis for such termination;

 

•

Zhone’s Board of Directors shall have (1) approved or recommended to its stockholders, or resolved to approve or recommend to its stockholders, or (2) entered into, or resolved to enter into, any agreement with respect to, an acquisition proposal other than that contemplated by the Merger Agreement; or

 

•

Zhone’s Board of Directors fails to recommend approval of the Share Issuance, or has withdrawn, or adversely modified or changed, or resolved to withdraw or adversely modify or change such recommendation.

 

Termination Fees and Expenses (page 79)

Payment of Expenses (page 79)

The Merger Agreement provides that upon termination of the Merger Agreement:

 

•

by DASAN, pursuant to the provision described in the first bullet under “The Merger Agreement—Termination of the Merger Agreement—Termination by DASAN,” Zhone is required to reimburse DASAN an amount equal to DASAN’s reasonable out-of-pocket expenses incurred relating to the Merger and the Merger Agreement, in an amount up to $5.0 million; and

 

•

by Zhone pursuant to the provision described in the second bullet under “The Merger Agreement—Termination of the Merger Agreement—Termination by Zhone,” DASAN is required to reimburse Zhone an amount equal to Zhone’s reasonable out-of-pocket expenses incurred relating to the Merger and the Merger Agreement, in an amount up to $5.0 million.

Termination Fee Payable by Zhone (page 79)

Zhone has agreed to pay DASAN a termination fee of $2.5 million, which we refer to as the Termination Fee, if:

 

•

DASAN terminates the Merger Agreement pursuant to the provision described in the second bullet or the third bullet under “The Merger Agreement—Termination of the Merger Agreement—Termination by DASAN”;

 

•

Zhone terminates the Merger Agreement pursuant to the provision described in the first bullet under “The Merger Agreement—Termination of the Merger Agreement—Termination by Zhone”; or

 

•

both of the following requirements are satisfied: (1) either Zhone or DASAN terminates the Merger Agreement pursuant to the provisions described in the first bullet under “The Merger Agreement—Termination of the Merger Agreement—Termination by either Zhone or DASAN” and (2)(i) at any time following the date of the Merger Agreement and prior to the termination of the Merger Agreement, an acquisition proposal for Zhone has been publicly made, proposed or communicated and not withdrawn and (ii) within 12 months following the termination of the Merger Agreement, Zhone consummates such acquisition proposal.

Escrow, Indemnification and Remedies (page 80)

The representations and warranties of the parties to the Merger Agreement will survive the consummation of the Merger for a period of two years following the Effective Time. During such period, each of Zhone and DASAN has agreed to indemnify the other party for breaches of representations, warranties, covenants and agreements by the indemnifying party, subject to certain exceptions and exclusions. A portion equal to approximately 10% of the total number of shares of Zhone common stock to be issued to DASAN pursuant to the Merger Agreement will be placed into escrow for a period of two years to provide the sole source of indemnification for any post-closing indemnification claims against DASAN. If DASAN is entitled to any post-closing indemnification payments as a result of successful claims against Zhone, such payments will be satisfied solely by payment in cash in U.S. dollars by Zhone.

At the Effective Time, the Board of Directors shall form a three-member standing committee composed of the members of the Board of Directors designated by Zhone pursuant to the Merger Agreement, which we refer to as the Special Committee. The Special Committee shall be responsible, among other matters, for the evaluation of potential claims for losses and indemnification rights under the Merger Agreement and the exercise or waiver of any of Zhone’s rights, benefits or remedies under the Merger Agreement. After the Effective Time, the Merger Agreement requires DASAN to deal exclusively with the Special Committee on all indemnification matters under the Merger Agreement.

 

Regulatory Clearances and Other Approvals (page 65)

The Merger is conditioned upon any applicable waiting period under the HSR Act and the antitrust or competition laws of any other applicable jurisdiction having expired or been terminated. As of the time of filing this proxy statement, Zhone and DASAN have determined that no such filings are required under the HSR Act or the antitrust or competition laws of any other applicable jurisdiction.

The Merger Agreement also provides for the parties to file a joint voluntary notice with CFIUS, pursuant to Section 721 of the Defense Production Act of 1950, as amended, which we refer to as the DPA, and associated implementing regulations at 31 CFR Part 800, et seq. Under the terms of the Merger Agreement, completion of the Merger is subject to the condition that any review or investigation by CFIUS shall have been concluded and that either (i) the parties shall have received written notice that a determination by CFIUS has been made that there are no issues of national security of the United States sufficient to warrant further review or investigation pursuant to Section 721 of the DPA to suspend or prohibit the consummation of the transactions contemplated by the Merger Agreement or (ii) the President of the United States shall not have acted pursuant to Section 721 of the DPA to suspend or prohibit the consummation of the Merger, and the applicable time period for the President to take such action shall have expired. Zhone and DASAN filed the joint voluntary notice with CFIUS on May 16, 2016, and received written notice from CFIUS on June 22, 2016 regarding the favorable conclusion of its review.

While we have no reason to believe it will not be possible to obtain regulatory approvals in a timely manner or without the imposition of burdensome conditions, there is no certainty that these approvals will be obtained within the period of time contemplated by the Merger Agreement or that any such approvals would not be conditioned upon mitigation actions unacceptable to the parties, or that a regulatory challenge to the Merger will not be made.

Federal Securities Law Consequences; Resale Restrictions (page 66)

The shares of Zhone common stock to be issued in connection with the Merger to DASAN will be “restricted securities.” Those shares of Zhone common stock will not be registered under the Securities Act of 1933, as amended, which we refer to as the Securities Act, upon issuance and will not be freely transferable. DASAN may not sell its shares of Zhone common stock acquired in connection with the Merger unless the shares are registered under the Securities Act or an exemption is available under the Securities Act. In connection with the Merger, as described in the “Ancillary Agreements—Registration Rights Agreement,” DASAN Zhone will enter into a Registration Rights Agreement with DASAN at the closing of the Merger pursuant to which it may be obligated to register the shares of DASAN Zhone common stock issued to DASAN in the Merger.

No Dissenters’ or Appraisal Rights (page 67)

No Zhone stockholder will be entitled to any dissenters’ or appraisal rights in connection with the Merger. Because Zhone is not a constituent corporation in the Merger, Zhone stockholders will continue to hold their shares of Zhone common stock following the Merger.

Accounting Treatment of the Transaction (page 67)

Although the parties have structured the transaction as a merger of equals, GAAP requires that one party to the transaction be identified as the acquirer. Based on a number of factors viewed as of the date of this proxy statement, including the relative voting rights of DASAN and legacy Zhone stockholders in DASAN Zhone anticipated to exist upon the completion of the Merger, the transaction is expected to be accounted for as a business combination, with DASAN as the accounting acquirer and Zhone as the accounting acquiree.

 

Ancillary Agreements (page 81)

Voting Agreement (page 81)

In connection with the entry into the Merger Agreement, and as an inducement to DASAN’s and DNS’ willingness to enter into the Merger Agreement, on April 11, 2016, the directors and executive officers of Zhone and certain stockholders of Zhone entered into a Voting Agreement with DASAN, which we refer to as the Voting Agreement, pursuant to which such persons and stockholders have agreed, on the terms set forth therein, to vote their shares of Zhone common stock in favor of the Share Issuance and against any acquisition or any proposal relating to an acquisition proposal, and to certain other matters.

Loan Agreement (page 81)

As a condition to the Merger, DASAN has agreed to enter into a Loan Agreement with DASAN Zhone at the closing of the Merger, pursuant to which DASAN will provide DASAN Zhone with a $5.0 million subordinated term loan facility. Under the Loan Agreement, DASAN Zhone will be permitted to request drawdowns of one or more term loans in an aggregate principal amount not to exceed $5.0 million. Such term loans will mature on the fifth anniversary of the initial funding date, will be pre-payable at any time without premium or penalty, and will bear interest at a rate to be specified (which will be no less favorable to DASAN Zhone than the interest rate charged by DASAN for its intercompany loans). The Loan Agreement will also contain customary covenants and events of default.

Lock-Up Agreement (page 81)

As a condition to the Merger, DASAN, each of the existing directors and executive officers of Zhone, each of the directors and executive officers of DASAN Zhone appointed at the closing, and certain existing significant stockholders of Zhone will enter into a Lock-Up Agreement, pursuant to which such persons and stockholders will agree not to offer, sell or otherwise dispose of any shares of DASAN Zhone common stock, or any options or warrants to purchase DASAN Zhone common stock, for a period of 180 days from the Effective Time (or for a period of 90 days from the Effective Time, in respect of certain existing significant stockholders of Zhone), subject to customary exceptions.

Registration Rights Agreement (page 81)

As a condition to the Merger, Zhone has agreed to enter into a Registration Rights Agreement with DASAN at the closing of the Merger, which will provide DASAN with the right to demand that DASAN Zhone register the shares of DASAN Zhone common stock issued to DASAN in the Merger and will also provide DASAN with piggyback registration rights for such shares of Zhone common stock.

Stockholder Agreement (page 82)

As a condition to the Merger, DASAN has agreed to enter into a Stockholder Agreement with DASAN Zhone, pursuant to which DASAN has agreed, on the terms set forth therein, to vote its shares of DASAN Zhone common stock (1) in favor of the election of each person who is nominated by the Board of Directors (or a committee thereof) following the Effective Time for election to the Board of Directors in accordance with the DASAN Zhone Bylaws and (2) against the removal of any such director unless such removal is recommended by a resolution approved by the affirmative vote of at least two-thirds of the entire Board of Directors. The term of the Stockholder Agreement will expire on the second anniversary of the Effective Time (provided that such voting obligations expire with respect to the election of the Zhone designated Co-Chief Executive Officer to the Board of Directors on the first anniversary of the Effective Time).

 

SUMMARY HISTORICAL AND UNAUDITED PRO FORMA FINANCIAL DATA

The following summary financial data is being provided to help you in your analysis of the financial aspects of the Merger. You should read this information in conjunction with the financial information included elsewhere and incorporated by reference in this proxy statement. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions under “Where You Can Find More Information.”

Summary Historical Financial Information of Zhone

The following tables present a summary of Zhone’s selected historical financial data derived from its last five years of financial statements and from its unaudited financial statements for the three months ended March 31, 2016. The financial data for each of the years ended December 31, 2015, 2014 and 2013 is derived from Zhone’s audited consolidated financial statements included in Zhone’s Annual Report on Form 10-K for the year ended December 31, 2015, which is incorporated into this proxy statement by reference. The financial data for each of the fiscal years ended December 30, 2012 and December 31, 2011 is derived from Zhone’s audited consolidated financial statements for such years, which have not been incorporated by reference into this proxy statement. The financial data for Zhone as of and for the three months ended March 31, 2016 and 2015 is derived from Zhone’s unaudited condensed consolidated financial statements and related notes contained in its Quarterly Report on Form 10-Q for the three months ended March 31, 2016, which is incorporated by reference into this proxy statement. The unaudited financial data presented has been prepared on a basis consistent with Zhone’s audited consolidated financial statements. These financial statements are unaudited, but, in the opinion of Zhone’s management, such unaudited financial data reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

 

Historical results are not necessarily indicative of the results that may be expected for any future period or any future date. Because this information is only a summary and does not provide all of the information contained in Zhone’s financial statements, including the related notes, this selected historical financial data should be read in conjunction with Zhone’s Annual Report on Form 10-K for the year ended December 31, 2015 and Zhone’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016. See the section entitled “Where You Can Find More Information” beginning on page 143.

 

		Three Months Ended March 31,				Three Months Ended March 31,				Year Ended December 31,
		2016				2015				2015				2014				2013				2012				2011
		(unaudited)								(audited)
		(in thousands, except per share data)
Statement of Comprehensive Income (Loss) Data:
Net revenue		$	20,599			$	27,122			$	100,756			$	120,582			$	122,248			$	115,385			$	124,502
Cost of revenue(1)			12,348				16,951				61,989				78,748				76,116				79,101				80,541
Gross profit			8,251				10,171				38,767				41,834				46,132				36,284				43,961
Operating expenses:
Research and product development(1)			3,558				4,050				15,449				17,340				15,326				18,542				21,380
Sales and marketing(1)			3,802				4,382				16,375				19,079				20,159				19,304				22,297
General and administrative(1)			4,253				2,277				8,691				9,409				6,199				7,157				7,784
Impairment of fixed assets			—				—				—				—				—				61				4,236
Total operating expenses			11,613				10,709				40,515				45,828				41,684				45,064				55,697
Operating income (loss)			(3,362	)			(538	)			(1,748	)			(3,994	)			4,448				(8,780	)			(11,736	)
Interest expense, net			(5	)			(53	)			(88	)			(68	)			(85	)			(102	)			(41	)
Other income (expense), net			(36	)			11				7				(1	)			(7	)			(9	)			111
Income (loss) before income taxes			(3,403	)			(580	)			(1,829	)			(4,063	)			4,356				(8,891	)			(11,666	)
Income tax provision			29				22				188				68				42				124				60
Net income (loss)		$	(3,432	)		$	(602	)		$	(2,017	)		$	(4,131	)		$	4,314			$	(9,015	)		$	(11,726	)
Other comprehensive loss			(35	)			(89	)			(321	)			(100	)			(151	)			(21	)			(40	)
Comprehensive income (loss)		$	(3,467	)		$	(691	)		$	(2,338	)		$	(4,231	)		$	4,163			$	(9,036	)		$	(11,766	)
Net income (loss) per share:
Basic net income (loss) per share		$	(0.10	)		$	(0.02	)		$	(0.06	)		$	(0.13	)		$	0.14			$	(0.29	)		$	(0.38	)
Diluted net income (loss) per share		$	(0.10	)		$	(0.02	)		$	(0.06	)		$	(0.13	)		$	0.13			$	(0.29	)		$	(0.38	)
Shares used in per-share calculation
Basic			33,841				32,605				32,941				32,380				31,429				31,010				30,671
Diluted			33,841				32,605				32,941				32,380				33,021				31,010				30,671
(1)    Amounts include stock-based compensation cost as follows:
Cost of revenue		$	1			$	4			$	7			$	7			$	—			$	63			$	61
Research and product development			13				13				53				11				2				297				244
Sales and marketing			26				25				105				29				2				250				350
General and administrative			2,496				131				966				739				420				704				1,015

 

		Three Months Ended March 31,				As of December 31,
		2016				2015				2014				2013				2012				2011
		(unaudited)				(audited)
		(in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term investments		$	9,330			$	10,113			$	11,528			$	15,686			$	11,119			$	18,190
Working capital			33,481				34,243				34,904				39,291				34,868				43,027
Total assets			54,249				56,645				65,712				71,817				61,724				80,732
Stockholders’ equity		$	33,255			$	34,157			$	34,343			$	37,559			$	31,940			$	39,527

Summary Historical Financial Information of DNS

The following tables set forth summary historical financial data for DNS. The statement of comprehensive income (loss) data and balance sheet data as of and for the years ended December 31, 2015, 2014 and 2013 are derived from DNS’ audited consolidated financial statements included elsewhere in this proxy statement. The statement of comprehensive income (loss) data and balance sheet data as of and for the three months ended March 31, 2016 and 2015 are derived from unaudited condensed consolidated financial statements included elsewhere in this proxy. The statement of comprehensive income (loss) data and balance sheet data as of and the years ended December 31, 2012 and 2011 are derived from unaudited consolidated financial statements not included elsewhere in this proxy. The unaudited financial data presented has been prepared on a basis consistent with DNS’ audited consolidated financial statements. These financial statements are unaudited, but, in the opinion of DNS’ management, such unaudited financial data reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the results for those periods. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or any future period.

The DNS historical results are not necessarily indicative of the results that may be expected for any future period or any future date. Because this information is only a summary and does not provide all of the information contained in DNS’ financial statements, including the related notes, this selected historical financial data should be read in conjunction with the audited consolidated financial statements of DNS and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of DNS” included elsewhere in this proxy statement.

 

		Three Months Ended March 31,				Three Months Ended March 31,				Year Ended December 31,
		2016				2015				2015				2014				2013				2012				2011
		(unaudited)								(audited)												(unaudited)
		(in thousands, except per share data)
Statement of Comprehensive Income (Loss) Data:
Net revenue		$	25,793			$	38,727			$	140,025			$	139,874			$	118,210			$	108,371			$	116,358
Cost of revenue			20,716				28,972				103,386				98,552				77,257				64,691				76,623
Gross profit			5,077				9,755				36,639				41,322				40,953				43,680				39,735
Operating expenses:
Research and product development			4,679				5,784				21,331				22,805				18,774				18,019				16,861
Selling and administrative expenses			4,417				3,834				17,923				15,314				14,040				18,438				19,561
Total operating expenses			9,096				9,618				39,254				38,119				32,814				36,457				36,422
Operating income (loss)			(4,019	)			137				(2,615	)			3,203				8,139				7,223				3,313
Interest income (expense), net			(146	)			(66	)			(396	)			(108	)			(79	)			791				(885	)
Foreign exchange gain(loss), net			(624	)			367				1,648				1,015				837				227				(208	)
Gain (loss) on derivative transactions, net			806				(188	)			(1,004	)			(1,130	)			(252	)			(955	)			—
Other income (expense), net			(97	)			61				(365	)			237				71				37				(348	)
Income (loss) before income taxes			(4,080	)			311				(2,732	)			3,217				8,716				7,323				1,872
Income tax expense (benefit)			(627	)			(77	)			232				1,380				2,208				2				992
Net income (loss)		$	(3,453	)		$	388			$	(2,964	)		$	1,837			$	6,508			$	7,321			$	880
Less: Net loss attributable to the non-controlling interests			6				—				—				—				—				—				—
Net income (loss) attributable to DASAN Network Solutions, Inc.			(3,459	)			388				(2,964	)			1,837				6,508				7,321				880
Other comprehensive income (loss) for the year, net of tax foreign currency translation adjustments			517				(238	)			(2,800	)			(1,997	)			905				2,570				(454	)
Comprehensive income (loss)		$	(2,936	)		$	150			$	(5,764	)		$	(160	)		$	7,413			$	9,891			$	426
Less: Comprehensive income attributable to the non-controlling interests			14				—				—				—				—				—				—
Comprehensive income (loss) attributable to DASAN Network Solutions Inc.			(2,950	)			150				(5,764	)			(160	)			7,413				9,891				426
Net income (loss) per share:
Basic net income (loss) per share		$	(0.01	)		$	0.00			$	(0.01	)		$	0.01			$	0.02			$	0.02			$	0.00
Diluted net income (loss) per share		$	(0.01	)		$	0.00			$	(0.01	)		$	0.01			$	0.02			$	0.02			$	0.00
Shares used in per-share calculation
Basic			353,678				343,591				347,005				342,738				340,761				340,016				338,472
Diluted			353,678				343,591				347,005				342,738				340,761				340,016				338,472