UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)......February 18, 2000
C-COR.net Corp.
(Exact name of Registrant as specified in its charter)
Pennsylvania 0-10726 24-0811591
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
60 Decibel Road, State College, Pennsylvania 16801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (814) 238-2461
(Former name or former address, if changed since last report.)
<PAGE>
The purpose of this Form 8-K/A is to amend the Current Report on Form 8-K dated
February 18, 2000 and filed on March 3, 2000, to file the required financial
statements and Pro Forma information required in Item 7 - Financial Statements,
Pro Forma Information and Exhibits.
Item 2. Acquisition or Disposition of Assets
On February 18, 2000, the Registrant consummated its acquisition of Worldbridge
Broadband Services, Inc., a Delaware corporation ("Worldbridge") pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") dated as of January 19,
2000 by and among the Registrant, Worldbridge and C-COR.net Services Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of the Registrant
("Acquisition Sub"). Pursuant to the Merger Agreement, Acquisition Sub was
merged (the "Merger") with and into Worldbridge, with Worldbridge being the
surviving entity as a wholly owned subsidiary of the Registrant. As
consideration for the Merger, each outstanding share of common stock of
Worldbridge was converted into the right to receive .197249 shares of the
Registrant's common stock, plus a right to receive a pro-rata portion of 160,356
shares that were issued into escrow, resulting in the issuance of approximately
1,603,584 shares of the Registrant's common stock (including the escrowed
shares). Outstanding options to acquire Worldbridge common stock were converted
into stock options to acquire the Registrant's common stock, using a conversion
ratio of .219166 shares of the Registrant's common stock for each share of
Worldbridge common stock (with an appropriate adjustment to the exercise price)
for an aggregate of stock options to acquire 196,416 shares of the Registrant's
common stock. The nature and amount of consideration paid in connection with the
Merger was determined based on arms length negotiations between the Registrant
and Worldbridge. Assets acquired by the Registrant in the Merger consist
primarily of cash, accounts receivable and equipment, which is used in
Worldbridge's services operation and the Registrant continues to use such assets
in the same manner. The Merger is being accounted for under the
pooling-of-interests method of accounting and is a tax-free reorganization. The
foregoing summary of the Merger is qualified in its entirety by reference to the
Merger Agreement filed as Exhibit 2.1 to this report and incorporated herein by
reference.
Subsequent to the Merger, three former executives of Worldbridge signed
employment agreements with Worldbridge (a wholly owned subsidiary of the
Registrant). Paul Janson, who previously held the position of President and
Chief Executive Officer of Worldbridge, became Vice President, Technical
Services of Worldbridge following the Merger. Jimmy K. Wilkes, who previously
held the position of Director, Inside Plant for Worldbridge, became Managing
Director, Network Integration Services of Worldbridge following the Merger.
Douglas R. Muench, who previously held the position of Director, Outside Plant
for Worldbridge, retained such position following the Merger.
Item 7. Financial Statements, Pro Forma Information and Exhibits
The following financial information and exhibits are filed as part of this
report:
(a) Financial Statements of Worldbridge Broadband Services, Inc. as of and
for the years ended December 31, 1999 and December 31, 1998.
Independent Auditors' Reports
Balance Sheets -- As of December 31, 1999 and December 31, 1998
Statements of Operations -- Years ended December 31, 1999 and December
31, 1998
Statements of Stockholders' Equity -- Years ended December 31, 1999 and
December 31, 1998
Statements of Cash Flows -- Years ended December 31, 1999 and December
31, 1998
Notes to Financial Statements
(b) Supplemental Consolidated Financial Statements of C-COR.net Corp.,
restated to reflect the pooling-of-interest combination with Worldbridge
Broadband Services, Inc
Independent Auditors' Reports
Supplemental Consolidated Balance Sheets as of December 24, 1999,
June 25, 1999, and June 26, 1998.
Supplemental Consolidated Statements of Operations for the twenty-six
weeks ended December 24, 1999 and December 25, 1998, and for the years
ended June 25, 1999, June 26, 1998, and June 27, 1997
Supplemental Consolidated Statements of Cash Flows for the twenty-six
weeks ended December 24, 1999 and December 25, 1998, and for the years
ended June 25, 1999, and June 26, 1998, and June 27, 1997
Supplemental Consolidated Statements of Shareholders' Equity for the
twenty-six weeks ended December 24, 1999 and for the years ended June
25, 1999, June 26, 1998, and June 27, 1997
Notes to Supplemental Consolidated Financial Statements.
(c) Exhibits
2.1 Agreement and Plan of Merger dated as of January 19, 2000 between
the Registrant, C-COR.net Services Acquisition Corp. and
Worldbridge Broadband Services, Inc. (Incorporated by reference
to the Registrant's 8-K dated February 18, 2000 and filed on
March 3, 2000. File No. 0-10726)
23.1 Consent of KPMG LLP (State College, PA)
23.2 Consent of KPMG LLP (Denver, CO)
27.1 Restated Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
27.4 Restated Financial Data Schedule
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Reports F-1
Balance Sheets -- As of December 31, 1999 and December 31, 1998 F-2
Statements of Operations -- Years ended December 31, 1999
and December 31, 1998 F-3
Statements of Stockholders' Equity -- Years ended
December 31, 1999 and December 31, 1998 F-4
Statements of Cash Flows -- Years ended December 31, 1999
and December 31, 1998 F-5
Notes to Financial Statements F-6
</TABLE>
<PAGE>
Independent Auditors' Report
The Board of Directors
Worldbridge Broadband Services, Inc.:
We have audited the accompanying balance sheets of Worldbridge Broadband
Services, Inc. as of December 31, 1999 and 1998, and the related statements of
operations, stockholders' 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 Worldbridge Broadband Services,
Inc. as of December 31, 1999 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
February 18, 2000
F-1
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................... $ 1,175,748 424,143
Trade accounts receivable, net of allowance for doubtful accounts
of $42,004 and $34,429 ......................................... 5,204,401 4,169,015
Deferred income taxes ............................................. 71,009 -
Prepaid expenses and other ........................................ 42,702 340,994
----------- -----------
Total current assets ...................................... 6,493,860 4,934,152
Equipment, net (notes 2 and 7) ........................................ 1,006,371 1,092,725
Other assets .......................................................... 39,547 58,835
----------- -----------
Total assets .............................................. $ 7,539,778 6,085,712
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable ............................................ $ 653,097 320,349
Accrued expenses (note 3) ......................................... 1,077,849 622,984
Income taxes payable .............................................. 99,420 15,000
Current portion of capital lease obligations (note 7) ............. 23,737 32,000
----------- -----------
Total current liabilities ................................. 1,854,103 990,333
Capital lease obligations, less current portion (note 7) .............. 21,767 42,854
Deferred income taxes (note 6) ........................................ 194,682 -
----------- -----------
Total liabilities ......................................... 2,070,552 1,033,187
----------- -----------
Stockholders' equity (note 5):
Undesignated preferred stock, 10,000,000 shares authorized;
none issued or outstanding ..................................... - -
Series B convertible preferred stock, par value $.01 per share,
2,000,000 shares authorized; 43,500 and 53,500 shares issued and
outstanding in 1999 and 1998; aggregate liquidation preference
of $4,350,000 at December 31, 1999 ............................. 4,350,000 5,350,000
Common stock, par value $.01 per share, 25,000,000 shares
authorized; 4,804,900 shares issued ............................ 48,049 48,049
Additional paid-in capital ........................................ 203,946 203,946
Retained earnings (deficit) ....................................... 1,048,645 (368,056)
Treasury stock, 112,570 common shares, at cost .................... (181,414) (181,414)
----------- -----------
Total stockholders' equity ................................ 5,469,226 5,052,525
----------- -----------
Commitments and contingencies (note 7)
----------- -----------
Total liabilities and stockholders' equity ................ $ 7,539,778 6,085,712
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
WORLDBRIDGE BROADBAND SERVICES, INC.
Statements of Operations
Years ended December 31, 1999 and 1998
1999 1998
------------ ------------
<S> <C> <C>
Net service revenue ......................... $ 21,956,072 15,811,245
Cost of services ............................ 16,136,619 14,044,571
------------ ------------
Gross profit ...................... 5,819,453 1,766,674
Operating costs and expenses:
Selling, general and administrative ..... 3,238,496 2,716,104
Depreciation and amortization ........... 394,466 266,362
------------ ------------
Operating income (loss) ........... 2,186,491 (1,215,792)
Other income (expense):
Interest income ......................... 49,590 42,084
Interest expense ........................ (6,144) (37,789)
Other, net .............................. 4,996 8,430
------------ ------------
48,442 12,725
Earnings (loss) before income taxes 2,234,933 (1,203,067)
Income tax expense (benefit) (note 6) ....... 818,232 (325,117)
------------ ------------
Net earnings (loss) ............... $ 1,416,701 (877,950)
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Statements of Stockholders' Equity
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Series B preferred stock Common stock Additional Retained Total
------------------------ ----------------- paid-in earnings Treasury stockholders'
Shares Amount Shares Amount capital (deficit) stock equity
----------- ---------- --------- --------- --------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1998 19,500 $1,950,000 4,804,900 $ 251,995 - 509,894 (332) 2,711,557
Purchase of 10,925 common shares - - - - - - (181,082) (181,082)
Issuance of Series B preferred
stock for cash 34,000 3,400,000 - - - - - 3,400,000
Establishment of $.01 per share
par value for common stock - - - (203,946) 203,946 - - -
Net loss - - - - - (877,950) - (877,950)
----------- ---------- --------- --------- --------- ---------- --------- -------------
Balances at December 31, 1998 53,500 5,350,000 4,804,900 48,049 203,946 (368,056) (181,414) 5,052,525
Purchase and retirement of 10,000
shares of Series B
preferred stock (10,000) (1,000,000) - - - - - (1,000,000)
Net earnings - - - - - 1,416,701 - 1,416,701
----------- ---------- --------- --------- --------- ---------- --------- -------------
Balances at December 31, 1999 43,500 $4,350,000 4,804,900 $ 48,049 203,946 1,048,645 (181,414) 5,469,226
=========== ========== ========= ========= ========= ========== ========= =============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WORLDBRIDGE BROADBAND SERVICES, INC.
Statements of Cash Flows
Years ended December 31, 1999 and 1998
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ............................................. $ 1,416,701 (877,950)
Adjustments to reconcile net earnings (loss) to net cash provided
(used) by operating activities:
Depreciation and amortization ............................. 394,466 266,362
Deferred tax expense (benefit) ............................ 123,673 (167,726)
Loss (gain) on sale of equipment .......................... 11,954 (6,188)
Changes in operating assets and liabilities:
Trade accounts receivable ............................... (1,035,386) (1,138,496)
Prepaid expenses and other .............................. 317,580 (270,766)
Trade accounts payable .................................. 332,748 (34,835)
Accrued expenses and income taxes payable ............... 539,285 17,305
----------- ----------
Net cash provided (used) by operating activities . 2,101,021 (2,212,294)
Cash flows from investing activities:
Purchases of equipment .......................................... (327,864) (755,234)
Proceeds from sale of equipment ................................. 7,798 36,734
----------- ----------
Net cash used by investing activities ............ (320,066) (718,500)
Cash flows from financing activities:
Purchase of preferred and common stock .......................... (1,000,000) (181,082)
Proceeds from issuance of preferred stock ....................... - 3,400,000
Net borrowings (repayments) under lines-of-credit with bank ..... - (107,308)
Proceeds from issuance of debt .................................. - 51,816
Principal payments on debt and capital lease obligations ........ (29,350) (169,685)
----------- ----------
Net cash provided (used) by financing activities . (1,029,350) 2,993,741
Net increase in cash and cash equivalents ........ 751,605 62,947
Cash and cash equivalents at beginning of year ...................... 424,143 361,196
----------- ----------
Cash and cash equivalents at end of year ............................ $ 1,175,748 424,143
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid for interest .......................................... $ 6,144 37,789
=========== ==========
Cash paid for income taxes ...................................... $ 610,247 -
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(1) Summary of Significant Accounting Policies
(a) Business and Basis of Financial Statement Presentation
Worldbridge Broadband Services, Inc. (the Company) provides
services to broadband telecommunications network operators which
include outsourced technical and operational services, network
systems integration services and certain operational and process
design consulting services.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
On February 18, 2000, all of the outstanding common shares of the
Company, including common shares issued in connection with the
conversion of Series B preferred stock, were acquired by
C-COR.net Corp.
(b) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
original maturities of three months or less at the date of
purchase.
(c) Equipment
Equipment is stated at cost. Costs of maintenance and repairs are
charged to expense as incurred. Depreciation is calculated using
the straight-line method over the estimated useful lives of the
assets, which range from 2 to 7 years.
(d) Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes (Statement 109). Under the asset and liability
method of 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 recorded 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 operations
in the period that includes the enactment date. A valuation
allowance is required to the extent any deferred tax assets may
not be realizable.
(e) Revenue Recognition
The Company bills and records revenue as services are provided,
in accordance with the terms of contracts with customers. Certain
contracts provide for retainages by customers which aggregated
approximately $98,000 and $94,000 at December 31, 1999 and 1998,
respectively.
(f) Impairment of Long-Lived Assets and Assets to be Disposed Of
In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
the Company reviews long-lived assets and certain identifiable
intangibles 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 generally measured by a comparison of the carrying amount of
an asset to future undiscounted cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is equal to the amount
by which the carrying amounts of the assets exceed the fair
values of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value, less costs to
sell. No impairment was recognized in 1999 or 1998.
F-6
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(g) Stock-Based Compensation
The Company accounts for its employee stock-based compensation
plans under the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and has
provided pro forma disclosures of net earnings (loss), as
required by Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting For Stock-Based Compensation.
(h) Reclassifications
Certain 1998 amounts have been reclassified to conform with the
1999 financial statement presentation.
(2) Equipment
Equipment consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Installation and test equipment $ 1,279,784 1,032,571
Vehicles 269,320 302,667
Computers and software 249,465 189,489
--------------- --------------
1,798,569 1,524,727
Accumulated depreciation (792,198) (432,002)
--------------- --------------
$ 1,006,371 1,092,725
=============== ==============
</TABLE>
(3) Accrued Expenses
Accrued expenses consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------------ ---------------
<S> <C> <C>
Accrued compensation $ 606,642 303,764
Accrued workers' compensation and health
insurance premiums 270,798 154,622
Other accrued expenses 200,409 164,598
------------ ---------------
$ 1,077,849 622,984
============ ===============
</TABLE>
(4) Debt
The Company has a revolving line-of-credit which provides for borrowings
of up to $3,000,000 through May 31, 2000, with interest at LIBOR plus 2%,
payable monthly. No amounts were outstanding under the line-of-credit at
December 31, 1999 and 1998.
(5) Stockholders' Equity
(a) Preferred Stock
Each share of Series B Preferred stock is convertible at the
option of the holder into common stock at $1.6575 per share.
Series B Preferred stockholders have voting rights equal to the
number of common shares into which the preferred shares may be
converted. During 1999, pursuant to the original agreement, the
Company exercised the right to repurchase 10,000 shares of the
stock from an investor at the original issuance price of $100 per
share, or $1,000,000. No other similar rights exist at December
31, 1999. Subsequent to December 31, 1999, as a result of the
business combination described in note 1, all preferred stock
converted into common shares.
F-7
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(b) Amendment to Articles of Incorporation
In 1998, the Company amended its articles of incorporation to
change the stated par values of all stock classifications to $.01
per share. Prior to this amendment, no par values had been
established for any classification of capital stock.
(c) Stock Options
The Company has granted options to purchase shares of common
stock to certain employees and directors. The options expire upon
the earlier of the date of termination of employment or 10 years
from the date of grant. The options vest immediately upon
issuance. However, the shares issued upon exercise are restricted
and subject to repurchase at the exercise price if employees
terminate prior to vesting of their shares. No options have been
exercised as of December 31, 1999. Subsequent to December 31,
1999, as a result of the business combination described in note
1, the Company's repurchase right lapsed in total due to this
change in control.
During 1999 and 1998, the weighted-average fair value of stock
options on the date of grant was $.27 using the Black Scholes
option-pricing model. The following assumptions were used: no
expected dividends, or volatility, risk-free interest rates of
approximately 6.0%, and an expected life of 3 years. The
remaining weighted average contractual life of the options
outstanding at December 31, 1999 was 8.9 years.
As discussed in note 1, the Company utilizes APB Opinion No. 25
in accounting for its employee stock options and, accordingly,
because the Company has granted all of its options with exercise
prices at fair value, no compensation cost has been recognized
for stock options in the accompanying financial statements. If
the Company determined compensation cost based on the fair value
of the options at the grant date under SFAS No. 123, the
Company's net earnings (loss) for 1999 and 1998 would have been
approximately $1,390,000 and $(903,000), respectively.
Stock option activity during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Number average
of exercise
options price
--------------- --------------
<S> <C> <C>
Balance at January 1, 1998 141,000 $ .19
Granted 469,000 1.66
Forfeited (47,000) .19
---------------
Options outstanding at December 31, 1998 563,000 1.66
Granted 380,200 1.66
Forfeited (47,000) 1.66
---------------
Options outstanding at December 31, 1999 896,200 1.66
===============
</TABLE>
F-8
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(6) Income Taxes
Income tax expense (benefit) consists of the following for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Current:
Federal $ 562,494 (370,580)
State 132,065 (122,263)
---------------- ----------------
Total current 694,559 (492,843)
---------------- ----------------
Deferred:
Federal 101,422 135,778
State 22,251 31,948
---------------- ----------------
Total deferred 123,673 167,726
---------------- ----------------
Total income tax expense (benefit) $ 818,232 (325,117)
================ ================
</TABLE>
Income tax expense (benefit) for the years ended December 31 differs
from the amount resulting from applying the federal statutory rate of 34%
to taxable income (loss) as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Expected tax expense (benefit) ......................... $ 759,877 (409,043)
State income taxes, net of federal benefit ............. 118,004 (63,522)
Change in valuation allowance for deferred tax assets .. (110,840) 110,840
Nondeductible expenses ................................. 14,837 8,811
Other, net ............................................. 36,354 27,797
--------- ---------
Actual income tax expense (benefit) ........... $ 818,232 (325,117)
========= =========
</TABLE>
Temporary differences that give rise to the components of deferred tax
assets and liabilities as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts .................. $ 17,642 14,460
Accrued expenses ................................. 33,504 18,480
Net operating loss carryforward .................. - 223,154
Other ............................................ 19,863 22,994
--------- ---------
Total deferred tax assets .................. 71,009 279,088
Valuation allowance .................................. - (110,840)
--------- ---------
Net deferred tax assets .................... $ 71,009 168,248
========= =========
Deferred tax liabilities:
Equipment, due to differences in depreciation .... $(153,398) (111,599)
Contract retainage ............................... (41,284) (56,649)
--------- ---------
Total deferred tax liabilities ............. $(194,682) (168,248)
========= =========
</TABLE>
F-9
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(7) Commitments, Contingencies and Related Party Transactions
(a) Leases
The Company leases vehicles, office space and apartments under
noncancellable operating lease agreements which expire through
2004. In addition, the Company has approximately $143,000 of
vehicles under capital leases, with related accumulated
depreciation approximating $83,000. Future minimum lease payments
as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Capital Operating
leases leases
----------------- -----------------
<S> <C> <C>
2000 $ 27,033 1,050,565
2001 18,235 902,366
2002 4,856 577,856
2003 - 184,445
2004 - 45,360
----------------- -----------------
Total future minimum lease payments 50,124 $ 2,760,592
=================
Less amount representing interest (4,620)
-----------------
Present value of future minimum lease
payments 45,504
Less current portion (23,737)
-----------------
Long-term portion $ 21,767
=================
</TABLE>
Rent expense for operating leases for the years ended December
31, 1999 and 1998 was $1,373,758 and $1,044,756, respectively.
(b) Related Party Transactions
The Company entered into an agreement effective August 1, 1999,
to provide services to, and pay certain expenses on behalf of an
affiliate, Open Access Broadband Networks, Inc. (OAB), which
amounts will be reimbursed by OAB. Approximately $800,000 was
paid on behalf of OAB during 1999, and at December 31, 1999,
$162,000 was due from OAB and is included in accounts receivable.
(c) Litigation
During 1999, the Company settled litigation in which it had
previously been named as a defendant by an employee of a
subcontractor seeking compensatory and punitive damages related
to alleged injuries from an on-the-job accident in December 1997.
All payments made and all future periodic payments to be made as
part of the settlement are covered by the Company's insurance.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on the Company's financial
position, results of operations or liquidity.
F-10
<PAGE>
WORLDBRIDGE BROADBAND SERVICES, INC.
Notes to Financial Statements
December 31, 1999 and 1998
(8) Significant Customers
The Company's revenue for the years ended December 31, 1999 and 1998
includes amounts from significant customers, as follows:
<TABLE>
<CAPTION>
% of Revenue
---------------------------------------
Customers 1999 1998
------------------ ----------------- -----------------
<S> <C> <C>
A 18.6 46.2
B 21.7 10.8
C 13.9 10.0
</TABLE>
At December 31, 1999 and 1998, receivables from these customers
represented 45% and 64% of the balance of trade accounts receivable,
respectively.
F-11
<PAGE>
Index to Supplemental Consolidated Financial Statements of C-COR.net Corp.,
restated to reflect the pooling-of-interest combination with Worldbridge
Broadband Services, Inc
<TABLE>
<S> <C>
Independent Auditors' Report F-13
Supplemental Consolidated Balance Sheets as of December 24, 1999, June 25, 1999,
and June 26, 1998 F-14
Supplemental Consolidated Statements of Operations for the twenty-six weeks
ended December 24, 1999 and December 25, 1998, and for the years ended June
25, 1999, June 26, 1998, and June 27, 1997 F-15
Supplemental Consolidated Statements of Cash Flows for the twenty-six weeks
ended December 24, 1999 and December 25, 1998, and for the years ended
June 25, 1999, and June 26, 1998, and June 27, 1997 F-16
Supplemental Consolidated Statements of Shareholders' Equity for the twenty-six
weeks ended December 24, 1999 and for the years ended June 25, 1999, June 26,
1998, and June 27, 1997 F-17
Notes to Supplemental Consolidated Financial Statements F-18
</TABLE>
F-12
<PAGE>
Independent Auditors' Report
The Board of Directors
C-COR.net Corp. and Subsidiaries:
We have audited the accompanying supplemental consolidated balance sheets of C-
COR.net Corp. and Subsidiaries 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 merger of C-COR.net Corp. and Worldbridge Broadband Services, Inc. on
February 18, 2000, which has been accounted for as a pooling 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 a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of the consummation. However, they will become the historical
consolidated financial statements of C-COR.net Corp. and Subsidiaries after
financial statements covering the date of consummation of the business
combination 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. and Subsidiaries 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 date of consummation of the business combination.
KPMG LLP
State College, Pennsylvania
March 10, 2000
F-13
<PAGE>
<TABLE>
<CAPTION>
C-COR.net Corp.
Supplemental Consolidated Balance Sheets
(In thousands, except share data)
December 24, June 25, June 26,
1999 1999 1998
------------------ --------------- -------------
(Unaudited)
ASSETS
Current assets
<S> <C> <C> <C>
Cash and cash equivalents $ 112,155 $ 5,805 $3,454
Marketable securities 15,217 445 356
Accounts and notes receivables, less allowance of $1,147 on
December 24, 1999, $1,052 on June 25, 1999 and $957 on
June 26, 1998 45,204 35,253 23,992
Inventories 30,840 23,565 17,809
Deferred taxes 6,872 6,352 2,965
Other current assets 3,652 3,546 2,916
Net current assets of discontinued operations 379 433 -
------------------ --------------- -------------
Total current assets 214,319 75,399 51,492
Property, plant, and equipment, net 29,156 28,821 30,946
Intangible assets, net of accumulated amortization of $97 on
December 24, 1999, $172 on June 25, 1999 and $-0- on
June 26, 1998 161 1,131 1,295
Other long-term assets 4,748 3,829 6,427
------------------ --------------- -------------
Total assets $ 248,384 $ 109,180 $ 90,160
================== =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 18,294 $16,421 $6,852
Accrued liabilities 13,208 17,400 11,469
Line-of-credit and short-term credit obligations - 4,638 -
Current portion of long-term debt 227 858 958
Net current liabilities of discontinued operations - - 517
------------------ --------------- -------------
Total current liabilities 31,729 39,317 19,796
Long-term debt, less current portion 1,640 3,741 5,610
Other long-term liabilities 2,918 1,464 1,041
Commitments and contingent liabilities
------------------ --------------- -------------
Total liabilities 36,287 44,522 26,447
------------------ --------------- -------------
Series A redeemable convertible preferred stock, no par - 3,393 2,780
Shareholders' equity
Preferred stock, no par; authorized 2,000,000 shares; issued, none - - -
Convertible preferred stock, no par 4,350 24,304 24,010
Common stock, $.05 par; authorized shares 100,000,000 at
December 24, 1999 and 48,000,000 at June 25, 1999 and
June 26, 1998; issued shares of 34,143,841 on December 24,
1999, 23,923,065 on June 25, 1999 and 23,662,427 on June 26, 1998 1,707 1,197 1,183
Additional paid-in capital 188,042 22,416 21,103
Accumulated other comprehensive loss (107) (96) (99)
Unearned compensation (16) - -
Retained earnings 25,282 20,605 20,813
Treasury stock at cost, shares of 1,226,118 on December 24, 1999,
1,318,118 on June 25, 1999 and 1,137,356 on June 26, 1998 (7,161) (7,161) (6,077)
------------------ --------------- -------------
Total shareholders' equity 212,097 61,265 60,933
------------------ --------------- -------------
Total liabilities and shareholders' equity $ 248,384 $ 109,180 $ 90,160
================== =============== =============
</TABLE>
See notes to supplemental consolidated financial statements.
F-14
<PAGE>
<TABLE>
<CAPTION>
C-COR.net Corp
Supplemental Consolidated Statements of Operations
(In thousands, except per share data)
Twenty-six Weeks Ended Years Ended
-------------------------------- -----------------------------------------
December 24, December 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
---------------- --------------- ------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales $ 138,662 $ 83,182 $ 202,168 $ 169,852 $ 144,988
Cost and expenses:
Cost of sales 104,350 65,383 154,278 136,297 115,902
Selling and administrative 14,873 13,457 30,467 22,440 19,533
Research and product development 6,683 5,961 11,833 9,988 7,706
Merger-related costs 3,673 - - - -
Provision for restructuring costs - - - 625 -
Interest 761 167 1,396 437 509
Other expense (income), net (619) 70 59 (32) (873)
---------------- --------------- ------------- ------------- -------------
129,721 85,038 198,033 169,755 142,777
---------------- --------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes 8,941 (1,856) 4,135 97 2,211
Income tax expense 4,306 964 4,839 57 927
---------------- --------------- ------------- ------------- -------------
Income (loss) from continuing operations 4,635 (2,820) (704) 40 1,284
---------------- --------------- ------------- ------------- -------------
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 42 304 397 928 (3,830)
---------------- --------------- ------------- ------------- -------------
Net income (loss) 4,677 (2,516) (307) 968 (9,151)
Dividend requirements on preferred stocks - (324) (613) (122) (116)
---------------- --------------- ------------- ------------- -------------
Net income (loss) available to common shareholders $ 4,677 $ (2,840) $ (920) $ 846 $ (9,267)
================ =============== ============= ============= =============
Net income (loss) per share - basic:
Continuing operations $ 0.18 $ (0.14) $ (0.06) $ - $ 0.05
Discontinued operations:
Loss from operations - - - - (0.28)
Gain (loss) on disposal - 0.01 0.02 0.04 (0.17)
---------------- --------------- ------------- ------------- -------------
Net income (loss) $ 0.18 $ (0.13) $ (0.04) $ 0.04 $ (0.40)
================ =============== ============= ============= =============
Net income (loss) per share - diluted:
Continuing operations $ 0.15 $ (0.14) $ (0.06) $ - $ 0.05
Discontinued operations:
Loss from operations - - - - (0.25)
Gain (loss) on disposal - 0.01 0.02 0.04 (0.15)
---------------- --------------- ------------- ------------- -------------
Net income (loss) $ 0.15 $ (0.13) $ (0.04) $ 0.04 $ (0.35)
================ =============== ============= ============= =============
Weighted average common shares and
common share equivalents
Basic 26,277 22,484 22,483 22,503 23,197
Diluted 30,408 22,484 22,483 22,503 25,929
</TABLE>
See notes to supplemental consolidated financial statements.
F-15
<PAGE>
<TABLE>
<CAPTION>
C-COR.net Corp.
Supplemental Consolidated Statements of Cash Flows
(In thousands)
Twenty-six Weeks Ended Years Ended
------------------------------ -------------------------------------
December 24, December 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
-------------- -------------- ----------- ------------ -----------
(Unaudited) (Unaudited)
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 4,677 $ (2,516) $ (307) $ 968 $ (9,151)
Adjustments to reconcile net income to net cash and
cash equivalents provided by operating activities:
Depreciation and amortization 4,853 4,212 9,199 7,233 5,577
Amortization of debt discount 381 - 911 - -
Amortization of unearned compensation 5 - - - -
(Gain) loss on disposal of discontinued (42) (304) (397) (928) 3,830
operations, net of tax
Provision for deferred retirement salary plan 301 239 204 292 252
Loss (gain) on sale of property, plant, and
equipment 333 56 235 (20) 21
Changes in operating assets and liabilities:
Accounts receivable (9,951) (6,609) (12,294) (1,188) (257)
Inventories (7,275) (1,694) (5,756) 2,748 (1,454)
Other assets 117 1,483 (58) (3,064) (247)
Accounts payable 1,873 3,974 9,540 (2,609) 3,211
Accrued liabilities (3,944) 604 6,084 3,818 206
Deferred income taxes 605 (1,010) (2,303) (3,357) (825)
Discontinued operations--working capital 96 (218) (553) 1,051 3,236
changes and noncash charges
-------------- -------------- ----------- ------------ -----------
Net cash and cash equivalents (used in) provided by
operating activities (7,971) (1,783) 4,505 4,944 4,399
-------------- -------------- ----------- ------------ -----------
Investing Activities:
Purchase of property, plant, and equipment (5,181) (3,173) (8,669) (10,808) (7,814)
Purchase of marketable securities (14,772) (50) (84) - (200)
Investment in equity securities (501) - - - -
Proceeds from sale of marketable securities - - - 15 258
Issuance of (payments on) notes receivable, net - 2 1,972 (2,011) 7
Change in other assets - 83 94 (146) (317)
Proceeds from sale of property, plant, and equipment 6 16 48 51 29
Proceeds from (investing activities of)
discontinued operations - - - 656 (698)
-------------- -------------- ----------- ------------ -----------
Net cash and cash equivalents used in investing activities (20,448) (3,122) (6,639) (12,243) (8,735)
-------------- -------------- ----------- ------------ -----------
Financing Activities:
Payment of debt and capital lease obligations (2,733) (4,700) (5,107) (1,136) (986)
Proceeds from long-term debt borrowing - 3,109 3,097 52 75
Proceeds from (payments on) short-term credit facilities, net (5,019) 6,852 5,019 (3,573) 1,235
Proceeds from issuance of convertible preferred stock - 1,355 1,355 6,180 17,731
Tax benefit deriving from exercise and sale of stock
option shares 2,775 - 94 57 71
Proceeds from issuance of common stock to employee stock
purchase plan 45 34 76 51 88
Proceeds from exercise of stock options 4,072 249 1,202 277 207
Proceeds from exercise of stock warrants 2,259 - - - -
Proceeds from issuance of common stock, net 133,370 - - - -
Payment of preferred dividends - - - - (68)
Net advances on receivable factoring - - - - (1,027)
Purchase and retirement of convertible preferred stock - - (1,000) - -
Purchase of treasury stock - (1,265) (1,265) (312) (5,765)
-------------- -------------- ----------- ------------ -----------
Net cash and cash equivalents provided by financing activities 134,769 5,634 3,471 1,596 11,561
-------------- -------------- ----------- ------------ -----------
Increase (decrease) in cash and cash equivalents 106,350 729 1,337 (5,703) 7,225
Elimination of duplicated activity (See Note B) - 1,014 1,014 (6) -
Cash and cash equivalents at beginning of period 5,805 3,454 3,454 9,163 1,938
-------------- -------------- ----------- ------------ -----------
Cash and cash equivalents at end of period $ 112,155 $ 5,197 $ 5,805 $ 3,454 $ 9,163
============== ============== =========== ============ ===========
</TABLE>
See notes to supplemental consolidated financial statements.
F-16
<PAGE>
<TABLE>
<CAPTION>
C-COR.net Corp.
Supplemental Consolidated Statements of Shareholder's Equity
(In thousands)
Accumulated
Additional Other
Comprehensive Preferred Common Paid-in Comprehensive Unearned Retained Treasury
Income Stock Stock Capital Income (Loss)CompensationEarnings Stock
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 28, 1996, as reported $ 3,900 $ 1,120 $ 19,876 $ (55) $ - $ 28,610 $ -
Pooling of interest with Worldbridge 249 53 (50) - - 192 -
-----------------------------------------------------------------------
Balance, June 28, 1996, as restated 4,149 1,173 19,826 (55) - 28,802 -
Net loss $ (9,151) - - - - - (9,151) -
Other comprehensive income: - - - - - - -
Net unrealized holding gains on marketable
securities 7 - - - - - - -
Foreign currency translation (loss) (67) - - - - - - -
-------------
Other comprehensive income (loss) (60) - - - (60) - - -
-------------
Comprehensive loss $ (9,211) - - - - - - -
=============
Shares issued 16,710 - - - - - -
Issuance of stock warrants - - 98 - - - -
Conversion of Series A preferred stock (249) - 249 - - - -
Accretion of discount on convertible
preferred stock - - - - - (48) -
Exercise of stock options - 4 203 - - - -
Payment of preferred stock dividends - - - - - (68) -
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 20,610 1,178 20,534 (115) - 19,535 (5,765)
Net income $ 968 - - - - - 968 -
Other comprehensive income: - - - - - - -
Net unrealized holding gains on marketable
securities 7 - - - - - - -
Foreign currency translation gain 9 - - - - - - -
-------------
Other comprehensive income 16 - - - 16 - - -
-------------
Comprehensive income $ 984 - - - - - - -
=============
Adjustment related to merger (Note B) - - - - - 432 -
Shares issued 3,400 - - - - - -
Issuance of stock warrants - - 189 - - - -
Accretion of discount on convertible
preferred stock - - - - - (122) -
Exercise of stock options - 5 272 - - - -
Tax benefit deriving from exercise and
sale of stock option shares - - 57 - - - -
Issue shares to employee stock purchase plan - - 51 - - - -
Purchase of treasury stock - - - - - - (312)
-----------------------------------------------------------------------
Balance, June 26, 1998 24,010 1,183 21,103 (99) - 20,813 (6,077)
Net loss $ (307) - - - - - (307) -
Other comprehensive income: - - - - - - -
Net unrealized holding gains on marketable
securities 4 - - - - - - -
Foreign currency translation loss (1) - - - - - - -
-------------
Other comprehensive income 3 - - - 3 - - -
-------------
Comprehensive loss $ (304) - - - - - - -
=============
Adjustment related to merger (Note B) - - - - - 712 -
Other adjustments - - (45) - - - -
Issuance of stock warrants 1,294 - - - - - -
Accretion of discount on convertible
preferred stock - - - - - (613)
Exercise of stock options - 13 1,189 - - - -
Tax benefit deriving from exercise and
sale of stock option shares - - 94 - - - -
Issue shares to employee stock purchase plan - 1 75 - - - -
Purchase and retirement of preferred stock (1,000) - - - - - -
Purchase of treasury stock - - - - - - (1,084)
-----------------------------------------------------------------------
Balance, June 25, 1999 24,304 1,197 22,416 (96) - 20,605 (7,161)
Net income $ 4,677 - - - - - 4,677 -
Other comprehensive income: - - - - - - -
Net unrealized holding loss on marketable
securities (11) - - - - - - -
-------------
Other comprehensive loss (11) - - - (11) - - -
-------------
Comprehensive income $ 4,666 - - - - - - -
=============
Shares issued - 322 133,048 - - - -
Conversion related to merger with
Convergence and SVCI (19,954) 133 23,214 - - - -
Exercise of stock options - 30 4,042 - - - -
Exercise of stock warrants - 25 2,481 - - - -
Tax benefit deriving from exercise and
sale of stock option shares - - 2,775 - - - -
Issue shares to employee stock purchase plan - - 45 - - - -
Issue restricted stock - - 21 - (21) - -
Amortization of unearned compensation - - - - 5 - -
-----------------------------------------------------------------------
Balance, December 24, 1999 (Unaudited) $ 4,350 $ 1,707 $ 188,042 $ (107) $ (16)$ 25,282 $ (7,161)
=======================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
F-17
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
Description of Business and Supplemental Consolidated Financial Statements
Description of Business
C-COR.net Corp. the ("Company") designs, manufactures, and markets cable network
transmission products and provides services and support to cable network
operators. The Company offers a comprehensive range of products, including radio
frequency ("RF") amplifiers, and fiber optic components for the cable headend,
node and RF plant. The Company's services focus on enabling reliable,
high-speed, broadband communications over hybrid fiber coax ("HFC") networks,
and include network design, service activation, optimization, management and
maintenance.
Supplemental Consolidated Financial Statements
The Company acquired Worldbridge Broadband Services, Inc. on February 18, 2000,
which was accounted for under the pooling-of-interests method of accounting. The
supplemental consolidated financial statements for the twenty-six-week interim
periods ended December 24, 1999 and December 25, 1998, and for each of the years
in the three-year period ended June 25, 1999 and the accompanying notes reflect
the Company's financial position and results of operations as if the acquired
entity was a wholly owned subsidiaries of the Company as of the beginning of the
earliest fiscal year presented. (See Note B)
A. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying supplemental 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 that ends on the last Friday in June. For
the twenty-six-week reporting periods presented herein, the periods ended on
December 24, 1999 and December 25, 1998. For the 52-week reporting periods
presented herein, the years ended on June 25, 1999, June 26, 1998, and June 27,
1997. (See Note B)
Use of Estimates
The preparation of the supplemental 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 in
accordance with the terms of contracts.
Fair Value of Financial Instruments
The carrying value of the Company's long-term borrowings approximates fair
value, after taking into consideration current rates offered to the Company for
similar debt instruments of comparable maturities. The fair values of financial
instruments have been determined through information obtained from quoted market
sources and management estimates.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on the
first-in, first-out method.
F-18
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
Property, Plant and Equipment
Property, plant and equipment, which include leased property under capital
leases, is stated at cost. 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....................................... 2 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", 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 supplemental consolidated financial statements.
The Company did not capitalize any software development costs during fiscal year
1997. Amortization expense for the twenty-six week periods ended December 24,
1999 and December 25, 1998 was $177 and $0, respectively. There was no
amortization expense 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 the twenty-six
week periods ended December 24, 1999 and December 25, 1998, the Company recorded
$128 and $14, respectively of amortization expense. 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.
Shareholders' Equity
On October 19, 1999, the shareholders of the Company approved a proposal to
amend the Amended and Restated Articles of Incorporation to increase the number
of shares of common stock authorized from 24,000,000 to 50,000,000.
On November 12, 1999, the Company completed a follow-on public offering of its
common stock, whereby 3,220,000 shares (6,440,000 shares on a post-split basis)
of common stock were issued and sold at a price of $44.00 per share ($22.00 per
share on a post-split basis). This offering resulted in net proceeds (after
deducting issuance costs) to the Company of $133,370. The proceeds of the
offering were used for repayment of debt, and will also be used for strategic
investments, capital expenditures, working capital, and other general corporate
purposes.
On December 7, 1999 the Company's board of directors declared a two-for-one
stock split of the Company's common stock. The stock split was effective for all
shares of record as of the close of business on December 22, 1999. The
additional shares were distributed on January 6, 2000. In connection with the
stock split, the par value per share of common stock was reduced from $.10 to
$.05 and the authorized number of shares of common stock was proportionately
increased from 50,000,000 to 100,000,000. All share and per share amounts have
been adjusted for the two-for-one stock split effective December 22, 1999, for
all periods presented.
F-19
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
At December 24, 1999, June 25, 1999, and June 26, 1998, treasury stock consisted
of 1,226,118, 1,318,118, and 1,137,356 shares of common stock, respectively. In
fiscal years 1999 and 1998, the Company repurchased 180,762 shares for $1,084
and 20,684 shares for $131, respectively, of its common stock under a stock
repurchase program adopted in September 1997. In fiscal year 1997, the Company
repurchased 1,000,000 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 December 24, 1999, consisted of municipal bonds,
corporate obligations 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"
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
supplemental consolidated financial statements.
Basic earnings (loss) per share is computed by dividing net income available to
common shareholders, by the weighted average number of common shares
outstanding. Dilutive net income (loss) per share is computed by dividing net
income (loss) available to common shareholders, by the weighted average number
of common shares outstanding plus the dilutive effect of options, warrants and
convertible preferred stock. The dilutive effect of options and warrants is
calculated under the treasury stock method using the average market price for
the period. The dilutive effect of the convertible preferred stock is calculated
under the if-converted method. Net income (loss) per share is calculated as
follows:
F-20
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended Year Ended
---------------------------- -------------------------------------------
Dec. 24, Dec. 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing operations $ 4,635 $ (2,820) $ (704) $ 40 $ 1,284
Less:
Preferred stock dividend - - - - (68)
Accretion of convertible preferred stock - (324) (613) (122) (48)
------------- ------------- ------------ ------------- -------------
Continuing income (loss) available to common shareholders $ 4,635 $ (3,144) $ (1,317) $ (82) $ 1,168
Gain (loss) from discontinued operations 42 304 397 928 (10,435)
------------- ------------- ------------ ------------- -------------
Net income (loss) available to common shareholders $ 4,677 $ (2,840) $ (920) $ 846 $ (9,267)
============= ============= ============ ============= =============
Weighted average common shares outstanding 26,277 22,484 22,483 22,503 23,197
Common stock equivalents 4,131 - - - 2,732
------------- ------------- ------------ ------------- -------------
Dilutive potential common shares 30,408 22,484 22,483 22,503 25,929
============= ============= ============ ============= =============
Basic:
Continuing operations 0.18 (0.14) (0.06) 0.00 0.05
Discontinued operations 0.00 0.01 0.02 0.04 (0.45)
------------- ------------- ------------ ------------- -------------
Net income (loss) available to common shareholders 0.18 (0.13) (0.04) 0.04 (0.40)
============= ============= ============ ============= =============
Diluted:
Continuing operations 0.15 (0.14) (0.06) 0.00 0.05
Discontinued operations 0.00 0.01 0.02 0.04 (0.40)
------------- ------------- ------------ ------------- -------------
Net income (loss) available to common shareholders 0.15 (0.13) (0.04) 0.04 (0.35)
============= ============= ============ ============= =============
</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 140 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 December 24, 1999, with a carrying value of $1,100.
Comprehensive Income
In fiscal year 1999, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" 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 supplemental 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 supplemental consolidated statements of
shareholders' equity. The adoption of this statement had no effect on net income
or shareholders' equity.
F-21
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
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>
Twenty-six weeks ended December 24, 1999
Unrealized holding loss during the period $ (3) $ (1) $ (2)
Net foreign exchange loss (14) (5) (9)
------------------ -------------- --------------
Total other comprehensive loss $ (17) $ (6) $ (11)
================== ============== ==============
Twenty-six weeks ended December 25, 1998
Unrealized holding loss during the period $ (8) $ (3) $ (5)
Net foreign exchange gain 43 17 26
------------------ -------------- --------------
Total other comprehensive income $ 35 $ 14 $ 21
================== ============== ==============
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 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. Business Combinations
On July 9, 1999, the Company consummated a merger with Convergence.com
Corporation ("Convergence"), a Georgia corporation, whereby Convergence became a
wholly owned subsidiary of the Company. As consideration in the merger, each
outstanding share of common stock of Convergence was converted into one share
(two shares post-split) of the Company's common stock, resulting in the issuance
of 2,866,646 shares (post-split) of the Company's common stock. Each outstanding
warrant to acquire Convergence common stock was converted into warrants to
acquire the Company's common stock for an aggregate of warrants to acquire
733,860 shares (post-split) of the Company's common stock. The merger was
accounted for under the pooling-of-interests method of accounting.
F-22
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
Prior to the merger, Convergence had operated on a calendar year basis.
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 supplemental consolidated financial statements. Accordingly, the
supplemental consolidated 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.
On September 17, 1999, the Company consummated a merger with Silicon Valley
Communications, Inc. ("SVCI"), a California corporation, whereby SVCI became a
wholly-owned subsidiary of the Company. As consideration in the merger, each
outstanding share of common stock of SVCI was converted into .094534 shares
(.189068 shares post-split) of the Company's common stock, resulting in the
issuance of 3,090,162 shares (post-split) 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 767,688 shares (post-split) of the Company's
common stock. The merger was accounted for under the pooling-of-interests method
of accounting.
Prior to the merger, SVCI had operated on a fiscal year ending in June.
Operating results for the fiscal years ended June 25, 1999, June 26, 1998, and
June 27, 1997 include the operations of SVCI for the 12-month periods ended June
25, 1999, June 30, 1998, and June 30, 1997, respectively.
The Company recorded a one-time charge of $3,673, ($3,113, net of tax), related
to the business combinations with Convergence and SVCI in the Company's
twenty-six-week period ended December 24, 1999. The one-time charge includes the
merger transaction costs, as well as restructuring costs which included
severance payments for approximately 40 employees affected by consolidation of
positions and administrative functions resulting from the mergers, and write-off
of assets related to existing fiber optic products that became redundant as a
result of the acquisition of SVCI.
On February 18, 2000, the Company consummated a merger with Worldbridge, a
Delaware corporation, whereby Worldbridge became a wholly owned subsidiary of
the Company. As consideration in the merger, each outstanding share of common
stock of Worldbridge was converted into .197249 shares of the Company's common
stock, plus a right to receive a pro-rata portion of 160,356 shares that were
issued into escrow, resulting in the issuance of approximately 1,603,584 shares
of the Company's common stock (including the escrowed shares). Outstanding stock
options to acquire Worldbridge common stock were converted into stock options to
acquire the Company's common stock, using a conversion ratio of .219166 shares
of the Company's common stock for each share of Worldbridge common stock, (with
appropriate adjustment to the exercise price) for an aggregate of stock options
to acquire 196,416 shares of the Company's common stock. The merger was
accounted for under the pooling-of-interests method of accounting.
Prior to the merger, Worldbridge had operated on a calendar year basis.
Operating results for the fiscal year ended June 25, 1999, include the
operations of Worldbridge for the 12-month period ended June 30, 1999. Operating
results for the fiscal years ended June 26, 1998 and June 27, 1997, include the
operations of Worldbridge for the 12-month periods ended December 31, 1998 and
December 31, 1997, respectively. This results in an overlapping period (July
1998 through December 1998) for Worldbridge's results of operations being
included in the supplemental consolidated financial statements. Accordingly, the
supplemental consolidated statement of shareholders' equity for the year ended
June 25, 1999 includes a $712 adjustment to eliminate the impact on retained
earnings for the overlap period.
F-23
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
Net sales and net income (loss) for the Company, Convergence, SVCI, and
Worldbridge prior to the combinations are as follows:
<TABLE>
<CAPTION>
Twenty-six Weeks
Ended Years Ended
------------------------------ ------------------------------------------------
Dec 24, Dec 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
------------- --------------- ------------ ------------- -------------
Net sales:
<S> <C> <C> <C> <C> <C>
C-COR.net Corp. $ 126,894 $ 70,063 $ 171,281 $ 152,144 $ 131,941
Convergence - 1,994 6,635 1,276 1,104
SVCI - 2,248 5,509 621 735
Worldbridge 11,768 8,877 18,743 15,811 11,208
------------- --------------- ------------ ------------- -------------
Combined $ 138,662 $ 83,182 $ 202,168 $ 169,852 $ 144,988
============= =============== ============ ============= =============
Net income (loss):
C-COR.net Corp. $ 4,004 $ 3,567 $ 10,852 $ 8,245 $ (6,178)
Convergence - (1,334) (2,516) (979) (305)
SVCI - (4,037) (8,622) (5,420) (3,054)
Worldbridge 673 (712) (21) (878) 386
------------- --------------- ------------ ------------- -------------
Combined $ 4,677 $ (2,516) $ (307) $ 968 $ (9,151)
============= =============== ============ ============= =============
</TABLE>
C. 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
date to the disposal date, were recorded in fiscal year 1997. The estimated
loss, net of tax benefit of $1,974 on the disposal of the discontinued business
segment, was $3,830 in fiscal year 1997.
The Company completed the phase-down of this operation as of March 1998. A gain
on disposal of the discontinued business segment of $42, net of tax expense of
$22, was recorded during the twenty-six-week period ended December 24, 1999. A
gain on disposal of the discontinued business segment of $304, net of tax
expense of $112 was recorded during the twenty-six-week period ended December
25, 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 supplemental
consolidated statements of operations. Summarized information relating to the
discontinued operation for fiscal year 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended
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>
F-24
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
The assets and liabilities of the discontinued operations have been reclassified
in the accompanying supplemental 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 December 24, 1999, June 25, 1999, and
June 26, 1998:
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
--------------- ---------------- ----------------
Current assets:
<S> <C> <C> <C>
Accounts receivable $ 16 $ 16 $ 150
Notes receivable 513 796 981
Deferred tax assets 472 474 1,602
Other assets - - 156
--------------- ---------------- ----------------
1,001 1,286 2,889
--------------- ---------------- ----------------
Current liabilities:
Accrued warranty and other (497) (728) (2,806)
Allowance for disposal of discontinued operations (125) (125) (600)
--------------- ---------------- ----------------
(622) (853) (3,406)
--------------- ---------------- ----------------
Net current assets (liabilities) of discontinued operations $ 379 $ 433 $ (517)
=============== ================ ================
</TABLE>
D. Marketable Securities
Marketable securities as of December 24, 1999, 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
---------------- --------------- --------------- ----------------
Dec. 24, 1999:
Available-for-sale:
<S> <C> <C> <C> <C>
Municipal bonds $ 435 $ - $ (12) $ 423
Corporate obligations 14,791 - - 14,791
Equity securities 1 2 - 3
---------------- --------------- --------------- ----------------
$ 15,227 $ 2 $ (12) $ 15,217
================ =============== =============== ================
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 December
24, 1999, were as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------------- ---------------
<S> <C> <C>
Available-for-sale:
Due in one year or less $ 15,141 $ 15,132
Due after one year through five years 85 82
Equity securities 1 3
---------------- ---------------
$ 15,227 $ 15,217
================ ===============
</TABLE>
F-25
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
E. Inventories
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Finished goods $ 6,966 $ 3,287 $ 2,850
Work-in-process 3,549 3,038 1,874
Raw materials 20,325 17,240 13,085
-------------- -------------- --------------
$ 30,840 $ 23,565 $ 17,809
============== ============== ==============
</TABLE>
Included in the amounts above were reserves of $3,970 at December 24, 1999,
$2,231 at June 25, 1999, and $3,213 at June 26, 1998.
F. Property, Plant and Equipment
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
---------------- ----------------- ---------------
<S> <C> <C> <C>
Land $ 468 $ 468 $ 468
Building and improvements
under capital lease - - 1,727
Buildings 10,957 10,760 10,683
Machinery and equipment
under capital lease 412 485 359
Machinery and equipment 56,934 52,367 45,776
Leasehold improvements 1,516 1,326 1,123
---------------- ----------------- ---------------
70,287 65,406 60,136
Less accumulated depreciation
and amortization 41,131 36,585 29,190
---------------- ----------------- ---------------
$ 29,156 $ 28,821 $ 30,946
================ ================= ===============
</TABLE>
G. Intangible Assets
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
------------------- ------------- -------------
Cost of intangibles:
<S> <C> <C> <C>
Patents and trademarks $ 8 $ 1,053 $ 1,045
Licensing costs 250 250 250
------------------- ------------- -------------
$ 258 $ 1,303 $ 1,295
------------------- ------------- -------------
Less accumulated amortization:
Patents and trademarks $ - $ (116) $ -
Licensing costs (97) (56) -
------------------- ------------- -------------
$ (97) $ (172) $ -
------------------- ------------- -------------
Net book value $ 161 $ 1,131 $ 1,295
=================== ============= =============
</TABLE>
H. Credit Facilities
In December 1999, the Company amended its credit agreement established with
three banks under which it may borrow up to $70,000. The agreement has two
parts. First, $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, which is
committed through November 30, 2000. The second part is a standby acquisition
facility, which enables the Company to borrow up to $50,000, for strategic
acquisitions and/or investments, which is also committed through November 30,
2000. A pricing matrix has been established for credit pricing on these
facilities which is a function of the Company's total funded indebtedness to
earnings before interest, taxes, depreciation and amortization (EBITDA) ratio.
Borrowings under this credit agreement bear interest at various rates, at the
Company's option. 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. As of December 24, 1999, the
Company had no borrowings outstanding under this credit agreement.
F-26
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
As a result of the Company's acquisition of Worldbridge, the Company has a line
of credit with a bank, which provides for borrowings up to $3,000 through May
31, 2000. Interest on the line of credit accrues at LIBOR, plus 2.0%, and is
payable monthly. There were no borrowings on this line of credit as of December
24, 1999, June 25, 1999, and June 26,1998.
As a result of the Company's acquisition of 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. There were no outstanding
balances on the line of credit, bridge loan, or term loan as of December 24,
1999. The outstanding balances on the line of credit, the bridge loan, and the
term loan were $2,515, $500, and $188, respectively, as of June 25, 1999. The
line of credit and loans were fully collateralized by a continuing security
interest in substantially all assets presently owned or subsequently acquired by
SVCI. The line of credit and loans contained certain restrictive financial
covenants. As of June 25, 1999, 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, SVCI borrowed $1,817 from certain founders and
shareholders of SVCI under promissory notes payable. As of December 24, 1999,
the balances on these loans was $-0-. As of June 25, 1999, the balance was
$1,435. The notes accrued interest at an annual rate of 9% and were due in July
1999. In connection with these notes, SVCI issued warrants to purchase its
common stock (See Note K). In connection with the merger, these warrants were
converted into warrants to acquire the Company's common stock.
In connection with the bridge loan, warrants to purchase 9,454 shares of the
Company's common stock were issued at an exercise price of $21.16 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 6,050 shares of the Company's common stock were issued at
an exercise price of $6.56 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 1,890
shares of the Company's common stock were issued at an exercise price of $6.56
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.
I. Long-term Debt
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
------------- ------------------- -----------------
<S> <C> <C> <C>
Notes payable $ 1,712 $ 4,392 $ 4,909
Capital lease obligations 155 207 1,659
------------- ------------------- -----------------
1,867 4,599 6,568
Less current portion 227 858 958
------------- ------------------- -----------------
$ 1,640 $ 3,741 $ 5,610
============= =================== =================
</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 December 24, 1999, was $245.
The Company obtained funding through the 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 December 24, 1999, was
$1,467.
F-27
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
On October 19, 1998, the Company borrowed $3,000 under a term loan facility with
a bank. The term loan required monthly principal payments of $50, plus interest
based on a one-to-three month variable rate at LIBOR plus 1.15%, through 2003.
The Company was 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, would 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 were made monthly. The Company was at risk of loss from this swap
agreement in the event of nonperformance by the counterparty. The Company
believed this risk to be minimal. On November 12, 1999, the Company paid off the
remaining principal balance of $1,350, on this term loan.
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 partially 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 supplemental consolidated
balance sheet.
As a result of the mergers with Convergence, SVCI and Worldbridge, the Company
acquired various capital leases for machinery and equipment, office equipment
and furniture and fixtures that expire through 2003.
Long-term debt at December 24, 1999, had scheduled maturities as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $ 126
2001 208
2002 209
2003 190
2004 173
Thereafter 961
-------------------
$ 1,867
===================
</TABLE>
F-28
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
At December 24, 1999, the future minimum payments required under capital lease
arrangements are as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $ 55
2001 56
2002 46
2003 20
-------------------
$ 177
Less amount representing interest 22
-------------------
Present value of future minimum lease payments 155
Less current portion of obligation under capital leases 67
-------------------
Long-term obligations under capital lease $ 88
===================
</TABLE>
Total interest paid on the short-term credit facilities (Reference Note H) and
long-term debt was $399, $410 and $469 for fiscal years ended 1999, 1998 and
1997, respectively.
J. 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, 4,000
restricted shares and 22,000 performance shares were awarded under the 1998
Incentive Plan. The restricted shares had an aggregate value of $22, which is
being amortized over a vesting period through June 2001. The performance shares
represent a right to receive common stock of the Company based upon achievement
of certain performance criteria over a performance period through June 2000.
Compensation expense related to the performance shares is based on current
market price of the Company's common stock at the time the performance criteria
is satisfied.
The Company's previous stock option plans provided for the grant of options to
employees with an exercise price per share of at least the fair market value of
such shares on the date prior to grant, and to directors with an exercise price
equal to the fair market value on the date of grant. Stock options granted to
certain employees vest in cumulative annual installments of either 20% or 25%
per year beginning one year after the date of grant. Options granted to non-
employee directors were exercisable one year after grant. Certain options held
by the Chairman were exercisable immediately.
In connection with the acquisition of 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 (.189068 on a post-split basis), 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.
In connection with the acquisition of Worldbridge, outstanding incentive and
nonqualified stock options to acquire Worldbridge common stock were converted
into stock options to acquire the Company's common stock at a conversion ratio
of .219166 (with appropriate adjustment to the exercise price). The incentive
and nonqualified stock options expire upon the earlier of the date of
termination of employment or 10 years from the date of grant. The options vested
immediately upon assumption by the Company. Prior to the acquisition, shares
issued upon exercise were restricted and subject to repurchase, by Worldbridge,
at the exercise price if employees terminated prior to the vesting of their
shares. As a result of the acquisition described in Note B, the repurchase right
lapsed in total due to the change in control.
F-29
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
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
--------------- -------------- --------------
Net income (loss)
<S> <C> <C> <C>
As reported $ (307) $ 968 $ (9,151)
Pro forma $ (3,781) $ (566) $ (9,417)
Net income (loss) per share:
Basic
As reported $ (0.04) $ 0.04 $ (0.40)
Pro forma $ (0.20) $(0.03) $ (0.41)
Diluted
As reported $ (0.04) $ 0.04 $ (0.35)
Pro forma $ (0.20) $(0.03) $ (0.36)
Shares:
Basic 22,483 22,503 23,197
Diluted 22,483 22,503 25,929
</TABLE>
The per share weighted-average fair values of stock options granted during
fiscal years 1999, 1998 and 1997, were $8.66, $5.55 and $2.44, 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 of 0%, risk-free interest rate of
5.00%, 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 of 0%, risk-free interest rate of
5.72%, a volatility factor of the expected market price of the Company's common
stock of .4913, and a weighted-average expected life of approximately 4 years.
Fiscal year 1997-expected dividend yield of 0%, risk-free interest rate of
6.38%, a volatility factor of the expected market price of the Company's common
stock of .5941, and a weighted-average expected life of approximately 4 years.
The fair value of stock options included in the pro forma amounts for fiscal
years 1999, 1998 and 1997 is not necessarily indicative of future effects on net
income and net income per share.
F-30
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
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>
Fiscal years ended: June 25, 1999 June 26, 1998 June 27, 1997
------------------------------- -------------------------------- -------------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------------------------------- -------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 3,192,136 $ 6.19 1,671,054 $ 6.63 1,766,698 $ 6.64
Granted 2,001,708 $ 8.22 2,267,913 $ 5.27 277,203 $ 6.44
Exercised (256,438) $ 4.77 (91,759) $ 2.89 (89,787) $ 2.54
Canceled (380,556) $ 3.58 (470,095) $ 4.76 (283,060) $ 7.80
------------- -------------- ---------------
Outstanding at end of year 4,556,850 $ 7.38 3,377,113 $ 6.08 1,671,054 $ 6.63
============= ============== ===============
Options exercisable at end of year 1,675,146 1,244,096 964,097
</TABLE>
Note: Stock option plan information as of June 25, 1999, includes stock option
activity of Worldbridge for the period July 1, 1998 through June 30, 1999. For
all other periods presented, stock option activity for Worldbridge is included
on a calendar year basis. This results in an overlap of stock option activity
for the period ended June 25, 1999.
The following table summarizes information about the Company's stock option
plans as of June 25, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ --------------------------------
Number Weighted-Avg. Number
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 6/25/99 Contractual Life Exercise Price at 6/25/99 Exercise Price
------------ --------------- ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
$0.110 to $8.380 1,040,888 7.2 years $2.75 828,834 $3.18
$8.500 to $14.130 772,418 6.2 years $5.30 205,604 $5.43
$14.375 to $19.750 1,175,398 7.0 years $7.61 312,374 $7.50
$20.120 to $25.500 1,424,726 7.7 years $10.95 224,598 $10.95
$25.750 to $31.250 143,420 6.1 years $13.66 103,736 $13.66
------------ ------------
4,556,850 7.1 years $7.38 1,675,146 $5.95
============ ============
</TABLE>
K. Shareholders' Equity
(a) Classes of Capital Stock
The authorized, issued and outstanding shares of the Company's classes of
capital stock are as follows:
<TABLE>
<CAPTION>
Authorized Issued and outstanding at:
Shares ---------------------------------------------------------
As of Dec. 24, Dec. 24, June 25, June 26,
1999 1999 1999 1998
--------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Preferred stock, no par 2,000,000 - - -
Series A redeemable convertible preferred stock - - 300,000 295,000
Series B convertible preferred stock - - 378,136 378,136
Series C convertible preferred stock - - 694,352 694,352
Series D convertible preferred stock 438,332 9,534 9,534 11,725
Common stock, $.05 par value per share,
net of treasury stock 100,000,000 32,917,723 22,604,947 22,525,071
</TABLE>
Shares presented in the table above have been adjusted based upon the applicable
exchange ratios associated with the acquisitions of Convergence, SVCI and
Worldbridge (See Note B). The preferred stock is convertible into an aggregate
of 575,187 shares of common stock as of December 24, 1999.
F-31
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
During the twenty-six-week period ended December 24, 1999, the Series A
convertible preferred stock, Series B convertible preferred stock, and Series C
convertible preferred stock were converted in to common stock, in conjunction
with the acquisitions of Convergence and SVCI.
(b) Warrants
Warrants presented in the table below have been adjusted for the stock-split and
applicable exchange ratios associated with the acquisitions of Convergence and
SVCI. (See Notes A and B)
As a result of the consummated mergers with Convergence and SVCI, warrants to
acquire Convergence and SVCI preferred and common stock were converted into
warrants to acquire common stock of the Company. These warrants have been issued
in connection with various financing and employment arrangements.
The following table summarizes information about warrants issued and outstanding
as of June 25, 1999:
<TABLE>
<CAPTION>
Warrants issued in connection with:
Warrants Range of Fiscal Year --------------------------------------
Issued Exercise Warrants Debt Equity Employment
Issued as of 6/25/99 Prices Expire Financing Financing Services
- ---------------- -------------- ---------------- ---------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fiscal Year 1997 264,696 $10.58 2001 264,696
Fiscal Year 1998 6,050 $6.56 2002 6,050
600,000 $5.00 2005 600,000
Fiscal Year 1999 1,890 $6.56 2002 1,890
9,454 $21.16 2002 9,454
207,030 $15.87 2002 207,030
10,398 $37.02 2002 10,398
133,860 $ 0 .38 to $5.00 2003 133,860
-------------- --------------------------------------
1,233,378 234,822 864,696 133,860
============== ======================================
</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
228,772 shares of the Company's stock, in connection with these debt financing
arrangements, had a fair value of $1,293 which is being amortized over the life
of the related loans. Amortization in the twenty-six-week period ended December
24, 1999 and in fiscal year 1999 totaled $382 and $911, respectively, which was
included in interest expense in the accompanying supplemental consolidated
statements of operations. No separate fair values were calculated in connection
with the 864,696 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 $247 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.
L. Income Taxes
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
June 25, June 26, June 27,
1999 1998 1997
------------- --------------- -----------------
<S> <C> <C> <C>
Income from continuing operations $ 4,839 $ 57 $ 927
Results of discontinued operations - - (2,752)
Gain (loss) on disposal of discontinued operations 477 (94) (1,974)
Stockholders' equity, for tax benefit derived from
exercise and sale of stock option shares (94) (57) (71)
------------- --------------- -----------------
$ 5,222 $ (94) $ (3,870)
============= =============== =================
</TABLE>
F-32
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(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 ..................... $ 6,466 $ 2,891 $ 1,643
State ....................... 617 142 (61)
Foreign ..................... 59 39 (98)
------- ------- -------
7,142 3,072 1,484
------- ------- -------
Deferred:
Federal ..................... (1,914) (2,539) (452)
State ....................... (389) (476) (105)
------- ------- -------
(2,303) (3,015) (557)
------- ------- -------
$ 4,839 $ 57 $ 927
======= ======= =======
</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>
Year 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 (10.8) (389.7) (12.3)
Tax effect of foreign income and losses - - (7.2)
Tax effect of foreign sales corporation - (300.0) (29.9)
Loss of net operating loss attributable
to S corporation period - 19.6 2.5
Increase in the valuation for deferred
tax assets 92.8 921.6 38.5
Permanent differences - 30.9 7.9
Other - (258.6) 7.5
-------------- --------------- -------------
117.0 % 58.8 % 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-33
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(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 $ 405 $ 269
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 8,690 4,870
Alternative minimum tax credit carryforwards 600 228
Other 381 184
--------------- -----------------
Total gross deferred tax assets 16,836 10,372
--------------- -----------------
Less valuation allowance (7,433) (2,851)
--------------- -----------------
Net total deferred tax assets 9,403 7,521
--------------- -----------------
Gross deferred tax liabilities
Plant and equipment, principally due to differences in depreciation (1,842) (1,961)
Other (96) (275)
--------------- -----------------
Total gross deferred tax liabilities (1,938) (2,236)
--------------- -----------------
Net deferred tax assets $ 7,465 $ 5,285
=============== =================
Reflected on attached supplemental consolidated balance sheets as:
Current deferred tax assets $ 6,352 $ 2,965
Non-current deferred tax assets (included in other long-term assets) 1,113 2,320
--------------- -----------------
Net deferred tax assets, pertaining to continuing operations $ 7,465 $ 5,285
=============== =================
</TABLE>
The valuation allowance for deferred tax assets as of the beginning of the
fiscal year was $2,851 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 $4,582 and $894, 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.
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 $26,664, 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.
F-34
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
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 $2,915, $1,915, and $1,096 in fiscal years 1999,
1998, and 1997, respectively.
M. 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.
N. Accrued Liabilities
<TABLE>
<CAPTION>
Dec. 24, June 25, June 26,
1999 1999 1998
--------------- --------------- ----------------
<S> <C> <C> <C>
Accrued incentive plan expense $ 1,747 $ 2,285 $ 1,716
Accrued vacation expense 1,713 2,000 1,512
Accrued salary expense 1,197 1,704 1,138
Accrued payroll and sales tax expense 1,528 1,639 917
Accrued sales commissions and rebates payable 578 951 789
Accrued warranty expense 1,891 1,742 1,733
Accrued workers compensation
self-insurance expense 1,908 1,724 1,319
Accrued merger-related costs 706 - -
Accrued restructuring costs - - 625
Accrued income tax payable 398 3,383 488
Accrued other 1,542 1,972 1,232
--------------- --------------- ----------------
$ 13,208 $ 17,400 $ 11,469
=============== =============== ================
</TABLE>
O. Other Expense (Income)
<TABLE>
<CAPTION>
Twenty-Six Weeks
Ended Years Ended
-------------------------- ------------------------------------------
Dec 24, Dec 25, June 25, June 26, June 27,
1999 1998 1999 1998 1997
------------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Investment income $ (918) $(135) $ (318) $ (434) $ (732)
Loss (gain) on foreign
currency transactions (29) 70 4 164 (58)
Other, net 328 135 373 238 (83)
------------- ----------- ------------- ------------- ------------
$ (619) $ 70 $ 59 $ (32) $ (873)
============= =========== ============= ============= ============
</TABLE>
F-35
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
P. 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 $35,178 and $23,874, respectively. Receivables are generally due
within 30 days. Credit losses are provided for in the supplemental consolidated
financial statements and have consistently been within management's
expectations.
Sales to two customers were $54,044 (27%) and $31,314 (15%), respectively, in
fiscal year 1999. Sales to one customer were $51,165 (30%) in fiscal year 1998.
Sales to one customer were $50,731 (35%) in fiscal year 1997.
Q. Commitments and Contingencies
The Company had an established letter of credit of $1,700 at December 24, 1999,
for its self-insured workers' compensation program.
The Company leases real property and other equipment under operating leases.
Certain leases are renewable and provide for the payment of real estate taxes
and other occupancy expenses. At June 25, 1999, the future minimum lease
payments for noncancelable leases with remaining lease terms in excess of one
year were as follows:
<TABLE>
<CAPTION>
Fiscal year ending:
<S> <C>
2000 $ 3,073
2001 2,984
2002 2,719
2003 1,138
2004 602
Thereafter 1,129
-------------------
$ 11,645
===================
</TABLE>
Rent expense relating to continuing operations was $3,412, $2,271 and $1,233 for
fiscal years ended 1999, 1998 and 1997, respectively.
R. Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>
Twenty-Six
First Second Weeks Ended
Quarter (1) Quarter Dec. 24, 1999
------------ --------- -----------
Fiscal Year 2000
<S> <C> <C> <C>
Net sales $ 70,281 $ 68,381 $ 138,662
Gross profit 17,488 16,824 34,312
Income from continuing operations 341 4,294 4,635
Discontinued operations 36 6 42
Net income $ 377 $ 4,300 $ 4,677
============ ========= ===========
Net income per share - basic:
Continuing operations $ 0.01 $ 0.15 $ 0.18
Discontinued operations 0.00 0.00 0.00
------------ --------- -----------
Net income $ 0.02 $ 0.15 $ 0.18
============ ========= ===========
Net income per share - diluted:
Continuing operations $ 0.01 $ 0.13 $ 0.15
Discontinued operations 0.00 0.00 0.00
------------ --------- -----------
Net income $ 0.01 $ 0.13 $ 0.15
============ ========= ===========
</TABLE>
F-36
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter 1999
------------ --------- ---------- ----------- -----------
Fiscal Year 1999
<S> <C> <C> <C> <C> <C>
Net sales $ 38,464 $ 44,718 $ 51,819 $ 67,167 $ 202,168
Gross profit 7,771 10,028 11,895 18,196 47,890
Income (loss) from continuing operations (1,447) (1,373) 751 1,365 (704)
Discontinued operations 288 16 - 93 397
Net income (loss) $ (1,159) $ (1,357) $ 751 $ 1,458 $ (307)
============ ========= ========== =========== ===========
Net income (loss) per share - basic:
Continuing operations $ (0.07) $ (0.07) $ 0.03 $ 0.05 $ (0.06)
Discontinued operations 0.01 0.00 0.00 0.01 0.02
------------ --------- ---------- ----------- -----------
Net income (loss) $ (0.06) $ (0.07) $ 0.03 $ 0.06 $ (0.04)
============ ========= ========== =========== ===========
Net income (loss) per share - diluted:
Continuing operations $ (0.07) $ (0.07) $ 0.03 $ 0.05 $ (0.06)
Discontinued operations 0.01 0.00 0.00 0.00 0.02
------------ --------- ---------- ----------- -----------
Net income (loss) $ (0.06) $ (0.07) $ 0.03 $ 0.05 $ (0.04)
============ ========= ========== =========== ===========
<CAPTION>
First Second Third Fourth
Fiscal Year 1998 Quarter Quarter Quarter Quarter (2) 1998
------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales $ 41,224 $ 41,027 $ 44,417 $ 43,184 $ 169,852
Gross profit 8,943 8,174 8,563 7,875 33,555
Income (loss) from continuing operations 1,200 481 516 (2,157) 40
Discontinued operations - - 363 565 928
Net income (loss) 1,200 481 879 (1,592) 968
============ ========= ========== =========== ===========
Net income (loss) per share - basic:
Continuing operations $ 0.05 $ 0.02 $ 0.02 $ (0.10) $ 0.00
Discontinued operations 0.00 0.00 0.02 0.03 0.04
------------ --------- ---------- ----------- -----------
Net income (loss) $ 0.05 $ 0.02 $ 0.04 $ (0.07) $ 0.04
============ ========= ========== =========== ===========
Net income (loss) per share - diluted:
Continuing operations $ 0.05 $ 0.02 $ 0.02 $ (0.10) $ 0.00
Discontinued operations 0.00 0.00 0.01 0.03 0.04
------------ --------- ---------- ----------- -----------
Net income (loss) $ 0.05 $ 0.02 $ 0.03 $ (0.07) $ 0.04
============ ========= ========== =========== ===========
</TABLE>
(1) Results from continuing operations for the first quarter of fiscal year
2000 include a one-time charge of $3,673, ($3,113, net of tax), related to
the business combinations with Convergence and SVCI.
(2) Results from continuing operations for the fourth quarter of fiscal year
1998 include a provision for restructuring costs of $625.
S. 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-37
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
T. Segment Information
The Company adopted the Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (Statement
131), in fiscal year 1999. For the twenty-six-week periods ended December 24,
1999 and December 25, 1998, and fiscal years 1999 and 1998, the Company operated
in two industry segments; the Electronic Distribution Products segment, which
provides HFC equipment for signal distribution applications, primarily to the
CATV market, and the Broadband Management Services segment, which provides HFC
technical services and Internet enabling technical services and support to
broadband operators in the United States. 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 twenty-six-week periods ended December
24, 1999 and December 25, 1998, and fiscal years 1999, 1998, and 1997 is as
follows:
<TABLE>
<CAPTION>
Discontinued
Continuing Operations Operations
---------------------------------- -----------------
Digital
Electronic Broadband Fiber Optics
Distribution Management Transmission
Products Services Products Total
----------------- -------------- ----------------- ---------------
26 week period ended December 24, 1999
<S> <C> <C> <C> <C>
Total revenue $ 118,908 $19,754 $ - $ 138,662
Operating income (A) 12,552 204 - 12,756
Investment income 918
Interest expense 761
Income tax expense (A) 4,888
Identifiable assets at December 24, 1999 235,675 12,330 1,001 249,006
Capital expenditures 4,010 1,171 - 5,181
Depreciation and amortization 4,152 701 - 4,853
26 week period ended December 25, 1998
Total revenue $ 73,151 $10,031 $ - $83,182
Operating income (loss) 997 (2,616) - (1,619)
Investment income 135
Interest expense 167
Income tax expense 1,076
Identifiable assets at December 25, 1998 90,187 6,901 1,069 98,157
Capital expenditures 2,550 623 - 3,173
Depreciation and amortization 4,000 212 - 4,212
Year ended June 25, 1999
Total revenue $ 176,790 $25,378 $ - $ 202,168
Operating income (loss) 8,154 (2,564) - 5,590
Investment income 150 168 - 318
Interest expense 1,376 20 - 1,396
Income tax expense 4,835 4 477 5,316
Identifiable assets at June 25, 1999 95,672 13,075 1,286 110,033
Capital expenditures 6,828 1,841 - 8,669
Depreciation and amortization 8,496 703 - 9,199
Year ended June 26, 1998
Total revenue $ 152,765 $17,087 $ - $ 169,852
Operating income (loss) 3,278 (2,776) - 502
Investment income 369 65 - 434
Interest expense 390 47 - 437
Income tax expense (benefit) 972 (915) (94) (37)
Identifiable assets at June 26, 1998 82,319 7,841 2,889 93,049
Capital expenditures 9,287 1,521 - 10,808
Depreciation and amortization 6,792 441 - 7,233
Year ended June 27, 1997
Total revenue $ 132,676 $12,312 $ 7,994 $ 152,982
Operating income (loss) 1,501 346 (9,357) (7,510)
Investment income 712 20 - 732
Interest expense 371 138 - 509
Income tax expense (benefit) 788 139 (2,752) (1,825)
Identifiable assets at June 27, 1997 82,099 5,107 7,530 94,736
Capital expenditures 6,989 825 698 8,512
Depreciation and amortization 5,371 206 1,388 6,965
</TABLE>
(A) Operating income and income tax expense for the twenty-six-week period
ended December 24, 1999, excludes the impact of the one time merger-related
cost related to the Convergence and SVCI mergers (See Note B)
F-38
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
The Company and subsidiaries operate in various geographic areas. The table
below presents the Company's continuing operations in each of the geographic
areas as indicated by the following:
<TABLE>
<CAPTION>
U.S. Canada Europe Eliminations Total
<S> <C> <C> <C> <C> <C>
26 week period ended December 24, 1999
Sales to unaffiliated customers:
Domestic $ 123,881 $ 42 $ 177 $ - $ 124,100
Export 14,562 - - - 14,562
Transfers between geographic areas 32 - - (32) -
Total revenue 138,475 42 177 (32) 138,662
Operating income (loss)(A) 13,568 (142) (670) - 12,756
Investment income 918
Interest expense 761
Income tax expense (A) 4,866
Identifiable assets at December 24, 1999 247,478 409 118 - 248,005
Capital expenditures 5,180 - 1 - 5,181
Depreciation and amortization 4,843 - 10 - 4,853
26 week period ended December 25, 1998
Sales to unaffiliated customers:
Domestic $ 73,937 $ 316 $ 131 $ - $ 74,384
Export 8,798 - - - 8,798
Transfers between geographic areas 54 - - (54) -
Total revenue 82,789 316 131 (54) 83,182
Operating income (loss) (1,550) (97) 28 - (1,619)
Investment income 135
Interest expense 167
Income tax expense 964
Identifiable assets at December 25, 1998 95,868 865 355 - 97,088
Capital expenditures 3,173 - - - 3,173
Depreciation and amortization 4,196 6 10 - 4,212
Year ended June 25, 1999
Sales to unaffiliated customers:
Domestic $ 182,632 $ 421 $ 236 $ - $ 183,289
Export 18,879 - - - 18,879
Transfers between geographic areas 162 - - (162) -
Total revenue 201,673 421 236 (162) 202,168
Operating income (loss) 5,902 (280) (32) - 5,590
Investment income 318 - - - 318
Interest expense 1,396 - - - 1,396
Income tax expense 4,839 - - - 4,839
Identifiable assets at June 25, 1999 107,755 509 483 - 108,747
Capital expenditures 8,669 - - - 8,669
Depreciation and amortization 9,163 12 24 - 9,199
Year ended June 26, 1998
Sales to unaffiliated customers:
Domestic $ 137,182 $ 1,635 $ 146 $ - $ 138,963
Export 30,889 - - - 30,889
Transfers between geographic areas 798 - - (798) -
Total revenue 168,869 1,635 146 (798) 169,852
Operating income 23 290 189 - 502
Investment income 432 - 2 - 434
Interest expense 436 - 1 - 437
Income tax expense 80 8 (31) - 57
Identifiable assets at June 26, 1998 88,925 954 281 - 90,160
Capital expenditures 10,807 1 - - 10,808
Depreciation and amortization 7,197 12 24 - 7,233
Year ended June 27, 1997
Sales to unaffiliated customers:
Domestic $ 118,931 $ 1,523 $ 751 $ - $ 121,205
Export 23,783 - - - 23,783
Transfers between geographic areas (95) - - 95 -
Total revenue 142,619 1,523 751 95 144,988
Operating income 1,668 162 17 - 1,847
Investment income 727 - 5 - 732
Interest expense 508 - 1 - 509
Income tax expense 829 100 (2) - 927
Identifiable assets at June 27, 1997 85,066 1,542 598 - 87,206
Capital expenditures 7,782 6 26 - 7,814
Depreciation and amortization 5,514 12 51 - 5,577
</TABLE>
(A) Operating income and income tax expense for the twenty-six-week period
ended December 24, 1999, excludes the impact of the one time merger-related
cost related to the Convergence and SVCI mergers (See Note B)
F-39
<PAGE>
C-COR.net Corp.
Notes to Supplemental Consolidated Financial Statements
(Information as of December 24, 1999 and December 25, 1998 and for the
twenty-six weeks ended December 24, 1999 and December 25, 1998 is unaudited)
(In thousands, except share and per share data)
U. Subsequent Events
Investment
On January 11, 2000, the Company increased its investment in Fortress
Technologies, Inc. ("Fortress Technologies"), a security networking company,
from $501 to $3,500. The investment in Fortress represents approximately a 5
percent ownership interest. In connection with the investment, the Company and
Fortress Technologies have agreed on key terms of a reseller agreement, under
which the companies will jointly offer a network-based security solution for
residential and business cable modem customers. In addition, the Company will
become the exclusive provider of this security solution to the domestic
broadband cable-operator market. The investment in Fortress is being carried at
cost, since the Company's ownership interest is less than 20%, and does not fall
within the guidelines of Financial Accounting Standards No. 115.
Asset Purchase - Advanced Communications Services, Inc. ("ACSI")
On January 28, 2000, a wholly owned subsidiary of the Company purchased
substantially all of the assets of Advanced Communications Services, Inc.
("ACSI"), a provider of advanced network engineering services, for $3,640. The
Company did not assume any material liabilities of ACSI in the transaction.
F-40
<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.
C-COR.net Corp.
(Registrant)
Date: March 15, 2000 By: /s/ William T. Hanelly
----------------------------------------------
William T. Hanelly
Vice President-Finance, Secretary
and Treasurer
Consent of Independent Accountants
The Board of Directors
C-COR.net Corp.:
We consent to the incorporation by reference in the registration statements
(Nos. 2-95959, 33-27440, 33-35208, 33-66590, 333-65805, 333-02505, 333-89067 and
333-30982) on Form S-8 and (Nos. 333-82697, 333-87909, 333-90011 and 333-90589)
on Form S-3 of C-COR.net Corp. of our report dated March 10, 2000, with respect
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 the Form 8-K/A of
C-COR.net Corp. dated February 18, 2000. The supplemental consolidated financial
statements give retroactive effect to the merger of C-COR.net Corp. and
Worldbridge Broadband Services, Inc. which occurred on February 18, 2000, which
has been accounted for using the pooling-of-interests method of accounting.
/s/ KPMG LLP
- ------------------
KPMG LLP
State College, Pennsylvania
March 14, 2000
Consent of Independent Accountants
The Board of Directors
Worldbridge Broadband Services, Inc.:
We consent to the incorporation by reference in the registration statements
(Nos. 2-95959, 33-27440, 33-35208, 33-66590, 333-65805, 333-02505, 333-89067 and
333-30982) on Form S-8 and (Nos. 333-82697, 333-87909, 333-90011 and 333-90589)
on Form S-3 of C-COR.net Corp. of our report dated February 18, 2000, with
respect to the balance sheets of Worldbridge Broadband Services, Inc. as of
December 31, 1999 and 1998, and the related statements of operations,
stockholders' equity and cash flows for the years then ended, which report
appears in the Form 8-K/A of C-COR.net Corp. dated February 18, 2000.
/s/ KPMG LLP
- -------------------
KPMG LLP
Denver, Colorado
March 14, 2000
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