<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 17, 1999
---------------------------
C-COR.net Corp.
--------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Pennsylvania 0-10726 24-0811591
- ------------------------------------------------------------------------------
(State or Other Juris- (Commission File (IRS Employer
diction of Incorporation) Number) Identification No.)
</TABLE>
60 Decibel Road
State College, PA 16801
- --------------------------------------------------------------------------------
(Address of Principal (Zip Code)
Executive Offices)
(814) 238-2461
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(Registrant's Telephone Number, Including Area Code)
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(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
This amendment to the Registrant's Current Report on Form 8-K dated
September 17, 1999 and filed on September 24, 1999 is being filed for the
purpose of amending certain financial information in Item 7 and providing
additional information in Item 5.
ITEM 5. OTHER EVENTS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations is being filed to accompany the financial
statements included in Item 7.
<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-Corp.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.
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
------------------------------------------------------------------------------
Historical Restated
------------------------------------------------ ----------------------------
June 30, June 28, June 27, June 26, June 25, June 27, June 26, June 25,
1995 1996 1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands, except per share data)
<S> <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
Cost and expenses:
Cost of sales.......... 88,373 104,852 104,702 117,557 129,124 106,485 121,986 138,793
Selling and
administrative........ 15,949 15,917 15,787 15,020 16,545 18,521 19,724 27,153
Research and product
development........... 3,786 4,857 5,681 7,459 9,038 7,706 9,988 11,833
Provision for
restructuring costs... -- -- -- 625 -- -- 625 --
Interest............... 706 960 318 335 229 380 399 1,384
Other expense
(income), net......... (264) (341) (250) 384 151 (861) 19 110
-------- -------- -------- -------- -------- -------- -------- --------
108,550 126,245 126,238 141,380 155,087 132,231 152,741 179,273
-------- -------- -------- -------- -------- -------- -------- --------
Income from continuing
operations before
income taxes........... 12,719 13,294 5,703 10,764 16,194 1,549 1,300 4,152
Income tax expense
(benefit):
Current................ 4,977 3,875 1,298 3,564 7,130 1,299 3,565 7,133
Deferred............... (786) 405 148 (117) (1,391) (648) (3,183) (2,298)
-------- -------- -------- -------- -------- -------- -------- --------
4,191 4,280 1,446 3,447 5,739 651 382 4,835
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
continuing operations.. 8,528 9,014 4,257 7,317 10,455 898 918 (683)
-------- -------- -------- -------- -------- -------- -------- --------
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
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).. $ 8,315 $ 5,919 $ (6,178) $ 8,245 $ 10,852 $ (9,537) $ 1,846 $ (286)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share - basic:
Continuing
operations............ $ 0.91 $ 0.94 $ 0.45 $ 0.80 $ 1.15 $ 0.07 $ 0.08 $ (0.06)
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
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).. $ 0.89 $ 0.62 $ (0.65) $ 0.90 $ 1.19 $ (0.79) $ 0.16 $ (0.02)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share - diluted:
Continuing
operations............ $ 0.86 $ 0.91 $ 0.44 $ 0.78 $ 1.10 $ 0.07 $ 0.07 $ (0.06)
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
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss).. $ 0.84 $ 0.60 $ (0.64) $ 0.88 $ 1.14 $ (0.77) $ 0.15 $ (0.02)
======== ======== ======== ======== ======== ======== ======== ========
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
Diluted................ 9,859 9,868 9,638 9,401 9,498 12,402 12,340 12,098
</TABLE>
<TABLE>
<CAPTION>
Historical Restated
-------------------------------------------- -----------------
June 30, June 28, June 27, June 26, June 25, June 26, June 25,
1995 1996 1997 1998 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securites.............. $ 1,938 $ 1,838 $ 811 $ 2,669 $ 3,385 $ 3,386 $ 5,140
Working capital......... 24,442 35,452 22,745 27,313 34,381 27,584 32,246
Total assets............ 85,868 77,278 71,119 75,518 93,664 84,074 102,949
Total long-term
obligations............ 2,172 8,030 7,201 6,367 4,392 6,493 4,540
Shareholders' equity.... 44,725 53,317 41,678 50,190 61,327 58,660 59,914
</TABLE>
2
<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.
Subsequent Events-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 1,542,215 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 397,911 shares of our common stock. The merger was
accounted for under the pooling-of-interests method of accounting.
We anticipate recording a one-time charge related to the business combinations
in the first quarter of fiscal year 2000. The one-time charge will include the
transaction costs, as well as employee severance payments and
3
<PAGE>
write-off of assets related to existing fiber optic products that will become
redundant as a result of the acquisition of Silicon Valley Communications.
Pooling-of-Interests Accounting. Both of our recent mergers were accounted for
using the pooling-of-interests method. This method requires that historical
financial results of the merged companies be combined and presented as if the
companies had always operated as one entity. Accordingly, our financial
statements are presented on a restated combined basis as if the mergers had
occurred on June 28, 1996 although they are not necessarily indicative of the
results that would have occurred if the three companies had actually been one
entity 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.
4
<PAGE>
Results of Operations
Our consolidated statements of operations for 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>
Years Ended
-----------------------------------------------------
Historical Restated
-------------------------- --------------------------
June 27, June 26, June 25, June 27, June 26, June 25,
1997 1998 1999 1997 1998 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... 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
----- ----- ----- ----- ----- -----
Gross margin ........... 20.6 22.7 24.6 20.4 20.8 24.3
Operating expenses:
Selling and adminis-
trative.............. 12.0 9.9 9.7 13.8 12.8 14.8
Research and product
development.......... 4.3 4.9 5.3 5.8 6.5 6.5
Provision for restruc-
turing costs......... -- 0.4 -- -- 0.4 --
----- ----- ----- ----- ----- -----
Total operating ex-
penses............. 16.3 15.2 15.0 19.6 19.7 21.3
Income from continuing
operations............. 4.3 7.5 9.6 0.8 1.1 3.0
Interest and other ex-
pense (income), net.... -- 0.5 0.2 (0.4) 0.3 0.8
----- ----- ----- ----- ----- -----
Income before income
taxes.................. 4.3 7.0 9.4 1.2 0.8 2.2
Provision for income
taxes.................. 1.1 2.2 3.3 0.5 0.2 2.6
----- ----- ----- ----- ----- -----
Net income (loss) from
continuing operations.. 3.2% 4.8% 6.1% 0.7% 0.6% (0.4)%
===== ===== ===== ===== ===== =====
</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.
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 $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
5
<PAGE>
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
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.
6
<PAGE>
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.
7
<PAGE>
Quarterly Operating Results
The following are our 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
----------------------------------------- ----------------------------------------
Sep. 27, Dec. 27, Mar. 27, Jun. 26, Sep. 25, Dec 25, Mar. 26, Jun. 25,
1997 1997 1998 1998 1998 1998 1999 1999
-------- -------- -------- -------- -------- ------- -------- --------
(In thousands)
<S> <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
Cost of sales................ 29,225 29,801 32,289 30,671 27,128 30,052 36,413 45,200
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 8,334 7,957 8,318 7,446 7,526 9,599 10,878 16,629
Operating expenses:
Selling and administrative.. 4,126 4,873 5,072 5,653 5,355 6,484 6,511 8,803
Research and product
development................ 2,366 2,175 2,319 3,128 2,789 3,172 2,480 3,392
Provision for restructuring
costs...................... -- -- -- 625 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses.... 6,492 7,048 7,391 9,406 8,144 9,656 8,991 12,195
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)...... 1,842 909 927 (1,960) (618) (57) 1,887 4,434
Interest and other expense
(income), net............... 273 151 (52) 46 27 244 58 1,165
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes....................... 1,569 758 979 (2,006) (645) (301) 1,829 3,269
Provision for income tax
expense (benefit)........... 394 86 132 (230) 471 691 1,241 2,432
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations.................. $ 1,175 $ 672 $ 847 $(1,776) $(1,116) $ (992) $ 588 $ 837
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------
Fiscal 1998 Fiscal 1999
----------------------------------------- ----------------------------------------
Sep. 27, Dec. 27, Mar. 27, Jun. 26, Sep. 25, Dec 25, Mar. 26, Jun. 25,
1997 1997 1998 1998 1998 1998 1999 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................ 77.8 78.9 79.5 80.5 78.3 75.8 77.0 73.1
------- ------- ------- ------- ------- ------- ------- -------
Gross margin................. 22.2 21.1 20.5 19.5 21.7 24.2 23.0 26.9
Operating expenses:
Selling and administrative.. 11.0 12.9 12.5 14.8 15.4 16.4 13.8 14.2
Research and product
development................ 6.3 5.8 5.7 8.2 8.0 8.0 5.3 5.5
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
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)...... 4.9 2.4 2.3 (5.1) (1.7) (0.2) 3.9 7.2
Interest and other expense
(income), net............... 0.7 0.4 (0.1) 0.1 0.1 0.6 0.1 1.9
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations before income
taxes....................... 4.2 2.0 2.4 (5.2) (1.8) (0.8) 3.8 5.3
Income tax expense
(benefit)................... 1.1 0.2 0.3 (0.6) 1.4 1.7 2.6 3.9
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from continuing
operations.................. 3.1 % 1.8 % 2.1 % (4.6)% (3.2)% (2.5)% 1.2 % 1.4 %
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
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
8
<PAGE>
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 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 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 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
9
<PAGE>
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.
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's 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.
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 approximately 60% of such compliance testing,
and at this time, there are no exceptions identified with these manufacturers'
assertions. We anticipate completing our compliance testing by the end of the
first quarter of fiscal 2000, other than our payroll system, which we
anticipate completing early in the second quarter of fiscal 2000.
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.
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.
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.
10
<PAGE>
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.
11
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Independent Auditors' Report
Financial Statements of Silicon Valley Communications, Inc.
("SVCI") as of and for the years ended June 25, 1999 and June 30,
1998. (audited)
Notes to Financial Statements
(b) In addition to the merger with SVCI, the Registrant consummated a
merger with Convergence.com Corporation, a Georgia Corporation
("Convergence"), on July 9, 1999 pursuant to which Convergence
became a wholly owned subsidiary of the Registrant. Included below
are the following consolidated financial statements of C-COR.net
Corp., restated to reflect the pooling-of-interest combinations
with both Convergence and SVCI.
Independent Auditors' Report.
Supplemental Consolidated Balance Sheets as of June 25, 1999 and
June 26, 1998.
Supplemental Consolidated Statements of Operations for the years
ended June 25, 1999, June 26, 1998 and June 27, 1997.
Supplemental Consolidated Statements of Cash Flows for the years
ended June 25, 1999, June 26, 1998 and June 27, 1997.
Supplemental Consolidated Statements of Shareholders' Equity for
the years ended June 25, 1999, June 26, 1998 and June 27, 1997.
Notes to Supplemental Consolidated Financial Statements.
12
<PAGE>
(a) Exhibits
2.1 Agreement and Plan of Merger dated as of July 13, 1999
between the Registrant, C-COR.net Acquisition Corp. and
Silicon Valley Communications, Inc. (incorporated by
reference to the Registrant's annual report on Form 10-K for
the fiscal year ended June 25, 1999, file No. 0-10726).
23.1 Consent of KPMG LLP (State College, PA).
23.2 Consent of KPMG LLP (Mountain View, CA).
13
<PAGE>
SILICON VALLEY COMMUNICATIONS, INC.
(Formerly Qualop Systems Corporation)
Financial Statements
June 25, 1999 and June 30, 1998
(With Independent Auditors' Report Thereon)
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-1
Balance Sheets............................................................. F-2
Statements of Operations................................................... F-3
Statements of Shareholders' (Deficit) Equity............................... F-4
Statements of Cash Flows................................................... F-5
Notes to Financial Statements.............................................. F-6
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Silicon Valley Communications, Inc.:
We have audited the accompanying balance sheets of Silicon Valley
Communications, Inc. (formerly Qualop Systems Corporation) as of June 25, 1999
and June 30, 1998, and the related statements of operations, shareholders'
(deficit) equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Silicon Valley Communications,
Inc. as of June 25, 1999 and June 30, 1998, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations, has negative working capital and an accumulated deficit, and is in
violation of certain debt covenants that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The accompanying financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
KPMG LLP
July 30, 1999, except as to Note 2, which is as of August 4, 1999
F-1
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Balance Sheets
June 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 66,991 $ 322,033
Accounts receivable, net of allowance for doubtful
accounts of $-0- and $223,127 in 1999 and 1998,
respectively...................................... 948,030 8,000
Inventories........................................ 2,087,782 434,269
Prepaid expenses and other current assets.......... 16,583 76,527
------------ ------------
Total current assets........................... 3,119,386 840,829
Other receivables.................................. 32,562 2,012,284
Property and equipment, net........................ 1,533,537 1,357,759
Other assets....................................... 57,160 102,410
------------ ------------
$ 4,742,645 $ 4,313,282
============ ============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Notes payable to bank.............................. $ 3,202,500 $ --
Notes payable to related parties................... 1,685,438 --
Current portion of capital lease obligations....... 50,550 72,622
Accounts payable................................... 3,058,184 630,872
Accrued compensation............................... 1,038,804 198,813
Accrued expenses................................... 818,474 239,966
------------ ------------
Total current liabilities...................... 9,853,950 1,142,273
Capital lease obligations, excluding current
portion........................................... -- 54,118
------------ ------------
Total liabilities.............................. 9,853,950 1,196,391
------------ ------------
Commitments
Shareholders' (deficit) equity:
Convertible preferred stock:
Series A, no par value; 4,000,000 shares
authorized; 4,000,000 shares issued and
outstanding; liquidation preference of
$4,400,000...................................... 3,900,000 3,900,000
Series B, no par value; 10,000,000 shares
authorized; 7,345,000 shares issued and
outstanding; liquidation preference of
$14,690,000..................................... 16,052,525 14,760,000
Common stock, no par value; 21,000,000 shares
authorized; 4,968,871 and 4,794,329 shares issued
and outstanding in 1999 and 1998, respectively.... 150,932 144,945
Accumulated deficit................................ (25,214,762) (15,688,054)
------------ ------------
Total shareholders' (deficit) equity........... (5,111,305) 3,116,891
------------ ------------
$ 4,742,645 $ 4,313,282
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Statements of Operations
Years ended June 25, 1999 and June 30, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net revenues......................................... $ 5,508,900 $ 620,689
Cost of revenues..................................... 4,816,027 3,290,981
----------- -----------
692,873 (2,670,292)
----------- -----------
Operating expenses:
Research and development............................ 2,795,362 2,529,508
Selling and marketing............................... 4,494,490 1,868,420
General and administrative.......................... 1,834,085 1,115,191
----------- -----------
Total operating expenses......................... 9,123,937 5,513,119
----------- -----------
Loss from operations............................. (8,431,064) (8,183,411)
Interest income...................................... 52,310 316,361
Interest expense..................................... (1,143,668) (27,980)
Other income (expense), net.......................... (3,486) --
----------- -----------
Loss before income taxes......................... (9,525,908) (7,895,030)
Income taxes......................................... 800 800
----------- -----------
Net loss......................................... $(9,526,708) $(7,895,830)
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Statements of Shareholders' (Deficit) Equity
Years ended June 25, 1999 and June 30, 1998
<TABLE>
<CAPTION>
Convertible preferred stock
------------------------------------------
Total
Series A Series B Common stock shareholders'
-------------------- --------------------- ------------------ Accumulated (deficit)
Shares Amount Shares Amount Shares Amount deficit equity
--------- ---------- --------- ----------- --------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of June 30,
1997................... 4,000,000 $3,900,000 7,345,000 $14,760,000 4,669,705 $141,637 (7,792,224) 11,009,413
Exercise of stock
options................ -- -- -- -- 124,624 3,308 -- 3,308
Net loss................ -- -- -- -- -- -- (7,895,830) (7,895,830)
--------- ---------- --------- ----------- --------- -------- ----------- ----------
Balances as of June 30,
1998................... 4,000,000 3,900,000 7,345,000 14,760,000 4,794,329 144,945 (15,688,054) 3,116,891
Exercise of stock
options................ -- -- -- -- 174,542 5,987 -- 5,987
Issuance of warrants.... -- -- -- 1,292,525 -- -- -- 1,292,525
Net loss................ -- -- -- -- -- -- (9,526,708) (9,526,708)
--------- ---------- --------- ----------- --------- -------- ----------- ----------
Balances as of June 30,
1999................... 4,000,000 $3,900,000 7,345,000 $16,052,525 4,968,871 $150,932 (25,214,762) (5,111,305)
========= ========== ========= =========== ========= ======== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Statements of Cash Flows
Years ended June 25, 1999 and June 30, 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $(9,526,708) $(7,895,830)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization of debt discount...................... 911,124 --
Loss on disposal of fixed assets................... 12,961 --
Depreciation and amortization...................... 518,278 692,156
Provision for doubtful accounts.................... -- 223,127
Write-off of inventory............................. 206,569 1,226,000
Changes in operating assets and liabilities:
Accounts receivable............................... (940,030) 88,711
Inventories....................................... (1,860,082) (243,162)
Prepaid expenses and other current assets......... 59,944 (50,497)
Other assets...................................... 45,250 119,649
Accounts payable.................................. 2,427,312 265,441
Other current liabilities......................... 1,418,499 236,222
----------- -----------
Net cash used in operating activities............ (6,726,883) (5,338,183)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................. (707,017) (504,582)
Repayment of note receivable........................ 1,979,722 --
Issuance of note receivable......................... -- (2,003,708)
----------- -----------
Net cash provided by (used in) investing
activities...................................... 1,272,705 (2,508,290)
----------- -----------
Cash flows from financing activities:
Principal payments on obligations under capital
lease.............................................. (76,190) (132,326)
Proceeds from the exercise of common stock options.. 5,987 3,308
Proceeds from the issuance of loans and warrants.... 5,269,339 --
----------- -----------
Net cash provided by (used in) financing
activities...................................... 5,199,136 (129,018)
----------- -----------
Net decrease in cash and cash equivalents............ (255,042) (7,975,491)
Cash and cash equivalents at beginning of year....... 322,033 8,297,524
----------- -----------
Cash and cash equivalents at end of year............. $ 66,991 $ 322,033
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year:
Interest........................................... $ 149,764 $ 27,980
=========== ===========
Income taxes....................................... $ 800 $ 800
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements
June 25, 1999 and June 30, 1998
(1) Summary of Significant Accounting Policies
(a) The Company
Silicon Valley Communications, Inc. (the Company) was incorporated in
California in July 1994 under the name Qualop Systems Corporation. In November
1998, the Company changed its name to Silicon Valley Communications, Inc. The
Company designs, develops, manufactures, and markets fiberoptic components and
optical communication products for the cable television, data communications,
and telecommunications markets.
During fiscal 1999, the Company changed to a 52-53 week fiscal year, ending on
the Friday closest to June 30.
(b) Cash Equivalents
The Company considers all highly liquid investments with remaining maturities
of three months or less at date of purchase to be cash equivalents. As of June
25, 1999 and June 30, 1998, cash equivalents included certificates of deposit
of $-0- and $50,000, respectively, and money market funds of $10,710 and
$244,436, respectively.
(c) Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company periodically reviews its inventories for potential slow-
moving and obsolete items and writes down impaired items to net realizable
value.
(d) Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are depreciated over the
shorter of their estimated useful lives, generally five years, or the remaining
term of the related lease. Equipment held under capital leases is amortized
over the shorter of the lease term or the estimated useful life of the asset,
generally three years.
(e) Income Taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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. 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. A
valuation allowance is recorded to reduce deferred tax assets to an amount for
which realization is more likely than not.
(f) Employee Stock-Based Compensation
The Company accounts for its stock option plan using the intrinsic value
method. As such, compensation expense is recorded if on the date of grant, the
current fair value of the underlying stock exceeds the exercise price.
F-6
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
(g) Use of Estimates
The preparation of 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.
(h) Impairment of Long-Lived Assets
The Company reviews property and equipment for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds their fair value. To date, no
adjustments to the carrying amount of property and equipment have been
required.
(i) Revenue Recognition
Revenue is recognized upon product shipment when there is no significant
uncertainty regarding customer acceptance and payment. The Company has
determined that no significant uncertainties exist regarding customer
acceptance and payment when the Company has received signed evidence of an
arrangement with the customer, the product has been shipped, and collection is
probable.
(j) Warranty
Upon shipment to its customers, the Company provides for the estimated cost to
repair or replace products to be returned under warranty. The Company's
warranty period is generally three years from the date of shipment.
(k) Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentrations
of credit risk, consist primarily of cash and cash equivalents, trade
receivables, and notes receivable.
The Company's cash and cash equivalents consist of checking, certificate of
deposit, and money market accounts with financial institutions.
The Company performs ongoing credit evaluations of its customers' financial
condition. The Company establishes reserves for potential credit losses and
such losses have historically been within management's expectations.
(l) Foreign Currency Transactions
All transactions with foreign suppliers and purchases are denominated in U.S.
dollars. As a result, the Company's exposure to foreign currency gains and
losses is not significant.
(m) Certain Significant Risks and Uncertainties
The Company operates in a dynamic industry, and accordingly, can be affected by
a variety of factors, many of which are outside the Company's control,
including the ability to obtain additional financing, level of capital spending
in the cable television industry, changes in the regulatory environment,
changes in market demand, the timing of customer orders, the mix of products to
be sold, competitive market conditions, lengthy sales cycles, new product
introductions by the Company's competitors, delays in the development of new
products,
F-7
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
fundamental changes in the technology used in the CATV and telecommunications
markets, market acceptance of new or existing products, the cost and
availability of components, the hiring, training and retention of key
employees, the mix of the Company's future customer base and sales channels,
litigation or other claims against the Company, the level of future
international sales, and general economic conditions.
(n) Comprehensive Income
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which establishes
requirements for the reporting and display of comprehensive income and its
components. The Company had no components of other comprehensive income (loss)
and, thus, comprehensive income (loss) consists entirely of net loss for the
years ended June 25, 1999 and June 30, 1998.
(o) Financial Instruments
The carrying value of the Company's cash equivalents, accounts receivable,
accounts payable, notes payable to banks, and notes payable to related parties
approximates fair value due to the short-term nature of these balances.
(p) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SOP 98-1 requires that certain costs
related to the development or purchase of internal-use software be capitalized
and amortized over the estimated useful life of the software. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. The Company does
not expect the adoption of SOP 98-1 to have a material impact on its results of
operations.
(2) Basis of Presentation
The Company has suffered recurring losses from operations, has negative working
capital and an accumulated deficit, and is in violation of certain debt
covenants that raise substantial doubt about its ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
upon obtaining additional financing from banks or investors and receiving a
waiver from the bank. The bank has agreed to take no action on the
noncompliance event due to the pending merger agreement. On August 4, 1999, the
Company entered into a private placement memorandum with a third party (the
Acquirer) whereby the Company will sell 100% of its outstanding common and
preferred stock in exchange for common stock. In connection with this
transaction, the Company has obtained a loan from the Acquirer in the amount of
$250,000 and a $3,000,000 line of credit (Note 5). The signing of the merger
agreement is contingent on the approval of the agreement by the shareholders of
the Company. There can be no assurance that management will be successful in
its endeavors to obtain such approval. The accompanying financial statements
have been prepared assuming the Company will continue as a going concern and do
not include any adjustments that might result from the outcome of this
uncertainty.
F-8
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
(3) Inventories
Inventories as of June 25, 1999 and June 30, 1998, consisted of the following:
<TABLE>
<CAPTION>
1999 1998
---------- -------
<S> <C> <C>
Raw materials............................................. $1,144,953 315,007
Work in process........................................... 450,419 119,262
Finished goods............................................ 492,410 --
---------- -------
Total................................................... $2,087,782 434,269
========== =======
</TABLE>
In September 1998, the Company canceled the shipment of certain transmitter
products deliverable under a large contract with a single customer due to a
credit issue. The Company anticipates selling a significant quantity of these
units to existing and new customers. Inventories as of June 25, 1999, include
approximately $383,000 of these finished goods, net of reserves.
(4) Property and Equipment
Property and equipment as of June 25, 1999 and June 30, 1998, consisted of the
following:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Computer and office equipment........................... $2,041,965 1,819,544
Furniture and fixtures.................................. 467,561 448,326
Computer software....................................... 91,842 80,770
---------- ---------
2,601,368 2,348,640
Accumulated depreciation................................ 1,067,831 990,881
---------- ---------
Net property and equipment............................ $1,533,537 1,357,759
========== =========
</TABLE>
As of June 25, 1999 and June 30, 1998, leased equipment totaled approximately
$178,000, with related accumulated amortization of approximately $99,000 and
$71,000, respectively.
(5) Credit Facilities
In May 1999, the Company signed a letter of intent regarding a private
placement memorandum with the Acquirer regarding a proposed merger whereby the
Company will become a wholly owned subsidiary of the Acquirer. In connection
with the merger, the Acquirer loaned the Company $250,000 to provide financing
for operations through the closing. The note bears interest at an annual rate
of prime plus 2% (9.75% as of June 25, 1999), and is due and payable on
September 1, 1999. The note is guaranteed by an officer of the Company.
In addition, in June 1999, the Company obtained a discretionary line of credit
from the Acquirer, with an available amount of $3,000,000. The line bears
interest at an annual rate of prime plus 2% (9.75% as of June 25, 1999) and
expires on June 22, 2000. The Acquirer retains the right to decline requests
for advances and may terminate the line of credit at any time. The line of
credit is guaranteed by an officer of the Company. As of June 25, 1999, the
Company has not drawn against this line of credit.
As of June 25, 1999, the Company has a bank line of credit, which provides for
borrowings of up to $3,000,000, a bank bridge loan, which provides for
borrowings of up to $1,000,000, and a bank equipment term loan of $300,000. 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
F-9
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
of September 4, 1999. The outstanding balances on the line of credit, bridge
loan, and the term loan are $2,515,000, $500,000, and $187,500, 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 the Company. The line of credit and loans contain
certain restrictive financial covenants. As of June 25, 1999, the Company was
not in compliance with certain of the covenants. The bank has agreed to defer
action on the noncompliance event due to the pending merger agreement (see Note
2).
In connection with the bridge loan, the Company issued warrants to purchase
50,000 shares of Series B preferred stock at an exercise price of the lower of
$4.00, or 50% of an initial public offering price or acquisition price. These
warrants have a fair value of $41,000 and are being amortized over the life of
the bridge loan.
In fiscal 1998, in connection with the line of credit and term loan, the
Company issued warrants to purchase 32,000 shares of Series B preferred stock
at an exercise price of the lowest of 50% of an IPO or acquisition price, the
closing price of a Series C preferred stock round, or $7.00 per share. The
purchase rights represented by these warrants expire on January 4, 2002. The
warrants have a fair value of $13,000 and are being amortized over the life of
the related debt instruments.
On October 21, 1998, the Company restructured its then existing bank line of
credit and term loan. In consideration for the restructuring, the Company
issued additional warrants to purchase 10,000 shares of the Company's Series B
preferred stock at an exercise price of the lowest of 50% of an IPO or
acquisition price, the closing price of a Series C preferred stock round, or
$7.00 per share. The warrants are exercisable upon issuance and expire on
January 4, 2002. The warrants have a fair value of $4,000 and are being
amortized over the life of the related debt instruments.
(6) Shareholders' (Deficit) Equity
(a) Convertible Preferred Stock
Each preferred share is convertible, at the option of the holder, into one
share of common stock, subject to adjustment for stock splits, stock dividends,
and other events. Each share automatically converts to common stock upon the
closing of an underwritten initial public offering of the Company's common
stock. Upon conversion, all declared and unpaid dividends on the preferred
stock shall be paid in cash.
Dividends, when and if declared, are payable to the holders of preferred stock
on the basis of the relative preference to which each such series is entitled.
Such dividends are noncumulative.
Each share of preferred stock is entitled to the same voting rights as each
share of common stock into which it is convertible. As long as any shares of
preferred stock are outstanding, a majority of the shareholders of preferred
stock must approve certain significant events as defined in the articles of
incorporation, such as amendments of the Company's articles of incorporation or
by-laws that materially alter preferred shareholder's rights or increases or
decreases in the authorized number of shares of preferred stock.
In the event of liquidation, dissolution, or winding up of the Company, holders
of Series A and B preferred stocks are entitled to receive $1.10 and $2.00 per
share, respectively, plus all declared but unpaid dividends, prior to any
distribution to holders of common stock.
F-10
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
(b) Stock Option Plan
Under the Company's 1995 Stock Option Plan (the Plan), the Board of Directors
has authorized the granting of up to 2,800,000 shares of nonqualified or
incentive stock options to employees, directors, or consultants of the Company.
Options are granted with exercise prices at fair value at date of grant for
incentive stock options and not less than 85% of fair value for nonqualified
options. If at the time an option is granted, the optionee owns greater than
10% of outstanding voting stock, the price of the incentive option is not less
than 110% of the fair value of the stock at the date of grant. 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 date of
grant. Nonqualified options are generally fully vested upon issuance and expire
10 years from date of grant.
A summary of all option activity under the Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
average
Number of exercise price
shares per share
--------- --------------
<S> <C> <C>
Outstanding as of June 30, 1997.................... 562,500 $0.01
Granted.......................................... 2,060,250 0.20
Canceled......................................... (938,126) 0.15
Exercised........................................ (130,624) 0.03
---------
Outstanding as of June 30, 1998.................... 1,554,000 0.17
Granted.......................................... 958,500 0.20
Canceled......................................... (883,895) 0.20
Exercised........................................ (174,542) 0.03
---------
Outstanding as of June 25, 1999.................... 1,454,063 0.19
=========
</TABLE>
The following table summarizes information about stock options outstanding as
of June 25, 1999:
<TABLE>
<CAPTION>
Weighted-
average Weighted- Weighted-
remaining average average
Exercise Number contractual exercise Number exercise
price outstanding life (years) price exercisable price
-------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.01 53,375 6.40 $0.01 41,240 $0.01
0.20 1,400,688 9.19 0.20 291,247 0.20
--------- -------
1,454,063 332,487
========= =======
</TABLE>
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income or loss had the Company adopted the fair value method.
Under SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models. The Company's calculations
of fair value were made using the Black-Scholes option pricing model with the
following weighted-average assumptions: 1999--expected life 4 years;
volatility, none; risk-free interest rate 5.21%; and no dividends during the
expected term; 1998--expected life 5 years; volatility, none; risk-free
interest rate, 5.48%; and no dividends during the expected term.
The per share weighted-average fair value of stock options granted during both
the years ended June 25, 1999 and June 30, 1998, was $0.04 on the date of
grant.
If the Company had applied the fair value method under SFAS No. 123, pro forma
net losses would have been $9,538,708 and $7,906,830 in fiscal 1999 and 1998,
respectively.
F-11
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
(c) Warrants
In March 1999, the Company issued to certain founders and holders of preferred
stock, warrants to purchase up to 1,150,000 shares of Series B preferred stock
at prices ranging from $3.00 to $7.00 per share in connection with a bridge
financing (see Note 9). These warrants expire in January 2002.
In addition, in March 1999, the Company issued to a bank warrants to purchase
50,000 shares of Series B preferred stock at the lower of $4.00 or 50% of an
initial public offering or acquisition price in connection with a bridge loan
obtained from the bank (see Note 5). These warrants expire in January 2002.
In April 1999, in connection with the restructuring of its line of credit and
term loan, the Company issued warrants to purchase 10,000 shares of Series B
preferred stock at an exercise price of $7.00 per share (see Note 5).
The fair value of the warrants issued in fiscal 1999 to purchase 1,210,000
shares of Series B preferred stock was calculated by the Company using the
Black-Scholes pricing model. The fair value of $1,292,525 is being amortized
over the life of the related loans. Amortization in fiscal 1999 totaled
$911,124, which is included in interest expense in the accompanying statement
of operations.
In fiscal 1998, in connection with the line of credit and term loan, the
Company issued warrants to purchase 32,000 shares of Series B preferred stock
at an exercise price of the lowest of 50% of an IPO or acquisition price, the
closing price of a Series C preferred stock round, or $7.00 per share (see Note
5).
In July 1996, the Company issued to certain holders of preferred stock,
warrants to purchase up to 1,400,000 shares of Series B preferred stock at
$2.00 per share for assistance with the Series B equity financing, and
establishment and maintenance of manufacturing partner relationships. The
warrants expire in January 2001. The Company has 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.
In July 1996, the Company sold for $70,000 to certain shareholders warrants to
purchase up to 350,000 shares of Series B preferred stock at $2.00 per share.
The warrants expired in July 1998.
(7) Income Taxes
Total income tax expense differs from expected tax expense (computed by
multiplying the U.S. income statutory rate of 34% to loss before income tax)
for the years ended June 25, 1999 and June 30, 1998, as a result of the
following:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Expected tax benefit.............................. $(3,239,000) (2,684,000)
Losses and temporary differences for which no tax
benefit was realized............................. 2,887,000 2,666,000
Nondeductible expenses............................ 352,800 18,800
----------- ----------
Total tax expense............................... $ 800 800
=========== ==========
</TABLE>
F-12
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Loss and research and development credit
carryover......................................... $ 7,818,000 3,781,000
Research and development expenses deferred for tax
purposes.......................................... 2,227,000 618,000
Other.............................................. 455,000 801,000
----------- ---------
Total gross deferred tax assets.................. 10,500,000 5,200,000
Less valuation allowance............................. 10,500,000 5,200,000
----------- ---------
Net deferred tax assets.......................... -- --
=========== =========
</TABLE>
The net change in the total valuation allowance for the years ended June 25,
1999 and June 30, 1998, was a net increase of $5,300,000 and $2,300,000,
respectively.
As of June 25, 1999, the Company has net operating loss carryforwards for
federal and California income tax purposes of approximately $17,000,000. The
federal net operating loss carryforwards expire primarily in the years 2010
through 2019. The California net operating loss carryforwards expire primarily
in the years 2003 through 2004.
As of June 25, 1999, the Company has research and development credit carryovers
for federal and California income tax purposes of approximately $400,000 and
$200,000, respectively. The federal carryforwards expire in the years 2010 and
2019, and the California carryforwards can be carried forward indefinitely.
The Company had a gross deferred tax asset of approximately $10,500,000 and
$5,200,000 as of June 25, 1999 and June 30, 1998, respectively. Management does
not believe it is more likely than not that the deferred tax assets will be
realized; accordingly, a full valuation allowance has been established against
the Company's net deferred tax asset balance and no tax benefit is shown in the
accompanying statement of operations.
Federal and state tax laws limit the use of net operating loss carryforwards in
certain situations where changes occur in the stock ownership of a company. The
Company believes that two such ownership changes, as defined, have occurred
from inception to June 25, 1999. Approximately $710,000 of the Company's net
operating loss is limited to an annual allowance of $2,360. Accordingly, nearly
all of this loss will expire unutilized. An additional $2,640,000 of the net
operating loss is subject to an annual allowance of approximately $256,000. The
remaining net operating loss of $13,650,000 is not subject to a change of
ownership limitation until the date of the pending merger. The Company has not
determined the ownership change limitation on the remaining loss due to the
pending merger of the Company.
F-13
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
(8) Commitments
The Company is obligated under certain noncancelable operating leases for
office space expiring in 2003. The Company also leases certain equipment under
capital lease arrangements, which expire through 2000.
Future minimum payments required under noncancelable operating and capital
lease arrangements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending leases leases
----------- ------- ----------
<S> <C> <C>
2000................................................... $53,114 549,780
2001................................................... -- 568,400
2002................................................... -- 588,980
2003................................................... -- 301,350
------- ----------
53,114 $2,008,510
==========
Less amount representing interest...................... 2,564
-------
Present value of future minimum lease payments......... 50,550
Less current portion of obligations under capital
leases................................................ 50,550
-------
Long-term obligations under capital lease.............. $ --
=======
</TABLE>
Rent expense for the years ended June 25, 1999 and June 30, 1998, was
approximately $595,000 and $259,000, respectively.
In connection with the private placement memorandum signed by the Company with
the Acquirer, either the Company or the Acquirer will incur break-up fees of
$3,000,000 and other penalties if either the Company or the Acquirer cancels
the agreement for cause, other than as specifically allowed under the
agreement.
The Company is party to litigation and claims arising in the ordinary course of
its business, which the Company does not believe will have a material adverse
impact on its business.
(9) Related Party Transactions
On September 25, 1997, the Company issued a $2,000,000 note receivable to an
officer of the Company, who is also a board member. The note accrued interest
at a rate of 8% per annum with the principal and accrued interest to be paid
within 36 months. As of June 25, 1999, the entire balance was repaid.
From March to May 1999, the Company borrowed $1,816,839 from certain founders
and shareholders under promissory notes payable. 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 1,150,000 shares of Series B preferred
stock (see Note 6). Subsequent to year-end, the term of the notes was extended
to August 1999.
(10) Segment and Geographic Information
During 1999, the Company adopted the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. Operating segments are defined as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker, or decision making
group, in deciding how to allocate resources and in assessing their
performance. The Company operates in one
F-14
<PAGE>
Silicon Valley Communications, Inc.
(Formerly Qualop Systems Corporation)
Notes to Financial Statements--(Continued)
June 25, 1999 and June 30, 1998
industry segment: the Electronic Distribution Products segment, which provides
HFC equipment for signal distribution applications primarily to the CATV
market. Substantially all revenues result from the sale of fiber optic and
communications products in the CATV industry. The Company's chief operating
decision maker reviews financial information presented on a Company-wide basis
for purposes of making operating decisions and assessing financial performance.
The Company's assets are primarily located in the United States and are not
allocated to any specific region. The Company does not produce reports for, or
measure the performance of, its geographic regions based on any asset-based
metrics, and, therefore, segment information is not provided for assets.
Two domestic customers accounted for approximately 90% of the Company's
revenues in fiscal 1999. Two international customers accounted for
approximately 53% of the Company's revenues in fiscal 1998. International sales
as a percentage of gross revenues were not significant in fiscal 1999 and were
96% for fiscal 1998. International sales in fiscal 1998 were principally sales
to Asian distributors. Domestic sales are made primarily to end users.
Two domestic customers comprise 93% of the accounts receivable balance as of
June 25, 1999. There were no customers with a significant accounts receivable
balance as of June 30, 1998.
F-15
<PAGE>
Index to Supplemental Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-17
Supplemental Consolidated Balance Sheets as of June 26, 1998 and June 25,
1999..................................................................... F-18
Supplemental Consolidated Statements of Operations for the years ended
June 27, 1997, June 26, 1998 and June 25, 1999........................... F-19
Supplemental Consolidated Statements of Cash Flows for the years ended
June 27, 1997, June 26, 1998 and June 25, 1999........................... F-20
Supplemental Consolidated Statements of Shareholders' Equity for the years
ended June 27, 1997, June 26, 1998 and June 25, 1999..................... F-21
Notes to Consolidated Financial Statements................................ F-22
</TABLE>
F-16
<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-17
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Supplemental Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................................. $ 4,695 $ 3,030
Marketable securities...................................... 445 356
Accounts and notes receivables, less allowance of $1,007 in
1999; $923 in 1998........................................ 31,314 19,823
Inventories................................................ 23,565 17,809
Deferred taxes............................................. 6,335 2,797
Other current assets....................................... 3,457 2,575
Net current assets of discontinued operations.............. 433 --
-------- -------
Total current assets................................... 70,244 46,390
Property, plant, and equipment, net........................ 27,792 29,853
Intangible assets, net of accumulated amortization of $172
in 1999; $-0- in 1998..................................... 1,131 1,295
Other long-term assets..................................... 3,782 6,536
-------- -------
Total assets........................................... $102,949 $84,074
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 16,286 $ 6,532
Accrued liabilities........................................ 16,242 10,831
Line-of-credit and short-term credit obligations........... 4,638 --
Current portion of long-term debt.......................... 832 926
Net current liabilities of discontinued operations......... -- 517
-------- -------
Total current liabilities.............................. 37,998 18,806
Long-term debt, less current portion....................... 3,708 5,567
Other long-term liabilities................................ 1,329 1,041
Commitments and contingent liabilities.....................
-------- -------
Total liabilities...................................... 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 12,761,485 in 1999 and 12,631,166 in
1998...................................................... 1,276 1,263
Additional paid-in capital................................. 44,649 42,041
Accumulated other comprehensive loss....................... (96) (99)
Retained earnings.......................................... 21,065 21,351
Treasury stock at cost, shares of 600,723 in 1999 and
510,342 in 1998........................................... (6,980) (5,896)
-------- -------
Total shareholders' equity............................. 59,914 58,660
-------- -------
Total liabilities and shareholders' equity............. $102,949 $84,074
======== =======
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Supplemental Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
----------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales........................................ $183,425 $154,041 $133,780
Cost and expenses:
Cost of sales................................... 138,793 121,986 106,485
Selling and administrative...................... 27,153 19,724 18,521
Research and product development................ 11,833 9,988 7,706
Provision for restructuring costs............... -- 625 --
Interest........................................ 1,384 399 380
Other expense (income), net..................... 110 19 (861)
-------- -------- --------
179,273 152,741 132,231
-------- -------- --------
Income from continuing operations before income
taxes........................................... 4,152 1,300 1,549
Income tax expense (benefit):
Current......................................... 7,133 3,565 1,299
Deferred........................................ (2,298) (3,183) (648)
-------- -------- --------
4,835 382 651
-------- -------- --------
Income (loss) from continuing operations......... (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............................ 397 928 (3,830)
-------- -------- --------
Net income (loss).......................... $ (286) $ 1,846 $ (9,537)
======== ======== ========
Net income (loss) per share--(basic):
Continuing operations........................... $ (0.06) $ 0.08 $ 0.07
Discontinued operations:
Loss from operations......................... -- -- (0.54)
Gain (loss) on disposal...................... 0.04 0.08 (0.32)
-------- -------- --------
Net income (loss).......................... $ (0.02) $ 0.16 $ (0.79)
======== ======== ========
Net income (loss) per share--(diluted):
Continuing operations........................... $ (0.06) $ 0.07 $ 0.07
Discontinued operations:
Loss from operations......................... -- -- (0.53)
Gain (loss) on disposal...................... 0.04 0.08 (0.31)
-------- -------- --------
Net income (loss).......................... $ (0.02) $ 0.15 $ (0.77)
======== ======== ========
Weighted average common shares and common share
equivalents
Basic........................................... 12,098 11,895 12,143
Diluted......................................... 12,098 12,340 12,402
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Supplemental Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Years Ended
----------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income (loss)................................ $ (286) $ 1,846 $(9,537)
Adjustments to reconcile net income to net cash
and cash equivalents provided by operating
activities:
Depreciation and amortization................... 8,860 6,967 5,433
Amortization of debt discount................... 911 -- --
(Gain) loss on disposal of discontinued
operations, net of tax......................... (397) (928) 3,830
Provision for deferred retirement salary plan... 204 292 252
Loss (gain) on sale of property, plant, and
equipment...................................... 229 (14) 22
Changes in operating assets and liabilities:
Accounts receivable............................ (11,491) (50) 1,127
Inventories.................................... (5,756) 2,748 (1,454)
Other assets................................... (165) (2,793) (221)
Accounts payable............................... 9,754 (2,574) 3,005
Accrued liabilities............................ 5,493 3,801 (113)
Deferred income taxes.......................... (2,298) (3,189) (929)
Discontinued operations--working capital
changes and noncash charges................... (553) 1,051 3,236
-------- -------- -------
Net cash and cash equivalents provided by
operating activities............................ 4,505 7,157 4,651
-------- -------- -------
Investing Activities:
Purchase of property, plant, and equipment....... (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........................... 94 (146) (317)
Proceeds from sale of property, plant, and
equipment....................................... 28 14 15
Proceeds from (investing activites of)
discontinued operations......................... -- 656 (698)
-------- -------- -------
Net cash and cash equivalents used in investing
activities...................................... (6,149) (11,525) (8,179)
-------- -------- -------
Financing Activities:
Payment of debt and capital lease obligations.... (5,050) (966) (941)
Proceeds from long-term debt borrowing........... 3,097 -- --
Proceeds from (payments on) short-term credit
facilities, net................................. 4,638 (3,466) 1,127
Proceeds from issuance of convertible preferred
stock........................................... 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............................................ 76 51 88
Proceeds from exercise of stock options.......... 1,202 277 278
Purchase of treasury stock....................... (1,084) (131) (5,765)
-------- -------- -------
Net cash and cash equivalents provided by (used
in) financing activities........................ 3,309 (1,398) 10,568
-------- -------- -------
Increase (decrease) in cash and cash
equivalents..................................... 1,665 (5,766) 7,040
Cash and cash equivalents at beginning of year... 3,030 8,796 1,762
-------- -------- -------
Cash and cash equivalents at end of year......... $ 4,695 $ 3,030 $ 8,802
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Supplemental Consolidated Statements of Shareholders' Equity
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Comprehensive Common Paid-in Comprehensive Retained Treasury
Income Stock Capital Income (Loss) Earnings Stock
------------- ------ ---------- ------------- -------- --------
<S> <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
income: -- -- -- -- --
Net unrealized holding
gains on marketable
securities............ 7 -- -- -- -- --
Foreign currency
translation (loss).... (67) -- -- -- -- --
-------
Other comprehensive
income (loss).......... (60) -- -- (60) -- --
-------
Comprehensive loss...... $(9,597) -- -- -- -- --
=======
Shares issued........... 21 15,698 -- -- --
Exercise of stock
options................ 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
income: -- -- -- -- --
Net unrealized holding
gains on marketable
securities............ 7 -- -- -- -- --
Foreign currency
translation gain...... 9 -- -- -- -- --
-------
Other comprehensive
income................. 16 -- -- 16 -- --
-------
Comprehensive income.... $ 1,862 -- -- -- -- --
=======
Adjustment related to
merger (Note A)........ -- -- -- 432 --
Shares issued........... 17 1,850 -- -- --
Exercise of stock
options................ 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
income: -- -- -- -- --
Net unrealized holding
gains on marketable
securities............ 4 -- -- -- -- --
Foreign currency
translation loss...... (1) -- -- -- -- --
-------
Other comprehensive
income................. 3 -- -- 3 -- --
-------
Comprehensive loss...... $ (283) -- -- -- -- --
=======
Shares issued........... 1 1,254 -- -- --
Exercise of stock
options................ 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)
====== ======= ===== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements
For the three fiscal years ended June 25, 1999
(In thousands, except share and per share data)
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
optimisations, 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 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.
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.
F-22
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands, except share and per share data)
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 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.
F-23
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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-24
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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>
Years Ended
--------------------------
June
June 25, 26, June 27,
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Income (loss) from continuing operations........ $ (683) $ 918 $ 898
Gain (loss) from discontinued operations........ 397 928 (10,435)
------- ------- --------
Net income (loss)............................... $ (286) $ 1,846 $ (9,537)
------- ------- --------
Basic shares outstanding........................ 12,098 11,895 12,143
Common stock equivalents........................ -- 445 259
------- ------- --------
Dilutive potential common shares................ 12,098 12,340 12,402
------- ------- --------
Net income (loss) per share--(basic)
Continuing operations.......................... $ (0.06) $ 0.08 $ 0.07
Discontinued operations........................ 0.04 0.08 (0.86)
------- ------- --------
Net income (loss)............................... $ (0.02) $ 0.16 $ (0.79)
------- ------- --------
Net income (loss) per share--(diluted)
Continuing operations.......................... $ (0.06) $ 0.07 $ 0.07
Discontinued operations........................ 0.04 0.08 (0.84)
------- ------- --------
Net income (loss)............................... $ (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-25
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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
------ --------- ------
<S> <C> <C> <C>
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.
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.
F-26
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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
--------
<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>
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
-------- --------
<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>
F-27
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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
--------- ---------- ---------- -----
<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
--------- -----
<S> <C> <C>
Available-for-sale:
Due after one year through five years....................... $351 $342
Equity securities........................................... 101 103
---- ----
$452 $445
==== ====
</TABLE>
D. Inventories
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
<S> <C> <C>
Finished goods............................................. $ 3,287 $ 2,850
Work-in-process............................................ 3,038 1,874
Raw materials.............................................. 17,240 13,085
------- -------
$23,565 $17,809
======= =======
</TABLE>
Included in the amounts above were reserves of $2,231 at June 25, 1999, and
$3,213 at June 26, 1998.
F-28
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
E. Property, Plant and Equipment
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
<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
-------- --------
<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>
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
F-29
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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.
H. Long-term Debt
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
<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
F-30
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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 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>
<S> <C>
Fiscal year ending:
2000................................................................ $ 832
2001................................................................ 788
2002................................................................ 796
2003................................................................ 789
2004................................................................ 173
Thereafter.......................................................... 1,162
------
$4,540
======
</TABLE>
F-31
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
At June 25, 1999, the future minimum payments required under capital lease
arrangements are as follows:
<TABLE>
<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.
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>
<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.
F-32
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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.
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
-------- -------- --------
<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.
F-33
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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.
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>
$ 0.11 to $ 8.38....... 329,068 6.0 years $ 4.71 223,041 $ 5.95
$ 8.50 to $14.13....... 386,209 6.2 years $10.60 102,802 $10.86
$14.375 to $19.75....... 587,699 7.0 years $15.23 156,187 $15.00
$20.12 to $25.50....... 712,363 7.7 years $21.89 112,299 $21.89
$25.75 to $31.25....... 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.
F-34
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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>
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 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
-------- -------- --------
<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>
F-35
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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
-------- --------- --------
<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>
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-36
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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
-------- --------
<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 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.
F-37
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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-38
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
M. Accrued Liabilities
<TABLE>
<CAPTION>
June 25, June 26,
1999 1998
-------- --------
<S> <C> <C>
Accrued incentive plan expense............................. $ 2,285 $ 1,716
Accrued vacation expense................................... 2,000 1,512
Accrued salary expense..................................... 1,297 835
Accrued payroll and sales tax expense...................... 1,519 917
Accrued sales commissions and rebates payable.............. 951 789
Accrued warranty expense................................... 1,742 1,733
Accrued workers compensation self-insurance expense........ 1,724 1,319
Accrued restructuring costs................................ -- 625
Accrued income tax payable................................. 3,304 473
Accrued other.............................................. 1,420 912
------- -------
$16,242 $10,831
======= =======
</TABLE>
N. Other Expense (Income)
<TABLE>
<CAPTION>
Years Ended
--------------------------
June 25, June 26, June 27,
1999 1998 1997
-------- -------- --------
<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-39
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
Q. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
------- ------- ------- ----------- --------
<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
------- ------- ------- ----------- --------
<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
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.
F-40
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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. In fiscal year 1999 and 1998, the Company
operated in two industry segments; the Electronic Distribution Products
segment, which provides HFC equipment for signal distribution applications and
technical services primarily to the CATV market and the Broadband Management
Services segment, which provides Internet enabling technical services and
support to broadband operators in the United States. In fiscal year 1997, the
Company operated in three industry segments: the Electronic Distribution
Products segment, the Broadband Management Services segment, and the Digital
Fiber Optics Transmission Products segment, which has been reported as a
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.
Information about industry segments for 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>
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-41
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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>
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>
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
F-42
<PAGE>
C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with
Convergence.com Corporation and Silicon Valley Communications, Inc.)
Notes to Consolidated Financial Statements--(Continued)
(in thousands except share and per share data)
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 anticipates recording a one-time charge related to the business
combinations in its first quarter of fiscal year 2000. The one-time charge will
include the transaction costs, as well as employee severance payments and
write-off of assets related to existing fiber optic products that will become
obsolete and be replaced by the SVCI product line.
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.
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-43
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: October 13, 1999
C-COR.net Corp.
(Registrant)
By: /s/ William T. Hanelly
------------------------------
Name: William T. Hanelly
Title: Vice President - Finance,
Secretary and Treasurer
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors and Stockholders
C-COR.net Corp.:
We consent to incorporation by reference in the registration statements (Nos. 2-
95959, 33-27440, 33-35208, 33-66590, 333-02505, 333-65805) on Form S-8 and (Nos.
333-82697, 333-87909) on Form S-3 of C-COR.net Corp. of our report dated
September 20, 1999 relating to the 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, which
report appears in Form 8-K/A of C-COR.net Corp. dated September 17, 1999. The
supplemental consolidated financial statements give retroactive effect to the
mergers of C-COR.net Corp. and Convergence.com, which occurred on July 9, 1999,
and Silicon Valley Communications, Inc., which occurred on September 17, 1999.
KPMG LLP
State College, Pennsylvania
October 13, 1999
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors and Stockholders
C-COR.net Corp.:
We consent to incorporation by reference in the registration statements (Nos. 2-
95959, 33-27440, 33-35208, 33-66590, 333-65805, and 333-02505) on Form S-8 and
(Nos. 333-82697 and 333-87909) on Form S-3 of C-COR.net Corp. of our report
dated July 30, 1999, except as to Note 2, which is as of August 4, 1999, with
respect to the balance sheets of Silicon Valley Communications, Inc. (formerly
Qualop Systems Corporation) as of June 25, 1999 and June 30, 1998, and the
related statements of operations, shareholders' (deficit) equity, and cash flows
for the years then ended, which report appears in the Form 8-K/A of C-COR.net
Corp. dated September 17, 1999.
KPMG LLP
Mountain View, California
October 13, 1999
