United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the thirteen-week period ended: September 27, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
C-COR.net Corp.
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(Exact Name of Registrant as Specified in Charter)
Pennsylvania 0-10726 24-0811591
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(State or Other Juris- (Commission File (IRS Employer
diction of Incorporation) Number) Identification No.)
60 Decibel Road
State College, PA 16801
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(Address of Principal (Zip Code)
Executive Offices)
(814) 238-2461
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.05 Par Value - 36,353,496 shares as of October 24, 2002.
C-COR.net Corp.
Page
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Part I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Independent Accountants' Review Report 2
Condensed Consolidated Balance Sheets:
As of September 27, 2002 and June 28, 2002 3
Condensed Consolidated Statements of Operations:
Thirteen Weeks Ended September 27, 2002 and September 28, 2001 4
Condensed Consolidated Statements of Cash Flows:
Thirteen Weeks Ended September 27, 2002 and September 28, 2001 5
Notes to Condensed Consolidated Financial Statements 6-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-24
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Control Procedures 26
Part II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Certifications 29-30
Independent Accountants' Review Report
The Board of Directors and Stockholders
C-COR.net Corp.:
We have reviewed the condensed consolidated balance sheet of C-COR.net Corp. and
subsidiaries as of September 27, 2002, and the related condensed consolidated
statements of operations and cash flows for the thirteen-week periods ended
September 27, 2002 and September 28, 2001. These condensed consolidated
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data, and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
C-COR.net Corp. and subsidiaries as of June 28, 2002, and the related
consolidated statements of operations, cash flows, and shareholders' equity for
the year then ended (not presented herein); and in our report dated August 9,
2002, except as to Note U, which is as of September 16, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of June 28, 2002, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ KPMG LLP
- ---------------------------
Harrisburg, Pennsylvania
October 11, 2002
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
C-COR.net Corp.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
September 27, June 28,
2002 2002
------------ ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ........................ $ 28,395 $ 111,858
Accounts and notes receivables, net .............. 42,032 27,582
Inventories ...................................... 51,666 39,084
Refundable income taxes .......................... 10,340 10,425
Deferred taxes ................................... 19,035 18,715
Other current assets ............................. 6,660 6,020
------------ ---------
Total current assets ............................. 158,128 213,684
Property, plant and equipment, net ............... 32,248 24,701
Intangible assets, net ........................... 63,968 8,843
Deferred taxes ................................... 25,932 20,549
Other long-term assets ........................... 3,018 3,046
------------ ---------
Total assets ..................................... $ 283,294 $ 270,823
============ =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable ................................. $ 25,985 $ 15,333
Accrued liabilities .............................. 42,186 32,991
Current portion of long-term debt ................ 626 633
------------ ---------
Total current liabilities ........................ 68,797 48,957
Long-term debt, less current portion ............. 1,192 1,263
Other long-term liabilities ...................... 1,930 2,005
------------ ---------
Total liabilities ................................ 71,919 52,225
------------ ---------
Shareholders' equity
Common stock, $.05 par; authorized shares of
100,000,000; issued shares of 39,988,250 on
September 27, 2002 and 39,945,219 on
June 28, 2002 ................................... 1,999 1,997
Additional paid-in capital ....................... 264,025 263,936
Accumulated other comprehensive income ........... 504 546
Accumulated deficit............................... (20,880) (13,622)
Treasury stock at cost, 3,640,953 shares on
September 27, 2002 and 3,629,506 shares on
June 28, 2002 ................................... (34,273) (34,259)
------------ ---------
Shareholders' equity ............................. 211,375 218,598
------------ ---------
Total liabilities and shareholders' equity ....... $ 283,294 $ 270,823
============ =========
See independent accountants' review report and notes to condensed consolidated
financial statements.
3
C-COR.net Corp.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended
---------------------------
September 27, September 28,
2002 2001
------------- -------------
Net sales .................................... $ 44,635 $ 52,025
Cost of sales ................................ 34,426 38,441
-------- --------
Gross margin ................................. 10,209 13,584
-------- --------
Operating expenses:
Selling and administrative ................... 11,767 10,720
Research and product development ............. 6,402 6,700
Amortization of goodwill and other intangibles 293 1,904
Acquired in-process technology charge ........ 1,560 0
Restructuring costs .......................... 211 1,503
-------- --------
Total operating expenses ..................... 20,233 20,827
-------- --------
Loss from operations ......................... (10,024) (7,243)
Interest expense ............................. (222) (25)
Investment income ............................ 591 503
Other expense, net ........................... (976) (1,761)
-------- --------
Loss before income taxes ..................... (10,631) (8,526)
Income tax benefit ........................... (3,373) (3,155)
-------- --------
Net loss ..................................... $ (7,258) $ (5,371)
======== ========
Net loss per share:
Basic ...................................... $ (0.20) $ (0.17)
Diluted .................................... $ (0.20) $ (0.17)
Weighted average common shares and common share equivalents:
Basic ...................................... 36,347 32,479
Diluted .................................... 36,347 32,479
See independent accountants' review report and notes to condensed consolidated
financial statements.
4
C-COR.net Corp.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Thirteen Weeks Ended
--------------------------
September 27, September 28,
2002 2001
------------ -----------
Operating Activities:
Net loss.............................................. $ (7,258) $ (5,371)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization......................... 3,019 4,445
Acquired in-process technology charge ................ 1,560 --
Provision for deferred retirement salary plan......... 26 10
Loss on sale of property, plant and equipment......... -- 157
Tax benefit deriving from exercise and sale of stock
option shares........................................ -- 451
Changes in operating assets and liabilities, net of
effect of acquisitions:
Accounts and notes receivable....................... 7,276 (14,922)
Inventories......................................... 1,682 (87)
Other assets........................................ (747) 986
Accounts payable.................................... (2,960) 4,506
Accrued liabilities................................. (4,596) 124
Deferred income taxes............................... (4,103) (4,348)
-------- --------
Net cash used in operating activities................. (6,101) (14,049)
-------- --------
Investing Activities:
Purchase of property, plant and equipment............. (689) (1,490)
Proceeds from the sale of property, plant
and equipment........................................ -- 1,059
Proceeds from sale of marketable securities and
other short-term investments......................... -- 7,967
Acquisitions, net of cash acquired.................... (76,643) (26,368)
-------- --------
Net cash used in investing activities................. (77,332) (18,832)
-------- --------
Financing Activities:
Payment of debt and capital lease obligations......... (78) (68)
Proceeds from issuance of common stock to employee
stock purchase plan.................................. 43 30
Proceeds from exercise of stock options and
stock warrants....................................... 47 342
Purchase of treasury stock............................ (14) (1,870)
-------- --------
Net cash used in financing activities................. (2) (1,566)
-------- --------
Effect of exchange rate changes on cash............... (28) --
-------- --------
Decrease in cash and cash equivalents................. (83,463) (34,447)
Cash and cash equivalents at beginning of period...... 111,858 87,891
-------- --------
Cash and cash equivalents at end of period............ $ 28,395 $ 53,444
======== ========
Supplemental cash flow information:
Non-cash investing and financing activities
Fair value adjustment of available-for-sale
securities........................................... $ (13) $ (21)
See independent accountants' review report and notes to condensed consolidated
financial statements.
5
C-COR.net Corp.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and, in the opinion
of management, contain all adjustments (consisting only of normal, recurring
adjustments) necessary to fairly present the Company's financial position as of
September 27, 2002 and the results of operations for the thirteen-week periods
ended September 27, 2002 and September 28, 2001. Operating results for the
thirteen-week periods ended September 27, 2002 are not necessarily indicative of
the results that may be expected for the year ending June 27, 2003, due to the
cyclical nature of the industry in which the Company operates, fluctuations in
currencies related to its foreign operations, and changes in overall conditions
that could affect the carrying value of its assets and liabilities. For further
information, refer to the financial statements and footnotes thereto included in
the Company's Form 10-K for the fiscal year ended June 28, 2002.
2. DESCRIPTION OF BUSINESS
C-COR.net Corp. (the Company) designs, manufactures, and markets network
distribution and transmission products and provides services and operational
support systems to operators of advanced hybrid fiber coax broadband networks.
The Company operates in three industry segments: Broadband Communications
Products, Broadband Network Services, and Broadband Management Solutions.
The Broadband Communications Products Division is responsible for research,
development, management, production, support, and sales of advanced fiber optic
and radio frequency equipment. The Broadband Network Services Division provides
outsourced technical services, including network engineering and design,
construction, activation, optimization, certification, maintenance, and
operations. The Broadband Management Solutions Division is responsible for the
development, integration, management, implementation, support and sales of
operational support systems that focus on network services management and mobile
workforce management solutions.
3. ACCOUNTING CHANGE AND ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (Statement 142). Statement 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. Statement 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Statement 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121).
The Company adopted the provisions of Statement 142 effective June 29, 2002. In
connection with Statement 142's transitional goodwill impairment evaluation, the
Company is required to perform an assessment of whether there is an indication
6
that goodwill is impaired as of the date of adoption. To accomplish this, the
Company must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the carrying amount of the reporting unit. To the extent the carrying amount of
a reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the second step of
the transitional impairment test must be performed. In the second step, the
implied fair value of the reporting unit goodwill is compared with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141, "Business
Combinations." The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. This second step is required to be
completed as soon as possible, but no later than June 27, 2003. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in our consolidated statement of operations.
The following information is provided to report what net loss for the
thirteen-week periods ended September 27, 2002 and September 28, 2001 would have
been, exclusive of amortization expense (including any related tax effects)
recognized related to goodwill and intangible assets that are no longer being
amortized as a result of the adoption of Statement 142:
Thirteen Weeks Ended
--------------------------
September 27, September 28,
2002 2001
------------ -----------
Reported net loss $(7,258) $(5,371)
Add back: Goodwill and workforce
Amortization, net of tax - 559
------------ -----------
Adjusted net loss $(7,258) $(4,812)
============ ===========
Basic and diluted net loss per share:
Reported net loss $ (0.20) $ (0.17)
Add back: Goodwill and workforce
Amortization, net of tax - 0.02
------------ -----------
Adjusted net loss $ (0.20) $ (0.15)
============ ===========
As of the date of adoption, the Company had unamortized goodwill in the amount
of $7,246 and unamortized identifiable intangible assets in the amount of $1,597
that are subject to the transition provisions of Statements 142. As part of
adopting this standard, the Company is planning on obtaining an independent
appraisal to assess the fair value of the Company's business units to determine
whether goodwill and certain identifiable intangibles carried on our books were
impaired and the extent of such impairment, if any, as of the date of adoption.
The Company anticipates completing this independent appraisal in the quarter
ended December 27, 2002, and as such, has not yet determined the impact of
adopting Statement 142 on the financial statements at the date of this report,
including whether the Company will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.
7
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement 144), which supersedes both Statement
121 and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement 142.
The Company adopted Statement 144 effective June 29, 2002. The adoption of
Statement 144 for long-lived assets held for use did not have a material impact
on the consolidated financial statements. The provisions of Statement 144 for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (Statement 146), which replaces Emerging
Issues Task Force No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of Statement 146 are effective for exit or disposal activities
that are initiated after December 31, 2002.
4. BUSINESS COMBINATIONS
Fiscal Year 2003
On September 16, 2002, the Company acquired certain assets and liabilities of
Philips Broadband Networks (PBN) from Royal Philips Electronics. PBN is a
provider of broadband products, including transmission products, network
optimizing technologies, and element management systems. PBN is supported by
sales and services organizations worldwide, with a strong customer base in
Europe and the Asia Pacific region. The purchase included assets in various
countries, cable infrastructure products, and a design and production facility
in Manlius, New York. These assets and the facility became part of our Broadband
Communications Products Division. The purchase of these net assets and
operations will provide the Company with an opportunity to increase its customer
and installed equipment base, primarily in the international markets of Europe
and Asia, and in addition, enable the Company to capitalize on the combined
synergies of our skilled workforce, market focus, and product offerings. The
purchase price for the acquisition was 80,000 Euros, which is subject to certain
adjustments.
The effective date of the acquisition was August 26, 2002 (PBN's fiscal month
end). Accordingly, the results of operations of PBN are included in the
consolidated financial statements for the period from August 26, 2002 through
8
September 27, 2002. At closing on September 16, 2002, the Company made an
initial cash payment of 75,000 Euros ($72,507 U.S. dollars, which is net of $200
of imputed interest) to Royal Philips Electronics, with subsequent payments
subject to certain adjustments. The Company anticipates additional consideration
to be paid of approximately $2,576 during the quarter ended December 27, 2002.
In addition, the Company incurred direct transaction costs of approximately $862
to consummate the acquisition. The Company used its available cash to fund the
acquisition. The acquisition is being accounted for as a purchase.
Any excess of the purchase price and related costs over the fair value of the
acquired net assets of the business will be recorded as goodwill. The following
table summarizes the estimated fair value of the net assets acquired from Royal
Philips Electronics, including goodwill, as of the effective date of the
acquisition.
Current assets................................ $35,945
Property, plant and equipment................. 9,384
Other long-term assets........................ 1,600
Intangible assets ............................ 5,215
Current liabilities........................... (25,248)
Goodwill...................................... 49,049
----------
Total purchase price.......................... $75,945
==========
One of the acquired intangible assets was in-process research and development,
representing research and development projects that were commenced but not yet
completed at the date of the acquisition, and which if unsuccessful, have no
alternative future use in research and development activities or otherwise. The
estimated value allocated to in-process research and development as of the
acquisition date was $1,560. The amount allocated to in-process research and
development was charged to expense as an acquired in-process technology charge
in the condensed consolidated statements of operations during the quarter ended
September 27, 2002. The Company anticipates obtaining a third-party valuation of
certain intangible assets acquired, thus the allocation of the purchase price is
preliminary and subject to change. A significant portion of the amount of the
goodwill from the acquisition is expected to be deductible for tax purposes.
However, due to expected basis differences in the book versus tax purchase price
allocation, which has not been completed to date, the amount of the goodwill
which is deductible versus not deductible has not yet been determined.
As of September 27, 2002, the net book value of intangible assets with definite
useful lives, resulting from all of the Company's business combinations, was
$4,959. These intangible assets are being amortized over their estimated useful
life of 36 months. The weighted-average life remaining on these intangible
assets is 30 months.
Fiscal Year 2002
On August 4, 2001, the Company acquired certain assets and assumed certain
liabilities of ADC Telecommunications, Inc. (ADC). The net assets and operations
acquired from ADC were considered the purchase of a business and have been
included in the consolidated financial statements from the date of acquisition.
Consideration for the acquisition was approximately $25,021, consisting of a
cash payment of $24,596 to ADC and direct transaction costs incurred of
approximately $425. The Company used its available cash to fund the acquisition.
9
The net assets acquired from ADC, including goodwill, were as follows:
Current assets $27,899
Property and equipment 5,381
Intangible assets acquired 4,404
Other long-term assets 3,905
Current liabilities (18,045)
Long-term debt (302)
Goodwill 1,779
----------
Total purchase price $25,021
==========
On July 3, 2001, a wholly owned subsidiary of the Company acquired Aerotec
Communications, Inc. (Aerotec) for $2,250. These net assets became part of the
Broadband Network Services Division. The results of operations of Aerotec have
been included in the consolidated financial statements from the date of
acquisition. Additional cash payments of up to $3,750 were required to be made
to Aerotec shareholders if certain performance targets are met. These
performance targets were substantially achieved and an additional cash payment
of $3,586 was made in August 2002 and recorded as additional goodwill. The
Company has recorded goodwill of $4,168 as of September 27, 2002 in connection
with this transaction, which represented the excess of the purchase price and
related costs over the fair value of the acquired net assets of the business.
The impact of this acquisition on the Company's historical results of operations
was not material.
Pro Forma
The following selected unaudited pro forma information is provided to present a
summary of the combined results of the Company's continuing operations, as if
the acquisition of certain operations of Philips and ADC had occurred as of June
30, 2001, giving effect to purchase accounting adjustments. The pro forma data
is for informational purposes only and may not necessarily reflect the results
of continuing operations of the Company had the operations acquired from Philips
and ADC operated as part of the Company for the thirteen weeks ended September
27, 2002 and September 28, 2001, respectively.
Thirteen Weeks Ended
September 27, September 28,
2002 2001
Net sales $ 59,167 $ 98,285
Net loss $ (6,226) $ (8,774)
Net loss per share--basic and diluted $ (0.17) $ (0.27)
10
5. INVENTORIES
Inventories include material, labor and overhead and are stated at the lower of
cost or market. Cost is determined on the first-in, first-out method.
Inventories as of September 27, 2002 and June 28, 2002 consisted of the
following:
September 27, June 28,
2002 2002
------- -------
Finished goods $ 16,509 $ 9,773
Work-in-process 8,430 8,041
Raw materials 26,727 21,270
------------ ------------
Total inventories $ 51,666 $ 39,084
============ ============
6. CREDIT AGREEMENT
On November 7, 2002, the Company entered into a new financing agreement with a
commercial lender. The new financing agreement is a two-year secured revolving
credit facility, to be used for working capital and general corporate purposes,
and provides an initial commitment up to an aggregate amount of $20,000. The
financing agreement allows for issuance of letters of credit and cash
borrowings. Letters of credit outstanding are limited to no more than $6,000.
Cash borrowings are limited by certain availability reserves and a borrowing
base, primarily a percentage of eligible domestic trade accounts receivables, up
to the facility's maximum availability less letters of credit outstanding.
As security for the financing agreement, the Company has pledged the following
collateral: trade accounts receivables, inventory, general intangibles, real
estate, equipment, life insurance policies, and certain pledged stock of a
wholly owned subsidiary. The financing agreement contains a number of
restrictive covenants, including covenants limiting incurrence of unsubordinated
debt, disposal of collateral, and the paying of dividends (except stock
dividends). The financing agreement contains no financial covenants.
The financing agreement is committed through November 6, 2004. Borrowings under
the credit agreement bear interest at an applicable bank rate or LIBOR plus two
and three-quarters percent (2.75%) per annum, payable monthly. The financing
agreement calls for a facility fee of $150 payable at execution of the
agreement, a fee on the unused commitment of 0.375% per annum payable monthly,
and an administrative fee of $36 per annum.
As a condition to closing on the finance agreement, the Company terminated its
prior credit agreement with a bank, whereby $7,500 was available as a revolving
line-of-credit, subject to an aggregate sub-limit of $5,000 for issuance of
letters of credit. This credit agreement was committed through November 22,
2002. As of September 27, 2002, the Company had no borrowings outstanding under
this prior credit agreement and had established letters of credit of $2,400
outstanding related to our workers' compensation programs and customer
obligations. The Company will continue to maintain these letters of credit with
the bank, and anticipates establishing an additional letter of credit of $525
related to an equipment lease obligation. We will be required to maintain cash
deposits in the face amount of these letters of credit as collateral. An
additional letter of credit in the face amount of $600 related to increased
11
requirements under our workers compensation policy will be issued under the new
financing agreement.
7. ACCRUED LIABILITIES
Accrued liabilities as of September 27, 2002 and June 28, 2002 consisted of the
following:
September 27, June 28,
2002 2002
------------- -------------
Accrued employee benefit expense $ 1,541 $ 2,745
Accrued vacation expense 3,437 2,868
Accrued salary expense 2,574 2,635
Accrued warranty expense 13,841 10,762
Accrued workers compensation
self-insurance expense 994 994
Accrued restructuring 3,597 2,965
Accrued income tax payable 2,477 1,809
Accrued other 13,725 8,213
------------ ------------
$ 42,186 $ 32,991
============ ============
8. RESTRUCTURING COSTS
During the thirteen-week period ended September 27, 2002, the Company recorded a
restructuring charge of $211, related to initiatives to improve its operating
performance by aligning the cost structure across the Company with current
business levels. The restructuring charge represents employee termination
benefits for 183 employees, all of which was paid as of September 27, 2002.
Details of restructuring charges as of September 27, 2002 are as follows:
Restructuring
Restructuring Charges from
Accrual at Charges in Acquisitions in Accrual at
June 28, Fiscal Year Fiscal Year Cash September 27,
2002 2003 2003 Paid 2002
----------- ------------- --------------- ------------ ------------
Employee severance and
termination benefits $2,416 $211 $1,435 $ 958 $3,104
Contractual obligations
and other 549 - - 56 493
----------- ------------- --------------- ------------ ------------
Total $2,965 $211 $1,435 $ 1,014 $3,597
=========== ============= =============== ============ ============
The Company anticipates the remaining amounts accrued as of September 27, 2002
will be substantially paid out as of April 30, 2003. The Company intends to
continue its initiatives to achieve more cost-effective operations throughout
the remainder of fiscal year 2003, which is expected to result in additional
restructuring expenses in amounts that have not yet been determined.
12
9. COMPREHENSIVE LOSS
The components of accumulated other comprehensive income, net of tax if
applicable, are as follows:
September 27, June 28,
2002 2002
------------- -------------
Unrealized loss on marketable securities $ (25) $ (12)
Foreign currency translation gain 529 558
----------- -----------
Accumulated other comprehensive income $ 504 $ 546
=========== ===========
The components of comprehensive loss of the Company for the thirteen-week
periods ended September 27, 2002 and September 28, 2001 are as follows:
Thirteen Weeks Ended
----------------------------
September 27, September 28,
2002 2001
------------- -------------
Net loss $ (7,258) $ (5,371)
Other comprehensive loss:
Unrealized loss on marketable securities (13) (21)
Foreign currency translation loss (29) (3)
--------- ---------
Other comprehensive loss (42) (24)
--------- ---------
Comprehensive loss $ (7,300) $ (5,395)
========= =========
13
10. NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
outstanding plus the dilutive effect of options and warrants. The dilutive
effect of options and warrants is calculated under the treasury stock method
using the average market price for the period. Net loss per share is calculated
as follows:
Thirteen Weeks Ended
-----------------------------
September 27, September 28,
2002 2001
------------ ------------
Net loss $ (7,258) $ (5,371)
============ ============
Weighted average common shares outstanding 36,347 32,479
Common share equivalents - -
------------ ------------
Weighted average common shares and common
share equivalents 36,347 32,479
============ ============
Net loss per share - basic $ (0.20) $ (0.17)
Net loss per share - diluted $ (0.20) $ (0.17)
For the thirteen-week periods ended September 27, 2002 and September 28, 2001,
common share equivalents of 199 and 1,601 shares, respectively, were excluded
from the diluted net loss per share calculation because they were antidilutive.
11. SEGMENT INFORMATION
The Company operates in three industry segments: Broadband Communication
Products, Broadband Network Services, and Broadband Management Solutions.
The "management approach" required under SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," has been used to present the
following segment information. This approach is based upon the way management
organizes segments within an enterprise for making operating decisions and
assessing performance.
The following costs and asset categories are not allocated to our segments, and
are reflected in the table as "unallocated items":
- Corporate selling, general and administrative expenses, certain quality
assurance costs, and technology oversight functions;
- Restructuring costs;
- Other intangible asset charges;
- Goodwill amortization resulting from acquisitions;
- Income tax benefit; and
14
- Identifiable assets of cash and cash equivalents, marketable securities
and other short-term investments, goodwill, and certain other long-term
corporate assets.
Information about industry segments for the thirteen-week periods ended
September 27, 2002 and September 28, 2001 are as follows:
Broadband Broadband Broadband
Communications Network Management
Products Services Solutions Unallocated Total
----------------------------------------------------------------------------
13 week period ended September 27, 2002
Net sales $ 38,371 $ 6,019 $ 245 $ - $ 44,635
Depreciation and amortization 2,179 210 251 379 3,019
Operating income (loss) (1,069) 45 (3,055) (5,945) (10,024)
Income tax benefit - - - 3,373 3,373
Identifiable assets at September 27, 2002 229,041 23,788 13,424 17,041 283,294
Capital expenditures 268 43 267 111 689
13 week period ended September 28, 2001
Net sales $ 43,920 $ 7,944 $ 161 $ - $ 52,025
Depreciation and amortization 1,728 233 1,666 818 4,445
Operating income (loss) 4,214 524 (5,132) (6,849) (7,243)
Income tax benefit - - - 3,155 3,155
Identifiable assets at September 28, 2001 154,196 25,097 27,422 48,227 254,942
Capital expenditures 116 59 117 1,198 1,490
Sales to unaffiliated customers by geographic region are as follows:
Thirteen Weeks Ended
--------------------------------
September 27, September 28,
2002 2001
--------- ---------
United States $ 34,163 $ 43,600
Europe 5,040 2,883
Other 5,432 5,542
--------- ---------
Total $ 44,635 $ 52,025
========= =========
Long-lived assets by geographic region are as follows:
September 27, September 28,
2002 2001
------------- -------------
United States $ 74,475 $ 55,734
Europe 16,836 889
Other 4,905 2,460
-------- ----------
Total $ 96,216 $ 59,083
========= ==========
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The following discussion addresses the financial condition of C-COR.net Corp. as
of September 27, 2002, and the results of our operations for the thirteen-week
period ended September 27, 2002, compared with the same period of the prior
fiscal year. This discussion should be read in conjunction with the Management's
Discussion and Analysis section for the fiscal year ended June 28, 2002,
included in the Company's Annual Report on Form 10-K.
Disclosure Regarding Forward-Looking Statements
Some of the information presented in this report contains forward-looking
statements made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements include, among
others, our ability to expand our product offering, fluctuations in demand for
telecommunications equipment and broadband management services, the slowdown in
network upgrade activity and the level of future network upgrade activity, the
trend toward more fiber in the network, global demand for our products and
services, our ability to expand our operations internationally, including the
impact of the Philips Broadband Networks (PBN) acquisition, our assessment of
credit risk related to major customers, and statements relating to our business
strategy. Forward-looking statements represent our judgment regarding future
events. Although we believe we have a reasonable basis for these forward-looking
statements, we cannot guarantee their accuracy and actual results may differ
materially from those anticipated due to a number of uncertainties, many of
which we are not aware. Factors which could cause actual results to differ from
expectations include, among others, capital spending patterns of the
communications industry, our ability to develop new and enhanced products,
continued industry consolidation, the development of competing technologies,
changes in the credit profile of major customers that would lead us to restrict
new product shipments or record an increase in the allowance for doubtful
accounts, and our ability to achieve our strategic objectives. For additional
information concerning these and other important factors that may cause our
actual results to differ materially from expectations and underlying
assumptions, please refer to the reports filed by us with the Securities and
Exchange Commission.
Business Overview
We design, manufacture, and market network distribution and transmission
products and provide services and operational support systems to operators of
advanced hybrid fiber coax broadband networks. We operate in three industry
segments: Broadband Communications Products, Broadband Network Services, and
Broadband Management Solutions.
The Broadband Communications Products Division is responsible for research,
development, management, production, support, and sales of advanced fiber optic
and radio frequency equipment. The Broadband Network Services Division provides
outsourced technical services, including network engineering and design,
construction, activation, optimization, certification, maintenance, and
operations. The Broadband Management Solutions Division is responsible for the
development, integration, management, implementation, support and sales of
operational support systems that focus on network services management and mobile
workforce management solutions.
16
Business Combinations
On September 16, 2002, we acquired certain assets and liabilities of Philips
Broadband Networks (PBN) from Royal Philips Electronics. PBN is a provider of
broadband products, including transmission products, network optimizing
technologies, and element management systems. PBN is supported by sales and
services organizations worldwide, with a strong customer base in Europe and the
Asia Pacific region. The purchase included assets in various countries, cable
infrastructure products, and a design and production facility in Manlius, New
York. These assets and the facility became part of our Broadband Communications
Products Division. The purchase price for the acquisition was 80.0 million
Euros, which is subject to certain adjustments.
The effective date of the acquisition was August 26, 2002. Accordingly, the
results of operations of PBN are included in the consolidated financial
statements for the period from August 26, 2002 through September 27, 2002. At
closing on September 16, 2002, the Company made an initial cash payment of 75.0
million Euros ($72.5 million U.S. dollars, which is net of $200,000 of imputed
interest) to Royal Philips Electronics, with subsequent payments subject to
certain adjustments. The Company anticipates additional consideration to be paid
of approximately $2.6 million during the quarter ending December 27, 2002. In
addition, the Company incurred direct transaction costs of approximately
$862,000 to consummate the transaction. The Company used its available cash to
fund the acquisition. The acquisition is being accounted for as a purchase.
On August 4, 2001, we acquired certain assets and assumed certain liabilities of
ADC Telecommunications, Inc. (ADC). The assets and operations acquired from ADC
were considered the purchase of a business and were included in the consolidated
financial statements since the date of purchase. Consideration for the
acquisition was approximately $25.0 million, consisting of a cash payment of
$24.6 million to ADC and direct transaction costs incurred of approximately
$425,000. In addition, we assumed certain liabilities. The Company has recorded
goodwill of $1.8 million as of September 27, 2002 in connection with this
transaction, which represents the excess of the purchase price and related costs
over the fair value of the acquired net assets of the business.
On July 3, 2001, a wholly owned subsidiary of the Company acquired Aerotec
Communications, Inc. (Aerotec) for $2.3 million. These net assets became part of
the Broadband Network Services Division. The results of operations of Aerotec
have been included in the consolidated financial statements from the date of
acquisition. Additional cash payments of up to $3.8 million were required to be
made to Aerotec shareholders if certain performance targets are met. These
performance targets were substantially achieved and an additional cash payment
of $3.6 million was made in August 2002 and recorded as additional goodwill. The
Company has recorded goodwill of $4.2 million as of September 27, 2002 in
connection with this transaction, which represents the excess of the purchase
price and related costs over the fair value of the acquired net assets of the
business.
Results of Operations
Net sales for the thirteen-week period ended September 27, 2002 were $44.6
million, a decrease of 14% from the prior year's sales of $52.0 million for the
same period.
Broadband Communications Products segment sales decreased by 13% to $38.4
million during the thirteen-week period, compared to $43.9 million for the same
period of the prior year. Sales resulting from the acquisition of the PBN assets
and operations during the thirteen-week period ended September 27, 2002 were
approximately $9.6 million. Optical product sales decreased by 17% to $18.0
million during the thirteen-week period ended September 27, 2002, compared to
17
$21.6 for the same period of the prior year. Sales of radio frequency amplifiers
decreased by 9% to $20.4 million during the thirteen-week period ended September
27, 2002, compared to $22.3 million for the same period of the prior year.
Although the Company has broadened its customers and increased its base of
installed equipment, the Company's sales of Broadband Communications Products is
dependent on the capital spending levels of its customers. Demand for our
Broadband Communications Products, primarily from domestic cable operations,
decreased during the quarter. Many of our customers have deferred capital
spending, reducing their purchases of broadband communications products compared
to the same period a year ago. Moreover, certain of our customers have
experienced financial difficulties, including Adelphia Communications, which
filed a petition for protection under the federal bankruptcy statutes in June
2002.
Broadband Network Services segment sales decreased by 24% to $6.0 million during
the thirteen-week period, compared to $7.9 million for the same period of the
prior year. The decrease during the quarter also resulted from reduced spending
by domestic cable operators on technical services. Sales were primarily
attributable to technical services performed in our customers' plants, including
system sweep, reverse path activation, ingress mitigation, node certification,
and system maintenance, which were also affected negatively by the slowdown in
spending by domestic cable operators.
Broadband Management Solutions segment sales were $245,000 during the
thirteen-week period, compared to $161,000 for the same period of the prior
year. Sales for both periods were primarily attributable to mobile workforce
software licenses and professional services.
Domestic sales as a percentage of total consolidated sales were 77% for the
thirteen-week period ended September 27, 2002, compared to 84% for the same
period of the prior year. Sales to domestic customers decreased by 22% to $34.2
million during the thirteen-week period, compared to $43.6 million for the same
period of the prior year. This decrease resulted from reductions in Broadband
Communications Products segment and Broadband Network Services segment sales,
due to a slowdown in spending by certain domestic multiple system operators
(MSOs).
International sales as a percentage of total consolidated sales were 23% for the
thirteen-week period ended September 27, 2002, compared to 16% for the same
period of the prior year. Sales to international customers increased by 24% to
$10.5 million for the thirteen-week period, compared to $8.4 million for the
same period of the prior year. The increase resulted from higher Broadband
Communications Products segment sales primarily in Europe and Asia during the
period. As a result of our acquisition of PBN assets and operations, we have
increased our customers and installed equipment base in the markets of Europe
and Asia. We have added operations in the Netherlands, Spain, Portugal, United
Kingdom, France, Germany, Singapore and Australia. These operations include
engineering, sales and administrative support activities to support the delivery
of localized versions of products and services to customers in Europe and Asia.
We expect the demand for our products in international markets will continue to
be highly variable. The international markets represent distinct markets in
which capital spending decisions for hybrid fiber coax network distribution
equipment can be affected by a variety of factors, including access to financing
and general economic conditions.
At September 27, 2002, our backlog of orders was $48.5 million, including $24.1
million for Broadband Communications Products, of which $19.1 million resulted
from our acquisition of PBN, $21.3 million for Broadband Network Services, and
$3.1 million for Broadband Management Solutions. By comparison, backlog at the
beginning of the quarter as of June 28, 2002 was $28.6 million, including $7.7
million for Broadband Communications Products, $20.2 million for Broadband
Network Services, and $689,000 for Broadband Management Solutions.
Gross margin was 22.9% for the thirteen-week period ended September 27, 2002.
This compares to 26.1% for the same period of the prior year. For the Broadband
Communications Products segment, gross margin was 25.3% for the thirteen-week
period ended September 27, 2002. This compares to 28.8% for the same period of
the prior year. The decrease in Broadband Communications Products segment gross
margin was due primarily to decreased volume, resulting in higher manufacturing
18
costs per unit due to allocating fixed factory overhead costs, and shifts in
product mix. For the Broadband Network Services segment, gross margin was 19.3%
for the thirteen-week period ended September 27, 2002. This compares to 20.5%
for the same period of the prior year. The decrease in Broadband Network
Services segment gross margin was due to lower service revenues, as well as
variability in the gross margins associated with the various technical service
offered. For the Broadband Management Solutions segment, gross margin was (268%)
for the thirteen-week period ended September 27, 2002. This compares to (438%)
for the same period of the prior year. Broadband Management Solutions segment
gross margin was negatively impacted in both periods by costs associated with
employees that support the deployment of network services management and mobile
workforce management solutions which are included in cost of sales. We
anticipate that our future gross margin will continue to be affected by many
factors, including revenue levels, sales mix, competitive pricing, the timing of
new product introductions.
Selling and administrative expenses were $11.8 million (26.4% of net sales) for
the thirteen-week period ended September 27, 2002, compared to $10.7 million
(20.6% of net sales) for the same period of the prior year. Selling and
administrative expenses increased during the thirteen-week period due to
personnel costs and administrative expenses related to our acquisition of PBN
assets and operations, effective as of August 26, 2002. This increase was
partially offset by expenses incurred in the same period of the prior year
associated with the implementation of a fully integrated enterprise resource
planning (ERP) system. The ERP system is a software-based management tool that
will simplify and standardize business processes such as financial systems,
manufacturing and purchasing, product development, and customer relationship
management. Costs of $1.8 million related to business process reengineering
activities and training associated with this project were expensed as incurred
during the thirteen-week period ended September 28, 2001. We anticipate
increased selling and administrative expenses in future periods related to the
acquisition of PBN, as we integrate the organization and its infrastructure.
Research and product development expenses were $6.4 million (14.3% of net sales)
for the thirteen-week period ended September 27, 2002, compared to $6.7 million
(12.9% of net sales) for the same period of the prior year. Research and product
development expenses in the Broadband Communications Products segment were $4.8
million for the thirteen-week period ended September 27, 2002, compared to $4.3
million for the same period of the prior year. The increase was primarily due to
higher personnel costs resulting from our acquisition of certain assets and
operations of Philips. The higher expenditure levels were primarily for the
development of optical products. Research and product development expenses in
the Broadband Management Solutions segment were $1.4 million for the
thirteen-week period ended September 27, 2002, compared to $2.2 million for the
same period of the prior year. The decrease was primarily due to lower personnel
costs resulting from reductions in the workforce and lower expenses for the
development of mobile workforce management software solutions. Other research
and product development expenses, not charged to segments, were $133,000 for the
thirteen-week period ended September 27, 2002, compared to $175,000 for the same
period of the prior year. We anticipate continuing investments in research and
product development expenses in future periods related to ongoing initiatives in
the development of optical products and network services management and mobile
workforce software capabilities.
Operating loss (excluding unallocated items) for the Broadband Communications
Products segment for the thirteen-week period ended September 27, 2002 was $1.1
million, compared to operating income of $4.2 million for the same period of the
prior year. The decrease in operating income for the thirteen-week period ended
September 27, 2002 was primarily attributable to the lower sales volume and
gross margins during the period, and higher operating costs associated with our
19
acquisition of PBN during the period. Operating income (excluding unallocated
items) for the Broadband Network Services segment for the thirteen-week period
ended September 27, 2002 was $45,000, compared to $524,000 for the same period
of the prior year. The decrease in operating income derives primarily from the
lower sales volume and gross margins during the period. Operating loss
(excluding unallocated items) for the Broadband Management Solutions segment for
the thirteen-week period ended September 27, 2002 was $3.1 million, compared to
an operating loss of $5.1 million for the same period of the prior year. The
decrease in operating loss derives primarily from lower research and development
costs associated with the development of operational support services solutions,
as well as the elimination of amortization expense associated with identifiable
intangible assets that were written off due to their impairment as of June 28,
2002.
Interest expense was $222,000 for the thirteen-week period ended September 27,
2002, compared to $25,000 for the same period of the prior year. The increase in
interest expense during the thirteen-week period resulted primarily from an
imputed interest charge recorded during the period related to the PBN
acquisition.
Investment income was $591,000 for the thirteen-week period ended September 27,
2002, compared to $503,000 for the same period of the prior year. The increase
in investment income resulted from a higher average investment balance during
the period compared to a year ago.
Other expense, net was $976,000 for the thirteen-week period ended September 27,
2002, compared to $1.8 million for the same period of the prior year. Other
expense, net for the thirteen-week period ended September 27, 2002 included a
$1.6 million loss related to the settlement of a foreign exchange forward
contract, which was offset by the partial recovery of $800,000 on a note
receivable from a third party that had been fully reserved for by the Company in
a prior period. Other expense, net for the thirteen-week period ended September
28, 2001 includes a charge to reserve for the aforementioned note receivable in
the amount of $1.3 million.
Our overall effective income tax rate was (31.7%) for the thirteen-week period
ended September 27, 2002, compared to (37.0%) for the same period of the prior
year. The lower effective income tax rate for the quarter reflects the impact of
U.S. federal, foreign and state income taxes, permanent differences associated
with the acquisition of PBN, and the provision of valuation allowances. In
addition, fluctuations in the effective income tax rate from period to period
reflect changes in permanent differences, non-deductible amounts, the relative
profitability related to U.S. versus non-U.S. operations and the differences in
statutory tax rates by jurisdiction.
Liquidity and Capital Resources
As of September 27, 2002, cash and cash equivalents totaled $28.4 million, down
from $111.9 million at June 28, 2002.
Net cash used in operating activities was $6.1 million for the thirteen-week
period, compared with cash used by operations of $14.0 million for the same
period of the prior year. For the thirteen-week period ended September 27, 2002
net cash used in operating activities was due primarily to the increased net
loss incurred during the period, reductions in accounts payables and accrued
liabilities, and an increase in deferred income taxes related to additional net
operating loss carryforwards recorded in the period. These changes were
partially offset by reductions in inventories and accounts and notes receivable
for the period.
20
Net cash used in investing activities was $77.3 million for the thirteen-week
period ended September 27, 2002, compared to cash used in investing activities
of $18.8 million for the same period of the prior year. The increase in cash
used in investing activities during the period was due primarily to utilizing
$73.1 million of cash for the acquisition of PBN assets and operations, and $3.6
million for the payment of an earnout provision associated with our Aerotec
acquisition. In addition to the initial consideration paid to Philips,
subsequent payments are required under the terms of the acquisition agreement.
The Company anticipates additional consideration to be paid of approximately
$2.6 million during the quarter ended December 27, 2002. The major elements of
the change in cash for the same period of the prior year were $26.4 million used
for the acquisition of operations of ADC, which were offset partially by
proceeds of $9.0 million from the sale of marketable securities and other
short-term investments and property, plant and equipment.
Net cash used in financing activities was $2,000 for the thirteen-week period
ended September 27, 2002, compared with cash used in financing activities of
$1.6 million for the same period of the prior year. The current year activity
primarily represented payments on long-term debt, which were partially offset by
proceeds from issuance of common stock to our employee stock purchase plan and
from the exercise of stock options and warrants. The major element of the change
in cash used for financing activities for the same period of the prior year was
$1.9 million for the purchase of treasury stock.
On November 7, 2002, we entered into a new financing agreement with a commercial
lender. The new financing agreement is a two year secured revolving credit
facility, to be used for working capital and general corporate purposes, and
provides an initial commitment up to an aggregate amount of $20.0 million. The
financing agreement allows for issuance of letters of credit and cash
borrowings. Letters of credit outstanding are limited to no more than $6.0
million. Cash borrowings are limited by certain availability reserves and a
borrowing base, primarily a percentage of eligible domestic trade accounts
receivables, up to the facility's maximum availability less letters of credit
outstanding.
As security for the financing agreement, the Company has pledged the following
collateral: trade accounts receivables, inventory, general intangibles, real
estate, equipment, life insurance policies, and certain pledged stock of a
wholly owned subsidiary. The financing agreement contains a number of
restrictive covenants, including covenants limiting incurrence of unsubordinated
debt, disposal of collateral, and the paying of dividends (except stock
dividends). The financing agreement contains no financial covenants.
The financing agreement is committed through November 6, 2004. Borrowings under
the credit agreement bear interest at an applicable bank rate or LIBOR plus two
and three-quarters percent (2.75%) per annum, payable monthly. The financing
agreement calls for a facility fee of $150,000 payable at execution of the
agreement, a fee on the unused commitment of 0.375% per annum payable monthly,
and an administrative fee of $36,000 per annum.
As a condition for closing on the finance agreement, the Company terminated its
prior credit agreement with a bank, whereby $7.5 million was available as a
revolving line-of-credit, subject to an aggregate sub-limit of $5.0 million for
issuance of letters of credit. This credit agreement was committed through
November 22, 2002. As of September 27, 2002, we had no borrowings outstanding
under this prior credit agreement and had established letters of credit of $2.4
million outstanding related to our workers' compensation programs and customer
obligations. The Company will continue to maintain these letters of credit with
the bank, and anticipates establishing an additional letter of credit of
$525,000 related to an equipment lease obligation. We will be required to
21
maintain cash deposits in the face amount of these letters of credit as
collateral. An additional letter of credit in the face amount of $600,000
related to increased requirements under our workers compensation policy will be
issued under the new financing agreement.
Our main source of liquidity is our cash on hand. We will continue to use cash
to fund operating losses anticipated in the next quarter, however we expect to
realize cash savings from ongoing restructuring initiatives. We intend to
continue our initiatives to achieve more cost-effective operations throughout
the remainder of fiscal year 2003, which is expected to result in additional
restructuring expenses in amounts that have not yet been determined. In
addition, based upon our recent operating losses, we expect to receive a federal
income tax refund of approximately $10.0 million during the quarter ended
December 27, 2002.
We believe that current cash and cash equivalents balances, our expected federal
income tax refund, as well as our new financing agreement discussed above will
be adequate to cover our operating cash requirements, restructuring costs and
the additional consideration for the acquisition of certain operations of PBN
over the next 12 months. However, we may find it necessary or desirable to seek
other sources of financing to support our capital needs and provide available
funds for working capital, or financing strategic initiatives, including
acquiring or investing in complementary businesses, products, services, or
technologies. Given the current status of the communications industry and its
impact on our near term financial results and the restrictions in the financing
agreement, we believe there are limited alternatives available as sources of
additional financing. Accordingly, any plan to raise additional capital would
likely involve equity-based financing, such as the issuance of common stock,
preferred stock, or unsubordinated convertible debt securities and warrants
under the Company's previously filed Registration Statement, which would be
dilutive to existing shareholders.
Accounting Changes and Accounting Pronouncement
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets" (Statement 142). Statement 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired in
a business combination) should be accounted for in financial statements upon
their acquisition. Statement 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Statement 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually. Statement 142 also requires
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121).
The Company adopted the provisions of Statement 142 effective June 29, 2002. In
connection with Statement 142's transitional goodwill impairment evaluation, the
Company is required to perform an assessment of whether there is an indication
that goodwill is impaired as of the date of adoption. To accomplish this, the
Company must identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as of the date
of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the carrying amount of the reporting unit. To the extent the carrying amount of
22
a reporting unit exceeds the fair value of the reporting unit, an indication
exists that the reporting unit goodwill may be impaired and the second step of
the transitional impairment test must be performed. In the second step, the
implied fair value of the reporting unit goodwill is compared with the carrying
amount of the reporting unit goodwill, both of which would be measured as of the
date of adoption. The implied fair value of goodwill is determined by allocating
the fair value of the reporting unit to all of the assets (recognized and
unrecognized) and liabilities of the reporting unit in a manner similar to a
purchase price allocation, in accordance with SFAS No. 141,"Business
Combinations." The residual fair value after this allocation is the implied fair
value of the reporting unit goodwill. This second step is required to be
completed as soon as possible, but no later than June 27, 2003. Any transitional
impairment loss will be recognized as the cumulative effect of a change in
accounting principle in our consolidated statement of operations in the quarter
ended December 27, 2002.
As of the date of adoption, the Company had unamortized goodwill in the amount
of $7.2 million and unamortized identifiable intangible assets in the amount of
$1.6 million that are subject to the transition provisions of Statements 142. As
part of adopting this standard, the Company is planning on obtaining an
independent appraisal to assess the fair value of the Company's business units
to determine whether goodwill and certain identifiable intangibles carried on
our books were impaired and the extent of such impairment, if any, as of the
date of adoption. The Company anticipates completing this independent appraisal
in the quarter ended December 27, 2002, and as such, has not yet determined the
impact of adopting Statement 142 on the financial statements at the date of this
report, including whether the Company will be required to recognize any
transitional impairment losses as the cumulative effect of a change in
accounting principle. For additional information and disclosures regarding
Statement 142, see Note 3.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (Statement 144), which supersedes both Statement
121 and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement 142.
The Company adopted Statement 144 effective June 29, 2002. The adoption of
Statement 144 for long-lived assets held for use did not have a material impact
on the consolidated financial statements. The provisions of Statement 144 for
assets held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" (Statement 146), which replaces Emerging
23
Issues Task Force No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." Statement 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
The provisions of Statement 146 are effective for exit or disposal activities
that are initiated after December 31, 2002.
24
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position,
results of operations, or cash flow of the Company due to adverse changes in
market prices, foreign currency exchange rates, and interest rates. The Company
is exposed to market risk because of changes in foreign currency exchange and
interest rates, and changes in the fair market value of its marketable
securities portfolios.
The Company is exposed to foreign currency exchange rate risks inherent in our
sales commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the United States dollar. As of June 28, 2002, the Company
had one outstanding foreign exchange forward contract in the notional amount of
80 million Euros. The Company was using this contract as an economic hedge of
the forecasted purchase price of PBN. SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," prohibits the use of hedge accounting for
forecasted transactions of a business combination. Therefore, the Company
recorded the fair value of the foreign exchange forward contract in the amount
of $1.6 million as a component of other income (expense), net in the
consolidated statements of operations as of June 28, 2002, based on quoted
market prices. This contract matured on August 21, 2002. As a result, a
reduction in the fair value of the contract at the time of settlement was
recorded during the quarter ending September 27, 2002 resulting in a loss of
$1.6 million.
The Company does not use derivative instruments in its marketable securities
portfolio. The Company classifies its investments in its marketable securities
portfolio as either available-for-sale or trading, and records them at fair
value. For the Company's available-for-sale securities, unrealized holding gains
and losses are excluded from income and are recorded directly to shareholders'
equity in accumulated other comprehensive income (loss), net of related deferred
income taxes. For the Company's trading securities, unrealized holding gains and
losses are included in the statement of operations in the period they arise.
Changes in interest rates are not expected to have a material adverse effect on
our financial condition or results of operations.
25
Item 4. Controls and Procedures
The Company's management is responsible for the preparation, integrity and
objectivity of the financial statements and other information presented in this
report. The financial statements of the Company have been prepared in accordance
with accounting principles generally accepted in the United States and reflect
certain estimates and adjustments by management. The Company's management
maintains a system of internal accounting controls and disclosure controls and
procedures which management believes provide reasonable assurance that the
transactions are properly recorded and the Company's assets are protected from
loss or unauthorized use.
The integrity of the accounting and disclosure systems are based on policies and
procedures, the careful selection and training of qualified financial personnel,
a program of internal controls and direct management review. The Company's
disclosure control systems and procedures are designed to ensure timely
collection and evaluation of information subject to disclosure, to ensure the
selection of appropriate accounting policies and to ensure compliance with the
Company's accounting policies and procedures.
Pursuant to Exchange Act Rule 13a-15, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and procedures as
defined in Exchange Act Rule 13a-14. Based upon that evaluation, as of November
5, 2002 the Chief Executive Officer and the Chief Financial Officer concluded
that the design and operation of the disclosure controls and procedures are
effective. No significant changes were made in the Company's internal controls
or in the other factors that could significantly affect these controls since
November 5, 2002 and there have been no corrective actions with regard to
significant deficiencies or material weaknesses.
Over the next 90 days, the Company, in conjunction with third party consultants,
will be performing a controls review of our Enterprise Resource Planning (ERP)
system that was implemented over the past six to nine months. The Company will
be performing a review of the database infrastructure and architecture,
administrative policies and procedures, configurations, and security as it
relates to the implementation of this ERP system. The objective of the review is
to provide an independent assessment of the control environment associated with
the Company's business information system.
26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The following exhibits are included herein:
(10) Financing Agreement dated November 7, 2002 by and among The CIT
Group/Business Credit, Inc., C-COR.net Corp., Broadband Capital
Corporation, Broadband Royalty Corporation, Broadband Management
Solutions, LLC and Broadband Network Services, Inc.
(15) Letter re: Unaudited Interim Financial Information.
(99)(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 135
(99)(a) Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 135
Reports on Form 8-K
On September 25, 2002, the Registrant filed a Form 8-K dated September 16, 2002,
reporting that on September 16, 2002, the Registrant completed its purchase of
certain assets of Philips Broadband Networks, under the terms and conditions
previously announced on July 8, 2002.
27
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 thereunto duly authorized.
C-COR.net Corp.
(Registrant)
Date: November 12, 2002 /s/ David A. Woodle
---------------------------------
Chief Executive Officer
Date: November 12, 2002 /s/ William T. Hanelly
---------------------------------
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2002 /s/ Joseph E. Zavacky
---------------------------------
Controller & Assistant
Secretary
(Principal Accounting Officer)
28
CERTIFICATIONS
I, David A. Woodle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of C-COR.net Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ David A. Woodle
----------------------------------
David A. Woodle
Chief Executive Officer
29
CERTIFICATIONS
I, William T. Hanelly, certify that:
1. I have reviewed this quarterly report on Form 10-Q of C-COR.net Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors:
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ William T. Hanelly
---------------------------------
William T. Hanelly
Chief Financial Officer
30