<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Rule 424(b)(4) promulgated under
the Securities Act of 1933.
Pursuant to Registration
No. 333-87909
2,800,000 Shares
[C-Cor.net Corp.]
Common Stock
$44.00 per share
- --------------------------------------------------------------------------------
C-COR.net Corp. is offering 2,800,000 shares of common stock with this
prospectus.
The common stock is traded on the Nasdaq National Market under the symbol
"CCBL." On November 8, 1999, the last reported sale price of the common stock
on the Nasdaq National Market was $44.125 per share.
Investing in the common stock involves a high degree of risk. See "Risk
Factors" beginning on page 5.
<TABLE>
<CAPTION>
Per
Share Total
------ ------------
<S> <C> <C>
Price to the public.................................... $44.00 $123,200,000
Underwriting discount.................................. $ 2.42 $ 6,776,000
Proceeds to C-COR.net.................................. $41.58 $116,424,000
</TABLE>
C-COR.net has granted an over-allotment option to the underwriters. Under this
option, the underwriters may elect to purchase a maximum of 420,000 additional
shares from C-COR.net within 30 days following the date of this prospectus to
cover over-allotments.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
CIBC World Markets Donaldson, Lufkin & Jenrette
Warburg Dillon Read LLC
Josephthal & Co. Inc.
The date of this Prospectus is November 8, 1999.
<PAGE>
[Picture with the caption "The Evolving Hybrid Fiber Coax (HFC) Network" which
depicts the different segments of the HFC network including the Network
Operations Center, headend, traditional node and mininode. There is also a list
of C-COR.net's primary products and services.]
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward Looking Statements............................................... 11
Use of Proceeds.......................................................... 12
Dividend Policy.......................................................... 12
Price Range of Common Stock.............................................. 13
Capitalization........................................................... 14
Selected Consolidated Financial Data..................................... 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 26
Management............................................................... 35
Description of Capital Stock............................................. 37
Underwriting............................................................. 39
Legal Matters............................................................ 41
Experts.................................................................. 41
Where You Can Find More Information...................................... 41
Incorporation of Certain Documents by Reference.......................... 42
Index to Financial Statements............................................ F-1
</TABLE>
-------------------------
As used in this prospectus, the terms "we," "us," "our" and "C-COR.net" mean
C-COR.net Corp. and its subsidiaries (unless the context indicates a different
meaning) and the term "common stock" means our common stock, $0.10 par value
per share. Unless otherwise stated, all information contained in this
prospectus assumes no exercise of the over-allotment option granted to the
underwriters. In addition, unless otherwise stated, all financial data gives
retroactive effect to the mergers of C-COR.net Corp., Convergence.com
Corporation and Silicon Valley Communications, Inc., which have been accounted
for using the pooling-of-interest method of accounting.
For discussion other than what is contained herein regarding our fiscal quarter
ended September 24, 1999, please refer to our report on Form 10-Q filed with
the Commission which is incorporated herein and made a part hereof.
The underwriters are offering the shares subject to various conditions and may
reject all or part of any order. The shares should be ready for delivery on or
about November 12, 1999, against payment in immediately available funds.
The following trademarks of C-COR.net Corp. are used throughout this
prospectus: C-COR, NAVICOR, FlexNet, FlexNode and CNM.
2
<PAGE>
Prospectus Summary
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and accompanying notes that appear
elsewhere in this prospectus.
About C-COR.net
We design, manufacture and market cable network transmission products and
provide services and support to cable network operators. Our customers include
the largest cable operators in the United States, such as Time Warner and AT&T,
many of the smaller domestic cable operators and several large international
cable operators. We offer a comprehensive range of products, including radio
frequency, or RF, amplifiers and fiber optic components for the cable headend,
node and RF plant. Our services focus on enabling reliable, high-speed,
broadband communications over hybrid fiber coax networks, or HFC networks, and
include network design, service activation, optimization, management and
maintenance.
Cable operators worldwide have begun upgrading and rebuilding their existing
networks to offer high-speed, two-way, broadband services such as Internet
delivery, telephony, video-on-demand and digital television. These investments
are a result of competitive pressures, industry consolidation, deregulation and
technical advancements, particularly in the use of fiber optic equipment. As
cable operators have consolidated to achieve economies of scale, non-cable
operators, such as Microsoft, Paul Allen and AT&T, have made substantial
investments in the HFC system design, not only validating it as a competitive
broadband medium, but increasing the available capital to spend on network
upgrades.
We acquired Silicon Valley Communications in September 1999 to broaden our
product line and increase our technology base to include dense wave division
multiplexing, or DWDM, technology and end-to-end fiber optic and RF
transmission equipment. Additionally, we acquired Convergence.com in July 1999
to enhance our broadband management services capability to include an
integrated package of network management and support services, such as enhanced
management software and a network operations center.
We recently introduced two new fiber optic products that are currently being
used in a field trial of AT&T's LightWire Neighborhood Broadband System in Salt
Lake City, Utah. We believe these two products, the MuxNode and the MiniNode,
are key components of the next generation of HFC networks. These products
provide bi-directional signal transmission featuring multiple forward and
reverse paths that support analog and digital video, high-speed data and
telephony. This system design provides for the broader deployment of fiber into
the network which provides increased bandwidth and network reliability.
The increasing size, complexity and traffic over cable networks requires
consistent, reliable network performance to meet customer demands. We believe
cable network operators will need to substantially increase their investment in
high quality, value added services such as network design, activation, Internet
enablement, advice on system upgrades and proactive performance management.
Given the increased complexity and cost associated with designing, monitoring
and maintaining next generation HFC networks, we also believe cable operators
will turn to third party providers, such as C-COR.net, to assist them in
enhancing network integrity.
Our core business strategy is to leverage our over 45 year reputation for
quality and service, our strong customer relationships and our extensive
installed base of transmission equipment to provide a broad line of flexible,
reliable and cost effective network products and service solutions.
Our principal executive offices are located at 60 Decibel Road, State College,
Pennsylvania 16801. Our telephone number is (814) 238-2461.
3
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The Offering
Common stock offered by C-COR.net....... 2,800,000 shares
Common stock to be outstanding after
the offering............................ 15,176,428 shares
Use of proceeds......................... For the repayment of debt, capital
expenditures, working capital and
general corporate purposes
Nasdaq National Market symbol........... CCBL
Summary Consolidated Financial Information
(In thousands, except for per share data)
The restated amounts give retroactive effect to the recent mergers of C-COR.net
Corp. and Convergence.com Corporation and Silicon Valley Communications, Inc.,
which have been accounted for using the pooling-of-interest method of
accounting. This method requires that the historical financial statements of
the merged companies be combined and presented as if the companies had always
operated as one entity. The as adjusted balance sheet data in the table below
give effect to the sale of 2,800,000 shares of common stock offered by us at an
offering price of $44.00 per share, and the application of the net proceeds
from the sale of the shares, after deducting the underwriting discount and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
Thirteen
Years Ended Weeks Ended
------------------------------------------------------- ------------------
Historical Restated Restated
--------------------------- --------------------------- --------
June 27, June 26, June 25, June 27, June 26, June 25, Sep. 25, Sep. 24,
1997 1998 1999 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Net sales............... $131,941 $152,144 $171,281 $133,780 $154,041 $183,425 $34,654 $64,503
Income (loss) from
continuing operations.. 4,257 7,317 10,455 898 918 (683) (1,116) 19
Loss from discontinued
operations............. (6,605) -- -- (6,605) -- -- -- --
Gain (loss) from
disposal of
discontinued
operations............. (3,830) 928 397 (3,830) 928 397 288 36
-------- -------- -------- -------- -------- -------- ------- -------
Net income (loss)....... $ (6,178) $ 8,245 $ 10,852 $ (9,537) $ 1,846 $ (286) $ (828) $ 55
======== ======== ======== ======== ======== ======== ======= =======
Net income (loss) per
share - basic:
Continuing operations.. $ 0.45 $ 0.80 $ 1.15 $ 0.07 $ 0.08 $ (0.06) $ (0.09) $ --
Discontinued
operations............ (0.70) -- -- (0.54) -- -- -- --
Disposal of
discontinued
operations............ (0.40) 0.10 0.04 (0.32) 0.08 0.04 0.02 --
-------- -------- -------- -------- -------- -------- ------- -------
Net income (loss)....... $ (0.65) $ 0.90 $ 1.19 $ (0.79) $ 0.16 $ (0.02) $ (0.07) $ --
======== ======== ======== ======== ======== ======== ======= =======
Net income (loss) per
share - diluted:
Continuing operations.. $ 0.44 $ 0.78 $ 1.10 $ 0.07 $ 0.07 $ (0.06) $ (0.09) $ --
Discontinued
operations............ (0.68) -- -- (0.53) -- -- -- --
Disposal of
discontinued
operations............ (0.40) 0.10 0.04 (0.31) 0.08 0.04 0.02 --
-------- -------- -------- -------- -------- -------- ------- -------
Net income (loss)....... $ (0.64) $ 0.88 $ 1.14 $ (0.77) $ 0.15 $ (0.02) $ (0.07) $ --
======== ======== ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
September 24, 1999
--------------------
Actual As Adjusted
-------- -----------
(Unaudited)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable securities......... $ 938 $107,690
Working capital.......................................... 34,522 148,496
Total assets............................................. 108,900 215,652
Total long-term obligations, including current
maturities.............................................. 4,326 1,876
Shareholders' equity..................................... 62,108 177,932
</TABLE>
4
<PAGE>
Risk Factors
You should carefully consider the following factors before deciding to invest
in the shares. The risks and uncertainties described below are not the only
ones we face. Additional risks and uncertainties not presently known to us or
which are similar to those faced by other companies in our industry or business
in general, may also impair our business operations. If any of the following
risks actually occur, our business, financial condition or results of future
operations could be materially and adversely affected. In such case, the
trading price of our common stock could decline, and you may lose all or part
of your investment. This prospectus also contains forward looking statements
that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors, including the risks we face as described below and
elsewhere in this prospectus. Please refer to "Forward Looking Statements" on
page 11.
Our customer base consists of a small number of customers in a single industry.
Historically, we have provided cable network transmission equipment to cable
operators in the United States and internationally. Most of our sales have been
to relatively few customers. Sales to our ten largest customers accounted for
approximately 72% of net sales in fiscal 1997, 74% of net sales in fiscal 1998
and 76% of net sales in fiscal 1999.
During the past 18 months there has been significant consolidation of ownership
of domestic cable systems. As a result, we expect that the concentration of our
sales among a small number of customers will continue for the foreseeable
future. Almost all of our sales are made on a purchase order basis and none of
our customers has entered into a long-term agreement requiring the purchase of
our products. The loss of, or any reduction in orders from, a significant
customer would harm our business. We expect that the consolidation of our
customer base may result in delays in receiving new orders or a reduction in
the size of orders for our products.
A decline in capital spending in the cable industry could substantially reduce
our revenue.
Almost all of our sales have been to cable operators and we expect this to
continue for the foreseeable future. Demand for our products depends
significantly on the size and timing of capital spending by cable operators for
constructing, rebuilding or upgrading their systems. We cannot accurately
predict the growth patterns of cable operators' spending, but we believe these
patterns depend on a variety of factors, including:
. overall demand for cable services and the acceptance of new broadband
services, such as Internet, telephony, video-on-demand and digital
television;
. competitive pressures, including the availability of alternative
delivery technologies, such as direct broadcast satellite, digital
subscriber line and local multipoint distribution services;
. cable operators' access to financing;
. cable operators' annual budget cycles;
. the status of federal, local and foreign government regulation of
telecommunications and television broadcasting; and
. fewer construction and upgrade projects typically occurring in winter
months, and during inclement weather.
We may be unable to manage the numerous risks and challenges associated with
our recent acquisitions of Convergence.com and Silicon Valley Communications,
which could adversely affect our operations and financial condition.
Recently, we have experienced significant growth, including the acquisitions of
Convergence.com and Silicon Valley Communications. These acquisitions have
placed, and we expect will continue to place, a significant strain on our
personnel, management and other resources.
We acquired Convergence.com in July 1999 to enable us to offer an integrated
package of technical services and products, including access to broadband
Internet and high speed data capabilities. Our ability
to successfully market these newly acquired services and products depends on:
. the evolution and growth of the market for high speed Internet and
broadband services;
5
<PAGE>
. assimilating Convergence.com's operations, research and development,
products, personnel and culture with ours;
. our ability to successfully develop, manufacture and gain market
acceptance of Convergence.com's services and products; and
. retaining Convergence.com's key personnel.
Our acquisition of Silicon Valley Communications in September 1999 presents us
with several challenges, including:
. interfacing and integrating Silicon Valley Communications' fiber optic
product line with our existing product line;
. maintaining quality control of our expanded product line;
. integrating Silicon Valley Communications' operations and culture with
ours, including the consolidation of separate sales organizations,
engineering capabilities, manufacturing operations and support
functions; and
. retaining Silicon Valley Communications' key employees, particularly in
the engineering and sales areas.
We cannot assure you that we will be able to successfully address the
challenges that these acquisitions present. Our failure to do so would likely
materially and adversely affect our business, financial condition and operating
results.
Reselling of stock issued in connection with our recent acquisitions may
adversely affect our stock price.
Subject to the effectiveness of certain registration statements we have filed
with the Securities and Exchange Commission and certain contractual limitations
relating to affiliates, shares issued to the Convergence.com and Silicon Valley
Communications shareholders will become eligible for resale. On various dates
beginning in September 1999 and ending in December 1999, 1,392,950 shares will
become eligible for resale. On various dates between January and February 2000,
1,585,454 shares will become eligible for resale. Together, these shares will
account for approximately 25% of our outstanding shares. Furthermore, 35,845
shares issuable upon exercise of options at a weighted average exercise price
of $1.89 and warrants to purchase 443,319 shares at a weighted average exercise
price of $12.18 will become eligible for resale on various dates beginning in
September 1999 and ending in December 1999. Additionally, 16,697 shares
issuable upon exercise of options at a weighted average exercise price of $2.06
and warrants to purchase 173,370 shares at a weighted average exercise price of
$26.58 will become eligible for resale on various dates between January and
February 2000. If a large portion of these shares is sold during these time
periods, our stock price will likely experience volatility and may fall.
If AT&T decides not to deploy our fiber optic products currently being used in
the Salt Lake City, Utah field trial, then our financial results would likely
be adversely affected.
Our next generation MiniNode and MuxNode fiber optic products are being used in
AT&T's LightWire Neighborhood Broadband System concept testing field trial in
Salt Lake City, Utah. If the field trial does not result in widespread
deployment of the LightWire system, our future revenues would be adversely
affected. Likewise, if this new system is deployed but does not include our
MiniNode and MuxNode products, our future revenues would be adversely affected.
We could be adversely affected if broadband communications do not develop
rapidly.
Our core products are cable network transmission equipment for hybrid fiber
coax networks, commonly known as HFC networks. HFC networks can be used to
transport Internet, telephony, video-on-demand and digital television. A
significant part of the current demand for our products depends on our
customers' desire to upgrade their existing networks and offer Internet and
telephony services in addition to cable television service. There are, however,
competing technologies such as direct broadcast satellite, digital subscriber
line and local multipoint distribution services that can provide these upgraded
services to end users. Improvements in a competing technology could result in
significant price and/or performance advantages for that technology which, in
turn, could reduce demand for our core products.
It is difficult for us to accurately predict the broadband communications
market's future growth
6
<PAGE>
rate, size and technological direction because the market is in a relatively
early stage of development. As this market matures, it is possible that cable
operators, telephone companies or other suppliers of broadband wireless and
satellite services will decide to adopt alternative technologies or standards
that are incompatible with our products. If we are unable to design,
manufacture and market products that incorporate or are compatible with these
new technologies or standards, our business would suffer.
If we are unable to design, manufacture and market new products in a timely
manner, then we may not remain competitive.
The broadband communications market, which includes Internet and telephony
services, is characterized by continuing technological advancement, changes in
customer requirements and evolving industry standards. To compete successfully,
we must design, manufacture and market new products that provide increasingly
higher levels of performance and reliability. Our inability to design,
manufacture and market these products or to achieve broad commercial acceptance
of these products would have an adverse effect on our business.
If we are unable to profitably increase network management service revenue, our
financial results would be adversely affected.
Our ability to increase network management service revenue depends on many
factors that are beyond our control. For example:
. our customers may decide not to outsource to third parties;
. we may be unable to compete effectively with our competitors,
particularly those with greater financial, technical, marketing and
other resources; and
. we may be unable to hire and retain enough qualified technical and
management personnel to support our growth plans.
In addition, the pricing structure and investment required in the network
management services
business are not well established. We may be unable to establish a business
strategy that generates adequate profitability or an adequate return on
investment.
If we are unable to retain our key personnel or recruit additional key
personnel in the future, then we may be unable to execute our business
strategy.
Our success depends on our ability to hire, retain and motivate highly
qualified personnel. Competition for qualified technical and other personnel is
intense and we may not successfully attract or retain such personnel.
Competitors and others in the past have recruited our employees and may do so
in the future. While we require our employees to sign customary agreements
concerning confidentiality and ownership of inventions, we generally do not
have employment contracts or noncompetition agreements with our personnel. If
we lose any of our key personnel, are unable to attract qualified personnel or
are delayed in hiring required personnel, particularly engineers and other
technical personnel, our business could be negatively affected.
Our reliance on several key components, subassemblies and modules used in the
manufacture of our products could restrict production.
We obtain many components, subassemblies and modules necessary for
manufacturing our products from a sole supplier or a limited group of
suppliers. Our reliance on sole or limited suppliers, particularly foreign
suppliers, and our increasing reliance on subcontractors, involves several
risks. These risks include a potential inability to obtain an adequate supply
of required components, subassemblies or modules, and reduced control over
pricing, quality and timely delivery of these components, subassemblies or
modules. We do not generally maintain long-term agreements with any of our
suppliers or subcontractors. We are currently experiencing a limited allocation
of a component for our amplifiers from Motorola, a major supplier. This could
affect near-term product shipments because this is a key component in several
of our products. An inability to obtain adequate deliveries or any other
circumstance, requiring us to seek alternative sources of supply, could affect
our ability to ship our products on a timely basis, which could damage our
relationships with current and prospective customers and harm our business.
7
<PAGE>
Changes in international trade laws, regulations or the political climate in
Mexico could hinder our production capacity.
We operate a manufacturing facility in Tijuana, Mexico that provides a
significant portion of our production capacity. This operation is exposed to
certain risks as a result of its location, including:
. changes in international trade laws, such as the North American Free
Trade Agreement, affecting our import and export activities;
. changes in, or expiration of, the Mexican government's Maquiladora
program, which provides economic benefits to us;
. changes in labor laws and regulations affecting our ability to hire and
retain employees;
. fluctuations of foreign currency and exchange controls;
. potential political instability and changes in the Mexican government;
. potential regulatory changes; and
. general economic conditions in Mexico.
Any of these risks could interfere with the operation of this facility and
result in reduced production, increased costs, or both. In the event that this
facility's production capacity is reduced, we could fail to ship products on
schedule and could face a reduction in future orders from dissatisfied
customers. If our costs to operate this facility increase, our margins would
decrease. Reduced shipments and margins would have an adverse affect on our
financial results and could lead to a decline in our stock price.
Our competitors, some of whom are larger and more established, may have a
competitive advantage over us.
The market for cable network transmission equipment is extremely competitive
and is characterized by rapid technological change. Our current competitors
include significantly larger companies with greater financial, technical,
marketing and other resources. Additional competition could come from new
entrants in the broadband communications equipment market.
These existing and potential competitors may be in a better position to
withstand any significant reduction in capital spending by cable operators and
to keep pace with changes in technology. If any of our competitors' products or
technologies become the industry standard, our business could be seriously
harmed. We cannot assure you that we will be able to compete successfully in
the future or that competition will not harm our business.
We expect to need additional capital in the future and may not be able to
secure adequate funds on terms acceptable to us.
We currently anticipate that our existing cash balance, available line of
credit, cash flow expected to be generated from future operations, together
with the proceeds from this offering, will be sufficient to meet our operating
needs for the next 12 to 24 months. If our cash flows are less than expected,
we may need to raise additional funds sooner to respond to unforeseen
technological or marketing hurdles, satisfy unforeseen liabilities or take
advantage of unanticipated opportunities. A future transaction could require
significant amounts of capital, as could the integration of our acquisitions of
Convergence.com and Silicon Valley Communications. We may not be able to obtain
funds at the time or times needed on terms acceptable to us, or at all. If we
are unable to obtain adequate funds on acceptable terms, we may not be able to
take advantage of market opportunities, develop new products or otherwise
respond to competitive pressures.
If our sales forecasts are not realized in a given period or if our operating
results fluctuate in any given quarter, our stock price may fall.
While we receive periodic forecasts from our customers as to their future
requirements, these forecasts may not accurately reflect future purchase orders
for our products. In addition, the sales cycles of many of our products,
particularly our newer products and products sold internationally, are
typically unpredictable and usually involve:
. a significant technical evaluation by our customers;
. a commitment of capital and other resources by cable operators;
. delays associated with cable operators' internal procedures to approve
large capital expenditures;
8
<PAGE>
. time required to engineer the deployment of new technologies or services
within broadband networks; and
. testing and acceptance of new technologies that affect key operations.
For these and other reasons, our sales cycles generally last three to six
months, but can last up to 12 months.
In addition, because a limited number of large customers account for a
significant portion of our sales, the timing of their orders can cause
significant fluctuation in our quarterly operating results. A portion of our
expenses for any given quarter is typically based on expected sales and if
sales are below expectations in any given quarter, the negative impact on our
operating results may be increased if we are unable to adjust our spending to
compensate for the lower sales. Accordingly, variations in the timing of sales
can cause significant fluctuation in our quarterly operating results and may
result in a fall in the price of our common stock.
Our stock price may be volatile and you may not be able to resell your shares
at or above the offering price.
The market price of our common stock has fluctuated widely in the past and is
likely to fluctuate in the future.
Factors affecting our stock price may include:
. variations in operating results from quarter to quarter;
. changes in earning estimates by analysts;
. market conditions in the industry; and
. general economic conditions.
For example, between August 17, 1999 and August 30, 1999, the price of our
common stock dropped from approximately $33.88 to $21.00 per share. Between
August 30, 1999 and October 18, 1999, the price of our common stock rose from
approximately $21.00 to $47.50 per share. Consequently, the current market
price of our common stock may not be indicative of future market prices, and
you may be unable to resell your shares of our common stock at or above the
offering price.
If our international sales do not meet our expectations, then our growth may be
less than expected.
Sales to customers outside of the United States represented 19% of net sales in
fiscal 1997, 21% of net sales in fiscal 1998 and 11% of net sales in fiscal
1999. We expect that international sales will represent a substantial portion
of our net sales in the future. Although we plan to invest resources to grow
our international sales, there can be no guarantee that this investment will
succeed. Our international operations are subject to a number of risks,
including:
. spending patterns of international cable operators;
. import and export license requirements, tariffs, taxes and other trade
barriers;
. fluctuations in currency exchange rates;
. difficulty in collecting accounts receivable;
. complying with a wide variety of foreign laws, treaties and
telecommunications standards;
. difficulty in staffing and managing foreign operations; and
. political and economic instability.
We may be harmed if we are unable to adequately protect our proprietary rights.
We currently hold 16 United States patents and have a number of patent
applications pending. We intend to continue to file patent applications in the
future, where we believe appropriate, and to pursue such applications with
United States and foreign patent authorities, but we cannot be sure that any
other patents will be issued on such applications or that our patents will not
be contested. Also, because issuance of a valid patent does not prevent other
companies from using alternative, non-infringing technology, we cannot be sure
that any of our patents will provide significant commercial protection. In
addition to patent protection, we also rely on trade secrets, technical know-
how, copyright and other unpatented proprietary information relating to our
product development and manufacturing activities. We try to protect this
information with confidentiality agreements with our employees and other
parties. We cannot be sure that these agreements will not be breached, that we
will have adequate remedies for any breach or that our trade secrets and
proprietary know-how will not
9
<PAGE>
otherwise become known or independently discovered by others.
Particular aspects of our technology could be found to infringe on the claims
of other existing or future patents. Other companies may hold or obtain patents
on inventions or may otherwise claim proprietary rights to technology necessary
to our business which could prevent us from developing new products. We cannot
predict the extent to which we may be required to seek licenses, or the extent
to which they will be available to us on acceptable terms, if at all.
We may be harmed if we have problems with Year 2000 issues.
We have assessed the Year 2000 readiness of our computer systems and date
sensitive equipment, which are comprised predominantly of third party software
and hardware. We are currently assessing the Year 2000 risks associated with
Convergence.com and Silicon Valley Communications. We have also contacted our
principal customers, suppliers, vendors and subcontractors to ascertain their
readiness for the Year 2000, and, where we believe necessary, made upgrades to
our systems and equipment.
Based upon our assessments to date, we believe that the products we presently
sell, and those we have installed in customers' networks in the past, are Year
2000 compliant. Undetected errors or defects may remain which could result in
litigation or other unexpected costs. If we, or any of our key suppliers or
customers, fail to mitigate internal or external Year 2000 risks, we may be
unable to process transactions, manufacture products, send invoices or engage
in similar normal business activities. We may experience additional costs and a
decline in sales for an indefinite period of time, which could materially and
adversely affect our business, financial condition and results of operations.
10
<PAGE>
Forward Looking Statements
This prospectus and the documents we have filed with the Securities and
Exchange Commission which we have referenced under "Where You Can Find More
Information" on page 41 contain forward looking statements made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward looking statements include, among others, statements regarding
our ability to provide complete network solutions, the demand for network
integrity, the trend toward more fiber in the HFC network, global demand for
our products and services and our ability to integrate Convergence.com and
Silicon Valley Communications. Forward looking statements represent our
judgment regarding future events. Although we believe we have a reasonable
basis for these forward looking statements, we cannot guarantee their accuracy
and actual results may differ materially from those we anticipated due to a
number of uncertainties, many of which we are not aware. Factors that could
cause actual results to differ from expectations include, among others, capital
spending patterns of the communications industry, our ability to develop new
and enhanced products, the unsuccessful deployment of our fiber optic products
in the AT&T field trial, or failure of the field trial more generally,
continued industry consolidation, the development of competing technology or
our ability to assimilate Convergence.com and Silicon Valley Communications. We
urge you to consider the risks and uncertainties discussed under "Risk Factors"
and elsewhere in this prospectus and in the other documents filed with the SEC
in evaluating our forward looking statements. We have no plans to update our
forward looking statements to reflect events or circumstances after the date of
this prospectus.
11
<PAGE>
Use of Proceeds
The net proceeds from the sale of the 2,800,000 shares of common stock we are
offering will be approximately $115.8 million. If the underwriters fully
exercise the over-allotment option, the net proceeds will be approximately
$133.3 million. "Net proceeds" is what we expect to receive after we pay the
underwriting discount and other estimated expenses for this offering.
We expect to use the net proceeds as follows:
. repayment of indebtedness of $2.4 million under a term loan which bears
interest at a rate of 6.14%, which at September 24, 1999 had a balance
of $2.5 million;
. repayment of approximately $12.6 million under a working capital and
acquisition facility which bears interest at the LIBOR 3 month rate plus
a margin ranging from 0.75% to 1.35%, approximately $6.0 million of
which we have borrowed since September 24, 1999; and
. the balance will be used for general corporate purposes, including
working capital and capital expenditures.
In addition, we may use a portion of the net proceeds to acquire complementary
products, technologies or businesses. We intend to invest the net proceeds from
this offering in short-term, investment grade, interest-bearing instruments
until they are used.
Dividend Policy
We have not paid cash dividends since our inception. We anticipate that we will
retain all future earnings for use in the expansion of the business and for
general corporate purposes and, therefore, do not anticipate paying any cash
dividends in the foreseeable future. Any future payment of dividends will be at
the discretion of our board of directors and will depend upon, among other
things, earnings, financial condition, capital requirements, level of
indebtedness, contractual restrictions with respect to the payment of dividends
and other relevant factors. Our senior credit facility prohibits the
distribution of dividends without the prior written consent of the lenders.
12
<PAGE>
Price Range of Common Stock
Our common stock started trading on the Nasdaq National Market in February 1981
under the symbol CCBL. On July 9, 1999, we changed our name from C-COR
Electronics, Inc. to C-COR.net Corp. The following table sets forth, for the
periods indicated, the high and low sales prices for our common stock, as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
Fiscal 1998:
First Quarter............................................. $ 17.500 $ 8.750
Second Quarter............................................ 18.375 13.500
Third Quarter............................................. 16.500 12.750
Fourth Quarter............................................ 18.125 12.000
Fiscal 1999:
First Quarter............................................. $ 20.000 $ 10.875
Second Quarter............................................ 18.375 8.875
Third Quarter............................................. 20.500 13.500
Fourth Quarter............................................ 32.125 16.000
Fiscal 2000:
First Quarter............................................. $ 39.500 $ 21.000
Second Quarter (through November 8, 1999)................. 47.500 26.625
</TABLE>
On November 8, 1999, the last reported sale price on the Nasdaq National Market
for our common stock was $44.125 per share. On November 5, 1999, there were
approximately 614 holders of record of the common stock.
13
<PAGE>
Capitalization
The following table presents our actual capitalization as of September 24, 1999
on:
. a restated basis giving effect to our acquisitions of Convergence.com
and Silicon Valley Communications pursuant to the pooling-of-interests
method of accounting; and
. as adjusted to reflect the sale of 2,800,000 shares of common stock that
we are offering with this prospectus at an offering price of $44.00 per
share, and the application of the proceeds, net of the underwriting
discount and our estimated expenses for this offering.
The total number of shares of outstanding common stock of September 24, 1999,
as adjusted for this offering, excludes options to purchase 1,996,245 shares at
a weighted average exercise price of $16.15 per share and warrants to purchase
616,689 shares at a weighted average exercise price of $16.23.
<TABLE>
<CAPTION>
September 24, 1999
--------------------
Actual As Adjusted
------- -----------
(In thousands)
<S> <C> <C>
Cash, cash equivalents and marketable securities.......... $ 938 $107,690
======= ========
Long-term debt, less current portion...................... $ 3,513 $ 1,663
Shareholders' equity:
Preferred stock, no par; authorized 2,000,000 shares;
issued, none........................................... -- --
Common stock, $0.10 par; authorized shares 24,000,000;
issued shares of 12,919,160 actual and 15,719,160 as
adjusted............................................... 1,292 1,572
Additional paid-in capital ............................. 46,790 162,334
Accumulated other comprehensive loss.................... (100) (100)
Unearned compensation................................... (14) (14)
Retained earnings....................................... 21,120 21,120
Treasury stock at cost, shares of 600,723............... (6,980) (6,980)
------- --------
Total shareholders' equity............................ 62,108 177,932
------- --------
Total capitalization................................ $65,621 $179,595
======= ========
</TABLE>
14
<PAGE>
Selected Consolidated Financial Data
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" for, and as of the end of, each of the fiscal
years in the five-year period ended June 25, 1999, are derived from the
historical Consolidated Financial Statements of C-COR.net Corp., which
financial statements have been audited by KPMG LLP, independent certified
public accountants. Such historical financial statements do not appear
separately herein. The restated amounts as of June 26, 1998 and June 25, 1999
and for each of the years in the three-year period ended June 25, 1999 are
derived from the supplemental financial statements, which give retroactive
effect to our mergers with Convergence.com Corporation on July 9, 1999 and
Silicon Valley Communications, Inc. on September 17, 1999, which have been
accounted for using the pooling-of-interests method of accounting. Such
supplemental restated financial statements have been audited by KPMG LLP,
independent certified public accountants. The supplemental restated financial
statements and the report thereon are included elsewhere in this prospectus.
Our financial statements for the thirteen week periods ended September 24, 1999
and September 25, 1998 are unaudited, and in our opinion include all
adjustments consisting of normal adjustments necessary for a fair presentation
of the results for the unaudited periods. You should not rely on interim
results as being indicative of results we may expect for the full year. You
should read this information in conjunction with our financial statements and
other financial data included elsewhere herein or incorporated by reference
from our reports filed with the SEC and the section of this prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended Thirteen Weeks Ended
------------------------------------------------------------------------------ ---------------------
Historical Restated Restated
------------------------------------------------ ---------------------------- --------
June 30, June 28, June 27, June 26, June 25, June 27, June 26, June 25, Sep. 25, Sep. 24,
1995 1996 1997 1998 1999 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- -------- -----------
(In thousands, except per share data)
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Net sales............ $121,269 $139,539 $131,941 $152,144 $171,281 $133,780 $154,041 $183,425 $34,654 $ 64,503
Cost and expenses:
Cost of sales....... 88,373 104,852 104,702 117,557 129,124 106,485 121,986 138,793 27,128 48,278
Selling and
administrative..... 15,949 15,917 15,787 15,020 16,545 18,521 19,724 27,153 5,355 7,109
Research and
product
development........ 3,786 4,857 5,681 7,459 9,038 7,706 9,988 11,833 2,789 3,175
Merger related
costs.............. -- -- -- -- -- -- -- -- -- 3,673
Provision for
restructuring
costs.............. -- -- -- 625 -- -- 625 -- -- --
Interest............ 706 960 318 335 229 380 399 1,384 57 621
Other expense
(income), net...... (264) (341) (250) 384 151 (861) 19 110 (30) 307
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
108,550 126,245 126,238 141,380 155,087 132,231 152,741 179,273 35,299 63,163
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Income (loss) from
continuing
operations before
income taxes........ 12,719 13,294 5,703 10,764 16,194 1,549 1,300 4,152 (645) 1,340
Income tax expense
(benefit):
Current............. 4,977 3,875 1,298 3,564 7,130 1,299 3,565 7,133 607 1,984
Deferred............ (786) 405 148 (117) (1,391) (648) (3,183) (2,298) (136) (663)
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
4,191 4,280 1,446 3,447 5,739 651 382 4,835 471 1,321
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Income (loss) from
continuing
operations.......... 8,528 9,014 4,257 7,317 10,455 898 918 (683) (1,116) 19
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Discontinued
operations:
Loss from
operations of
discontinued
business segment,
net of tax......... (213) (3,095) (6,605) -- -- (6,605) -- -- -- --
Gain (loss) on
disposal of
discontinued
business segment,
net of tax......... -- -- (3,830) 928 397 (3,830) 928 397 288 36
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Net income
(loss)......... $ 8,315 $ 5,919 $ (6,178) $ 8,245 $ 10,852 $ (9,537) $ 1,846 $ (286) $ (828) $ 55
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Net income (loss) per
share - basic:
Continuing
operations......... $ 0.91 $ 0.94 $ 0.45 $ 0.80 $ 1.15 $ 0.07 $ 0.08 $ (0.06) $ (0.09) $ 0.00
Discontinued
operations:
Loss from
operations........ (0.02) (0.32) (0.70) -- -- (0.54) -- -- -- --
Gain (loss) on
disposal......... -- -- (0.40) 0.10 0.04 (0.32) 0.08 0.04 0.02 0.00
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Net income
(loss)......... $ 0.89 $ 0.62 $ (0.65) $ 0.90 $ 1.19 $ (0.79) $ 0.16 $ (0.02) $ (0.07) $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Net income (loss) per
share - diluted:
Continuing
operations......... $ 0.86 $ 0.91 $ 0.44 $ 0.78 $ 1.10 $ 0.07 $ 0.07 $ (0.06) $ (0.09) $ 0.00
Discontinued
operations:
Loss from
operations........ (0.02) (0.31) (0.68) -- -- (0.53) -- -- -- --
Gain (loss) on
disposal......... -- -- (0.40) 0.10 0.04 (0.31) 0.08 0.04 0.02 0.00
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Net income
(loss)......... $ 0.84 $ 0.60 $ (0.64) $ 0.88 $ 1.14 $ (0.77) $ 0.15 $ (0.02) $ (0.07) $ 0.00
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
Weighted average
common shares and
common share
equivalents:
Basic............... 9,332 9,554 9,504 9,148 9,137 12,143 11,895 12,098 12,124 12,224
Diluted............. 9,859 9,868 9,638 9,401 9,498 12,402 12,340 12,098 12,124 13,266
<CAPTION>
Historical Restated
------------------------------------------------ ------------------
June 30, June 28, June 27, June 26, June 25, June 26, June 25, Sep. 24,
1995 1996 1997 1998 1999 1998 1999 1999
-------- -------- -------- -------- -------- -------- -------- -----------
(In thousands) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equiva-
lents and marketable
securities.......... $ 1,938 $ 1,838 $ 811 $ 2,669 $ 3,385 $ 3,386 $ 5,140 $ 938
Working capital...... 24,442 35,452 22,745 27,313 34,381 27,584 32,246 34,522
Total assets......... 85,868 77,278 71,119 75,518 93,664 84,074 102,949 108,900
Total long-term
obligations,
including current
maturities ......... 2,172 8,030 7,201 6,367 4,392 6,493 4,540 4,326
Shareholders'
equity............... 44,725 53,317 41,678 50,190 61,327 58,660 59,914 62,108
</TABLE>
15
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
All statements, trend analysis and other information contained in the following
discussion relative to markets for our products and trends in sales, gross
margin and anticipated expense levels, as well as other statements, including
words such as "may," "will," "anticipate," "believe," "plan," "estimate,"
"expect" and "intend" and other similar expressions constitute forward looking
statements. These forward looking statements are subject to business and
economic risks and uncertainties, and our actual results of operations may
differ materially from those contained in the forward looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in "Risk Factors" as well as other risks and
uncertainties referenced in this prospectus. The following discussion should be
read in conjunction with our financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are part of this prospectus or incorporated here by reference
to our reports filed with the SEC.
Overview
We design, manufacture and market cable network transmission products and
provide services and support to information service providers. Our principal
customers are cable operators who operate hybrid fiber coax networks, commonly
referred to as HFC networks, for delivering video, voice and data services.
Almost all of our sales have been derived from the sale of radio frequency
amplifiers, commonly referred to as RF amplifiers, fiber optic nodes and
technical services to cable operators that are upgrading or rebuilding their
networks. With the acquisition of Silicon Valley Communications in September
1999, we broadened our product line to include end-to-end fiber optic and RF
transmission equipment for cable operators continuing to upgrade their
networks. With the acquisition of Convergence.com in July 1999, we broadened
our service offering to include an integrated package of network management and
support services.
Business Combinations. On July 9, 1999, we consummated a merger with
Convergence.com, a Georgia corporation, whereby Convergence.com became our
wholly owned subsidiary. The merger will enable us to offer an integrated
package of network management and support services and products. The expertise
of Convergence.com in enabling high-speed digital data transmission and
Internet delivery over HFC networks by providing network design, activation and
support services will augment our existing technical service capabilities. In
the merger, each outstanding share of common stock of Convergence.com was
converted into one share of our common stock, resulting in the issuance of
1,433,323 shares of our common stock. Each outstanding warrant to acquire
Convergence.com common stock was converted into a warrant to acquire our common
stock for an aggregate of warrants to acquire 366,930 shares of our common
stock. The merger was accounted for under the pooling-of-interests method of
accounting.
On September 17, 1999, we consummated a merger with Silicon Valley
Communications, a California corporation, whereby Silicon Valley Communications
became our wholly owned subsidiary. This acquisition will enable us to broaden
and strengthen our network transmission product offering by adding advanced
fiber optic products to our existing RF and fiber optic products. In
particular, our product offering will be strengthened with respect to headend
fiber optic equipment. As consideration in the merger, each outstanding share
of common stock of Silicon Valley Communications was converted into 0.094534
shares of our common stock, resulting in the issuance of 1,545,081 shares of
our common stock (subject to reduction pursuant to certain escrow
arrangements). Outstanding stock options and warrants to acquire Silicon Valley
Communications common stock were converted into stock options and warrants to
acquire our common stock using the same conversion ratio (with appropriate
adjustment to the exercise price) for an aggregate of stock options and
warrants to acquire 383,844 shares of our common stock. The merger was
accounted for under the pooling-of-interests method of accounting.
We recorded a one-time charge of $3.7 million ($3.1 million net of tax) related
to the business combinations in the quarter ended September 24, 1999. The one-
time charge includes the merger transaction costs, as well as restructuring
costs which included severance payments for approximately 40 employees affected
by
16
<PAGE>
consolidation of positions and administrative functions resulting from the
mergers, and write-off of assets related to existing fiber optic products that
became redundant as a result of the acquisition of Silicon Valley
Communications.
Pooling-of-Interests Accounting. Both of these mergers were accounted for using
the pooling-of-interests method of accounting. This method requires that
historical financial results of the merged companies be combined and presented
as if we had always operated as one entity. Accordingly, our financial
statements are presented on a restated combined basis as if the mergers had
occurred as of the beginning of quarters ended September 24, 1999 and September
25, 1998 and on June 28, 1996 for the restated financial statements. The
restated combined financial statements are not necessarily indicative of the
results that would have occurred if the three companies had actually been one
entity during the entire quarters ended September 24, 1999 and September 25,
1998 or during fiscal 1997, 1998 and 1999.
On an historical, separate company basis, our income from continuing operations
grew from $4.3 million in fiscal 1997 to $7.3 million in fiscal 1998 and to
$10.5 million in fiscal 1999. However, during this period both Convergence.com
and Silicon Valley Communications were investing in technology and capability
development and incurred net losses. Thus, on a combined basis our financial
statements reflect significantly reduced income from continuing operations in
fiscal 1997 and fiscal 1998 and a net loss from continuing operations in fiscal
1999. In addition to the investment in technology and capability development
that occurred during this period, these results reflect operating expenses for
three separate companies that were higher than those that likely would have
been incurred if the three companies were actually one entity during this
period. For example, sales and administrative staffs could have been reduced to
avoid duplicative efforts.
Results of Discontinued Operations. On July 10, 1997, we announced the
discontinuation of our Digital Fiber Optics Transmission Products segment
located in Fremont, California through a nine-month wind-down process.
Anticipated wind-down costs were recorded as a loss on disposal of the
discontinued segment in the results of discontinued operations for fiscal 1997.
We completed the wind-down of this operation in March 1998. A gain on disposal
of the discontinued business segment of $397,000, net of tax expense, was
recorded in fiscal 1999. This compared to a gain on disposal of the
discontinued business segment for fiscal 1998 of $928,000, which included a net
tax benefit. The gains in fiscal 1999 and 1998 represented adjustments of the
estimated loss on the disposal of the business segment of $3.8 million, net of
tax recorded in fiscal 1997. The gain in fiscal 1999 resulted primarily from
settlement of certain warranty claims. In fiscal 1998, the gain was derived
primarily from higher than anticipated proceeds associated with the disposal of
assets, primarily inventory, and lower than anticipated operating costs from
the measurement date to the disposal date.
The after-tax loss from operations of the discontinued business segment was
$6.6 million for fiscal 1997, which was primarily attributable to increased
warranty costs of $3.3 million and an impairment loss on goodwill of $571,000.
17
<PAGE>
Results of Operations
Below are our consolidated statements of operations from continuing operations
for the thirteen weeks ended September 25, 1998 on a restated basis and
September 24, 1999, each as a percentage of net sales. Our consolidated
statements of operations from continuing operations for the fiscal years ended
June 27, 1997, June 26, 1998 and June 25, 1999 as a percentage of net sales, on
an historical separate company and restated basis, are as follows:
<TABLE>
<CAPTION>
Thirteen
Years Ended Weeks Ended
----------------------------------------------------- ------------------
Historical Restated Restated
-------------------------- -------------------------- --------
June 27, June 26, June 25, June 27, June 26, June 25, Sep. 25, Sep. 24,
1997 1998 1999 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 79.4 77.3 75.4 79.6 79.2 75.7 78.3 74.8
----- ----- ----- ----- ----- ----- ----- -----
Gross margin ........... 20.6 22.7 24.6 20.4 20.8 24.3 21.7 25.2
Operating expenses:
Selling and
administrative....... 12.0 9.9 9.7 13.8 12.8 14.8 15.4 11.0
Research and product
development.......... 4.3 4.9 5.3 5.8 6.5 6.5 8.0 5.0
Merger-related costs.. -- -- -- -- -- -- -- 5.7
Provision for restruc-
turing costs......... -- 0.4 -- -- 0.4 -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses........... 16.3 15.2 15.0 19.6 19.7 21.3 23.4 21.7
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
continuing
operations............. 4.3 7.5 9.6 0.8 1.1 3.0 (1.7) 3.5
Interest and other
expense (income), net.. -- 0.5 0.2 (0.4) 0.3 0.8 0.1 1.4
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
continuing operations
before income taxes.... 4.3 7.0 9.4 1.2 0.8 2.2 (1.8) 2.1
Provision for income
taxes.................. 1.1 2.2 3.3 0.5 0.2 2.6 1.4 2.1
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) from
continuing operations.. 3.2% 4.8% 6.1% 0.7% 0.6% (0.4)% (3.2)% 0.0%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The effect of the acquisitions on restated historical results is a slight
reduction in gross margins and significant reductions in operating and net
after-tax margins. Operating expenses as a percentage of sales increase by four
to six percentage points when the historical financial results of the three
companies are combined. This increase reflects the cost of the separate
corporate offices and sales organizations of the three companies, as well as
the investment in research and product development at Silicon Valley
Communications.
Quarter Ended September 24, 1999 and Restated Quarter Ended September 25, 1998
Net Sales. Net sales for the quarter ended September 24, 1999 increased 86.1%
to $64.5 million from $34.7 for the same period in the prior fiscal year. The
increase in sales was primarily attributable to increased capital spending for
cable network transmission equipment by domestic cable operators and from
increased sales of technical services related to design, activation and support
of cable networks.
Domestic sales increased 84.2% during the quarter ended September 24, 1999 and
represented 89.7% of total net sales for the quarter ended September 24, 1999
compared to 90.7% for the same period in the prior fiscal year. The increase
was the result of additional domestic sales of HFC transmission equipment and
related services during the quarter by domestic cable operators continuing to
upgrade and rebuild their systems, principally to offer new services including
two-way Internet access.
18
<PAGE>
International sales increased 104.8% during the quarter ended September 24,
1999 and represented 10.3% for the quarter ended September 24, 1999 compared to
9.3% for the same period in the prior fiscal year. The increase for the quarter
resulted primarily from demand from a customer in Canada. We expect
international markets will represent a substantial portion of our sales base,
but we believe demand will continue to be highly variable.
Gross Margin. Gross margin for quarter ended September 24, 1999 was 25.2%
compared 21.7% for the same period in the prior fiscal year. Reductions in
material costs, changes in customer and product mix, lower manufacturing costs
resulting from our operation in Mexico and efficiencies resulting from higher
production volume and manufacturing automation initiatives contributed to the
increase in the margin during the quarter ended September 24, 1999 compared to
the same period in the prior fiscal year.
Selling and Administrative. Selling and administrative expenses for the quarter
ended September 24, 1999 increased 32.8% to $7.1 million (11.0% of net sales)
from $5.4 million (15.4% of net sales) for the same period in the prior fiscal
year. The increase was due to various selling and administrative costs,
including personnel costs associated with higher sales volumes, expansion of
our technical customer services business unit and our domestic sales force.
Research and Product Development. Research and product development costs for
the quarter ended September 24, 1999 increased 13.8% to $3.2 million (5.0% of
net sales) from $2.8 million (8.0% of net sales) for the same period in the
prior fiscal year. The increased expenditures resulted from higher personnel
costs and additional expenses primarily for development of fiber optic
transmission products, including transmitters, receivers and Erbium-Doped Fiber
Amplifiers, or EDFAs, for advanced HFC networks and network management
products, including continued development of our CNM System 2 software. These
products include our new mini-fiber nodes and multiplexing nodes, for which
initial delivery has been made to AT&T Broadband and Internet Services for
deployment in the Salt Lake City trial of AT&T's LightWire Neighborhood
Broadband System. Both node products form part of the foundation for the
experimental LightWire architecture developed by AT&T. The trial deployment in
Salt Lake City will be used for concept testing of this architecture. We
anticipate research and product development expenses to increase in future
periods related to ongoing initiatives, although these expenses may vary as a
percentage of sales.
Interest and Other Expense (Income), Net. Interest expense for the quarter
ended September 24, 1999 was $621,000 compared to $57,000 for the same period
in the prior fiscal year. Interest expense for the quarter ended September 24,
1999 included $381,000 of additional amortization related to the fair market
value of warrants issued in fiscal year 1999 in connection with certain debt
financing arrangements. In addition, interest expense increased for the quarter
as a result of an increase in short-term borrowings on our revolving line-of-
credit agreement and other short-term credit facilities during the period.
Other expense for the quarter ended September 24, 1999 was $355,000 compared to
$18,000 for the same period in the prior fiscal year. The increase in other
expense resulted primarily from adjustment of the carrying value of property
held-for-sale and losses on disposal of property, plant, and equipment during
the quarter ended September 24, 1999.
Income Taxes. The effective income tax rate for the quarter ended September 24,
1999 was 98.6% compared to 73.0% for the same period in the prior fiscal year.
Our effective tax rate for the quarter ended September 24, 1999, excluding non-
recurring business combination costs, was approximately 37.5%. The higher
effective tax rate for the quarter ended September 24, 1999 is a result of
permanent differences for non-deductible business combination costs incurred in
relation to the mergers with Convergence.com and Silicon Valley Communications.
The higher effective tax rate for the quarter ended September 25, 1998 resulted
from limited tax benefit related to operating losses at both Silicon Valley
Communications and Convergence.com
Restated Fiscal Years Ended June 25, 1999, June 26, 1998 and June 27, 1997
Net Sales. Net sales increased 19.1% to $183.4 million in fiscal 1999 from
$154.0 million in fiscal 1998. The increase in sales was primarily attributable
to increased capital spending for cable network transmission equipment by
domestic cable operators and from increased sales of technical services related
to design, activation and support of cable networks. Net sales increased 15.1%
to $154.0 million in fiscal 1998 from
19
<PAGE>
$133.8 million in fiscal 1997. The increase in sales was a result of increased
demand for HFC equipment, as well as technical services to both domestic and
international customers, primarily to cable operators.
Domestic sales increased by 35.0% to $163.9 million in fiscal 1999 from $121.4
million in fiscal 1998. Domestic sales increased 12.7% to $121.4 million in
fiscal 1998 from $107.7 million in fiscal 1997. Domestic sales of HFC network
transmission equipment and related services increased in fiscal 1999 and fiscal
1998 as a result of domestic cable operators continuing to upgrade and rebuild
their systems. Total domestic sales were 89.4% of consolidated net sales in
fiscal 1999, 78.8% in fiscal 1998 and 80.5% in fiscal 1997.
Convergence.com contributed $6.6 million to domestic sales in fiscal 1999, $1.1
million in fiscal 1998 and $889,000 in fiscal 1997. The growth in sales
reflected cable operators' increasing demand for network management products
and services. Silicon Valley Communications contributed $5.1 million to
domestic sales in fiscal 1999, $12,000 in fiscal 1998 and $49,000 in fiscal
1997. The increase in domestic sales was based on the introduction of a new
product line of fiber optic equipment designed for cable networks.
International sales decreased 40.4% to $19.5 million in fiscal 1999 from $32.7
million in fiscal 1998. The decrease primarily reflected weaker sales in all
international markets, with the exception of Asia. International sales
increased 25.3% to $32.7 million in fiscal 1998 from $26.1 million in fiscal
1997, resulting primarily from increased sales to Canada, Europe and Latin
America. We expect international markets will represent a substantial portion
of our sales base, but we believe demand will continue to be highly variable.
Our total international sales were 10.6% of consolidated net sales in fiscal
1999, 21.2% in fiscal 1998 and 19.5% in fiscal 1997.
Convergence.com contributed $17,000 to international sales in fiscal 1999,
$154,000 in fiscal 1998 and $215,000 in fiscal 1997. Silicon Valley
Communications contributed $350,000 to international sales in fiscal 1999 and
$609,000 in fiscal 1998. The decrease in international sales primarily
reflected the phasing out of a transmission equipment product line that had
been designed principally for the Asian market.
Gross Margin. Gross margin was 24.3% in fiscal 1999, 20.8% in fiscal 1998 and
20.4% in fiscal 1997. Reductions in material costs, changes in customer and
product mix, lower manufacturing costs resulting from our operation in Mexico
and efficiencies resulting from higher production volume and manufacturing
automation initiatives contributed to the increase in the gross margin in
fiscal 1999 compared to fiscal 1998. The gross margin increase in fiscal 1998
compared to fiscal 1997 was primarily attributable to material cost reductions,
changes in customer and product mix, and efficiencies resulting from higher
production volumes.
Silicon Valley Communications' gross margin was 12.6% in fiscal 1999. In fiscal
1998, Silicon Valley Communications incurred cost of sales of $3.3 million on
sales of $621,000. This large cost of sales was primarily attributable to an
inventory write-off due to obsolescence. Convergence.com's gross margin was
26.9% in fiscal 1999, 10.8% in fiscal 1998 and 35.9% in fiscal 1997.
Selling and Administrative. Selling and administrative expenses were $27.2
million (14.8% of net sales) in fiscal 1999, $19.7 million (12.8% of net sales)
in fiscal 1998 and $18.5 million (13.8% of net sales) in fiscal 1997. The
increase in selling and administrative expenses in fiscal 1999 was due
primarily to various selling and administrative costs to support higher sales
volumes, including personnel costs associated with expansion of our offering of
technical services. In addition, Silicon Valley Communications expanded its
domestic sales force in conjunction with introducing a new product line of
fiber optic equipment designed for use in cable networks. Silicon Valley
Communications also added to its administrative and management headcount to
handle growing sales volume. Convergence.com increased selling and
administrative expenses in fiscal 1999 as its sales volume grew. The increase
in selling and administrative expenses for fiscal 1998 was due to an expected
20
<PAGE>
rise in demand for Silicon Valley Communications' and Convergence.com's
products and services. The increase in expenses at Silicon Valley
Communications and Convergence.com was partially offset by a decrease of
expenditures at preacquisition C-COR.net resulting from reconfiguration of our
worldwide sales territories and the consolidation of our sales organization
implemented in the fourth quarter of fiscal 1997. We anticipate increased
selling and administrative expenses in fiscal 2000, although these expenses may
vary as a percentage of net sales.
Silicon Valley Communications incurred selling and administrative expenses of
$6.3 million in fiscal 1999 and $3.0 million in fiscal 1998. Convergence.com
incurred selling and administrative expenses of $4.3 million in fiscal 1999,
$1.7 million in fiscal 1998 and $838,000 in fiscal 1997.
Research and Product Development. Research and product development expenses
were $11.8 million (6.5% of net sales) in fiscal 1999, $10.0 million (6.5% of
net sales) in fiscal 1998 and $7.7 million (5.8% of net sales) in fiscal 1997.
The increase in research and product development expenses in fiscal 1999 was
primarily due to our continued investment in new products and technologies. The
increased expenditures resulted from higher personnel costs and additional
expenses primarily for development of fiber optic and network management
products, including continued development of our CNM System 2 software. We
anticipate increased research and product development expenditures in fiscal
2000 related to ongoing initiatives, although these expenses may vary as a
percentage of net sales.
Silicon Valley Communications incurred research and product development
expenses of $2.8 million in fiscal 1999 and $2.5 million in fiscal 1998.
Convergence.com did not classify any costs as research and product development
during these fiscal years.
Provision for Restructuring Costs. In fiscal 1998, we recorded a restructuring
charge of $625,000 related to our decision on June 25, 1998, to close our
manufacturing plant located in Reedsville, Pennsylvania in order to reduce
costs and improve productivity and asset utilization. The restructuring charge
represented salaries and benefits for approximately 143 employees affected by
the plant closing.
Interest and Other Expense (Income), Net. Interest expense was $1.4 million in
fiscal 1999, $399,000 in fiscal 1998 and $380,000 in fiscal 1997. The increase
in interest expense in fiscal 1999 resulted from increased borrowing at Silicon
Valley Communications and the amortization of the fair market value of warrants
issued by Silicon Valley Communications in conjunction with obtaining
financing. This amortization resulted in $911,000 in interest expense in fiscal
1999.
Other expense was $110,000 in fiscal 1999 and $19,000 in fiscal 1998 and other
income was $861,000 in fiscal 1997. The increased expense in fiscal 1999
resulted from a reduction in investment income for Silicon Valley
Communications partially offset by greater investment income and lower foreign
currency transaction losses for historical C-COR.net. The increased expense in
fiscal 1998 resulted from costs accrued in relation to the settlement of
certain litigation and foreign exchange losses resulting primarily from the
weakened Canadian dollar as well as reduction in investment income for Silicon
Valley Communications.
Income Taxes. Our effective income tax rate was 116.5% in fiscal 1999, 29.4% in
fiscal 1998 and 42.0% in fiscal 1997. The higher effective tax rate for fiscal
1999 resulted from a limited tax benefit from the operating losses at Silicon
Valley Communications and Convergence.com, and reduced tax benefits from our
Foreign Sales Corporation and higher state income taxes. The lower effective
tax rate for fiscal 1998 resulted from tax benefits of approximately $3.1
million resulting from the operating losses at Silicon Valley Communications
and Convergence.com. In addition, fluctuations in the effective income tax rate
from period to period reflect changes in permanent non-deductible amounts, the
relative profitability related to both domestic and international operations
and differences in statutory rates. For fiscal years after fiscal 1999, we
expect to have an effective annual tax rate that approximates statutory rates.
21
<PAGE>
Quarterly Operating Results
The following are our unaudited consolidated quarterly operating results from
continuing operations in dollar amounts and as a percentage of net sales for
the periods indicated after giving retroactive effect to the mergers with
Convergence.com and Silicon Valley Communications. This data is derived, in
part, from our annual and quarterly consolidated financial statements which are
incorporated into this prospectus by reference. In our opinion, the quarterly
financial information has been prepared on the same basis as our annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial results.
Results of operations for previous quarters are not necessarily indicative of
results for future quarters. The following discussion is qualified by the more
detailed discussion of the quarterly results contained in our quarterly
filings. Such filings do not include the results of Convergence.com and Silicon
Valley Communications.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1999 Fiscal 2000
--------------------------------------- --------------------------------------- -----------
Sep. 27, Dec. 27, Mar. 27, Jun. 26, Sep. 25, Dec 25, Mar. 26, Jun. 25, Sep. 24,
1997 1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- ------- -------- -------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales.................... $37,559 $37,758 $40,607 $38,117 $34,654 $39,651 $47,291 $61,829 $64,503
Cost of sales................ 29,225 29,801 32,289 30,671 27,128 30,052 36,413 45,200 48,278
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 8,334 7,957 8,318 7,446 7,526 9,599 10,878 16,629 16,225
Operating expenses:
Selling and administrative.. 4,126 4,873 5,072 5,653 5,355 6,484 6,511 8,803 7,109
Research and product
development................ 2,366 2,175 2,319 3,128 2,789 3,172 2,480 3,392 3,175
Merger-related costs........ -- -- -- -- -- -- -- -- 3,673
Provision for restructuring
costs...................... -- -- -- 625 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 6,492 7,048 7,391 9,406 8,144 9,656 8,991 12,195 13,957
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)...... 1,842 909 927 (1,960) (618) (57) 1,887 4,434 2,268
Interest and other expense
(income), net............... 273 151 (52) 46 27 244 58 1,165 928
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes....................... 1,569 758 979 (2,006) (645) (301) 1,829 3,269 1,340
Provision for income tax
expense (benefit)........... 394 86 132 (230) 471 691 1,241 2,432 1,321
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations.................. $ 1,175 $ 672 $ 847 $(1,776) $(1,116) $ (992) $ 588 $ 837 $ 19
======= ======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1999 Fiscal 2000
--------------------------------------- --------------------------------------- -----------
Sep. 27, Dec. 27, Mar. 27, Jun. 26, Sep. 25, Dec 25, Mar. 26, Jun. 25, Sep. 24,
1997 1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- ------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0 % 100.0 % 100.0 % 100.0 % 100.0% 100.0% 100.0 %
Cost of sales................ 77.8 78.9 79.5 80.5 78.3 75.8 77.0 73.1 74.8
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross margin................. 22.2 21.1 20.5 19.5 21.7 24.2 23.0 26.9 25.2
Operating expenses:
Selling and administrative.. 11.0 12.9 12.5 14.8 15.4 16.4 13.8 14.2 11.0
Research and product
development................ 6.3 5.8 5.7 8.2 8.0 8.0 5.3 5.5 5.0
Merger-related costs........ -- -- -- -- -- -- -- -- 5.7
Provision for restructuring
costs...................... -- -- -- 1.6 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 17.3 18.7 18.2 24.6 23.4 24.4 19.1 19.7 21.7
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)...... 4.9 2.4 2.3 (5.1) (1.7) (0.2) 3.9 7.2 3.5
Interest and other expense
(income), net............... 0.7 0.4 (0.1) 0.1 0.1 0.6 0.1 1.9 1.4
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes....................... 4.2 2.0 2.4 (5.2) (1.8) (0.8) 3.8 5.3 2.1
Income tax expense
(benefit)................... 1.1 0.2 0.3 (0.6) 1.4 1.7 2.6 3.9 2.1
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations.................. 3.1% 1.8% 2.1 % (4.6)% (3.2)% (2.5)% 1.2% 1.4% 0.0 %
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Our net sales increased in each consecutive quarter of fiscal 1999 as a result
of increased demand for our HFC transmission products and network management
services. In each of the second through fourth quarters, we received orders in
excess of $50 million. In the second quarter we initiated actions to increase
our production capacity, including ordering additional manufacturing equipment,
automating certain parts of the manufacturing process to alleviate production
bottlenecks and hiring additional manufacturing employees. These actions
allowed us to increase our production capacity and shipments in the third and
fourth quarters. The large increase in net sales in the fourth quarter
reflected growth in our services business as well as increased shipments of
fiber optic products and expanded production capacity for building RF
amplifiers.
Gross margins improved sequentially in fiscal 1999 with the exception of the
third quarter. The dip in the third quarter was caused by additional costs
incurred to increase manufacturing capacity and expand capacity in the services
business. The improvement in gross margin in the fourth quarter reflected
operating leverage from the increased sales volume, increased production from
our Mexico facility, improved pricing from our suppliers and the benefit of
manufacturing automation initiatives.
Selling and administrative costs increased in the fourth quarter as a result of
many factors including higher sales commissions related to the higher sales
level and an expansion of the sales and marketing force at Silicon Valley
Communications.
Interest and other expense increased in the fourth quarter mainly as a result
of the amortization of the fair market value of warrants issued by Silicon
Valley Communications in connection with obtaining financing. Of the total fair
market value of $1.3 million, $911,000 was amortized in the fourth quarter.
Liquidity and Capital Resources
As of September 24, 1999, cash and cash equivalents totaled $500,000 compared
to $4.7 million at June 25, 1999. Net cash and cash equivalents used in
operating activities was $4.5 million for the quarter ended September 24, 1999
compared to cash and cash equivalents provided by operating activities of $2.6
million for the same period in the prior fiscal year. The increase in cash and
cash equivalents used in operating activities for the quarter ended September
24, 1999 was primarily due to business combination costs associated with the
mergers of Convergence.com and Silicon Valley Communications, and increased
inventory purchases and accounts receivables resulting from a higher level of
production and sales volume during the quarter.
As of June 25, 1999, cash and cash equivalents totaled $4.7 million up from
$3.0 million at June 26, 1998. Net cash and cash equivalents provided by
operating activities were $4.5 million in fiscal 1999, $7.1 million in fiscal
1998 and $4.7 million in fiscal 1997. The decrease in cash provided by
operating activities from fiscal 1998 to fiscal 1999 was primarily due to the
losses generated by Convergence.com and Silicon Valley Communications. The
improvement in cash provided by operating activities from fiscal 1997 to fiscal
1998 was primarily due to operations discontinued in 1997.
Net cash and cash equivalents used in investing activities was $3.2 million for
the quarter ended September 24, 1999 compared to $1.0 million for the same
period in the prior fiscal year. The increase in cash and cash equivalents used
in investing activities was primarily due to increased purchases of property,
plant and equipment to expand and automate our manufacturing operations.
Net cash used in investing activities was $6.1 million in fiscal 1999, $11.5
million in fiscal 1998 and $8.2 million in fiscal 1997. The increased cash used
in investing activities in fiscal 1998 was due primarily to higher purchases
and replacements of property, plant and equipment to expand and automate
manufacturing operations, including the start-up of our manufacturing operation
in Tijuana, Mexico, as well as a loan to an affiliate by Silicon Valley
Communications. The decrease in cash used in investing activities in fiscal
1999 was due primarily to the repayment of the loan.
Net cash and cash equivalents provided by financing activities totaled $3.5
million for the quarter ended September 24, 1999 compared to net cash and cash
equivalents used in financing activities of $3.6 million for
23
<PAGE>
the same period in the prior fiscal year. Our financing activities consist
primarily of borrowings and payments on short-term and long-term debt. During
the quarter ended September 24, 1999 we increased our net borrowings on our
short-term credit facilities by $1.6 million for working capital purposes. In
addition, we generated $2.1 million in cash as a result of employee stock
option exercises during the quarter ended September 24, 1999.
Net cash generated from financing activities totaled $3.3 million in fiscal
1999, compared to net cash used of $1.4 million in fiscal 1998 and net cash
generated of $10.6 million in fiscal 1997. The increase in net cash generated
from financings from fiscal 1998 to fiscal 1999 was primarily due to proceeds
from loans received by Silicon Valley Communications. The decrease in net cash
generated from fiscal 1997 to fiscal 1998 was primarily due to the issuance of
preferred stock by Silicon Valley Communications in fiscal 1997. This amount
was offset by our repurchase of 500,000 shares of our common stock for $5.8
million in fiscal 1997 under a stock repurchase program adopted in December
1996.
During fiscal 1998 and 1999 we had a line of credit which was committed through
December 31, 1999. On August 9, 1999, we entered into a new credit agreement
established with three banks under which we may borrow up to $70.0 million for
working capital, strategic acquisitions and investments. Borrowing on this
facility is unsecured, subject to a negative pledge on all business assets, and
we are required to maintain certain financial ratios and meet certain
indebtedness tests.
We anticipate that significant future uses of cash will include increased
working capital due to sales growth, capital expenditures, additional
investment in the infrastructure and technology required for network management
services and investment required to expand our international business. We
believe that the proceeds from this offering, operating cash flow, and our
$70.0 million line of credit agreement, will be adequate to provide for all
operating cash requirements for the next 12 to 24 months, subject to
requirements that additional growth or strategic development might dictate.
Year 2000 Readiness Disclosure
We are aware of the issues associated with the limitations of the programming
code in many existing computer systems, whereby the computer systems may not
properly recognize or process date-sensitive information as the Year 2000
approaches. Our date-sensitive systems include test equipment, computer systems
embedded in production equipment, products containing computer systems,
business data processing systems, production management and planning systems,
and personal computers. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
During fiscal 1999, our Year 2000 project team (consisting of representatives
from our information technology, finance, manufacturing, product development,
quality assurance, and sales and marketing departments) completed its
assessment of our internal date-sensitive equipment to determine Year 2000
compliance. As of June 25, 1999, prior to the acquisitions of Convergence.com
and Silicon Valley Communications, we concluded that approximately 7% of our
date-sensitive equipment was non-compliant. Most of these non-compliant items
can and will be upgraded to be compliant before January 1, 2000 at minimal
cost. The non-compliant hardware and software were determined not to be in
critical systems.
At this time, all critical systems have been designated compliant by their
manufacturers. To verify manufacturers' assertions, we developed a testing plan
for our critical systems and began compliance testing during the third quarter
of fiscal 1999. We have completed compliance testing, other than our payroll
system, which we anticipate completing early in the second quarter of fiscal
2000. At this time, there are no exceptions identified with these
manufacturers' assertions.
Throughout fiscal 1999, we corresponded with our principal customers,
suppliers, vendors and subcontractors to ascertain their readiness for the Year
2000 and requested assurances that they are addressing the Year 2000 issue.
These actions were intended to help mitigate the possible external impact of
Year 2000 issues. However, we are unable to fully assess the potential
consequences in the event of unforeseen compliance issues with the systems
operated by our customers, suppliers, vendors or subcontractors.
24
<PAGE>
We have assessed our products presently being sold and those installed in
customers' networks. Only our network management system has inherent software
embedded in it and we have assessed our network management software and
firmware, both present and previously sold versions, and found them to be Year
2000 compliant.
As a result of the mergers consummated with Convergence.com on July 9, 1999 and
with Silicon Valley Communications on September 17, 1999, we are in the process
of assessing each of Convergence.com's and Silicon Valley Communications' Year
2000 initiatives. We will focus on the compliance attainment efforts of their
customers and suppliers and Convergence.com's and Silicon Valley
Communications' internal date-sensitive equipment. This activity is expected to
last into the second quarter of fiscal 2000. Our preliminary assessment is that
the Year 2000 costs associated with these mergers will be minimal.
Based on our assessment to date, we believe we will not experience any material
disruption as a result of Year 2000 problems with our internal financial,
manufacturing and other computer systems. Our most reasonably likely worst case
scenario would be disruption of our operations and lost revenues as a result of
non-compliance of our systems and those operated by our customers, suppliers,
vendors and subcontractors. We have established a contingency plan detailing
how we will operate under this scenario. This plan will be refined during the
first and second quarters of fiscal 2000, but includes provisions for
increasing production and inventory levels, altering third-party business
relationships, if necessary, ensuring adequate financial and personnel
resources exist to adequately remedy problems as soon as detected, and other
contingency efforts.
While the total estimated cost of assessing Year 2000 issues is difficult to
predict with accuracy, based on our evaluation and assessment thus far, we
estimate that our total costs will not exceed $500,000 and should not have a
material adverse impact on our operating results or financial condition.
However, Year 2000 issues could have a significant impact on our operations and
our financial results if modifications cannot be completed on a timely basis,
if unforeseen needs or problems arise, or if there are unforeseen compliance
problems with the systems operated by our customers, suppliers, vendors or
subcontractors. Moreover, the change to the Year 2000 may negatively impact our
customers or the cable television industry as a whole, causing reduced demand
and market disruption in anticipation of, or following, the start of the Year
2000.
Recent Accounting Changes
In fiscal 1999, we adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" or Statement 130, which was effective for
fiscal years beginning after December 15, 1997. This Statement establishes
standards for reporting and classifying components of comprehensive income in
the financial statements and requires that the accumulated balance of other
comprehensive income be displayed separately from retained earnings and
additional paid-in-capital in the equity section of the financial statements.
In addition, we also adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" or
Statement 131, which was effective for fiscal years beginning after December
15, 1997. This Statement establishes standards for providing disclosures
related to products and services, geographic area and major customers.
Implementation of these Statements did not have a material effect on our
consolidated financial statements.
In 1998, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" or Statement 133, which was effective for fiscal years
beginning after June 15, 1999. In July 1999, the FASB announced it was delaying
the effective date of Statement 133 for one year to fiscal years beginning
after June 15, 2000. This Statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. We anticipate adopting
this Statement in our fiscal 2001 consolidated financial statements as
required. Implementation of this Statement is not expected to have a material
effect on our consolidated financial statements.
25
<PAGE>
Business
Overview
We design, manufacture and market cable network transmission products and
provide services and support to cable network operators. Our customers include
the largest cable operators in the United States, such as Time Warner and AT&T,
many of the smaller domestic cable operators and several large international
cable operators. Our customers primarily operate hybrid fiber coax networks,
commonly referred to as HFC networks, for delivering video, voice and data
services. We offer a comprehensive range of products, including radio frequency
amplifiers, or RF amplifiers, and fiber optic components for the cable headend,
node and RF plant. Our services focus on enabling reliable, high-speed,
broadband communications over HFC networks, and include network design,
activation, optimization, management and maintenance. Our core business
strategy is to leverage our over 45 year reputation for quality and service,
our strong customer relationships and our extensive installed base of
transmission equipment to provide a broad line of flexible, reliable and cost
effective network products and service solutions.
Industry Background
Cable networks consist of a headend where information is received from a
satellite, Internet gateway or telephony network, a transmission infrastructure
that distributes the signal throughout the network and connections from the
transmission network to the subscribers. Historically, these systems offered
one-way only video service. Recently, the cable industry, like other segments
of the communications industry, has been undergoing substantial change as a
result of:
. deregulation that allows competition among communications companies,
including wireline and wireless telephone companies and cable operators,
for communications services;
. demand by consumers for two-way, high-speed broadband communications to
accommodate Internet, telephony and other new information services; and
. the desire to customize services for specific customers, which requires
flexible and easy to configure networks.
For the cable industry, these factors are resulting in:
. upgrades to existing cable networks to provide two-way, interactive
broadband services which will allow cable operators to compete against
other broadband communications technologies, including dense wave
division multiplexing, commonly referred to as DWDM, digital subscriber
line, or DSL, and local multipoint distribution service, commonly known
as LMDS;
. greater utilization of fiber optic technology in the cable network;
. consolidation among cable operators;
. investments in cable operators by non-cable operators; and
. increased demand for more flexible and reliable cable networks.
Cable Operators are Upgrading their Systems. High-speed, two-way voice, video
and data transmission has been limited by the existing cable network, which was
originally designed for one-way analog video signals. Recently, cable operators
worldwide have begun upgrading their existing networks to offer high-speed,
two-way broadband digital transmission for new interactive services, such as
always-on Internet, telephony, video-on-demand and digital television. Major
upgrade activities include:
. expanding downstream bandwidth from 550 MHz up to either 750 MHz or 860
MHz;
. introducing and upgrading return path capabilities for two-way
communications; and
. increasing the number of optical nodes in the network to reduce the
number of homes served by each node, thereby increasing available
bandwidth in both directions.
Paul Kagan Associates estimates that in 1999 only 26% of the worldwide cable
plant is two-way capable, but that by 2002, 53% of the worldwide cable plant
will be two-way capable, as measured by the number of homes
26
<PAGE>
served by cable plant. In the United States, where the upgrade of HFC networks
to increase bandwidth and to make them capable of two-way transmission has
begun, these networks require advanced return path equipment for transmission
of voice and data from the subscriber to the headend to accommodate the
interactive nature of telephony and Internet services. In addition, the growth
of telephony and Internet service will require extending fiber further in the
network and increasing the amount of fiber optic equipment in an HFC network.
Current network system designs have fiber optic nodes that serve 500 to 3,000
homes. Reliable delivery of telephony and data services to large numbers of
subscribers may require fiber optic nodes that serve only 50 to 250 homes.
Consolidation in the Cable Television Industry. Until recently, many cable
operators have been slow to upgrade their networks due to capital constraints
and the need to achieve significant economies of scale to support the required
capital expenditures. Major cable operators are achieving economies of scale by
increasing the size of their cable systems through cable system exchanges and
the acquisition of smaller cable operators and independent operators. We
believe that consolidation of cable operators is substantially complete thereby
allowing them to focus on upgrading their systems.
Investments in Cable Operators by Non-Cable Operators. Recently, computer and
telephone companies have made substantial investments in cable operators in
order to compete for the ability to provide both new and existing services. We
believe these investments have increased the available capital for cable
network upgrades and have further validated the HFC network system design as a
competitive broadband medium. Some examples of these investments include:
. in 1997, Microsoft invested $1 billion in Comcast;
. in 1998, Paul Allen purchased a controlling interest in Marcus Cable for
$2.8 billion and acquired Charter Communications for $4.5 billion; and
. in 1999, AT&T completed the acquisition of TCI for approximately $60
billion and announced the acquisition of MediaOne for approximately $58
billion.
Network Integrity Required. Cable operators will need to increase network
integrity to address consumer demands for reliability arising from:
. the increased size, complexity and traffic over cable networks; and
. new communications services such as telephony, electronic commerce and
Internet access which involve the consistent delivery of more critical
information than traditional entertainment services.
We believe that cable operators will need to substantially increase their
investment in high quality, value added network services, such as comprehensive
network design, activation, Internet enablement, advice on system upgrades and
cable modems, proactive performance management and 24 hours a day, 7 days a
week customer support. Given the complexity and cost to implement these
services, we believe that this will lead to more third-party outsourcing for
these services.
Strategy
We have been providing HFC transmission products and services to cable
operators for over 45 years. Our customers include the largest cable operators
in the United States, many of the smaller domestic cable operators and several
large international cable operators. Our core business strategy is to leverage
our over 45 year reputation for quality and service, our strong customer
relationships and our extensive installed base of cable network transmission
equipment to provide a full line of flexible, reliable and cost-effective
network solutions. We are seeking to implement this strategy through both
internal development of new products and services as well as acquisitions.
Specific aspects of our strategy include:
Providing a Comprehensive HFC Network Product Line. We offer a full range of
fiber optic and electronic equipment to transmit signals in both directions
over HFC networks from "the headend to the curb." We have undertaken several
initiatives to broaden our product line to capture the additional investment
being made by cable operators. First, in December 1998, we introduced our
NAVICOR family of optical node products.
27
<PAGE>
Second, in July 1999, we acquired Convergence.com, which allows us to resell
headend and network equipment such as servers, routers and cable modem
termination systems that are required to transmit high speed data across cable
networks. Third, in September 1999, we acquired Silicon Valley Communications,
which added a broad complement of advanced fiber optic headend equipment and
optical transmitters and receivers. We have delivered these new products to
enable next generation, fiber rich, two-way HFC networks such as those being
deployed in field trial by AT&T in Salt Lake City.
We expect the next major wave of upgrade activity in the United States will
focus on adding fiber optic nodes to the network to reduce the number of homes
served by a node from between 500 to 3,000 homes to between 50 to 250 homes. We
believe future node size reduction will be achieved by using separate
transmitters to feed nodes, using dense wave division multiplexing, or DWDM, to
add dedicated signals to individual nodes, adding reverse path transmitters,
segmenting multi-output nodes or upgrading existing amplifiers into nodes. We
supply products for all of these upgrades.
Leveraging Extensive Installed Base of Equipment for Upgrade and Rebuild
Sales. We intend to leverage our large installed base of transmission equipment
in our customers' networks through upgrades, rebuilds and node size reductions.
Over the past four years we have shipped approximately one million RF
amplifiers. We provide a more cost effective upgrade path for our customers due
to our ability to upgrade existing components for our installed product base
rather than requiring our customers to purchase all new equipment. As our
customers continue to upgrade their networks, we believe that this path will
provide us with a competitive advantage in providing this equipment.
Providing Next Generation Network Management Services to Enhance Network
Integrity. The requirement for HFC network integrity and reliability has become
much greater as traffic and complexity have grown and as networks become
increasingly used for critical communications such as telephony and electronic
commerce. However, current approaches to managing HFC networks focus on
monitoring limited, individual elements of the network such as the cable modem
or power supplies. Through our network management software and Network
Operations Center, we can provide a comprehensive, proactive view of the
network from the set top box and/or cable modem to the headend. We intend to
continue developing our network management services to address the various
types of equipment and the unique characteristics of the different information
types that will be delivered over future HFC networks.
Delivering Total Network Solutions to Meet Cable Operators' Emerging Broadband
Needs. We believe that we are able to offer a broad network solution to cable
operators by delivering both a comprehensive line of equipment and the network
services that cable operators require across the entire HFC network. We are
able to design the network to enhance reliability, deliver the equipment and
software, furnish installation and activation services, and provide ongoing
network management and support services.
Increasing International Sales. We currently supply products and services to a
number of large international customers, including cable operators in Canada,
Europe, Asia and Latin America. We intend to invest in further developing our
international distribution channels and in providing localized versions of our
products. With our broadened product and service offering, we intend to supply
comprehensive network solutions to these and other operators in various
international markets who generally prefer to purchase products and services
from suppliers offering a more complete product line.
HFC Products
An HFC network connects a central information source, typically referred to as
the headend, to individual residential users through a physical plant of fiber
optic and coaxial cables, and a variety of electrical and fiber optic devices
that transmit, receive, modulate and amplify the signals as they move through
the network. A typical HFC network consists of three major segments: the
headend, the node and the RF plant. We offer a comprehensive range of products
for each of these segments.
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<PAGE>
Headend Equipment
The headend receives information from a satellite transmission, Internet
gateway, telephony network or other source and converts this information to
laser modulated optical signals for transmission across the network. Larger
networks feature both primary headends and a series of secondary headends or
hubs. We offer a broad range of headend equipment that features advanced
technology such as dense wave division multiplexing, DWDM, which allows
multiple signal wavelengths to be transmitted on one fiber across the network.
Nodes
The general function of the node in the HFC network is to convert information
from optical signals to RF signals for distribution to the home. Our NAVICOR
family of node products are upgradeable, scalable, modular and fully integrated
with our RF amplifiers. These features allow RF amplifiers to be upgraded to
nodes and simple nodes to be upgraded to telecommunication nodes with
narrowcasting and redundant configurations. Narrowcasting refers to customizing
content for certain subscribers by dedicating fibers or wavelengths to that
content. We designed the optical components of the nodes to fit into the lid,
or cover, of the amplifier housing so that upgrades from amplifiers to nodes
are easily accomplished by replacing the lid. Recently, we introduced a new
family of fiber optic nodes, the MuxNode and the MiniNode, that are used in
networks designed for node sizes of 50 to 250 homes.
RF Plant
The RF plant comprises products that transmit information between nodes and
subscribers. These products are essentially RF amplifiers that come in various
configurations such as trunks, bridgers and line extenders. A trunk amplifier
handles a large amount of information in a network when the node size is
greater than 500 homes. A bridger amplifier splits the signal to send it to a
greater number of destinations. Line extenders move the information to the
home.
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<PAGE>
The following table summarizes our major products and their primary functions
and features:
<TABLE>
<CAPTION>
Network
Segment Our Products Functions and Features
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Headend Universal Chassis . houses components of the headend equipment
. features modular, one and three rack unit design
. compact design maximizes limited headend rack
space
---------------------------------------------------------------------------------------
1310nm and 1550nm . convert RF signals to laser-modulated optical
Transmitters signals
. incorporate predistortion technology
. 1550nm transmitters available for dense wave
division multiplexing applications
. satisfy primary channel requirements for North
America, Latin America and parts of Asia and
Europe
---------------------------------------------------------------------------------------
Erbium Doped Fiber . used to amplify optical signals
Amplifiers, or EDFA . suitable for wave division multiplexing, or WDM,
and dense wave division multiplexing, or DWDM,
. used for both analog and digital applications
---------------------------------------------------------------------------------------
Forward Path Receiver . converts optical signals to RF signals
. features low noise contribution for clear signal
conversion
---------------------------------------------------------------------------------------
Return Path Transmitter . conveys digital and video return path signals
. used for data monitoring and other interactive
applications
---------------------------------------------------------------------------------------
Dual Return Path Receiver . plug-in module that includes two independent return
path receivers
. receives digital and video return path signals
- -----------------------------------------------------------------------------------------------------
Nodes NAVICOR Quadrant . provides four optical transmitters, four optical
Node/Bridger receivers and four active RF outputs
. includes a variety of reverse path transmitters for
data, telephony and video services
. modular design increases operating flexibility
---------------------------------------------------------------------------------------
NAVICOR Flexnet Nodes . can be configured with single or dual optical
receivers and transmitters
. available in cost effective version for less complex
networks
---------------------------------------------------------------------------------------
Node Return Path . available in both Fabry-Perot and distributed
Transmitter feedback versions for analog and digital applications
- -----------------------------------------------------------------------------------------------------
RF Plant FlexNet Trunk . high performance, high capacity amplifier with three
outputs
. field upgradable to a node
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------------
FlexNet Terminating Bridger . amplifier with two distribution outputs
. field upgradable to a node
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------------
NAVICOR and FlexNet Line . used to transmit information at the end of the line
Extenders to residential users
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------------
I-Flex Amplifiers and Nodes . European version of the FlexNet product line
</TABLE>
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<PAGE>
New HFC Products
MuxNode and MiniNode. We recently introduced two new fiber optic products that
are currently in field trial with AT&T's LightWire Neighborhood Broadband
System in Salt Lake City, Utah. We believe these two products, the MuxNode and
the MiniNode, are key components of the next generation of HFC networks. This
system design provides for the broader deployment of fiber into the network,
thereby providing increased bandwidth per home and greater network reliability.
The MuxNode is an advanced, scalable, bi-directional fiber optic network
device. The MuxNode is used to transmit and receive fiber optic signals to as
many as 12 MiniNodes. The MiniNode is a high output receiver which replaces
many of the amplifiers in the network and is designed to serve approximately 50
to 250 homes. The MiniNodes feature multiple forward and reverse paths that
support analog video, digital video, high speed data and telephone
applications. This new system design facilitates high speed, interactive
broadband communications that allow operators to provide new and enhanced
services to customers with greater network reliability.
The MuxNode and MiniNode feature dense wave division multiplexing, or DWDM,
technology which allows multiple signal wavelengths to be transmitted on one
fiber. This increases the volume of information that can be conveyed over the
network. It also allows cable operators greater flexibility in customizing
content for individual subscribers by dedicating certain wavelengths to that
content, for example, video-on-demand.
Broadband Management Services
We also offer a broad array of services to assist our customers in operating
reliable networks with high integrity. These services include design,
activation, network management and optimization, as well as ongoing support,
repair and maintenance.
Network Design. Network design provides customized plans for high-reliability
and cost-effective HFC network upgrades and rebuilds. Each customized plan
takes into account the current state of the network and the target applications
including such factors as channel capacity, two-way requirements, performance
specifications, powering needs, high speed data transmission, Internet access
and network management options. The plan details the quantity, type and
configuration of equipment required in the headend and throughout the remainder
of the network. Deliverables include design services, highly accurate maps,
bill-of-materials and custom drafting.
Activation Services. Activation services are required for a newly installed or
upgraded network to become operational. They include activation/energizing,
sweep and balance, and proof of performance testing. These services identify
and correct any problems that may exist within the newly configured system and
validate whether the construction is sound and the system is operating
optimally.
Network Management Software. Our network management software offering, CNM
System 2, is a third generation product that automatically identifies new units
in the network and receives signals from intelligent agents that provide early
notice of equipment and other network related problems. CNM System 2 is based
on industry standards which facilitate use with numerous network elements and
maximize interoperability with other software applications. Our NAVICOR and I-
Flex product lines are fully integrated with CNM System 2.
We have implemented additional network management software in our Network
Operations Center in Suwanee, Georgia. This software facilitates proactive
monitoring and management of networks by identifying usage trends, pinpointing
customers that consume large amounts of bandwidth for special billing, and
providing real-time fault detection and provisioning advice. The Center's
software collects data and other information from cable modems installed in the
home thereby increasing the amount and reliability of data available to
proactively manage the network. We are currently working to integrate our CNM
System 2 software with the Network Operations Center software to provide a more
comprehensive network management product both for use in our Network Operations
Center and for licensing to customers.
Network Management Services. Our Network Operations Center currently provides a
number of network management services to smaller cable operators. These
services include server management, RF technician help-desk support and end-
user help-desk support, as well as monitoring the overall network integrity.
Server
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<PAGE>
management monitors the servers and routers installed in the customer headend
that control the flow of high-speed data traffic. This service includes remote
backups, problem diagnosis and secondary service. RF technician help-desk
support uses the cable modems as telemetry devices and aids the operator in
troubleshooting, problem diagnosis and maintenance of the RF cable plant. End-
user help-desk services take inbound calls from cable operators' subscribers
with problems and questions on Internet service and browser network
applications.
Network Operations Center Consulting and System Integration Services. We
provide program management, engineering and technical resources for cable
operators to assist them in the design, development, implementation and
operation of their own network operations centers. Typical deliverables during
the planning and design phase include the site survey, business process
assessment, services architecture planning, customer capability assessment,
concept of operations document, systems architecture document and detailed
bill-of-materials. We also procure and install all equipment and software,
regardless of the manufacturer. We offer customized software development to
integrate the network management software with other customer applications such
as billing, dispatching and geographic information systems.
Equipment Service Center. Our Equipment Service Center provides repair and
maintenance services on transmission equipment from all manufacturers. Repair
services include documentation of parts, labor and problem identification.
Upgrade services include bandwidth increases and frequency changes.
Customers
Our principal customers are cable operators and distributors including
Adelphia, Armstrong, AT&T, Blue Ridge, Charter, Comcast, Cox, Fanch,
Intermedia, Mediacom, MediaOne, Pan Asian Systems, PTK, Rifkin, Rogers, TCA,
Time Warner and 21st Century. Our largest customers during fiscal 1999 were
Time Warner, which accounted for 26% of net sales, and AT&T, which accounted
for 17% of net sales. Our largest customer during fiscal 1998 and fiscal 1997
was Time Warner, which accounted for 31% of net sales in fiscal 1998 and 36% in
fiscal 1997. No other customer accounted for more than 10% of net sales during
fiscal 1999, fiscal 1998 and fiscal 1997. Sales to customers outside of the
United States represented 11% of net sales in fiscal 1999, 21% of net sales in
fiscal 1998 and 19% of net sales in fiscal 1997.
Sales and Distribution
Our sales and distribution department is organized into regions that address
areas in the United States, Canada, Latin America, Europe and Asia. In the
United States, we utilize a direct sales force and address our customers both
at the corporate and cable system levels. In Europe, we utilize both direct
sales personnel and distributors. In the other regions, we mainly use
distributors. In addition, we have a number of sales professionals focusing on
selling network management and technical services.
Our sales representatives are supported by sales engineers and customer support
personnel that provide extensive technical support both during and after the
sale. We also provide training to customers and distributors, either at our
facility or at their site.
Our marketing organization is responsible for product planning and management.
This function includes forecasting technology trends, market dynamics and
customer requirements so that new products and services can be developed and
introduced in a timely fashion and at competitive price points. Our marketing
organization provides support to the sales force by developing marketing
brochures, product catalogs and other materials. In addition, the organization
conducts public relation activities and an advertising campaign to heighten
industry awareness of our company and our products and services.
Backlog
We schedule production of our products based on our backlog, informal
commitments from customers and sales projections. Our backlog consists of firm
orders by customers for delivery within the next 12 months. At September 24,
1999, backlog of sales orders amounted to $43.4 million. At June 25, 1999,
backlog of sales orders amounted to $57.6 million, at June 26, 1998, backlog of
sales orders amounted to $25.4 million and, at June 27, 1997, backlog of sales
orders amounted to $35.6 million.
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<PAGE>
Anticipated orders from customers may fail to materialize and delivery
schedules may be deferred or canceled for a number of reasons, including
reductions in capital spending by cable operators. In addition, due to weather-
related seasonal factors and annual capital spending budget cycles of many
customers, our backlog may not necessarily be indicative of actual sales for
any succeeding period.
Facilities
Our manufacturing facilities and processes are ISO 9001 compliant, except for
our Santa Clara facility, which we acquired in connection with the Silicon
Valley Communications acquisition and for which we are currently undertaking
efforts to make compliant. We operate within a progressive assembly environment
for the manufacture of top-level finished products. Our progressive assembly
process includes component preparation, printed circuit board assembly, final
mechanical assembly and test. For certain products, we augment this
manufacturing approach using subcontractors for the printed circuit board
assembly. We perform product audits throughout the factories to ensure customer
quality requirements are met. We operate six principal facilities that we
believe are sufficient for our present operations. Our principal facilities are
as follows:
<TABLE>
<CAPTION>
Approximate Owned /
Location Principal Use Square Feet Leased
- -------- ------------- ----------- -------
<S> <C> <C> <C>
State College, Pennsyl-
vania.................. Administrative Offices and Manufacturing 133,000 Owned
Tijuana, Mexico......... Manufacturing 61,900 Leased
Tipton, Pennsylvania.... Manufacturing 45,000 Owned
Santa Clara, Califor-
nia.................... Development Engineering and Manufacturing 24,500 Leased
Suwanee, Georgia........ Network Operations Center 13,650 Leased
Almere, The Nether-
lands.................. Administrative Offices 5,100 Leased
</TABLE>
Research and Product Development
We are engaged in ongoing research and product development activities that are
intended to advance existing product lines, provide custom-designed variations
of existing product lines, and develop or evaluate new products. Research and
product development activities for the major product groups are conducted at
our headquarters and Santa Clara, California and Suwanee, Georgia facilities.
During fiscal 1999, research and product development expenditures were
primarily directed at expanding our fiber optic technology, network management
systems and RF amplifier line. During fiscal 1999, we also continued with
product development process improvements to reduce cycle time to design,
manufacture and market new products, reduce manufacturing costs and improve
design quality.
During fiscal 1999, we spent approximately $11.8 million on research and
product development related to fiber optic systems, RF transmission equipment,
and network management. Expenditures in these areas totaled approximately $10.0
million during fiscal 1998 and approximately $7.7 million during fiscal 1997.
Competition
Cable equipment markets are highly competitive, requiring substantial resources
and skilled and experienced personnel. We compete based on quality, technology,
customer service, breadth of product offering, pricing and delivery schedule.
We compete with other companies in each of the markets in which we operate,
including General Instrument, Scientific-Atlanta, ADC Telecommunications, Antec
and Harmonic, some of which are large publicly traded companies that may have
greater financial, technical and marketing resources than we do. As we move
forward with our strategy, we may face additional competition from other
broadband management services providers. We have competed successfully in these
markets for over 45 years.
Employees
As of June 25, 1999, we had approximately 1,950 employees, approximately 68% of
whom were engaged in manufacturing, inspection and quality control activities
and 8% of whom were engaged in research and development. The remaining 24% were
engaged in executive, administrative, sales and technical customer services
activities. None of our employees is represented by a labor union with respect
to his or her employment by C-COR.net. We have not experienced any work
stoppages and we consider our relations with our employees to be good.
33
<PAGE>
Suppliers
We closely monitor supplier delivery performance and quality, and employ a
strategy of limiting the total number of global suppliers to those who are
quality leaders in their respective specialties and who will work with us as
partners in the supply chain. Typical items purchased are die cast aluminum
housings, RF hybrids, printed circuit boards, fiber optic lasers and standard
electronic components. Although a few of the components we use are single-
sourced, we have experienced no significant difficulties to date in obtaining
adequate quantities of raw materials and component parts.
We are currently experiencing a limited allocation of RF hybrids that are
manufactured by Motorola and Phillips. We believe we will be able to obtain
sufficient quantities to meet production commitments, but may incur higher
costs in doing so, which would adversely affect gross margins in the short
term.
We use in-house vendor supply relationships to gain access to key parts needed
in the manufacturing process on a "just-in-time" basis. We have implemented a
number of in-house vendor supply relationships to date, and will continue to
establish such relationships in the future in order to decrease vendor lead
times and reduce on-hand inventory.
Intellectual Property
We hold 16 United States patents for various inventions relating to fiber optic
and RF transmission equipment and network management techniques. We attempt to
protect our intellectual property through patents, trademarks, copyrights and a
program of maintaining certain technology as trade secrets. We intend to apply
for patent protection for new inventions in the future as they are developed.
34
<PAGE>
Management
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Richard E. Perry......... 69 Chairman of the Board of Directors
David A. Woodle.......... 43 President and Chief Executive Officer, Director
David R. Ames............ 50 Senior Vice President-Strategic Development and Corporate Marketing
David J. Eng............. 46 Senior Vice President-Worldwide Sales
Gerhard B. Nederlof...... 51 Senior Vice President-Broadband Management Services
Terry L. Wright.......... 49 Senior Vice President-Technology
Mary G. Beahm............ 39 Vice President-Human Resources
Lawrence R. Fisher, Jr... 49 Vice President-Science and Technology
William T. Hanelly....... 43 Vice President-Finance, Secretary and Treasurer
Donald F. Miller......... 57 Vice President-Operations and Manufacturing
Donald M. Cook, Jr....... 68 Director
Michael J. Farrell....... 49 Director
I.N. Rendall Harper, Jr.. 62 Director
Anne P. Jones............ 65 Director
John J. Omlor............ 65 Director
Dr. Frank Rusinko, Jr.... 69 Director
Dr. James J. Tietjen..... 67 Director
</TABLE>
Richard E. Perry has been our Chairman since June 1986. He has also served as
our Chief Executive Officer from July 1985 to August 1996 and from March 1998
to July 1998 and as our President from July 1985 to December 1992.
David A. Woodle has been our President and Chief Executive Officer since July
20, 1998. Before that he was General Manager-Strategic Systems of Raytheon
Systems Company, a company providing computer systems integration services to
government and commercial customers, from January 1998 to July 1998, Vice
President and General Manager, Raytheon E-Systems, HRB Systems from June 1996
to January 1998 and Vice President, Strategic Programs and TMS, Raytheon E-
Systems, HRB Systems from October 1990 to June 1996.
David R. Ames has been our Senior Vice President-Strategic Development and
Corporate Marketing since July 1999. Before that he served as Chairman,
President and Chief Executive Officer and co-founder of Convergence.com
Corporation from May 1994 to July 1999.
David J. Eng has been our Senior Vice President-Worldwide Sales since March
1997. Before that he served as our Vice President-Sales, North, Central and
South America from August 1996 to March 1997 and Vice President-Sales &
Marketing from August 1994 to August 1996. He has also served as Director,
Regional Telephony Sales, Scientific Atlanta, Inc. from March 1993 to July 1994
and Regional Sales Manager, Scientific Atlanta, Inc. from April 1985 to
February 1993.
Gerhard B. Nederlof has been our Senior Vice President-Broadband Management
Services since July 1999. Before that he served as our Senior Vice President-
Marketing from September 1998 to July 1999, Senior Vice President- Marketing,
Business Development and Services from March 1997 to September 1998, Vice
President-Sales, Europe and Pacific Rim from August 1996 to March 1997 and Vice
President-International from January 1992 to August 1996. He also served as
Managing Director of DataCable B.V. from November 1981 to January 1992.
Terry L. Wright has been our Senior Vice President-Technololgy since July 1999.
Before that he served as Chief Technology Officer and co-founder of
Convergence.com Corporation from May 1994 to July 1999.
Mary G. Beahm has been our Vice President-Human Resources since November 1998.
Before that she served as Human Resources Consultant, Westinghouse Electric
Corporation from August 1987 to November 1998.
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<PAGE>
Lawrence R. Fisher, Jr. has been our Vice President-Science and Technology
since July 1999. Before that he was our Vice President-Engineering from August
1996 to July 1999, Director, RF Engineering Product Development from June 1995
to July 1996 and Manager, RF Engineering from June 1994 to May 1995. He also
served as Director of Engineering, Calan, Inc. from January 1993 to May 1994.
William T. Hanelly has been our Vice President-Finance, Secretary and Treasurer
since October 1998. Before that he served as Division Controller of three
divisions for Raytheon Systems Company from May 1998 to October 1998 and as
Vice President, Finance of HRB Systems from June 1994 to May 1998.
Donald F. Miller has been our Vice President-Operations & Manufacturing since
August 1995. Before that he served as our Plant Manager from September 1987 to
August 1995.
Donald M. Cook, Jr. is retired. Formerly, he was the President and Chief
Operating Officer of SEMCOR, Inc., a corporation providing systems engineering
and management services, from May 1990 to January 1996. He also serves as a
Director of RMS Information Systems, Inc.
Michael J. Farrell has been President of Farrell & Co., an investment banking
firm specializing in investing in and organizing mergers involving
manufacturing companies, since 1982. Before that, he was President and CEO, MK
Rail Corporation from 1995 to 1996 and President and COO from 1994 to 1995. He
also serves as Director, Farrell & Co., American Alloys and Pittsburgh Flatroll
Company, Freedom Forge, Federated Investors, Inc. and Board of Visitors,
Pennsylvania State University Smeal College of Business Administration.
I. N. Rendall Harper, Jr. has been the President, Chief Executive Officer and
Treasurer of American Micrographics Company, Inc., a computer graphics company,
since 1977. He also serves as Director, Federal Reserve Bank of Cleveland,
Keystone Minority Capital Fund and Duquesne University.
Anne P. Jones has been a Telecommunications Consultant since October 1994. She
was also a Partner in the Washington, D.C. office of the law firm of
Sutherland, Asbill & Brennan from September 1983 to October 1994. She also
serves as a Director of Motorola, Inc. and American Express Funds.
John J. Omlor has been the President and Chief Executive Officer, John J. Omlor
Associates, Ltd., a general business consulting firm, since 1981. He has also
been Executive Vice President and Chief Financial Officer, Paper Manufacturers
Co., a manufacturer of office consumables, from September 1987 to September
1997. He currently serves as a Director of Paper Manufacturers Co. and FCG,
Inc.
Dr. Frank Rusinko, Jr. has been a Scientist and Director of Consortium for
Premium Carbon Products from Coal since June 1998. Since August 1991, he has
also served as Senior Scientist and Director, Carbon Research Center of College
of Earth and Mineral Sciences, The Pennsylvania State University. He served as
a Senior Scientist and Director, The Anthracite Institute and The Cooperative
Program in Coal Research, from July 1992 to December 1995, College of Earth and
Mineral Sciences, The Pennsylvania State University; Honorary President, Intech
EDM, a division of Intech Technology, N.V., a supplier to the electrical
discharge machining after-market, from August 1991 to December 1993; and
Chairman, Transor Filter, U.S.A., a supplier of EDM filtration systems, since
August 1991.
Dr. James J. Tietjen has been the Dean, School of Technology Management, The
Stevens Institute of Technology, since July 1996. He also served as Head of
Department of Management and Engineering Management, The Stevens Institute of
Technology, from August 1994 to July 1996; President and Chief Executive
Officer, SRI International, a non-profit scientific research firm, from
December 1990 to January 1994; and President and Chief Operating Officer, David
Sarnoff Research Center, Inc., a contract research laboratory, from April 1987
through November 1990.
36
<PAGE>
Description of Capital Stock
General. We are authorized to issue 50,000,000 shares of common stock, par
value $.10 per share and 2,000,000 shares of preferred stock, no par value per
share. All outstanding shares of common stock are fully paid and nonassessable.
As of November 5, 1999, there were 12,376,428 shares of common stock
outstanding and no shares of preferred stock outstanding.
Common Stock. Each holder of common stock is entitled to one vote for each
share owned of record on all matters submitted to the vote of shareholders,
subject to any voting rights of holders of preferred stock that may be issued
in the future. We have three classes of Directors which have staggered terms of
three years. Subject to preferences that may be applicable to any preferred
stock that may be issued in the future and the restrictions on payment of
dividends imposed by our credit facilities and other agreements, the holders of
common stock will be entitled to such dividends as may be declared from time to
time by the Board of Directors from funds legally available therefor and will
be entitled, after payment of all prior claims, to receive, on a pro rata
basis, all of our assets upon liquidation, dissolution or winding up. The
common stock is not redeemable and does not have any conversion rights. Holders
of shares of common stock generally have no preemptive rights to maintain their
respective percentage of ownership in future offers and sales of stock. The
rights, preferences and privileges of holders of common stock are subject to
the rights, preferences and privileges of any preferred stock which we may
issue in the future which could have priority with respect to dividends and
liquidation distributions. We have never paid dividends on our common stock and
have no current intention to do so.
Preferred Stock. No preferred stock that has been authorized is issued or
outstanding. The Board of Directors is authorized to issue one or more series
of preferred stock and to determine the voting rights and the number of shares
constituting the series and the designations, preferences, qualifications,
privileges, limitations, restrictions, options, conversion rights and other
special or relative rights. The Board of Directors may, without shareholder
approval, issue preferred stock with voting and other rights that could
adversely affect the voting power of the holders of common stock. The Board has
designated one series of Preferred Stock in connection with our shareholder
rights plan which is more fully described below.
Anti-Takeover. We have the following provisions in our Articles of
Incorporation or Bylaws which could be viewed as having anti-takeover effects:
(a) a provision requiring advance notice for shareholder nominations of
directors, (b) a staggered Board, (c) "blank check" preferred stock, (d)
removal of directors only for cause, (e) no shareholder action by partial
written consent and (f) a supermajority (66 2/3%) vote required to approve
certain transactions between the Company and an "interested shareholder." In
addition, on August 17, 1999, our Board of Directors adopted a shareholder
rights plan which provided a dividend distribution of one preferred share
purchase right for each outstanding share of our common stock payable September
9, 1999 to shareholders of record on August 30, 1999. Each purchase right
entitles shareholders to buy one one-hundredth of a share of newly created
Series A Junior Participating Preferred Stock at an exercise price $150.00.
Generally, the rights will be exercisable if a person or group hereafter
acquires or commences a tender offer or exchange offer for 20% or more of our
common stock and shares of preferred stock purchasable upon exercise of the
rights will be entitled to a preferential quarterly dividend, voting rights and
a stipulated return in the event of any merger or similar transaction. If we
are acquired after a person or group becomes an "Acquiring Person"(as defined
in the rights plan), each right will entitled its holder to purchase, at the
right's exercise price, a number of shares of common stock of the acquiring
person or group having a market value at that time of twice the right's
exercise price. The rights are designed to assure that all of our shareholders
receive fair and equal treatment in the event of any proposed takeover.
The Pennsylvania Business Corporation Law contains certain provisions
applicable to us that restrict the ability of a person or entity to acquire
control of a Pennsylvania corporation through a business combination, such as a
merger, consolidation or share exchange, or through the acquisition of shares
constituting at least twenty
37
<PAGE>
percent of the votes that can be cast in the election of directors of the
corporation. In general, these provisions operate, under certain circumstances,
to (i) disenfranchise certain shares owned by a person or group that acquires
voting power over 20%, 33 1/3% or 50% or more of the voting shares of the
corporation that are designated as control shares, unless the voting rights of
such shares are restored by shareholder vote, (ii) permit a corporation to
redeem control shares at their then fair market value, (iii) require a person
or group that acquires or announces an intention to acquire 20% or more of the
voting power of the corporation's securities during certain specified time
periods to give notice to each shareholder and the court and (iv) give
shareholders of the corporation the right to receive the fair value of their
shares in cash from a person or group that has acquired 20% of the voting power
of the corporation.
Registration of Shares issued to the Convergence.com and Silicon Valley
Communications Shareholders. Pursuant to the terms of the acquisitions of
Convergence.com and Silicon Valley Communications, we are required to register
the shares of our common stock issued and issuable upon exercise of warrants
and options which we assumed in connection with the acquisitions. We have
already obtained effectiveness of a registration statement covering the resale
of 1,800,253 shares and have filed a registration statement covering the resale
of an additional 1,929,432 shares.
Transfer Agent and Registrar. The Transfer Agent and Registrar for our common
stock is American Stock Transfer & Trust Company.
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<PAGE>
Underwriting
We have entered into an underwriting agreement with the underwriters named
below. CIBC World Markets Corp., Donaldson, Lufkin & Jenrette Securities
Corporation, Warburg Dillon Read LLC and Josephthal & Co. Inc. are acting as
representatives of the underwriters. The underwriting agreement provides for
the purchase of a specific number of shares of common stock by each of the
underwriters. The underwriters' obligations are several, which means that each
underwriter is required to purchase a specified number of shares, but is not
responsible for the commitment of any other underwriter to purchase shares.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares of common
stock set forth opposite its name below:
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
CIBC World Markets Corp..................................... 917,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 917,000
Warburg Dillon Read LLC..................................... 524,000
Josephthal & Co. Inc........................................ 262,000
First Montauk Securities Corp. ............................. 30,000
Freimark Blair & Company, Inc. ............................. 30,000
Kirkpatrick, Pettis, Smith, Polian Inc. .................... 30,000
Parker/Hunter Incorporated.................................. 30,000
SoundView Technology Group, Inc. ........................... 30,000
C.E. Unterberg, Towbin...................................... 30,000
---------
Total..................................................... 2,800,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters have
agreed to purchase all of the shares offered by this prospectus (other than
those covered by the over-allotment option described below) if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances.
The representatives have advised us that the underwriters propose to offer the
shares directly to the public at the public offering price that appears on the
cover page of this prospectus. In addition, the representatives may offer some
of the shares to certain securities dealers at such price less a concession of
$1.50 per share. The underwriters may also allow, and such dealers may reallow,
a concession not in excess of $0.10 per share to certain other dealers. After
the shares are released for sale to the public, the representatives may change
the offering price and other selling terms at various times.
We have granted the underwriters an over-allotment option. This option, which
is exercisable for up to 30 days after the date of this prospectus, permits the
underwriters to purchase a maximum of 420,000 additional shares from us to
cover over-allotments. If the underwriters exercise all or part of this option,
they will purchase shares covered by the option at the public offering price
that appears on the cover page of this prospectus, less the underwriting
discount. If this option is exercised in full, the total price to the public
will be $141.7 million, and the total proceeds to us will be $133.9 million.
The underwriters have severally agreed that, to the extent the over-allotment
option is exercised, they will each purchase a number of additional shares
proportionate to the underwriter's initial amount reflected in the foregoing
table.
39
<PAGE>
The following table provides information regarding the amount of the discount
to be paid to the underwriters by us:
<TABLE>
<CAPTION>
Total
-----------------------------------------
Without Exercise of With Full Exercise of
Per Share Over-Allotment Over-Allotment
--------- ------------------- ---------------------
<S> <C> <C>
$2.42 $6,776,000 $7,792,400
</TABLE>
We estimate that the total expenses of the offering, excluding the underwriting
discount, will be approximately $600,000.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
We, as well as our executive officers and Directors, have agreed to a 90-day
"lock up" with respect to approximately 1,438,302 shares of common stock, and
certain other of our securities that they beneficially own, including
securities that are convertible into shares of common stock and securities that
are exchangeable or exercisable for shares of common stock. This means that,
subject to certain exceptions, for a period of 90 days following the date of
this prospectus, we and such persons may not offer, sell, pledge or otherwise
dispose of these securities without the prior written consent of CIBC World
Markets Corp.
Rules of the Securities and Exchange Commission may limit the ability of the
underwriters to bid for or purchase shares before the distribution of the
shares is completed. However, the underwriters may engage in the following
activities in accordance with the rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purposes of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters
may create a short position in the shares by selling more shares than
are set forth on the cover page of this prospectus. If a short position
is created in connection with the offering, the representatives may
engage in syndicate covering transactions by purchasing shares in the
open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option.
. Penalty bids--If the representatives purchase shares in the open market
in a stabilizing transaction or syndicate covering transaction, they may
reclaim a selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
. Passive market making--Market makers in the shares who are underwriters
or prospective underwriters may make bids for or purchases of shares,
subject to certain limitations, until the time, if ever, at which a
stabilizing bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of shares.
Neither we nor the underwriters make any representation or prediction as to the
effect that the transactions described above may have on the price of the
shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
40
<PAGE>
Legal Matters
The validity of the shares of common stock offered hereby will be passed upon
for us by Ballard Spahr Andrews & Ingersoll, LLP, Philadelphia, Pennsylvania.
Certain legal matters will be passed upon for the underwriters by Hale and Dorr
LLP, Boston, Massachusetts.
Experts
The supplemental consolidated financial statements of the Registrant and
subsidiaries as of June 25, 1999 and June 26, 1998, and for each of the years
in the three-year period ended June 25, 1999, which have been restated to
reflect pooling-of-interests combinations with Convergence.com Corporation and
Silicon Valley Communications, Inc. have been included herein and in the
Registration Statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the
authority of said firm as experts in accounting and auditing.
Where You Can Find More Information
This prospectus, which constitutes a part of a registration statement on Form
S-3 filed by us with the Commission under the Securities Act, omits certain of
the information set forth in the registration statement. Reference is hereby
made to the registration statement and to the exhibits thereto for further
information with respect to us and the securities offered hereby. Copies of the
registration statement and the exhibits thereto are on file at the offices of
the Commission and may be obtained upon payment of the prescribed fee or may be
examined without charge at the public reference facilities of the Commission
described below or via the Commission's web site described below.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents, and each statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.
We are subject to the informational requirements of the Exchange Act, and,
accordingly, file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, NW, Washington,
D.C. 20549, and at the Commission's Regional Offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such documents may also be obtained from the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, at
prescribed rates. Information regarding the operation of the Public Reference
Room may be obtained by calling the Commission at 1-800-SEC-0330. The
Commission maintains a web site (http://www.sec.gov) that contains material
regarding issuers that file electronically with the Commission.
41
<PAGE>
Incorporation Of Certain Documents By Reference
The following documents or portions of documents filed by us (File No. 0-10726)
with the Commission are incorporated herein by reference:
(a) Annual Report on Form 10-K, as amended by Form 10-K/A, for the fiscal
year ended June 25, 1999.
(b) Reports on Form 8-K filed on July 15, 1999, July 26, 1999 (as amended
by Form 8-K/A filed on August 2, 1999), August 30, 1999 and September 24,
1999 (as amended by Form 8-K/A filed on October 13, 1999).
(c) Quarterly Report on Form 10-Q for the fiscal quarter ended September
24, 1999.
(d) The description of our common stock contained in our registration
statement on Form 8-A filed with the Commission under the Exchange Act on
October 27, 1982, as amended by the Form 8 filed with the Commission on
July 3, 1990.
(e) The description of our Series A Junior Participating Preferred Stock
Purchase Rights contained in our registration statement on Form 8-A filed
with the Commission under the Exchange Act on August 30, 1999.
All reports and other documents subsequently filed by us pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
prospectus and prior to the filing of a post-effective amendment which
indicates that all securities offered hereby have been sold or which
deregisters all securities remaining unsold, shall be deemed to be incorporated
by reference into this prospectus and to be a part hereof from the date of the
filing of such reports or documents. Any statement contained in a document, all
or a portion of which is incorporated by reference herein, shall be deemed to
be modified or superseded for purposes of this prospectus to the extent that a
statement contained or incorporated by herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this prospectus.
Upon written or oral request, we will provide without charge to each person,
including any beneficial owner, to whom this prospectus is delivered a copy of
any or all of such documents which are incorporated herein by reference (other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference into the documents that this prospectus
incorporates). Written or oral requests for copies should be directed to
William T. Hanelly, Vice President-Finance, Secretary and Treasurer, 60 Decibel
Road, State College, PA 16801, (814) 238-2461.
42
<PAGE>
Index to Supplemental Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Supplemental Consolidated Balance Sheets as of September 24, 1999
(unaudited), June 25, 1999, and June 26, 1998............................. F-3
Supplemental Consolidated Statements of Operations for the thirteen weeks
ended September 24, 1999 and September 25, 1998 (unaudited), and for the
years ended June 25, 1999, June 26, 1998, and June 27, 1997............... F-4
Supplemental Consolidated Statements of Cash Flows for the for the thirteen
weeks ended September 24, 1999 and September 25, 1998 (unaudited), and for
the years ended June 25, 1999, and June 26, 1998, and June 27, 1997....... F-5
Supplemental Consolidated Statements of Shareholders' Equity for the
thirteen weeks ended September 24, 1999 (unaudited) and for the years
ended June 25, 1999, June 26, 1998, and June 27, 1997..................... F-6
Notes to Supplemental Consolidated Financial Statements.................... F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
C-COR.net Corp.:
We have audited the accompanying supplemental consolidated balance sheets of C-
COR.net Corp. as of June 25, 1999, and June 26, 1998, and the related
supplemental consolidated statements of operations, cash flows and
shareholders' equity for each of the years in the three-year period ended June
25, 1999. These supplemental consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these supplemental consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the mergers of C-COR.net Corp. and Convergence.com and Silicon Valley
Communications, Inc. on July 9, 1999 and September 17, 1999, respectively,
which have been accounted for as poolings-of-interests as described in the
description of business section of the notes to the supplemental consolidated
financial statements. Generally accepted accounting principles proscribe giving
effect to consummated business combinations accounted for by the pooling-of-
interests method in financial statements that do not include the dates of
consummation. These financial statements do not extend through the dates of the
consummation. However, they will become the historical consolidated financial
statements of C-COR.net Corp. after financial statements covering the dates of
consummation of the business combinations are issued.
In our opinion, the supplemental consolidated financial statements referred to
above present fairly, in all material respects, the financial position of C-
COR.net Corp. as of June 25, 1999, and June 26, 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 25, 1999, in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the dates of consummation of the business combinations.
KPMG LLP
State College, Pennsylvania
September 20, 1999
F-2
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Supplemental Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
September 24, June 25, June 26,
1999 1999 1998
------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents..................... $ 500 $ 4,695 $ 3,030
Marketable securities......................... 438 445 356
Accounts and notes receivables, less allowance
of $1,322 on September 24, 1999, $1,007 on
June 25, 1999 and $923 on June 26, 1998 ..... 34,269 31,314 19,823
Inventories................................... 27,931 23,565 17,809
Deferred taxes................................ 6,974 6,335 2,797
Other current assets.......................... 5,905 3,457 2,575
Net current assets of discontinued
operations................................... 305 433 --
-------- -------- -------
Total current assets...................... 76,322 70,244 46,390
Property, plant, and equipment, net........... 28,664 27,792 29,853
Intangible assets, net of accumulated
amortization of $76 on September 24, 1999,
$172 on June 25, 1999 and $-0- on
June 26, 1998................................ 182 1,131 1,295
Other long-term assets........................ 3,732 3,782 6,536
-------- -------- -------
Total assets.............................. $108,900 $102,949 $84,074
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable.............................. $ 15,145 $ 16,286 $ 6,532
Accrued liabilities........................... 19,220 16,242 10,831
Line-of-credit and short-term credit
obligations.................................. 6,622 4,638 --
Current portion of long-term debt............. 813 832 926
Net current liabilities of discontinued
operations................................... -- -- 517
-------- -------- -------
Total current liabilities................. 41,800 37,998 18,806
Long-term debt, less current portion.......... 3,513 3,708 5,567
Other long-term liabilities................... 1,479 1,329 1,041
Commitments and contingent liabilities........
-------- -------- -------
Total liabilities......................... 46,792 43,035 25,414
-------- -------- -------
Shareholders' equity
Preferred stock, no par; authorized 2,000,000
shares; issued, none......................... -- -- --
Common stock, $.10 par; authorized shares
24,000,000; issued shares of 12,919,160 on
September 24, 1999, 12,761,485 on June 25,
1999 and 12,631,166 on June 26, 1998......... 1,292 1,276 1,263
Additional paid-in capital.................... 46,790 44,649 42,041
Accumulated other comprehensive loss.......... (100) (96) (99)
Unearned compensation......................... (14) -- --
Retained earnings............................. 21,120 21,065 21,351
Treasury stock at cost, shares of 600,723 on
September 24, 1999 and June 25, 1999, and
510,342 on June 26, 1998..................... (6,980) (6,980) (5,896)
-------- -------- -------
Total shareholders' equity................ 62,108 59,914 58,660
-------- -------- -------
Total liabilities and shareholders'
equity................................... $108,900 $102,949 $84,074
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Supplemental Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Years Ended
--------------------------- ----------------------------
September 24, September 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
------------- ------------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............... $64,503 $34,654 $183,425 $154,041 $133,780
Cost and expenses:
Cost of sales.......... 48,278 27,128 138,793 121,986 106,485
Selling and
administrative........ 7,109 5,355 27,153 19,724 18,521
Research and product
development........... 3,175 2,789 11,833 9,988 7,706
Merger-related costs... 3,673 -- -- -- --
Provision for
restructuring costs... -- -- -- 625 --
Interest............... 621 57 1,384 399 380
Other expense (income),
net................... 307 (30) 110 19 (861)
------- ------- -------- -------- --------
63,163 35,299 179,273 152,741 132,231
------- ------- -------- -------- --------
Income (loss) from
continuing operations
before income taxes.... 1,340 (645) 4,152 1,300 1,549
Income tax expense
(benefit):
Current................ 1,984 607 7,133 3,565 1,299
Deferred............... (663) (136) (2,298) (3,183) (648)
------- ------- -------- -------- --------
1,321 471 4,835 382 651
------- ------- -------- -------- --------
Income (loss) from con-
tinuing operations..... 19 (1,116) (683) 918 898
------- ------- -------- -------- --------
Discontinued operations:
Loss from operations of
discontinued business
segment, net of tax... -- -- -- -- (6,605)
Gain (loss) on disposal
of discontinued
business segment, net
of tax................ 36 288 397 928 (3,830)
------- ------- -------- -------- --------
Net income
(loss)........... $ 55 $ (828) $ (286) $ 1,846 $ (9,537)
======= ======= ======== ======== ========
Net income (loss) per
share--(basic):
Continuing operations.. $ 0.00 $ (0.09) $ (0.06) $ 0.08 $ 0.07
Discontinued
operations:
Loss from
operations......... -- -- -- -- (0.54)
Gain (loss) on
disposal........... 0.00 0.02 0.04 0.08 (0.32)
------- ------- -------- -------- --------
Net income
(loss)........... $ 0.00 $ (0.07) $ (0.02) $ 0.16 $ (0.79)
======= ======= ======== ======== ========
Net income (loss) per
share--(diluted):
Continuing operations.. $ 0.00 $ (0.09) $ (0.06) $ 0.07 $ 0.07
Discontinued
operations:
Loss from
operations......... -- -- -- -- (0.53)
Gain (loss) on
disposal........... 0.00 0.02 0.04 0.08 (0.31)
------- ------- -------- -------- --------
Net income
(loss)........... $ 0.00 $ (0.07) $ (0.02) $ 0.15 $ (0.77)
======= ======= ======== ======== ========
Weighted average common
shares and common share
equivalents
Basic.................. 12,224 12,124 12,098 11,895 12,143
Diluted................ 13,266 12,124 12,098 12,340 12,402
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Supplemental Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Years Ended
----------------------- ----------------------------
Sep. 24, Sep. 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
-------- -------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss)........ $ 55 $ (828) $ (286) $ 1,846 $(9,537)
Adjustments to reconcile
net income to net cash
and cash equivalents
provided by operating
activities:
Depreciation and
amortization........... 2,164 2,086 8,860 6,967 5,433
Amortization of debt
discount............... 381 -- 911 -- --
Amortization of unearned
compensation........... 7 --
(Gain) loss on disposal
of discontinued
operations, net of
tax.................... (36) (288) (397) (928) 3,830
Provision for deferred
retirement salary
plan................... 150 125 204 292 252
Loss (gain) on sale of
property, plant, and
equipment.............. 333 -- 229 (14) 22
Changes in operating
assets and liabilities:
Accounts receivable..... (2,955) 970 (11,491) (50) 1,127
Inventories............. (4,366) (242) (5,756) 2,748 (1,454)
Other assets............ (1,603) 1,598 (165) (2,793) (221)
Accounts payable........ (1,141) 1,643 9,754 (2,574) 3,005
Accrued liabilities..... 2,978 (2,129) 5,493 3,801 (113)
Deferred income taxes... (663) (136) (2,298) (3,189) (929)
Discontinued
operations--working
capital changes and
noncash charges........ 164 (209) (553) 1,051 3,236
------- ------- -------- -------- -------
Net cash and cash
equivalents provided by
(used in) operating
activities.............. (4,532) 2,590 4,505 7,157 4,651
------- ------- -------- -------- -------
Investing Activities:
Purchase of property,
plant, and equipment.... (3,190) (1,074) (8,159) (10,053) (7,244)
Purchase of marketable
securities.............. -- -- (84) -- (200)
Proceeds from sale of
marketable securities... -- -- -- 15 258
Issuance of (payments on)
notes receivable, net... -- -- 1,972 (2,011) 7
Change in other assets... -- 45 94 (146) (317)
Proceeds from sale of
property, plant, and
equipment............... 2 -- 28 14 15
Proceeds from (investing
activities of)
discontinued
operations.............. -- -- -- 656 (698)
------- ------- -------- -------- -------
Net cash and cash
equivalents used in
investing activities.... (3,188) (1,029) (6,149) (11,525) (8,179)
------- ------- -------- -------- -------
Financing Activities:
Payment of debt and
capital lease
obligations............. (214) (4,481) (5,050) (966) (941)
Proceeds from long-term
debt borrowing.......... -- -- 3,097 -- --
Proceeds from (payments
on) short-term credit
facilities, net......... 1,603 980 4,638 (3,466) 1,127
Proceeds from issuance of
convertible preferred
stock................... -- 5 336 2,780 15,710
Tax benefit deriving from
exercise and sale of
stock option shares..... -- -- 94 57 71
Issue common stock to
employee stock purchase
plan.................... 25 15 76 51 88
Proceeds from exercise of
stock options........... 2,111 213 1,202 277 278
Purchase of treasury
stock................... -- (364) (1,084) (131) (5,765)
------- ------- -------- -------- -------
Net cash and cash
equivalents provided by
(used in) financing
activities.............. 3,525 (3,632) 3,309 (1,398) 10,568
------- ------- -------- -------- -------
Increase (decrease) in
cash and cash
equivalents............. (4,195) (2,071) 1,665 (5,766) 7,040
Cash and cash equivalents
at beginning of year.... 4,695 3,030 3,030 8,796 1,762
------- ------- -------- -------- -------
Cash and cash equivalents
at end of year.......... $ 500 $ 959 $ 4,695 $ 3,030 $ 8,802
======= ======= ======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Supplemental Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid-in Comprehensive Unearned Retained Treasury
Income Stock Capital Income (Loss) Compensation Earnings Stock
------------- ------ ---------- ------------- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, June 28, 1996,
as reported............ $ 960 $19,602 $ (55) -- $32,810 $ --
Poolings of interest
with Convergence and
SVCI................... 252 4,082 -- -- (4,200) --
------ ------- ----- ----- ------- --------
Balance, June 28, 1996,
as restated............ 1,212 23,684 (55) -- 28,610 --
Net loss................ $(9,537) -- -- -- -- (9,537) --
Other comprehensive in-
come:
Net unrealized holding
gains on marketable
securities............ 7 -- -- -- -- -- --
Foreign currency trans-
lation (loss)......... (67) -- -- -- -- -- --
-------
Other comprehensive in-
come (loss)............ (60) -- -- (60) -- -- --
-------
Comprehensive loss...... $(9,597) -- -- -- -- -- --
=======
Shares issued........... 21 15,698 -- -- -- --
Exercise of stock op-
tions.................. 4 273 -- -- -- --
Tax benefit deriving
from exercise and sale
of stock option
shares................. -- 71 -- -- -- --
Issue shares to employee
stock purchase plan.... 1 87 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (5,765)
------- ------ ------- ----- ----- ------- --------
Balance, June 27, 1997.. 1,238 39,813 (115) -- 19,073 (5,765)
Net income.............. $ 1,846 -- -- -- -- 1,846 --
Other comprehensive in-
come:
Net unrealized holding
gains on marketable
securities............ 7 -- -- -- -- -- --
Foreign currency trans-
lation gain........... 9 -- -- -- -- -- --
-------
Other comprehensive in-
come................... 16 -- -- 16 -- -- --
-------
Comprehensive income.... $ 1,862 -- -- -- -- -- --
=======
Adjustment related to
merger (Note A)........ -- -- -- -- 432 --
Shares issued........... 17 1,850 -- -- -- --
Exercise of stock op-
tions.................. 8 270 -- -- -- --
Tax benefit deriving
from exercise and sale
of stock option
shares................. -- 57 -- -- -- --
Issue shares to employee
stock purchase plan.... -- 51 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (131)
------- ------ ------- ----- ----- ------- --------
Balance, June 26, 1998.. 1,263 42,041 (99) -- 21,351 (5,896)
Net loss................ $ (286) -- -- -- -- (286) --
Other comprehensive in-
come:
Net unrealized holding
gains on marketable
securities............ 4 -- -- -- -- -- --
Foreign currency trans-
lation loss........... (1) -- -- -- -- -- --
-------
Other comprehensive in-
come................... 3 -- -- 3 -- -- --
-------
Comprehensive loss...... $ (283) -- -- -- -- -- --
=======
Shares issued........... 1 1,254 -- -- -- --
Exercise of stock op-
tions.................. 11 1,185 -- -- -- --
Tax benefit deriving
from exercise and sale
of stock option
shares................. -- 94 -- -- -- --
Issue shares to employee
stock purchase plan.... 1 75 -- -- -- --
Purchase of treasury
stock.................. -- -- -- -- -- (1,084)
------- ------ ------- ----- ----- ------- --------
Balance, June 25, 1999.. 1,276 44,649 (96) -- 21,065 (6,980)
Net income.............. $ 55 -- -- -- -- 55 --
Other comprehensive
income:
Net unrealized holding
loss on marketable se-
curities.............. (4) -- -- -- -- -- --
-------
Other comprehensive
loss................... (4) -- -- (4) -- -- --
-------
Comprehensive income.... $ 51 -- -- -- -- -- --
=======
Shares issued........... -- -- -- -- -- --
Exercise of stock op-
tions.................. 16 2,095 -- -- -- --
Tax benefit deriving
from exercise and sale
of stock options
shares................. -- -- -- -- -- --
Issue shares to employee
stock purchase plan.... -- 25 -- -- -- --
Issue restricted stock.. -- 21 -- (21) -- --
Amortization of unearned
compensation .......... -- -- -- 7 -- --
------ ------- ----- ----- ------- --------
Balance, September 24,
1999................... $1,292 $46,790 $(100) $(14) $21,120 $(6,980)
====== ======= ===== ===== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Description of Business
The Company designs and manufactures network distribution products and provides
technical services in support of two-way hybrid fiber coax (HFC) networks. The
Company has predominately operated in the Electronic Distribution Products
segment, which provides HFC equipment for signal distribution applications
primarily to the cable television (CATV) market. In order to expand the
Company's product offering in the Electronics Distribution Products segment, on
September 17, 1999, subsequent to the fiscal year ended June 25, 1999, the
Company completed a merger with Silicon Valley Communications, Inc. ("SVCI"),
whereby SVCI became a wholly-owned subsidiary of the Company. In addition, on
July 9, 1999, also subsequent to the fiscal year ended June 25, 1999, the
Company completed a merger with Convergence.com Corporation ("Convergence"),
whereby Convergence became a wholly owned subsidiary of the Company. These
transactions were accounted for under the pooling-of-interest method of
accounting and accordingly, the accompanying financial statements have been
retroactively restated to give effect to the Convergence and SVCI mergers as if
they had occurred on June 28, 1996. As a result of the merger with Convergence,
the Company now operates a separate business unit called Broadband Management
Services, which provides design, activation, network management and
optimizations, as well as ongoing support, repair and maintenance to broadband
operators in the United States.
A. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its foreign and domestic subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Reporting Periods
Management has adopted a fiscal year which ends on the last Friday in June. For
the 13-week reporting periods presented herein, the quarters ended on September
24, 1999 and September 25, 1998. For the 52-week reporting periods presented
herein, the years ended on June 25, 1999, June 26, 1998, and June 27, 1997.
Convergence had operated and reported on a calendar year basis prior to the
merger. Operating results for the fiscal year ended June 25, 1999 and June 26,
1998, include the operations of Convergence for the 12-month periods ended June
30, 1999 and June 30, 1998, respectively. Operating results for the fiscal year
ended June 27, 1997, include the operations of Convergence for the 12-month
period ended December 31, 1997. This results in an overlapping period (July
1997 through December 1997) for Convergence's results of operations being
included in the restated consolidated financial statements. Accordingly, the
statement of shareholders' equity for the year ended June 26, 1998 includes a
$432 adjustment to eliminate the impact on retained earnings for the overlap
period.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Revenue Recognition
The Company's revenues derive principally from equipment sales, which are
generally recognized when the equipment has been shipped. Revenue from Internet
service is recognized monthly as services are provided to subscribers. Other
service revenues, consisting of system design, field services and other
consulting engagements, are generally recognized as services are rendered.
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable and accrued
liabilities approximate their fair value due to the short-term nature of those
instruments. The carrying value of the Company's long-term borrowings
approximates fair value.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment, which includes leased property under capital
leases, is stated at cost. Cost includes interest associated with capital
additions. Capitalized interest was $-0- for fiscal years 1999, 1998 and 1997,
respectively. Depreciation or amortization is calculated on the straight-line
method for financial statement purposes based upon the following estimated
useful lives:
<TABLE>
<S> <C>
Building and improvements under capital lease................. 15 years
Buildings..................................................... 15 to 25 years
Machinery and equipment under capital lease................... 5 years
Machinery and equipment....................................... 3 to 10 years
Leasehold improvements........................................ 7 to 15 years
</TABLE>
Computer Software
Under Statement of Financial Accounting Standards No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" (Statement
86), the Company capitalizes certain internal and purchased software
development and production costs once technological feasibility has been
achieved. For the fiscal years ended 1999 and 1998, the Company capitalized
$389 and $670, respectively, of purchased software development costs, which is
included in other long-term assets in the consolidated financial statements.
The Company did not capitalize any software development costs during fiscal
year 1997. Amortization will commence upon initial product release, which the
Company anticipates will occur during the first quarter of its fiscal year
2000, and as such no amortization has been recorded in fiscal years 1999 and
1998.
Intangible Assets
Patents, trademarks and licenses are carried at cost less accumulated
amortization, which is calculated on a straight-line basis over the estimated
three year useful life of the asset. The patents, trademarks and license costs
relate to purchased and internally developed product lines. For fiscal years
ended 1999, 1998 and 1997, the Company recorded $172, $-0- and $-0- of
amortization, respectively.
Income Taxes
Under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (Statement 109), deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
F-8
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under Statement
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date.
Shareholders' Equity
In fiscal years 1999 and 1998, the Company repurchased 90,381 shares for $1,084
and 10,342 shares for $131, respectively, of its common stock under a stock
repurchase program adopted in September 1997. In fiscal year 1997, the Company
repurchased 500,000 shares of its common stock for $5,765, under a stock
repurchase program adopted in December 1996. The Company used its available
capital resources to fund the purchases under both repurchase programs. The
repurchased stock is being held by the Company as treasury stock and is
available to be used in meeting the Company's obligations under its present and
future stock option plans and for other corporate purposes. In May 1999, the
Company terminated the stock repurchase program adopted in September 1997.
Cash Equivalents
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents. Cash equivalents are
reflected at the lower of cost or market.
Marketable Securities
Marketable securities at June 25, 1999, consisted of municipal bonds and equity
securities. The Company follows the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (Statement 115), in accounting for marketable securities.
Under Statement 115, the Company classifies all of its marketable securities as
available-for-sale and records them at fair value. Unrealized holding gains and
losses are excluded from income and are recorded directly to shareholders'
equity in accumulated other comprehensive income, net of related deferred
income taxes.
Net income (loss) per share
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(Statement 128), became effective for financial statements issued for periods
ending after December 15, 1997. The Company adopted this statement in the
second quarter of fiscal year 1998, and has restated prior periods presented as
required. Implementation of this Statement did not have a material effect on
the Company's consolidated financial statements.
F-9
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Basic earnings (loss) per share are computed based on the weighted average
number of common shares outstanding, excluding any dilutive options and awards.
Dilutive net income (loss) per share is computed based on the weighted average
number of common shares outstanding plus the dilutive effect of options. The
dilutive effect of options is calculated under the treasury stock method using
the average market price for the period. Net income (loss) per share is
calculated as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Years Ended
------------------------------------------------
Sep. 24, Sep. 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
--------- --------- -------- ------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Income (loss) from
continuing operations.. $ 19 $ (1,116) $ (683) $ 918 $ 898
Gain (loss) from
discontinued
operations............. 36 288 397 928 (10,435)
--------- ---------- ------- ------- --------
Net income (loss)....... $ 55 $ (828) $ (286) $ 1,846 $ (9,537)
========= ========== ======= ======= ========
Basic shares
outstanding............ 12,224 12,124 12,098 11,895 12,143
Common stock
equivalents............ 1,042 -- -- 445 259
--------- ---------- ------- ------- --------
Dilutive potential
common shares.......... 13,266 12,124 12,098 12,340 12,402
========= ========== ======= ======= ========
Net income (loss) per
share--(basic)
Continuing operations.. $ 0.00 $ (0.09) $ (0.06) $ 0.08 $ 0.07
Discontinued
operations............ 0.00 0.02 0.04 0.08 (0.86)
--------- ---------- ------- ------- --------
Net income (loss)....... $ 0.00 $ (0.07) $ (0.02) $ 0.16 $ (0.79)
========= ========== ======= ======= ========
Net income (loss) per
share--(diluted)
Continuing operations.. $ 0.00 $ (0.09) $ (0.06) $ 0.07 $ 0.07
Discontinued
operations............ 0.00 0.02 0.04 0.08 (0.84)
--------- ---------- ------- ------- --------
Net income (loss)....... $ 0.00 $ (0.07) $ (0.02) $ 0.15 $ (0.77)
========= ========== ======= ======= ========
</TABLE>
Product Warranty
The Company warrants its products against defects in materials and workmanship,
generally for three to five years depending upon product lines. A provision for
estimated future costs relating to warranty expense is recorded when product is
shipped, based upon historical claims history and specifically identified
warranty exposures.
Restructuring Costs
On June 25, 1998, the Company announced the closing of its manufacturing plant
located in Reedsville, Pennsylvania. As a result of this action, the Company
incurred restructuring charges in the fourth quarter of its fiscal year 1998 of
$625. The restructuring charge represented salaries and benefits for
approximately 143 employees affected by the plant closing. The work force
reduction occurred during the first quarter of fiscal year 1999, thereby
eliminating the restructuring accrual at June 25, 1999.
At June 26, 1998, the Company had a Lease/Option to Purchase Agreement with the
Mifflin County Industrial Development Corporation (MCIDC) for the building and
improvements located in Reedsville, Pennsylvania. On August 10, 1998, the
Company purchased the facility using its available capital resources and
expects to sell the facility at a price in excess of its net carrying value.
The facility has been reclassified from property, plant and equipment to
property held-for-sale, which is included in other current assets on the
consolidated balance sheet as of June 25, 1999, with a carrying value of
$1,281.
F-10
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Comprehensive Income
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (Statement 130), which
requires net unrealized investment gains or losses on the Company's available-
for-sale securities and net foreign exchange gains or losses on translation,
which previously were reported directly in shareholders' equity, to be included
in accumulated other comprehensive income in the consolidated balance sheet and
in the disclosure of comprehensive income. The totals of other comprehensive
income items and comprehensive income (which includes net income) are displayed
separately in the consolidated statements of shareholders' equity. The adoption
of this statement had no effect on net income or shareholders' equity.
The components of other comprehensive income (loss) and the related tax effects
are as follows:
<TABLE>
<CAPTION>
Income
Amount Tax Amount
Before Expense Net of
Tax (Benefit) Taxes
------ --------- ------
(In thousands)
<S> <C> <C> <C>
Thirteen weeks ended September 24, 1999
Unrealized holding loss during the period.......... $ (6) $ (2) $ (4)
----- ---- ----
Total other comprehensive loss..................... $ (6) $ (2) $ (4)
===== ==== ====
Thirteen weeks ended September 25, 1998
Net foreign exchange gain.......................... $ 40 $ 16 $ 24
----- ---- ----
Total other comprehensive income................... $ 40 $ 16 $ 24
===== ==== ====
Fiscal year ended June 25, 1999
Unrealized holding gain during the fiscal year..... $ 7 $ 3 $ 4
Net foreign exchange loss.......................... (2) (1) (1)
----- ---- ----
Total other comprehensive income................... $ 5 $ 2 $ 3
===== ==== ====
Fiscal year ended June 26, 1998
Unrealized holding gain during the fiscal year..... $ 12 $ 5 $ 7
Net foreign exchange gain.......................... 15 6 9
----- ---- ----
Total other comprehensive income................... $ 27 $ 11 $ 16
===== ==== ====
Fiscal year ended June 27, 1997
Unrealized holding gain during the fiscal year..... $ 12 $ 5 $ 7
Net foreign exchange loss.......................... (112) (45) (67)
----- ---- ----
Total other comprehensive income (loss)............ $(100) $(40) $(60)
===== ==== ====
</TABLE>
Accounting and Disclosure Changes
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (Statement
133), which was effective for fiscal years beginning after June 15, 1999. In
July 1999, the FASB announced it was delaying the effective date of Statement
133 for one year, to fiscal years beginning after June 15, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. The Company anticipates adopting this Statement in its
fiscal year 2001 consolidated financial statements as required. Implementation
of this Statement is not expected to have a material effect on the Company's
consolidated financial statements.
F-11
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
B. Discontinued Operations
On July 10, 1997, the Company announced that it would discontinue its Digital
Fiber Optics Transmission Products segment located in Fremont, California, in a
nine-month wind-down process. An estimated loss on disposal, including write-
offs of inventory and fixed assets and other costs from the measurement to the
disposal date, were recorded in fiscal year 1997. The estimated loss, net of
tax benefit of $1,974 on the disposal of the discontinued business segment, was
$3,830 in fiscal year 1997.
The Company completed the phase-down of this operation as of March 1998. A gain
on disposal of the discontinued business segment of $397, net of tax expense of
$477, was recorded during the fiscal year ended 1999. The gain in fiscal year
1999 resulted primarily from settlement of certain warranty claims. The Company
recorded a gain of $928, which includes a net tax benefit of $94 on the
disposal of the discontinued segment in fiscal year 1998. In fiscal year 1998,
the gain derived primarily from higher than anticipated proceeds associated
with the disposal of assets, primarily inventory, and lower than anticipated
operating costs from the measurement date to the disposal date.
The after-tax loss from operations of the discontinued business segment was
$6,605 for fiscal year 1997. The primary factors contributing to the loss from
operations of the discontinued business segment in fiscal year 1997 were
increased warranty costs of $3,300 and an impairment loss on goodwill of $571,
recorded in the fourth quarter of fiscal year 1997.
Operating results for the discontinued business segment are segregated and
reported as discontinued operations in the accompanying consolidated statements
of operations. Summarized information relating to the discontinued operation
for fiscal year 1997 is as follows:
<TABLE>
<CAPTION>
June 27, 1997
--------------
(In thousands)
<S> <C>
Net sales..................................................... $ 7,994
Costs and expenses............................................ (17,351)
--------
Loss before income taxes...................................... (9,357)
Income tax benefit............................................ 2,752
--------
Net loss...................................................... $ (6,605)
========
</TABLE>
F-12
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying consolidated financial statements to
separately identify them as net current assets (liabilities) related to the
discontinued operations. These net assets consist of net working capital and
other assets, less related liabilities as follows as of June 25, 1999 and June
26, 1998:
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Current assets:
Accounts receivable.................................... $ 16 $ 150
Notes receivable....................................... 796 981
Deferred tax assets.................................... 474 1,602
Other assets........................................... -- 156
----- ------
1,286 2,889
----- ------
Current liabilities:
Accrued warranty and other............................. (728) (2,806)
Allowance for disposal of discontinued operations...... (125) (600)
----- ------
(853) (3,406)
----- ------
Net current assets (liabilities) of discontinued
operations.............................................. $ 433 $ (517)
===== ======
</TABLE>
C. Marketable Securities
Marketable securities as of June 25, 1999 and June 26, 1998, consisted of the
following:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(In thousands)
<S> <C> <C> <C> <C>
June 25, 1999:
Available-for-sale:
Municipal bonds....................... $351 $ -- $ (9) $342
Equity securities..................... 101 2 -- 103
---- ----- ----- ----
$452 $ 2 $ (9) $445
==== ===== ===== ====
June 26, 1998:
Available-for-sale:
Municipal bonds....................... $366 $ -- $ (12) $354
Equity securities..................... 2 -- -- 2
---- ----- ----- ----
$368 $ -- $ (12) $356
==== ===== ===== ====
</TABLE>
Maturities of investment securities classified as available-for-sale at June
25, 1999, were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- -----
(In thousands)
<S> <C> <C>
Available-for-sale:
Due after one year through five years....................... $351 $342
Equity securities........................................... 101 103
---- ----
$452 $445
==== ====
</TABLE>
F-13
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
D. Inventories
<TABLE>
<CAPTION>
Sep.
24, June 25, June 26,
1999 1999 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Finished goods..................................... $ 4,928 $ 3,287 $ 2,850
Work-in-process.................................... 5,338 3,038 1,874
Raw materials...................................... 17,665 17,240 13,085
------- ------- -------
$27,931 $23,565 $17,809
======= ======= =======
</TABLE>
Included in the amounts above were reserves of $4,034 at September 24, 1999,
$2,231 at June 25, 1999 and $3,213 at June 26, 1998.
E. Property, Plant and Equipment
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Land....................................................... $ 468 $ 468
Building and improvements under capital lease.............. -- 1,727
Buildings.................................................. 10,760 10,683
Machinery and equipment under capital lease................ 343 217
Machinery and equipment.................................... 50,874 44,393
Leasehold improvements..................................... 1,326 1,123
------- -------
63,771 58,611
Less accumulated depreciation and amortization............. 35,979 28,758
------- -------
$27,792 $29,853
======= =======
</TABLE>
F. Intangible Assets
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Cost of intangibles:
Patents and trademarks................................... $1,045 $1,045
Licensing costs.......................................... 258 250
------ ------
1,303 1,295
------ ------
Less accumulated amortization:
Patents and trademarks................................... $ (116) $ --
Licensing costs.......................................... (56) --
------ ------
(172) --
------ ------
Net book value............................................. $1,131 $1,295
====== ======
</TABLE>
F-14
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
G. Credit Facilities
The Company has a line-of-credit with a bank, whereby the Company may borrow
the lesser of $25,000, net of outstanding letters of credit up to a $2,000 sub-
limit, or a percentage of eligible accounts receivable and inventory. The
borrowings bear interest at various rates generally equal to the London
Interbank Offered Rate (LIBOR) plus 1.00% and require compliance with certain
covenants. Interest is payable in 30 days as billed. The line-of-credit
agreement is committed through December 31, 1999. Accounts receivable and
inventory collateralize the borrowings. At June 25, 1999, and June 26, 1998,
the Company had no short-term borrowings outstanding on this revolving line-of-
credit. Based upon the Company's analysis of eligible accounts receivable and
inventory, approximately $23,300 was available to borrow as of June 25, 1999.
On August 9, 1999, the Company replaced this revolving line-of-credit agreement
with a new credit agreement (Reference Note T).
As a result of the Company's merger with SVCI, the Company has an additional
line of credit with a bank, which provided for borrowings of up to $3,000, a
bank bridge loan, which provided for borrowings of up to $1,000, and a bank
equipment term loan of $300. The line of credit and term loan bear annual
interest at the bank's prime rate plus 0.50% (8.25% as of June 25, 1999), with
maturity dates of June 30, 1999, and August 30, 2000, respectively. The bridge
loan bears interest at the bank's prime rate plus 1.5% (9.25% as of June 25,
1999), with a maturity date of September 4, 1999. The outstanding balances on
the line of credit, bridge loan, and the term loan are $2,515, $500, and $188,
respectively, as of June 25, 1999. The line of credit and loans are fully
collateralized by a continuing security interest in substantially all assets
presently owned or subsequently acquired by SVCI. The line of credit and loans
contain certain restrictive financial covenants. As of June 25, 1999, the SVCI
was not in compliance with certain of the covenants. The bank agreed to defer
action on the noncompliance event pending the signing of a merger agreement. A
merger agreement was signed with the Company on July 13, 1999.
From March to May 1999, the Company borrowed $1,817 from certain founders and
shareholders of SVCI under promissory notes payable. As of June 25, 1999, the
balance was $1,435. The notes bear interest at an annual rate of 9% and are due
in July 1999. In connection with these notes, the Company issued warrants to
purchase the Company's common stock (See Note J).
In connection with the bridge loan, warrants to purchase 4,727 shares of the
Company's common stock were issued at an exercise price of $42.31 per share.
These warrants have a fair value of $41 and are being amortized over the life
of the bridge loan.
In fiscal year 1998, in connection with the line of credit and term loan,
warrants to purchase 3,025 shares of the Company's common stock were issued at
an exercise price of $74.05 per share. The purchase rights represented by these
warrants expire on January 4, 2002. The warrants have a fair value of $13 and
are being amortized over the life of the related debt instruments.
On October 21, 1998, a then existing bank line of credit and term loan was
restructured. In consideration for the restructuring, warrants to purchase 945
shares of the Company's common stock were issued at an exercise price of $74.05
per share. The warrants are exercisable upon issuance and expire on January 4,
2002. The warrants have a fair value of $4 and are being amortized over the
life of the related debt instruments.
F-15
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
H. Long-term Debt
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Notes payable.............................................. $4,392 $4,909
Capital lease obligations.................................. 148 1,584
------ ------
4,540 6,493
Less current portion....................................... 832 926
------ ------
$3,708 $5,567
====== ======
</TABLE>
Notes Payable: The Company obtained funding through the Pennsylvania Industrial
Development Authority (PIDA) of $539 for construction of the Tipton,
Pennsylvania, manufacturing facility. The PIDA borrowing has an interest rate
of 3%, which is contingent upon meeting certain job creation commitments.
Monthly payments of principal and interest of $4 are required through 2006.
Certain property, plant and equipment collateralize the borrowing. The
principal balance at June 25, 1999 was $264.
The Company obtained funding through the Pennsylvania Industrial Development
Authority (PIDA) of $1,952 for 40% of the cost of building expansion at its
manufacturing facility in State College, Pennsylvania. The PIDA borrowing has
an interest rate of 2%, which is contingent upon meeting certain job creation
commitments. Monthly payments of principal and interest of $13 are required
through 2010. Certain property, plant and equipment collateralize the
borrowing. The principal balance at June 25, 1999 was $1,528.
On October 19, 1998, the Company borrowed $3,000 under a term loan facility
with a bank. The term loan requires monthly principal payments of $50, plus
interest based on a one-to-three month variable rate at LIBOR plus 1.15%,
through 2003. The Company is using a derivative financial instrument to reduce
its exposure to market risk resulting from interest rates. On October 20, 1998,
the Company entered into an interest rate swap agreement that fixes the
interest rate at 6.14% on the notional amount of floating rate debt through
October 21, 2003. The financial institution, as counterparty to the agreement,
will pay the Company a floating interest rate based on a one-month LIBOR rate
during the term of the agreement in exchange for the Company paying the fixed
interest rate. Interest payments are made monthly. The Company is at risk of
loss from this swap agreement in the event of nonperformance by the
counterparty. The Company believes this risk to be minimal. The principal
balance under this term loan at June 25, 1999 was $2,600.
On August 20, 1998, the Company paid off the remaining balances of two loans
obtained from the Pennsylvania Sunny Day Fund. The original principal balance
of the loans totaled $4,500, which funded the expansion and renovation of the
Company's State College facility. The two notes evidencing the funding had an
interest rate of 2%, which was contingent upon meeting certain job creation
commitments. The first note was for $488 with an original maturity of 15 years,
and the second was for $4,012 with an original maturity of 7 years. Monthly
payments of principal and interest of $3 and $51, respectively, were required
on these notes through the years 2010 and 2002, respectively. Certain equipment
collateralized the borrowing. The loan balances were paid off in order to
eliminate certain restrictive covenants associated with the loan agreements.
The principal balances of the two loans paid off were $409 and $2,506,
respectively.
Capital Lease Obligations: As a result of the Company's decision on June 25,
1998, to close its manufacturing facility located in Reedsville, Pennsylvania,
the Company executed its option to purchase the building and improvements for
approximately $1,454, plus closing costs, under the Lease/Option to Purchase
Agreement it had with the MCIDC on August 10, 1998. The Company was the
guarantor of several borrowing
F-16
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
commitments by the MCIDC for financing the $1,727 cost of the project. The
lease called for a monthly payment of $14, which was equal to the monthly
principal and interest of the various borrowing commitments by the MCIDC
through 2010. The original term of the lease was for 15 years with the option
to purchase the leased premises at any time during the lease term for the
outstanding balance of the borrowing commitments plus closing costs. The
borrowing commitments carried a weighted-average interest rate of 4.7%. For
financial accounting purposes, the lease was accounted for during fiscal year
1998 as a capital lease and, accordingly, an asset and liability were recorded.
As of June 25, 1999, the building and improvements were reclassified as
property held-for-sale, as part of other current assets in the consolidated
balance sheet.
As a result of the mergers with Convergence and SVCI, the Company acquired
various capital leases for machinery and equipment, office equipment and
furniture and fixtures that expire through 2003.
Long-term debt at June 25, 1999 had scheduled maturities as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Fiscal year ending:
2000........................................................... $ 832
2001........................................................... 788
2002........................................................... 796
2003........................................................... 789
2004........................................................... 173
Thereafter..................................................... 1,162
------
$4,540
======
</TABLE>
At June 25, 1999, the future minimum payments required under capital lease
arrangements are as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Fiscal year ending:
2000........................................................... $ 91
2001........................................................... 36
2002........................................................... 36
2003........................................................... 22
----
$185
Less amount representing interest................................ 37
----
Present value of future minimum lease payments................... 148
Less current portion of obligation under capital leases.......... 73
----
Long-term obligations under capital lease........................ $ 75
====
</TABLE>
Total interest paid on the short-term credit facilities (Reference Note G) and
long-term debt was $387, $372 and $341 for fiscal years ended 1999, 1998 and
1997, respectively.
F-17
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Operating Leases: The Company leases real property and other equipment under
operating leases. Certain leases are renewable and provide for the payment of
real estate taxes and other occupancy expenses. At June 25, 1999, the future
minimum lease payments for noncancelable leases with remaining lease terms in
excess of one year were as follows:
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C>
Fiscal year ending:
2000........................................................... $2,096
2001........................................................... 2,123
2002........................................................... 2,090
2003........................................................... 861
2004........................................................... 572
Thereafter..................................................... 1,129
------
$8,871
======
</TABLE>
Rent expense relating to continuing operations was $2,132, $1,226 and $866 for
fiscal years ended 1999, 1998 and 1997, respectively.
I. Stock Award Plans
In October 1998, the Company adopted a Stock Incentive Plan ("1998 Incentive
Plan"), which provides for several types of equity-based incentive compensation
awards. Awards, when made, may be in the form of stock options, restricted
shares, performance shares and performance units. Stock options granted to
employees and directors are at a price not less than 100% of the fair market
value of such shares on the date of grant. Stock options granted to certain
employees begin vesting in cumulative annual installments of 25% per year
beginning one year after the date of grant. Options granted to non-employee
directors are exercisable one year after grant. During fiscal year 1999, 2,000
restricted shares and 11,000 performance shares were awarded under the 1998
Incentive Plan. The restricted shares had an aggregate value of $22, which is
being amortized over a vesting period through June 2001. The performance shares
represent a right to receive common stock of the Company based upon achievement
of certain performance criteria over a performance period through June 2000.
Compensation expense related to the performance shares is based on current
market price of the Company's common stock at the time the performance criteria
is satisfied.
The Company's previous stock option plans provided for the grant of options to
employees with an exercise price per share of at least the fair market value of
such shares on the date prior to grant, and to directors with an exercise price
equal to the fair market value on the date of grant. Stock options granted to
certain employees vest in cumulative annual installments of either 20% or 25%
per year beginning one year after the date of grant. Options granted to non-
employee directors were exercisable one year after grant. Certain options held
by the Chairman were exercisable immediately.
In connection with the merger with SVCI, outstanding incentive and nonqualified
stock options to acquire SVCI common stock were converted into stock options to
acquire the Company's common stock at a conversion ratio of .094534 (with
appropriate adjustment to the exercise price). Incentive stock options
generally vest over 4 or 5 years, with 25% or 20% vesting after one year and
the remainder monthly thereafter, and expire 10 years from the date of grant.
Nonqualified options are generally fully vested upon issuance and expire 10
years from date of grant.
F-18
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
The Company adopted the disclosure requirements of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123).
As allowed by Statement 123, the Company has chosen to continue to account for
stock based compensation using Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's stock at the grant date over
the amount an employee must pay to acquire the stock. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Company's
plans been determined under Statement 123, the Company's net income (loss) and
net income (loss) per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years Ended
---------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
(In thousands, except per
share data)
<S> <C> <C> <C>
Net income (loss):
As reported.................................. $ (286) $1,846 $(9,537)
Pro forma.................................... $(3,392) $ 381 $(9,789)
Net income (loss) per share:
Basic
As reported................................ $ (0.02) $ 0.16 $ (0.79)
Pro forma.................................. $ (0.28) $ 0.03 $ (0.81)
Diluted
As reported................................ $ (0.02) $ 0.15 $ (0.77)
Pro forma.................................. $ (0.28) $ 0.03 $ (0.79)
</TABLE>
The per share weighted-average fair values of stock options granted during
fiscal years 1999, 1998 and 1997, were $16.49, $10.92 and $4.36, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following weighed-average assumptions:
Fiscal year 1999-expected dividend yield 0%, risk-free interest rate of 5.0%, a
volatility factor of the expected market price of the Company's common stock of
.7395, and a weighted-average expected life of approximately 4 years.
Fiscal year 1998-expected dividend yield 0%, risk-free interest rate of 5.72%,
a volatility factor of the expected market price of the Company's common stock
of .4913, and a weighted-average expected life of approximately 4 years.
Fiscal year 1997-expected dividend yield 0%, risk-free interest rate of 6.38%,
a volatility factor of the expected market price of the Company's common stock
of .5941, and a weighted-average expected life of approximately 4 years.
The fair value of stock options included in the pro forma amounts for fiscal
years 1999, 1998 and 1997 is not necessarily indicative of future effects on
net income and net income per share.
F-19
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
A summary of the status of the Company's stock option plans, as of June 25,
1999, June 26, 1998, and June 27, 1997, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
Years Ended
----------------------------------------------------------------------------
June 25, 1999 June 26, 1998 June 27, 1997
------------------------- ------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,565,166 $12.61 804,624 $13.74 873,048 $13.42
Granted................. 819,778 $18.40 1,031,168 $10.83 118,000 $14.99
Exercised............... (128,219) $ 9.54 (45,879) $ 6.13 (44,893) $ 5.08
Canceled................ (169,676) $ 7.52 (224,747) $ 9.42 (141,531) $15.59
--------- --------- --------
Outstanding at end of
year................... 2,087,049 $15.48 1,565,166 $12.67 804,624 $13.74
========= ========= ========
Options exercisable at
end of year............ 646,197 498,658 451,147
</TABLE>
The following table summarizes information about the Company's stock option
plans as of June 25, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 6/25/99 Contractual Life Exercise Price at 6/25/99 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.110 to $ 8.380...... 329,068 6.0 years $ 4.71 223,041 $ 5.95
$ 8.500 to $14.130...... 386,209 6.2 years $10.60 102,802 $10.86
$14.375 to $19.750...... 587,699 7.0 years $15.23 156,187 $15.00
$20.120 to $25.500...... 712,363 7.7 years $21.89 112,299 $21.89
$25.750 to $31.250...... 71,710 6.1 years $27.31 51,868 $27.32
--------- --------- ------ ------- ------
2,087,049 6.9 years $15.48 646,197 $13.40
========= ========= ====== ======= ======
</TABLE>
J. Warrants
As a result of the consummated mergers with Convergence and SVCI, warrants to
acquire Convergence and SVCI common stock were converted into warrants to
acquire common stock of the Company. These warrants have been issued in
connection with various financing and employment arrangements.
The following table summarizes information about warrants issued and
outstanding as of June 25, 1999:
<TABLE>
<CAPTION>
Warrants issued in connection
with:
Fiscal Year ------------------------------
Warrants Issued Range of Warrants Debt Equity Employment
Issued as of 6/25/99 Exercise Prices Expire Financing Financing Services
------ --------------- ---------------- ----------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1997........ 132,348 $21.16 2001 132,348
Fiscal Year 1998........ 3,025 $74.05 2002 3,025
300,000 $10.00 2005 300,000
Fiscal Year 1999........ 114,386 $31.73 to $74.05 2002 114,386
66,930 $ 0.75 to $10.00 2003 66,930
------- ------- ------- ------
616,689 117,411 432,348 66,930
======= ======= ======= ======
</TABLE>
F-20
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
The fair value of the warrants issued in fiscal years 1998 and 1999, in
connection with debt financing transactions, were calculated by the Company
using the Black-Scholes pricing model. In fiscal year 1999, warrants to
purchase 114,386 shares of the Company's stock, in connection with these debt
financing arrangements, had a fair value of $1,293 which is being amortized
over the life of the related loans. Amortization in fiscal year 1999 totaled
$911, which is included in interest expense in the accompanying statement of
operations. In fiscal year 1998, in connection with these debt financing
arrangements, the Company had calculated the estimated fair value of warrants
issued and determined that the amount was not significant to the accompanying
financial statements taken as a whole, and as such, no amortization expense has
been included. No separate fair values were calculated in connection with the
432,348 warrants in fiscal years 1997 and 1998, as these were issued in
connection with an equity financing transaction. Also in fiscal year 1999, the
Company recognized compensation expense of $248 in connection with the issuance
of warrants to an employee, as the exercise price was less than the fair value
of the stock on the date of grant.
K. Income Taxes
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Income from continuing operations............... $4,835 $382 $ 651
Results of discontinued operations.............. -- -- (2,752)
Gain (loss) on disposal of discontinued
operation...................................... 477 (94) (1,974)
Stockholders' equity, for tax benefit derived
from exercise and sale of stock option shares.. (94) (57) (71)
------ ---- -------
$5,218 $231 $(4,146)
====== ==== =======
</TABLE>
Income tax expense (benefit) attributable to continuing operations consisted of
the following components:
<TABLE>
<CAPTION>
Years Ended
----------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- --------- --------
(In thousands)
<S> <C> <C> <C>
Current:
Federal........................................ $ 6,459 $ 3,262 $1,493
State.......................................... 615 264 (96)
Foreign........................................ 59 39 (98)
------- ------- ------
7,133 3,565 1,299
------- ------- ------
Deferred:
Federal........................................ (1,910) (2,675) (531)
State.......................................... (388) (508) (117)
------- ------- ------
(2,298) (3,183) (648)
------- ------- ------
$ 4,835 $ 382 $ 651
======= ======= ======
</TABLE>
F-21
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
A reconciliation of the effective income tax rate from continuing operations
with the U.S. federal income tax rate of 35 percent applied to pretax income
from continuing operations was as follows:
<TABLE>
<CAPTION>
Years Ended
--------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Statutory rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax.......... (10.7) (26.5) (19.8)
Tax effect of foreign income and losses......... -- -- (10.3)
Tax effect of foreign sales corporation......... (0.4) (24.6) (42.7)
Loss of net operating loss attributable to S
corporation period............................. -- 1.6 3.6
Increase in the valuation allowance for deferred
tax assets..................................... 92.3 66.2 55.0
Permanent differences........................... 0.3 1.9 11.0
Other........................................... -- (24.2) 10.2
----- ----- -----
116.5% 29.4% 42.0%
===== ===== =====
</TABLE>
A tax benefit of $593, deriving from the Company's Foreign Sales Corporation
(FSC), was recorded in the third quarter of fiscal year 1997. The tax benefit
resulted from reassessment of the Company's foreign sales transactions for
fiscal years 1994, 1995 and 1996.
F-22
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 25, 1999 and
June 26, 1998, relating to continuing operations are presented below:
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Gross deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts..................................... $ 391 $ 255
Inventories, principally due to additional costs for
tax purposes.......................................... 220 168
Inventories, principally due to accrual for
obsolescence.......................................... 809 628
Compensated absence, principally due to accrual for
financial reporting purposes.......................... 837 483
Workers' compensation expense accrual for financial
reporting purposes.................................... 689 449
Warranty expense accrual for financial reporting
purposes.............................................. 650 583
Employee benefit plan accrual for financial reporting
purposes.............................................. 375 224
Deferred research and development for tax purposes..... 3,180 2,286
Net operating loss carryforwards....................... 8,676 4,647
Alternative minimum tax credit carryforwards........... 600 228
Other.................................................. 392 142
------- -------
Total gross deferred tax assets....................... 16,819 10,093
------- -------
Less valuation allowance................................ (7,433) (2,740)
------- -------
Net total deferred tax assets......................... 9,386 7,353
------- -------
Gross deferred tax liabilities
Plant and equipment, principally due to differences in
depreciation.......................................... (1,707) (1,850)
Other.................................................. (96) (218)
------- -------
Total gross deferred tax liabilities.................. (1,803) (2,068)
------- -------
Net deferred tax assets................................. $ 7,583 $ 5,285
======= =======
Reflected on attached consolidated balance sheets as:
Current deferred tax assets............................ $ 6,335 $ 2,797
Non-current deferred tax assets........................ 1,248 2,488
------- -------
Net deferred tax assets, pertaining to continuing
operations............................................. $ 7,583 $ 5,285
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of the beginning of the
fiscal year was $2,740 and $1,957 in 1999 and 1998, respectively. The net
change in valuation allowance for the years ended June 25, 1999 and June 26,
1998 was an increase of $4,693 and $783, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income and tax planning
strategies in making this assessment. In order to fully realize the net total
deferred tax assets, the Company will need to generate future taxable income
prior to the expiration of the net operating loss carryforwards which expire at
various years through 2019. Based upon the level of historical taxable income
and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences, net
of the valuation allowance at
F-23
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
June 25, 1999. The amount of the deferred tax asset considered realizable,
however, could be reduced in the near term if estimates of future taxable
income during the carryforward period are reduced.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of June 25, 1999 will be allocated to income tax benefit
that would be reported in the consolidated statements of operations.
At June 25, 1999, the Company had a federal net operating loss carryforward of
approximately $20,850 and state net operating loss carryforwards of
approximately $26,650, which are available to offset future federal and state
taxable income, and expire at various dates through fiscal year 2019. In
addition, at June 25, 1999, the Company has research and development credit
carryovers for federal and state income tax purposes of approximately $400 and
$200, respectively. The federal credit carryforwards expire in the years 2010
and 2019, and the state carryforwards can be carried forward indefinitely.
The Company has not recognized a deferred tax liability for the basis
differences and the undistributed earnings related to its foreign subsidiaries
since the investment is essentially permanent in duration. Undistributed
earnings were approximately $720 at June 25, 1999.
Cash paid for income taxes was $2,897, $1,915 and $1,072 in fiscal years 1999,
1998 and 1997, respectively.
L. Retirement Plans
The Company has a retirement savings and profit sharing plan, which qualifies
under Section 401(k) of the Internal Revenue Code. Participation is available
to all employees meeting minimum service and age requirements.
The Company has a deferred compensation plan that does not qualify under
Section 401 of the Internal Revenue Code, which provides officers and key
executives with the opportunity to participate in an unqualified deferred
compensation plan. The total of net participant deferrals, which is reflected
in other long-term liabilities, was $464 and $382 at June 25, 1999 and June 26,
1998, respectively.
The Company also has a deferred retirement salary plan, which is limited to
certain officers. The Company has accrued the present value of the estimated
future retirement benefit payments over the periods from the date of the
agreements. The accrued balance of these plans, included in other long-term
liabilities, was $865 and $659 at June 25, 1999, and June 26, 1998,
respectively.
Total expenses for these plans were $1,158, $1,349 and $1,375 for fiscal years
ended 1999, 1998 and 1997, respectively.
F-24
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
M. Accrued Liabilities
<TABLE>
<CAPTION>
Sep.
24, June 25, June 26,
1999 1999 1998
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Accrued incentive plan expense................... $ 987 $ 2,285 $ 1,716
Accrued vacation expense......................... 1,814 2,000 1,512
Accrued salary expense........................... 4,759 1,297 835
Accrued payroll and sales tax expense............ 1,024 1,519 917
Accrued sales commissions and rebates payable.... 547 951 789
Accrued warranty expense......................... 1,918 1,742 1,733
Accrued workers compensation self-insurance
expense......................................... 1,904 1,724 1,319
Accrued merger-related costs..................... 1,365 -- --
Accrued restructuring costs...................... -- -- 625
Accrued income tax payable....................... 3,119 3,304 473
Accrued other.................................... 1,783 1,420 912
------- ------- -------
$19,220 $16,242 $10,831
======= ======= =======
</TABLE>
N. Other Expense (Income)
<TABLE>
<CAPTION>
Years Ended
--------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment income................................ $(259) $(392) $(721)
Loss (gain) on foreign currency transactions..... 4 164 (58)
Other, net....................................... 365 247 (82)
----- ----- -----
$ 110 $ 19 $(861)
===== ===== =====
</TABLE>
O. Concentration of Credit Risk
The Company's customers are primarily in the cable television CATV industry.
The Company performs periodic credit evaluations of its customers' financial
conditions and generally does not require collateral. At June 25, 1999 and June
26, 1998, accounts receivables from customers in the CATV industry were
approximately $31,240 and $19,705, respectively. Receivables are generally due
within 30 days. Credit losses are provided for in the consolidated financial
statements and have consistently been within management's expectations.
Sales to two customers were $47,700 (26%) and $31,304 (17%), respectively, in
fiscal year 1999. Sales to one customer were $47,098 (31%) in fiscal year 1998.
Sales to one customer were $48,026 (36%) in fiscal year 1997.
P. Commitments and Contingencies
The Company had an established letter of credit of $1,700 at June 25, 1999, for
its self-insured workers' compensation program.
F-25
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Q. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
------- ------- ------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1999
Net sales..................... $34,654 $39,651 $47,291 $61,829 $183,425
Gross profit.................. 7,526 9,599 10,878 16,629 44,632
Income (loss) from continuing
operations................... (1,116) (992) 588 837 (683)
Discontinued operations....... 288 16 -- 93 397
------- ------- ------- ------- --------
Net income (loss)............. $ (828) $ (976) $ 588 $ 930 $ (286)
======= ======= ======= ======= ========
Net income (loss) per share--
(basic):
Continuing operations....... $ (0.09) $ (0.08) $ 0.05 $ 0.07 $ (0.06)
Discontinued operations..... 0.02 -- -- 0.01 0.04
------- ------- ------- ------- --------
Net income (loss)............. $ (0.07) $ (0.08) $ 0.05 $ 0.08 $ (0.02)
======= ======= ======= ======= ========
Net income (loss) per share--
(diluted):
Continuing operations....... $ (0.09) $ (0.08) $ 0.05 $ 0.06 $ (0.06)
Discontinued operations..... 0.02 -- -- 0.01 0.04
------- ------- ------- ------- --------
Net income (loss)............. $ (0.07) $ (0.08) $ 0.05 $ 0.07 $ (0.02)
======= ======= ======= ======= ========
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter (1) 1998
------- ------- ------- ----------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1998
Net sales..................... $37,559 $37,758 $40,607 $38,117 $154,041
Gross profit.................. 8,334 7,957 8,318 7,446 32,055
Income (loss) from continuing
operations................... 1,175 672 847 (1,776) 918
Discontinued operations....... -- -- 363 565 928
------- ------- ------- ------- --------
Net income (loss)............. $ 1,175 $ 672 $ 1,210 $(1,211) $ 1,846
======= ======= ======= ======= ========
Net income (loss) per share--
(basic):
Continuing operations....... $ 0.10 $ 0.06 $ 0.07 $ (0.15) $ 0.08
Discontinued operations..... -- -- 0.03 0.05 0.08
------- ------- ------- ------- --------
Net income (loss)............. $ 0.10 $ 0.06 $ 0.10 $ (0.10) $ 0.16
======= ======= ======= ======= ========
Net income (loss) per share--
(diluted):
Continuing operations....... $ 0.10 $ 0.06 $ 0.07 $ (0.14) $ 0.07
Discontinued operations..... -- -- 0.03 0.04 0.08
------- ------- ------- ------- --------
Net income (loss)............. $ 0.10 $ 0.06 $ 0.10 $ (0.10) $ 0.15
======= ======= ======= ======= ========
</TABLE>
- --------
(1) Results from continuing operations for the fourth quarter of fiscal year
1998 include a provision for restructuring costs of $625.
R. Litigation
As previously reported in the Company's Annual Report for the fiscal year ended
June 27, 1997, on or about March 31, 1995, certain shareholders of the Company
filed a complaint in the United States District Court for the Eastern District
of Pennsylvania against the Company and its Chief Executive Officer alleging
violations of Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934
and common law. On September 27, 1997, a tentative settlement was reached with
respect to this litigation and the settlement amount was recorded in the
F-26
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
financial statements during the first quarter of fiscal year 1998. On July 14,
1998, the United States District Court for the Eastern District of Pennsylvania
approved the settlement reached by the parties and dismissed the case with
prejudice.
S. Segment Information
The Company adopted the Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
(Statement 131), in fiscal year 1999. For the thirteen-week period ended
September 24, 1999, the Company operated in two industry segments; the
Electronic Distribution Products segment, which provides HFC equipment for
signal distribution applications, primarily to the CATV market, and the
Broadband Management Services segment, which provides HFC technical services
and Internet enabling technical services and support to broadband operators in
the United States. For the thirteen-week period ended September 25, 1998, and
fiscal years 1999 and 1998, the Company also operated in two industry segments,
the Electronic Distribution Product segment, which at that time included HFC
technical services and the Broadband Management Services segment. For the
thirteen-week period ended September 24, 1999, the Company elected to change
the reporting of its Broadband Management Services segment, to include HFC
technical services which were previously reported as part of the Electronic
Distribution Product segment during the thirteen-week period ended September
25, 1998. The Company believes it is impracticable to disclose the impact of
this change on a restated segment basis for prior periods presented and does
not believe the change to be significant. In fiscal year 1997, the Company
operated in three industry segments: the Electronic Distribution Products
segment, the Broadband Management Services discontinued business segment and
provided products for long-distance point-to-point video, voice and data signal
transmission applications primarily for telephony, distance learning and other
non-CATV markets. On July 10, 1997, the Company announced the discontinuation
of its Digital Fiber Optics Transmission Products segment.
F-27
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
Information about industry segments for the thirteen-week periods ended
September 24, 1999 and September 25, 1998 and fiscal years 1999, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
Discontinued
Continuing Operations Operations
----------------------- ------------
Digital
Electronic Broadband Fiber Optics
Distribution Management Transmission
Products Services Products Total
------------ ---------- ------------ --------
<S> <C> <C> <C> <C>
Thirteen-week period ended
September 24, 1999 (In thousands)
Total revenue................ $ 60,461 $ 4,042 $ -- $ 64,503
Operating income (loss)
(exclusive
of merger related costs).... 7,172 (1,231) -- 5,941
Interest income.............. -- -- -- 48
Interest expense............. -- -- -- 621
Income tax expense........... -- -- -- 1,321
Identifiable assets at
September 24, 1999.......... 100,674 8,226 1,154 110,054
Capital expenditures......... 2,683 507 -- 3,190
Depreciation and
amortization................ 1,976 188 -- 2,164
Thirteen-week period ended
September 25, 1998
Total revenue................ $ 33,758 $ 886 $ -- $ 34,654
Operating income (loss)...... (112) (506) -- (618)
Interest income.............. -- -- -- 48
Interest expense............. -- -- -- 57
Income tax expense........... -- -- -- 471
Identifiable assets at
September 25, 1998.......... 100,458 2,491 2,885 105,834
Capital expenditures......... 1,054 20 -- 1,074
Depreciation and
amortization................ 2,011 75 -- 2,086
Year ended June 25, 1999
Total revenue................ $176,790 $ 6,635 $ -- $183,425
Operating income (loss)...... 8,044 (2,508) -- 5,536
Interest income.............. 150 109 -- 259
Interest expense............. 1,376 8 -- 1,384
Income tax expense........... 4,835 -- 477 5,312
Identifiable assets at June
25, 1999.................... 101,105 1,844 1,286 104,235
Capital expenditures......... 6,828 1,331 -- 8,159
Depreciation and
amortization................ 9,407 364 -- 9,771
Year ended June 26, 1998
Total revenue................ $152,765 $ 1,276 $ -- $154,041
Operating income (loss)...... 3,259 (1,560) -- 1,699
Interest income.............. 369 23 -- 392
Interest expense............. 390 9 -- 399
Income tax expense
(benefit)................... 972 (590) (94) 288
Identifiable assets at June
26, 1998.................... 82,319 1,755 2,889 86,963
Capital expenditures......... 9,287 766 -- 10,053
Depreciation and
amortization................ 6,792 175 -- 6,967
Year ended June 27, 1997
Total revenue................ $132,676 $ 1,104 $7,994 $141,774
Operating income (loss)...... 2,362 (433) (9,357) (7,428)
Interest income.............. 712 9 -- 721
Interest expense............. 371 9 -- 380
Income tax expense
(benefit)................... 788 (137) (2,752) (2,101)
Identifiable assets at June
27, 1997.................... 82,099 815 7,530 90,444
Capital expenditures......... 6,989 255 698 7,942
Depreciation and
amortization................ 5,371 62 1,388 6,821
</TABLE>
F-28
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
The Company and subsidiaries operate in various geographic areas as indicated
by the following:
<TABLE>
<CAPTION>
U.S. Canada Europe Eliminations Total
-------- ------ ------ ------------ --------
<S> <C> <C> <C> <C> <C>
Thirteen-week period ended
September 24, 1999 (In thousands)
Sales to unaffiliated
customers:
Domestic...................... $ 57,874 $ 42 $ 43 -- $ 57,959
Export........................ 6,544 -- -- -- 6,544
Transfers between geographic
areas......................... 12 -- -- (12) --
Total revenue.................. 64,430 42 43 (12) 64,503
Operating income (loss)........ 6,198 (66) (191) -- 5,941
Interest income................ -- -- -- -- 48
Interest expense............... -- -- -- -- 621
Income tax expense............. -- -- -- -- 1,321
Identifiable assets at
September 24, 1999............ 108,281 455 164 -- 108,900
Capital expenditures........... 3,189 -- 1 -- 3,190
Depreciation and amortization.. 2,159 -- 5 -- 2,164
Thirteen-week period ended
September 25, 1998
Sales to unaffiliated
customers:
Domestic...................... $ 31,417 $ 200 $ 40 -- $ 31,657
Export........................ 2,997 -- -- -- 2,997
Transfers between geographic
areas......................... 52 -- -- (52) --
Total revenue.................. 34,466 200 40 (52) 34,654
Operating income
(loss)(exclusive of merger
related costs)................ (624) (23) 29 -- (618)
Interest income................ -- -- -- -- 48
Interest expense............... -- -- -- -- 57
Income tax expense............. -- -- -- -- 471
Identifiable assets at
September 25, 1998............ 101,556 954 439 -- 102,949
Capital expenditures........... 1,074 -- -- -- 1,074
Depreciation and amortization.. 2,078 3 5 -- 2,086
Year ended June 25, 1999
Sales to unaffiliated
customers:
Domestic...................... $163,889 $ 421 $236 $ -- $164,546
Export........................ 18,879 -- -- -- 18,879
Transfers between geographic
areas......................... 162 -- -- (162) --
Total revenue.................. 182,930 421 236 (162) 183,425
Operating income (loss)........ 5,848 (280) (32) -- 5,536
Interest income................ 259 -- -- -- 259
Interest expense............... 1,384 -- -- -- 1,384
Income tax expense............. 4,835 -- -- -- 4,835
Identifiable assets at June 25,
1999.......................... 101,957 509 483 -- 102,949
Capital expenditures........... 8,159 -- -- -- 8,159
Depreciation and amortization.. 9,735 12 24 -- 9,771
Year ended June 26, 1998
Sales to unaffiliated
customers:
Domestic...................... $121,371 $1,635 $146 $ -- $123,152
Export........................ 30,889 -- -- -- 30,889
Transfers between geographic
areas......................... 798 -- -- (798) --
Total revenue.................. 153,058 1,635 146 (798) 154,041
Operating income............... 1,220 290 189 -- 1,699
Interest income................ 390 -- 2 -- 392
Interest expense............... 398 -- 1 -- 399
Income tax expense............. 405 8 (31) -- 382
Identifiable assets at June 26,
1998.......................... 82,839 954 281 -- 84,074
Capital expenditures........... 10,052 1 -- -- 10,053
Depreciation and amortization.. 6,931 12 24 -- 6,967
Year ended June 27, 1997
Sales to unafifiliated
customers:
Domestic...................... $107,723 $1,523 $751 $ -- $109,997
Export........................ 23,783 -- -- -- 23,783
Transfers between geographic
areas......................... (95) -- -- 95 --
Total revenue.................. 131,411 1,523 751 95 133,780
Operating income............... 1,750 162 17 -- 1,929
Interest income................ 716 -- 5 -- 721
Interest expense............... 379 -- 1 -- 380
Income tax expense............. 553 100 (2) -- 651
Identifiable assets at June 27,
1997.......................... 80,774 1,542 598 -- 82,914
Capital expenditures........... 7,212 6 26 -- 7,244
Depreciation and amortization.. 5,370 12 51 -- 5,433
</TABLE>
F-29
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
T. Subsequent Events
Business Combinations
On July 9, 1999, the Company consummated a merger with Convergence, a Georgia
corporation, whereby Convergence became a wholly-owned subsidiary of the
Company. As consideration for the merger, each outstanding share of common
stock of Convergence was converted into one share of the Company's common stock
for an aggregate of 1,433,323 shares of the Company's common stock. Each
outstanding warrant to acquire Convergence common stock was converted into a
warrant to acquire the Company's common stock for an aggregate of warrants to
acquire 366,930 shares of the Company's common stock. The merger is being
accounted for under the pooling-of-interests method of accounting.
On September 17, 1999, the Company consummated a merger with SVCI, a California
corporation, whereby SVCI became a wholly-owned subsidiary of the Company. As
consideration for the merger, each outstanding share of common stock of SVCI
was converted into the right to receive .094534 shares of the Company's common
stock for an aggregate of 1,542,215 shares of the Company's common stock
(subject to reduction pursuant to certain escrow arrangements). Outstanding
stock options and warrants to acquire SVCI common stock were converted into
stock options and warrants to acquire the Company's common stock, using the
same conversion ratio (with appropriate adjustment to the exercise price) for
an aggregate of stock options and warrants to acquire 387,227 shares of the
Company's common stock. The merger is being accounted for under the pooling-of-
interests method of accounting.
The Company recorded a one-time charge of $3,673 ($3,113, net of tax), related
to the business combinations in the thirteen-week period ended September 24,
1999. The one-time charge includes the merger transaction costs, as well as
restructuring costs which included severance payments for approximately 40
employees affected by consolidation of positions and administrative functions
resulting from the mergers, and write-off of assets related to existing fiber
optic products that became redundant as a result of the acquisition of SVCI.
Credit Facilities
On August 9, 1999, the Company replaced its $25,000 revolving line of credit
agreement, with a new credit agreement established with three banks under which
it may borrow up to $70,000. The agreement has two parts; $20,000 is available
as a revolving line of credit, subject to an aggregate sub-limit of $2,000 for
issuance of letters of credit. This revolving line of credit is committed
through December 31, 1999. A pricing matrix has been established for credit
pricing on this facility as a function of the Company's total funded
indebtedness to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio, and is subject to adjustment quarterly. Interest on the
borrowings under the credit agreement is determined at the Company's option by
(a) LIBOR plus a margin ranging from .75%-1.35%, (b) Federal funds rate plus a
margin ranging from 1.15%-1.75% or (c) Prime rate plus a margin ranging from
.25%-.50%. The second part is a 364 day standby acquisition facility which
enables the Company to borrow up to $50,000, for strategic acquisitions and/or
investments. Each draw on the facility may be extended for up to 84 months. A
pricing matrix has also been established for credit pricing on this facility
which is also a function of the Company's total funded indebtedness to EBITDA
ratio, and is subject to adjustment quarterly. Interest on the borrowings under
this part of the credit agreement would be determined, at the Company's option
by (a) LIBOR plus a margin ranging from .90%-1.50% (b) Prime rate plus a margin
ranging from .25%-.50% or (c) fixed at the bank 5 or 7 year fixed rates through
an interest rate swap.
F-30
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc., with
respect to periods prior to the thirteen-week period ended September 24, 1999.)
Notes to Consolidated Financial Statements--(Continued)
(Information as of September 24, 1999 and September 25, 1998 and for the
thirteen weeks
ended September 24, 1999 and September 25, 1998 is unaudited)
In addition, the Company amended its existing $3,000 term loan to eliminate
terms and conditions that govern that facility and replaced them with terms and
conditions that have been entered into the revolving line-of-credit and the
standby facility. The outstanding balance on the term loan will be split among
the three participating banks based on their pro-rated share of the total
balance of combined credit facilities.
Borrowings on these facilities are unsecured, subject to a negative pledge on
all business assets, and the Company is required to maintain certain financial
ratios and indebtedness tests.
F-31
<PAGE>
[Picture of several C-COR.net's products and services which include; MiniNode,
NAVICOR Node, Headend Equipment, FlexNet Amplifier, MuxNode, Field Engineering,
Network Operations Center and CNM System2.]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
- -------------------------------------------------------------
[C-Cor.net Corp.]
C-COR.net Corp.
2,800,000 Shares
Common Stock
------------
PROSPECTUS
------------
November 8, 1999
CIBC World Markets
Donaldson, Lufkin & Jenrette
Warburg Dillon Read LLC
Josephthal & Co. Inc.
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus. No
dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This prospectus is not an offer to sell nor
is it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this prospectus is
correct only as of the date of this prospectus, regardless of the time of the
delivery of this prospectus or any sale of these securities.