Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number: 0-10726
----------------
C-COR.net Corp.
(Exact name of Registrant as specified in its charter)
Pennsylvania 24-0811591
(I.R.S. Employer
(State or other jurisdiction of Identification No.)
incorporation or organization)
60 Decibel Road
State College, Pennsylvania 16801
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (814) 238-2461
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.05 par value
Series A Junior Participating Preferred Stock Purchase Rights
----------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [_]
As of August 31, 2000, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $656,166,069.
As of August 31, 2000, the Registrant had 34,040,523 shares of Common Stock
outstanding.
Documents Incorporated by Reference:
1)Proxy Statement dated September 13, 2000 (Part III)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
Item 1. Business
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, statements regarding the ability of C-COR.net Corp. (the
Company or we) to provide complete network solutions, the demand for network
integrity, the trend toward more fiber in the network, the Company's ability to
develop new and enhanced products, global demand for the Company's products and
services, and statements relating to the Company's business strategy. Forward-
looking statements represent the Company's judgment regarding future events.
Although the Company believes it has a reasonable basis for these forward-
looking statements, the Company cannot guarantee their accuracy and actual
results may differ materially from those the Company 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, the Company's ability to
develop new and enhanced products, continued industry consolidation, the
development of competing technology, and the Company's ability to achieve its
strategic objectives. For additional information concerning these and other
important factors which may cause the Company's actual results to differ
materially from expectations and underlying assumptions, please refer to the
reports filed by the Company with the Securities and Exchange Commission.
Introduction
We design, manufacture and market network transmission products and provide
services and support to information service providers. Our principal customers
are the largest cable operators in the United States, such as AT&T Broadband,
Time Warner Cable, Adelphia Communications, Charter Communications, Cox
Communications and Comcast, many smaller domestic cable operators, companies
building new broadband networks in the United States, and several international
cable operators. Our customers primarily operate hybrid fiber coax (HFC)
networks for delivering video, voice and data services to homes and businesses.
We offer a comprehensive range of products, including RF (radio frequency)
amplifiers, and fiber optic equipment for the network headend, node and RF
plant. Our services focus on enabling and supporting reliable, high-speed
broadband communications over HFC networks. These services include network
management and enabling services, high-speed data certification, system
integration services, data security solutions, network engineering and design,
system activation, network optimization, and system maintenance.
Our core strategy is to leverage our 47-year reputation for quality and
service, our strong customer relationships, and our extensive installed base of
transmission equipment to provide a broad line of flexible, reliable and cost-
effective network products and service solutions. To meet the strategic
objective of delivering both a comprehensive line of equipment and the network
services that our customers require across the entire HFC network, we completed
four acquisitions during fiscal year 2000.
On July 9, 1999, we acquired Convergence.com Corporation (Convergence). The
acquisition of Convergence has enabled us to offer an integrated package of
network management and application enabling services and products.
On September 17, 1999, we acquired Silicon Valley Communications, Inc. (SVCI).
This acquisition has enabled us to broaden and strengthen our network
transmission product offering by adding advanced fiber optic products to our
existing RF and fiber optic equipment.
On January 28, 2000, we acquired Advanced Communications Services, Inc. (ACSI)
and on February 18, 2000, we acquired Worldbridge Broadband Services, Inc.
(Worldbridge). These acquisitions have expanded our customer and geographic
base in providing engineering and technical services to the broadband industry.
1
Our headquarters are in State College, Pennsylvania. We have production and
service facilities in State College and Tipton, Pennsylvania; Tijuana, Mexico;
Santa Clara and Riverside, California; Suwanee, Georgia; and Lakewood,
Colorado. We also maintain offices in Almere, The Netherlands, and Hong Kong.
Industry Overview
HFC networks consist of a headend where information is received from a
satellite, Internet gateway or telephony network, a transmission infrastructure
that distributes the signal throughout the network and connections from the
transmission network to the subscribers. Historically, these systems offered
one-way only video service. Recently, the cable industry, like other segments
of the communications industry, has been undergoing substantial change as a
result of:
. deregulation that allows competition among communications companies,
including wireline and wireless telephone companies and cable operators,
for communications services;
. demand by consumers for two-way, high-speed broadband communications to
accommodate Internet, telephony and other new information services; and
. the need to customize services for specific customers, thereby requiring
flexible and easy-to-configure networks.
For the cable television industry, these factors are resulting in:
. upgrades to existing cable networks to provide two-way, interactive
broadband services that will allow cable operators to compete against
other broadband communications technologies, including digital
subscriber line (DSL), local multichannel distribution service (LMDS),
and direct broadcast satellite (DBS);
. greater utilization of fiber optic technology, such as dense wave
division multiplexing (DWDM), in the cable network;
. consolidation among cable operators driven by the increased capital
requirements to implement system upgrades;
. investments in cable operators by non-cable operators in an effort to
compete for both new and existing services and to provide a full range
of communication services;
. entry of new, well-capitalized companies building advanced HFC networks
that offer alternative access to business and residential users;
. increased demand for more flexible and reliable cable networks to
support the new services being offered; and
. demand for more sophisticated network management products to address
quality of service requirements and to support access by multiple
information service providers.
Strategy Overview
Our core business strategy is to leverage our 47-year legacy in the broadband
communications industry for quality and service, our strong customer
relationships, and our extensive installed base of network transmission
equipment to provide a full line of flexible, reliable and cost-effective HFC
network solutions. We are seeking to implement this strategy through both
internal development of new products and services as well as acquisitions.
Specific aspects of our strategy include:
Providing a Comprehensive HFC Network Product Line. We offer a full range of RF
and fiber optic distribution electronics to transmit signals in both directions
over HFC networks from "the headend to the curb." We have ongoing initiatives
to broaden our product line to capture the additional investment being made by
HFC network operators. For example, our September 1999 acquisition of SVCI
added advanced fiber optic headend equipment and optical transmitters,
receivers and amplifiers to our legacy product lines. In addition,
2
over the past year we have introduced new versions of our NAVICOR(TM) and
FlexNet(R) product lines with features designed for international markets. We
have also introduced new versions of our NAVICOR product line tailored for the
emerging domestic market for advanced HFC networks being deployed by new
network operators.
Leveraging an Extensive Installed Base of Equipment for Upgrade and Rebuild
Sales. We are leveraging our large installed base of transmission equipment in
our customers' networks through upgrades, rebuilds and node size reductions. We
provide a cost-effective upgrade path for our customers to upgrade existing
components of installed products rather than purchasing all new equipment.
Providing Network Management Services to Enhance Network Integrity. The
requirement for HFC network integrity and reliability has become much greater
as network traffic and complexity have grown and as networks have become
increasingly used for critical communications, such as telephony and electronic
commerce. Current approaches to managing HFC networks, however, focus on
monitoring limited, individual elements of the network, such as the cable modem
or power supplies. In contrast, our network management software and Network
Operations Center provide a comprehensive, proactive view of the network from
the set top box and/or modem to the headend. We are continuing to enhance and
expand our network management services to address the various types of
equipment and the unique characteristics of the different information types
that will be delivered over future HFC networks.
Delivering Total Network Solutions to Meet the Emerging Broadband Needs of HFC
Network Operators. We are able to offer a broad network solution to HFC network
operators by delivering both a comprehensive line of equipment and the network
services that they require across the entire HFC network. We design the network
to enhance reliability, deliver the equipment and software, furnish
installation and activation services, and provide ongoing network management
and support services.
Increasing International Sales. We are currently supplying products and
services to a number of international customers, including cable operators in
Canada, Europe, and Asia. In an effort to increase international sales, we are
expanding our international distribution channels and providing localized
versions of our products. With our broadened product and services offering, we
are supplying comprehensive network solutions to network operators in various
international markets who generally prefer to purchase products and services
from suppliers offering a more complete product line.
Increasing Domestic Sales to New Network Operators. We are currently pursuing
opportunities with a number of new companies that are building advanced HFC
networks in metropolitan areas across the United States. Unlike our traditional
customers that are upgrading legacy networks that were originally designed for
one-way transmission of video signals, these new customers are implementing new
networks designed for high-speed bidirectional traffic. We are modifying our
NAVICOR product line accordingly. In addition, we are offering to outsource our
full capability of technical services and network management to these new
customers who do not have established technical work forces.
Products and Services
We provide products and services through two business segments in support of
our customers as they plan, design, build and maintain complex broadband
communications networks.
Our Telecommunications Equipment segment offers high-quality RF and fiber optic
transmission electronics for two-way HFC networks.
Our Broadband Management Services (BMS) segment offers comprehensive customer
service for the full HFC network life cycle. These services include network
management services, high-speed data certification, system integration
services, data security solutions, network engineering and design, system
activation, network optimization, and system maintenance.
See Note S to the consolidated financial statements for financial information
relating to each of these segments for fiscal years 2000, 1999 and 1998.
3
Telecommunications Equipment Segment
An HFC network connects a central information source, typically referred to as
the headend, to individual residential users through a physical plant of fiber
optic and coaxial cables and a variety of electrical and fiber optic devices
that transmit, receive, modulate and amplify the signals as they move through
the network. A typical HFC network consists of three major segments: the
headend, the node and the RF plant. We offer a comprehensive range of products
for each of these segments.
Headend Equipment
The headend receives information from a satellite transmission, Internet
gateway, telephony network or other source and converts this information to
laser modulated optical signals for transmission across the network. Larger
networks feature both primary headends and a series of secondary headends or
hubs. We offer a broad range of headend equipment that features advanced
technology, such as DWDM, allowing multiple signal wavelengths to be
transmitted on one fiber across the network. This increases the volume of
information that can be conveyed over the network. It also allows network
operators flexibility in tailoring content for individual subscribers by
dedicating certain wavelengths to that content, such as video on demand.
Nodes
The general function of the node in the HFC network is to convert information
from optical signals to RF signals for distribution to the home. We offer the
NAVICOR family of node products that are upgradeable, scalable, modular and
fully integrated with our RF amplifiers. These features allow RF amplifiers to
be upgraded to nodes and simple nodes to be upgraded to telecommunication nodes
with narrowcasting and redundant configurations. Narrowcasting refers to
customizing content for certain subscribers by dedicating fibers or wavelengths
to that content. We have designed the optical components of the nodes to fit
into the lid, or cover, of the amplifier housing so that upgrades from
amplifiers to nodes are easily accomplished by replacing the lid. In addition
to offering the "fiber in the lid" upgrade product, in September 1999 we
introduced new node products, the Mux Node and the Mini Node, designed for
relatively small node sizes of 50 to 250 homes. In December 1999, we
demonstrated digital return technology in our nodes that enhances the return
path capacity of a network.
RF Plant
The RF plant comprises products that transmit information between the nodes and
subscribers. These products are essentially RF amplifiers that come in various
configurations such as trunks, bridgers and line extenders. A trunk amplifier
handles a large amount of information in a network when the node size is
greater than 500 homes. A bridger splits the signal to send it to a greater
number of destinations. Line extenders move the information to the home.
4
The following table summarizes our major products and their primary functions
and features:
Network
Segment Products Functions and Features
- ----------------------------------------------------------------------------------------------------
Headend Universal Chassis . houses components of the headend equipment
. features modular one and three rack design
. compact design maximizes limited headend rack
space
--------------------------------------------------------------------------------------
1310 nm and 1550 nm . convert RF signals to laser modulated optical signals
Transmitters . incorporate predistortion and linearization technology
. satisfy primary channel requirements for North
America, Latin America and parts of Asia and Europe
--------------------------------------------------------------------------------------
Erbium Doped Fiber . used to amplify optical signals
Amplifiers (EDFAs) . suitable for wave division multiplexing (WDM)
and DWDM
. used for both analog and digital applications
--------------------------------------------------------------------------------------
Forward Path Receiver . converts optical signals to RF signals
. features low noise contribution for clear signal
conversion
--------------------------------------------------------------------------------------
Return Path Transmitter . conveys digital and video return path signals
. used for data monitoring and other interactive
applications
--------------------------------------------------------------------------------------
Dual Return Path Receiver . plug-in module that includes two independent
return path receivers
. receives digital and video return path signals
- ----------------------------------------------------------------------------------------------------
Nodes NAVICOR Quadrant . provides four optical transmitters and four optical
Node/Bridger receivers
. includes a variety of reverse path transmitters for
data, telephony and video services
. modular design increases operating flexibility
--------------------------------------------------------------------------------------
NAVICOR FlexNet Nodes . can be configured with single or dual optical
receivers and transmitters
. available in cost effective version for less complex
networks
--------------------------------------------------------------------------------------
Node Return Path . available in Fabry-Perot and distributed feedback
Transmitters versions for analog and digital applications
--------------------------------------------------------------------------------------
Mux Node . scalable, bi-directional fiber optic network device
. used to transmit and receive fiber optic signals to up
to twelve Mini Nodes.
--------------------------------------------------------------------------------------
Mini Node . a high output receiver that replaces many of the
amplifiers in the network
. designed to serve approximately 50-to-100 homes
. features multiple forward and reverse paths that
support analog video, digital video, high-speed
data and telephone applications
--------------------------------------------------------------------------------------
I-Flex(R) II Node . cabinet-mount, modular design with two or three
active outputs
. single or dual forward path receivers and reverse
path transmitters
. optional I-Flex II standards--compliant transponder
for element management capability
5
Network
Segment Products Functions and Features
- -----------------------------------------------------------------------------------------------
RF Plant FlexNet Trunk . high performance, high capacity amplifier with three
outputs
. field upgradeable to a node
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------
FlexNet Terminating . amplifier with two distribution outputs
Bridger . field upgradeable to a node
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------
NAVICOR and FlexNet . used to transmit information at the end of the line to
Line Extenders subscribers
. available in 750 and 862 MHz bandwidth versions
---------------------------------------------------------------------------------
I-Flex II Bridger . cabinet-mount, two or three active outputs
. high performance, high capacity, 862 MHz bandwidth
. flexible reverse path capability
. upgradable to I-Flex II node
---------------------------------------------------------------------------------
I-Flex Line Extender . cabinet-mount, end-of-line amplifier used with I-Flex
nodes and bridgers
. available in 862 MHz bandwidth
New HFC Products and Developments include:
New Product Capabilities Specific to the International Market. In December
1999, we enhanced our NAVICOR and FlexNet product lines with a 55/70 split at
862 MHz. The frequency split is the demarcation between forward channels and
reverse bandwidth. The 55/70 frequency split meets the requirements of the
Asian market.
Digital Return Technology. In December 1999, we demonstrated digital return
technology in our NAVICOR nodes and headend products at a major industry show.
Digital return technology replaces conventional high-performance Distributed
Feedback (DFB) laser technology with a lower cost, but equal-performing digital
grade laser. In March 2000, we entered into an agreement with Finisar
Corporation to develop a set of fiber optics-based products for active or
passive broadband HFC networks that will enhance and facilitate the
transmission of the return-path signals using digital technology. We anticipate
these products will be available in fiscal year 2001.
Standards-Based Network Management Equipment. In June 2000, we reached an
agreement in principle with SilCom Manufacturing Technology Inc. to jointly
design and develop a transponder for our I-Flex Fiber Node product line that is
compatible with proposed HMS (Hybrid Management Sub-Layer) standards. As an
original member of the SCTE (Society of Cable Telecommunications Engineers)
Subcommittee defining the HMS protocol suite to support cost effective
interoperability of HFC network management systems, we have played an active
role in drafting the HMS standards now under evaluation by the Subcommittee.
The HMS-compatible I-Flex II Node will be designed and implemented to migrate
to final SCTE standards using a simple software upgrade.
New Circuit Technique. In June 2000, we announced we had developed and applied
for a patent on a new circuit technique, Transfer Linearization(TM), to improve
the linear characteristics of standard silicon technology hybrids (active
amplifier components of fiber optic nodes and RF amplifiers) while maintaining
the reliability of silicon. We anticipate that, by implementing Transfer
Linearization, broadband system operators will realize the advantages of lower
distortion and higher operating levels and channel capacities with little
additional power consumption.
6
1310 nm TA Series Transmitters. In June 2000, we introduced a new line of
advanced 1310 nm headend forward path transmitters within the NAVICOR family of
RF fiber optic products. The TA series of 1310 nm transmitters are designed
specifically to meet the high performance requirements needed to maintain the
reliability and integrity of broadband networks as they deliver multiple
services.
Broadband Management Services Segment
We offer the broadband network operator a broad array of products and services
to support the implementation, operation and management of reliable, multi-
application networks with high integrity. Our BMS segment enables and manages
new service applications over HFC networks, offering network management and
enabling services, high-speed data certification, system integration services,
data security solutions, network engineering and design, system activation,
network optimization and system maintenance.
Specific BMS products and services include:
COR-ConvergenceTM. COR-Convergence is a multi-layered, scalable and integrated
communications management system supporting end-to-end element, network,
service and business management functions for broadband networks that handle
multiple consumer services such as telephony, high-speed data and/or video.
Specific capabilities provided by COR-Convergence include, but are not limited
to, real-time device monitoring, auto-provisioning, plant management, QoS
(Quality of Service) management and root cause analyses.
COR-ConnectTM. A component of COR-Convergence, COR-Connect is a platform also
sold as a stand-alone product. The unit provides software translation for
converting between network protocols, thereby allowing standards-based or
proprietary host systems to communicate with various standards-based or
proprietary network elements.
CNMTM (Cable Network Manager) System. A component of COR-Convergence, the CNM
System is also sold as a stand-alone product. The PC-based CNM supports
proactive management of network performance, reliability and quality with
specific functions in the areas of fault management, change control, directed
maintenance, network performance and facilities management.
COR.LaunchSM. We provide High-Speed Data (HSD) end-to-end launch services from
design through deployment. Services include project management, requirements
analyses, system design, development and integration, RF/CMTS certification
using sweep and balance techniques, and traffic analysis and planning.
COR.CallSM. We provide a 24X7 High-Speed Data (HSD) Help Desk Service via a
toll-free number for cable modem or dial-up subscribers of broadband network
operators. Customer Help Desk support includes OS connectivity support, web
browser support and configuration, mail client support and configuration, FTP
access and client support, new user install assistance, end-user Home Page
assistance, account creation and management, return-call support, dispatch
services for market escalations, and modem provisioning and management
services.
COR.NOCSM. Our Network Operations Center (NOC), near Atlanta, Georgia, provides
24X7 outsourced monitoring and management for the broadband operator's network
equipment and services. NOC support includes network monitoring, remote
management, troubleshooting, and fault isolation and reporting, all using
state-of-the-art tools.
Outsourced Operational Services. We provide customers full outsourcing services
in handling field operations, including technical management, system
maintenance, customer service calls and installation activity. All field
operations are managed and performed to predetermined standards and technical
metrics.
Outside Plant Services. We provide hands-on technical services performed in the
customer's plant. These are highly complex tasks largely centered on the
conversion of the cable operator's plant from a one-way analog
7
video medium to a two-way, fully interactive broadband pipe, and the continuing
operation of it as such. Among the services provided are system sweep, reverse
path activation, ingress mitigation, node certification, plant hardening, cable
testing, cable repair, system maintenance, contract service calls, process
design, personnel development and training, and network construction.
Network Systems Integration (Inside Plant) Services. We provide systems
integration and installation services for data, telephony and digital video
platforms to network operators and network equipment manufacturers. We also
provide consulting services that include process design advisory services, SPC
(Statistical Process Control) system design, network design and specification
consulting. Our Network Systems Integration technicians perform hands-on
services covering "rack and stack" final assembly and deployment of Cable Modem
Termination Systems, DWDM lasers, and HFC telephony systems, among others.
Significant Customers
During the past fiscal year, our customers have included almost all of the
largest cable system operators in the United States. Our largest customers
during fiscal year 2000 were AT&T, Time Warner Cable and Adelphia, accounting
for 19%, 19%, and 13%, respectively, of net sales. Our largest customers during
fiscal year 1999 were Time Warner Cable and AT&T, which accounted for 27% and
15%, respectively, of net sales. Our largest customer during fiscal year 1998
was Time Warner Cable, which accounted for 30% of net sales. All of these
principal customers purchase both products and services.
Sales and Distribution
Our sales and distribution function is organized into two major global regions:
the first covering the Americas; the second covering the EuroPacific area.
Cross-functional account teams focused on specific customers or groups of
customers support our sales and distributions efforts.
Sales efforts are conducted from our headquarters; from offices in the
Netherlands, Hong Kong, Canada and Latin America; from regional sales offices
located in the United States; and through numerous distributors around the
world.
We sell our products and services in the United States through our direct sales
force, which is organized both geographically and by customer account teams. We
approach our customers at both the corporate and system levels. A highly
qualified technical staff supports our sales force. They work closely with
customers to design systems, develop technical proposals and assist with
installation and post-sale support.
International sales in Canada, Europe, Asia and Latin America are made through
our direct sales force and through distributors.
Additionally, we provide 24x7 technical support, both directly and through
distributors, as well as training for customers and distributors, as required,
both in our facilities and on-site.
Our marketing function develops strategies for product lines and, in
conjunction with the sales force, identifies evolving technical and application
needs of customers. The marketing function is also responsible for demand
forecasting and general support of the sales force, particularly at major
accounts.
For fiscal year 2000, our international sales represented 11% of net sales. In
fiscal years 1999 and 1998, international sales were 10% and 19%, respectively,
of net sales. See Note S to the consolidated financial statements.
Backlog
We schedule production of our products based on our backlog, informal
commitments from customers and sales projections. Our backlog consists of firm
orders by customers for delivery within the next 12 months. At
8
June 30, 2000, our backlog of orders was $89.3 million including $61.3 million
for the Telecommunications Equipment segment and $28.0 million for the BMS
segment. At June 25, 1999, our backlog of orders was $73.0 million, including
$57.2 million for the Telecommunications Equipment segment and $15.8 million
for the BMS segment. At June 26, 1998 our backlog of orders was $31.0 million,
including $25.1 million for the Telecommunications Equipment segment and $5.9
million for the BMS segment.
Anticipated orders from customers may fail to materialize and delivery
schedules may be deferred or canceled for a number of reasons, including
reductions in capital spending by network operators. In addition, due to
weather-related seasonal factors and annual capital spending budget cycles of
many customers, our backlog may not necessarily be indicative of actual sales
for any succeeding period.
Research and Product Development
We operate in an industry that is subject to rapid changes in technology. Our
ability to compete successfully depends in large part upon anticipating such
changes. Accordingly, we engage in ongoing research and development activities
that are intended to advance existing product lines, provide custom-designed
variations of existing product lines and develop or evaluate new products.
Research and development activities are conducted at our headquarters and at
our facilities in Santa Clara, California, and Suwanee, Georgia.
Our product planning teams, which take input from account teams and research
engineers, assign product development priorities and develop an overall product
plan. Cross-functional project teams, coordinated by a program manager then
implement the product plan.
During the past fiscal year, research and product development expenditures were
primarily directed at expanding our fiber optic technology and network
management systems. We also continued with product development process
improvements to reduce cycle time to design, develop and deliver new products,
reduce manufacturing costs and improve design quality.
During fiscal years 2000, 1999 and 1998, we spent approximately $16.0 million,
$11.8 million and $10.0 million, respectively, on research and development.
Anticipated product development initiatives focused on fiber optics, network
management and other technology areas are expected to result in increased
research and development expense in future years. No research and product
development expenditures mentioned above have been capitalized.
Competition
The broadband communications markets are dynamic and highly competitive,
requiring substantial resources of those companies that compete in these
markets, skilled and experienced personnel and a capability to anticipate and
capitalize on change. Our Telecommunications Equipment segment competes with
other companies including Motorola's Broadband Communications Sector (formerly
General Instrument Corporation), Scientific-Atlanta, Antec, Harmonic and ADC
Telecommunications, some of which are large publicly traded companies that may
have greater financial, technical and marketing resources than we do.
Our products are marketed with emphasis on their quality and are generally
priced competitively with other manufacturers' product lines. Product
reliability and performance, technological innovation, responsive customer
service, breadth of product offering, and pricing are several of the key
criteria for competition.
There are several competing vendors offering network management products and
services in the United States, some of which have greater sales of similar
products and services than we do. However, we believe that we offer a more
integrated solution that is tailored to the requirements of HFC network
operators. We also believe that our work force of broadband technicians is
among the largest in the United States and provides a competitive advantage.
9
Employees
We had approximately 2,200 employees as of August 2000.
Suppliers
We closely monitor supplier delivery performance and quality, and employ a
strategy of limiting the total number of global suppliers to those who are
quality leaders in their respective specialties and who will work with us as
partners in the supply chain. Typical items purchased are die cast aluminum
housings, RF hybrids, printed circuit boards, fiber optic lasers and standard
electronic components. Although a few of the components we use are single-
sourced, we have experienced no significant difficulties to date in obtaining
adequate quantities of raw materials and component parts.
We use in-house vendor supply relationships to gain access to key parts needed
in the manufacturing process on a "just-in-time" basis. We have implemented a
number of in-house vendor supply relationships to date and will continue to
establish such relationships in the future in order to decrease vendor lead
times and reduce on-hand inventory.
We outsource the manufacture of certain assemblies and modules where it is
cost-effective to do so or where there are advantages with respect to delivery
times. Current outsourcing arrangements include power supplies, accessories,
optical modules and digital return modules. We also outsource the manufacture
of products in Europe to reduce logistics costs and improve delivery times. We
anticipate further outsourcing initiatives in the future.
Strategic Partnerships
We have entered into strategic agreements with various technology partners to
enhance our fiber optic capabilities, to further development of our network
management systems and to expand globally.
In the area of fiber optics, we have entered into an agreement with Finisar
Corporation, a leading provider of optical and digital integration technology,
to co-develop a set of fiber optics-based products for two-way HFC networks
that provide digital return functionality to improve network performance,
economics and capacity. In addition, JDS Uniphase is working with us through an
OEM agreement to incorporate JDS fiber-optic lasers into our headend product
line.
In the area of network management, our alliances with Fortress Technologies
Inc., SilCom Manufacturing Technology Inc., and Interactive Enterprise Ltd.
have significantly enhanced our branded BMS product offerings: COR.NOC, our NOC
near Atlanta, Georgia, and COR-Convergence, our communications management
system for broadband networks. Fortress Technologies is providing us with
advanced security solutions for broadband networks. SilCom is working with us
on emerging industry standards-based hardware and software technology for
network element management. Interactive Enterprise is contributing a software-
based mediation platform that enables, among other network management
functions, the auto-provisioning of cable modems. All address key network
management concerns of our customer base of network operators.
To facilitate our expansion in the international markets, we are partnering
with Filtronic plc, an international electronics company, to cost-effectively
design and manufacture amplifiers and nodes tailored to the European market.
Intellectual Property
We hold 14 United States patents for various inventions relating to fiber optic
and RF transmission equipment and technology, and network management techniques
and services. We attempt to protect our intellectual
10
property through patents, trademarks, copyrights and a program of maintaining
certain technology as trade secrets.
Item 2. Properties
We operate the following principal facilities:
Approximate (O)Owned
Location Principal Use Square Feet (L)Leased
- -------- ------------- ----------- ---------
State College,
Pennsylvania........... Administrative Offices and Manufacturing 133,000 O
Tipton, Pennsylvania.... Manufacturing 45,000 O
Tijuana, Mexico......... Manufacturing 89,400 L
Santa Clara,
California............. Development Engineering and Manufacturing 24,500 L
Suwanee, Georgia........ Network Operations Center 13,650 L
Lakewood, Colorado...... Administrative Offices 4,510 L
Riverside, California... Administrative Offices 4,023 L
Almere, The
Netherlands............ Administrative Offices 5,100 L
On June 25, 1998, we announced the closing of our manufacturing plant located
in Reedsville, Pennsylvania, in order to reduce costs and improve productivity
and asset utilization. On August 10, 1998, we purchased the facility, which is
currently being held for sale.
We are approved for ISO 9001 registration at our Pennsylvania and Tijuana
manufacturing facilities. ISO 9001 is the most comprehensive of all ISO 9000
series requirements and includes quality assurance in design, development,
production, installation and servicing. Criteria for registration are set by
the International Organization for Standardization, whose function is to
develop global standards in an effort to improve the exchange of goods and
services internationally. This designation builds on our reputation as a high-
quality, global provider of transmission electronics.
Item 3. Legal Proceedings
None
11
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2000.
Executive Officers of the Registrant
All executive officers of the company are elected annually at the Annual
Meeting of the Board of Directors (which is normally held on the date of the
Annual Meeting of Shareholders of the Company) to serve in their offices for
the next succeeding year and until their successors are duly elected and
qualified. The listing immediately following this paragraph gives certain
information about our executive officers, including the age, present position
and business experience during the past five years.
Name Age Position/Experience
---- --- -------------------
Richard E. Perry.......... 70 Chairman since June 1986; Chief Executive
Officer from July 1985 to August 1996, and from
March 1998 to July 1998.
David A. Woodle........... 44 President and Chief Executive Officer since
July 20, 1998. General Manager-Strategic
Systems of Raytheon Systems Company, a company
providing computer systems integration services
to government and commercial customers, from
January 1998 to July 1998; Vice President and
General Manager, Raytheon E-Systems, HRB
Systems from June 1996 to January 1998; VP,
Strategic Programs and TMS, Raytheon E-Systems,
HRB Systems from October 1990 to June 1996.
Mary G. Beahm............. 40 Vice President--Human Resources since November
1998; Human Resources Consultant, Westinghouse
Electric Corporation, a company providing
products and services to government and
commercial industries, from August 1987 to
November 1998.
David J. Eng.............. 47 Sr. Vice President--Americas Business , since
February 2000; Sr. Vice President--Worldwide
Sales from March 1997 to February 2000; Vice
President--Sales, North, Central and South
America from August 1996 to March 1997; Vice
President--Sales & Marketing from August 1994
to August 1996.
Lawrence R. Fisher, Jr. .. 50 Vice President--Science and Technology since
July 1999. Vice President--Engineering from
August 1996 to July 1999; Director, RF
Engineering Product Development from June 1995
to July 1996.
William T. Hanelly........ 44 Vice President--Finance, Secretary and
Treasurer since October 1998; Regional
Controller, Raytheon E-Systems, a company
providing computer systems integration services
to government and commercial customers, from
May 1998 to October 1998; Vice President--
Finance, HRB Systems from June 1994 to May
1998.
Donald F. Miller.......... 58 Vice President--Operations & Manufacturing
since August 1995.
Gerhard B. Nederlof....... 52 Sr. Vice President--EuroPacific Business since
February 2000; Sr. Vice President--Broadband
Management Services from July 1999 to February
2000; Sr. Vice President--Marketing from
September 1998 to July 1999; Sr. Vice
President--Marketing, Business Development and
Services from March 1997 to September 1998;
Vice President--Sales, Europe and Pacific Rim
from August 1996 to March 1997; Vice
President--International from January 1992 to
August 1996.
12
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
The Company's common stock is traded on The Nasdaq Stock Market's National
Market System. The Nasdaq symbol is CCBL. The range of high and low price
information as reported by Nasdaq follows:
High Low
------ ------
1999
Quarter ended
September 30, 1998........................................... $ 9.63 $ 5.66
December 31, 1998............................................ $ 7.75 $ 5.00
March 31, 1999............................................... $ 9.75 $ 6.97
June 30, 1999................................................ $14.72 $ 8.56
2000
Quarter ended
September 30, 1999........................................... $18.13 $10.81
December 31, 1999............................................ $41.64 $14.13
March 31, 2000............................................... $51.63 $21.38
June 30, 2000................................................ $48.50 $19.50
We have never paid a dividend. As of June 30, 2000, there were 638 shareholders
of record of common stock.
In connection with the acquisition of Worldbridge on February 18, 2000, the
Company issued 1,603,584 shares of the Company's common stock (including
160,356 shares that were issued into escrow). These securities were issued in a
private placement pursuant to Section 4(2) of the Securities Act of 1933, as
amended. As required under the merger agreement, a registration statement
covering the resale of shares issued to former Worldbridge shareholders, has
been declared effective by the Securities and Exchange Commission.
13
Item 6. Selected Financial Data
Selected Financial Data
(in thousands except per share data)
Historical(/1/)
---------------
June 30, June 25, June 26, June 27, June 28,
Fiscal Year Ended 2000 1999 1998 1997 1996
- ----------------- -------- -------- -------- -------- ---------------
Statement of operations
data:
Net sales................ $281,135 $202,168 $169,852 $144,988 $139,539
Income (loss) from
continuing operations
excluding non-recurring
charges................. 17,903 (704) 434 1,284 9,014
Income (loss) from
continuing operations... 14,461 (704) 40 1,284 9,014
Loss from discontinued
operations.............. -- -- -- (6,605) (3,095)
Gain (loss) from disposal
of discontinued
operations.............. 1,063 397 928 (3,830) --
Net income (loss)........ 15,524 (307) 968 (9,151) 5,919
Net income (loss) per
share--basic(/2/)
Continuing operations
excluding non-
recurring charges..... $ 0.60 $ (0.06) $ 0.02 $ 0.05 $ 0.47
Continuing operations.. 0.48 (0.06) -- 0.05 0.47
Discontinued
operations............ -- -- -- (0.28) (0.16)
Disposal of
discontinued
operations............ 0.04 0.02 0.04 (0.17) --
Net income (loss) per
share--basic............ 0.52 (0.04) 0.04 (0.40) 0.31
Net income (loss) per
share--diluted(/2/)
Continuing operations
excluding non-
recurring charges..... $ 0.53 $ (0.06) $ 0.02 $ 0.05 $ 0.46
Continuing operations.. 0.43 (0.06) -- 0.05 0.46
Discontinued
operations............ -- -- -- (0.25) (0.16)
Disposal of
discontinued
operations............ 0.03 0.02 0.04 (0.15) --
Net income (loss) per
share--diluted.......... 0.46 (0.04) 0.04 (0.35) 0.30
Weighted average common
shares and common share
equivalents(/2/)
Basic.................. 30,039 22,483 22,503 23,197 19,109
Diluted................ 33,968 22,483 22,503 25,929 19,737
Balance sheet data (at
period end):
Working capital.......... $189,299 $ 36,082 $ 31,696 $ 35,591 $ 35,452
Total assets............. 273,039 109,180 90,160 88,721 77,278
Total long-term debt
obligations............. 1,752 7,992 9,348 8,532 8,030
Shareholders' equity..... 227,658 61,265 60,933 55,976 53,317
- --------
(/1/)The information presented for fiscal year ended June 28, 1996, is derived
from the historical consolidated financial statements of C-COR.net Corp.,
and has not been restated for the fiscal year 2000 mergers.
(/2/)Net income (loss) per share amounts and weighted average common shares and
common share equivalents have been adjusted to reflect a 2-for-1 stock
split effective December 22, 1999.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We design, manufacture and market network transmission products and provide
services and support to HFC network operators. We operate in two industry
segments; the Telecommunications Equipment segment which provides a
comprehensive range of products, including RF amplifiers and fiber optic
equipment for the network headend, node and RF plant; and the Broadband
Management Services segment which focuses on enabling reliable, high-speed,
broadband communications over HFC networks and includes network management and
enabling services, high-speed data certification, system integration services,
data security solutions, network engineering and design, system activation,
network optimization, and system maintenance.
Business Combinations
Pooling of Interests. During fiscal year 2000, the Company consummated three
acquisitions which were accounted for under the pooling-of-interests method of
accounting.
On July 9, 1999, we consummated a merger with Convergence, whereby Convergence
became a wholly owned subsidiary of the Company. As consideration in the
merger, the outstanding shares of common stock of Convergence were converted
into 2,866,646 shares of the Company's common stock. Outstanding warrants to
acquire Convergence common stock were converted into warrants to acquire an
aggregate of 733,860 shares of the Company's common stock.
On September 17, 1999, we consummated a merger with SVCI, whereby SVCI became a
wholly owned subsidiary of the Company. As consideration in the merger, the
outstanding shares of common stock of SVCI were converted into 3,090,162 shares
of the Company's common stock (including 350,418 shares that were issued into
escrow). Outstanding stock options and warrants to acquire SVCI common stock
were converted into stock options and warrants to acquire an aggregate of
767,688 shares of the Company's common stock.
On February 18, 2000, we consummated a merger with Worldbridge, whereby
Worldbridge became a wholly owned subsidiary of the Company. As consideration
in the merger, the outstanding shares of common stock of Worldbridge were
converted into 1,603,584 shares of the Company's common stock (including
160,356 shares that were issued into escrow). Outstanding stock options to
acquire Worldbridge common stock were converted into stock options to acquire
an aggregate of 196,416 shares of the Company's common stock.
We recorded one-time charges of $9.0 million related to the business
combinations with Convergence, SVCI and Worldbridge during fiscal year 2000.
The one-time charges include merger transaction and other related 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. At June 30, 2000, a liability of $489,000 related to these
business combination costs is included in accrued liabilities.
Asset Purchase. On January 28, 2000, a wholly owned subsidiary of the Company
purchased substantially all of the assets of ACSI for $3.6 million. As a result
of the acquisition, we recorded goodwill in the amount of $2.5 million related
to the excess of the purchase price over the fair value of the net assets
acquired. The goodwill is being amortized on a straight-line basis over ten
years. We did not assume any material liabilities of ACSI in the transaction.
15
Results of Operations
The Company's consolidated statements of operations from continuing operations
for fiscal years 2000, 1999, and 1998 as a percentage of net sales, are as
follows:
Year Ended
---------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Net sales...................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 74.2% 75.3% 79.0%
----- ----- -----
Gross margin................................... 25.8% 24.7% 21.0%
Operating expenses:
Selling and administrative................... 11.1% 16.0% 14.5%
Research and product development............. 5.7% 5.9% 5.9%
Merger and restructuring costs............... 3.2% 0.0% 0.3%
----- ----- -----
Total operating expenses................... 20.0% 21.9% 20.7%
----- ----- -----
Income from continuing operations.............. 5.8% 2.8% 0.3%
Interest and other income (expense), net..... 1.3% (0.7)% (0.2)%
----- ----- -----
Income from continuing operations before income
taxes......................................... 7.1% 2.1% 0.1%
Provision for income taxes..................... 2.0% 2.4% 0.1%
----- ----- -----
Income (loss) from continuing operations....... 5.1% (0.3)% 0.0%
===== ===== =====
Net Sales. Net sales increased by 39% to $281.1 million in fiscal year 2000
from $202.2 million in fiscal year 1999. Telecommunications Equipment segment
sales increased by 35% to $239.3 million in fiscal year 2000 from $176.8
million in fiscal year 1999. The increase was attributable to sales growth in
RF and fiber optics products as we continue to expand our product offering
through development of new products, acquisitions and strategic partnerships to
meet domestic and international customer demands. BMS segment sales increased
by 65% to $41.8 million in fiscal year 2000 from $25.4 million in fiscal year
1999. The increase was primarily attributable to technical services performed
in our customers' plants, including system sweep, reverse path activation,
ingress mitigation, node certification and system maintenance. Net sales
increased by 19% to $202.2 million in fiscal year 1999 from $169.9 million in
fiscal year 1998. Telecommunications Equipment segment sales increased by 16%,
to $176.8 million in fiscal year 1999 from $152.8 million in fiscal year 1998,
as a result of increased capital spending by certain domestic cable operators
for network transmission equipment. BMS segment sales increased by 49%, to
$25.4 million in fiscal year 1999 from $17.1 million in fiscal year 1998, due
to increased technical services related to design, activation and support of
HFC networks.
Domestic sales increased by 37% to $250.3 million in fiscal year 2000 from
$182.6 million in fiscal year 1999. This growth occurred in both
telecommunication equipment and broadband management services sales. A
significant amount of consolidation and system swaps occurred among our
domestic customer base over the past 18 months. Following that activity,
several of the resulting large multiple system operators (MSO's) began
upgrading the properties they had acquired and this translated into increased
demand for our products and services. Domestic sales increased by 33% to $182.6
million in fiscal year 1999 from $137.2 million in fiscal year 1998. The
increase was principally in sales of telecommunications equipment, resulting
from increased demand for network equipment by certain domestic MSO's. Total
domestic sales were 89% of net sales for fiscal year 2000, as compared to 90%
and 81% for fiscal years 1999 and 1998, respectively.
International sales increased by 58% to $30.8 million in fiscal year 2000 from
$19.6 million in fiscal year 1999. This growth was principally in sales of
telecommunications equipment and reflected the beginning of a network upgrade
program by a major customer in Canada and increased demand from customers in
the EuroPacific region. International sales decreased by 40% to $19.6 million
in fiscal year 1999 from $32.7 million in fiscal year 1998. The decrease
resulted generally from a weakness in sales to all international markets, with
the
16
exception of Asia, in fiscal year 1999. We expect international markets will
continue to represent a substantial portion of our sales base, but believe
demand will continue to be highly variable. The international markets represent
distinct markets in which capital spending decisions for HFC network
distribution equipment can be impacted by a variety of factors including access
to financing and general economic conditions. Our total international sales
were 11% of consolidated net sales in fiscal year 2000, as compared to 10% and
19% for fiscal years 1999 and 1998, respectively.
We are subject to certain risks as a result of market and customer
concentration. For additional information regarding risks, reference Note P of
the consolidated financial statements.
Gross Margin. Gross margin was 25.8% in fiscal year 2000, 24.7% in fiscal year
1999 and 21.0% in fiscal year 1998. For the Telecommunications Equipment
segment, gross margin was 27.3% in fiscal year 2000, 25.3% in fiscal year 1999
and 22.3% in fiscal year 1998. In fiscal year 2000, efficiencies resulting from
higher production volumes enabled us to improve our absorption of fixed
manufacturing overhead costs, and realize greater material cost reductions, as
compared to fiscal year 1999. In addition, changes in product mix and ongoing
efforts to improve manufacturing automation initiatives also contributed to the
increase in gross margin percentage in fiscal year 2000, relative to fiscal
year 1999. Reductions in material costs, changes in customer and product mix,
lower manufacturing costs resulting from our operation in Mexico, efficiencies
resulting from higher production volume and manufacturing automation
initiatives, all contributed to the increase in the gross profit margin in
fiscal year 1999, relative to fiscal year 1998. For the BMS segment, gross
margin was 17.6% in fiscal year 2000, 19.9% in fiscal year 1999 and 9.6% in
fiscal year 1998. In fiscal year 2000, gross margin for the BMS segment
declined relative to fiscal year 1999 due to increased costs associated with a
ramp-up of personnel and other infrastructure costs as the Company expanded its
technical services group. Gross margin for the BMS segment increased in fiscal
year 1999, compared to fiscal year 1998, due to improved margins on products
and services to manage high-speed data, as well as technical customer services.
Selling and Administrative. Selling and administrative expenses were $31.3
million (11.1% of net sales) in fiscal year 2000, $32.4 million (16.0% of net
sales) in fiscal year 1999 and $24.6 million (14.5% of net sales) in fiscal
year 1998. The decrease in selling and administrative expenses in fiscal year
2000 was primarily due to the consolidation of certain positions and
administrative functions, as a result of the mergers with Convergence and SVCI.
The increase in selling and administrative expenses for fiscal year 1999,
compared to fiscal year 1998, was due primarily to personnel and other costs
associated with expansion of our domestic sales force in conjunction with the
introduction of new products and expanded offering of technical services
related to design, activation and support of HFC networks. We anticipate
increasing selling and administrative expense in future periods, related to
international expansion, although these expenses may vary as a percentage of
net sales.
Research and Product Development. Research and product development expenses
were $16.0 million (5.7% of net sales) in fiscal year 2000, $11.8 million (5.9%
of net sales) in fiscal year 1999 and $10.0 million (5.9% of net sales) in
fiscal year 1998. The increase in research and product development expenditures
in fiscal year 2000 resulted from higher personnel costs and additional
expenses primarily for development of fiber optic transmission products,
including transmitters, receivers, Erbium-Doped Fiber Amplifiers and the
continued development of network management products and capabilities. The
increase in research and product development expenses in fiscal year 1999
compared to fiscal year 1998 resulted from higher personnel costs and
additional expenses primarily for development of fiber optic and network
management products. We anticipate continuing increases in research and product
development expenses in future periods, related to ongoing initiatives,
although these expenses may vary as a percentage of net sales.
Operating Income (Loss) By Segment. Operating income (excluding non-recurring
business combination costs) for the Telecommunications Equipment segment in
fiscal years 2000, 1999 and 1998, was $28.1 million, $8.2 million and $3.3
million, respectively. The increase in operating income for each year was
attributable to increased volume and improvement in gross margins. Operating
loss (excluding non-recurring business combination costs) for the BMS segment
in fiscal years 2000, 1999 and 1998, was $2.8 million, $2.6 million
17
and $2.8 million, respectively. The losses derive primarily from increased
investment and development costs associated with our network management
products.
Interest and Investment Income. Interest expense was $814,000 in fiscal year
2000, $1.4 million in fiscal year 1999 and $437,000 in fiscal year 1998. The
decrease in interest expense in fiscal year 2000 resulted from reductions of
long-term debt and borrowings on various short-term credit facilities, and a
decrease in the amortization related to the fair market value of warrants
issued in fiscal year 1999 in connection with certain debt financing
arrangements by SVCI. The increase in interest expense in fiscal year 1999
compared to 1998 resulted primarily from increased borrowings on various credit
facilities and $911,000 of amortization related to the fair market value of
warrants issued in connection with certain debt financing arrangements by SVCI.
Investment income was $4.9 million in fiscal year 2000, $318,000 in fiscal year
1999 and $434,000 in fiscal year 1998. The increase in investment income in
fiscal year 2000 resulted from short-term investments of the net proceeds
received in our follow-on public offering completed on November 12, 1999. The
decrease in investment income in fiscal year 1999 compared to 1998 resulted
primarily from a reduced level of short-term invested cash balances.
Income Taxes. Our overall effective income tax rate was 27.6% for fiscal year
2000, 117.0% for fiscal year 1999 and 58.8% for fiscal year 1998. The lower
effective income tax rate for fiscal year 2000 resulted primarily from an
adjustment to the valuation allowance on deferred tax assets related to certain
tax benefits from the acquisitions of Convergence and SVCI, and was offset
partially by permanent differences for non-deductible business combination
costs incurred in relation with the mergers with Convergence, SVCI and
Worldbridge. The higher effective income tax rate in fiscal year 1999, as
compared to fiscal year 1998, resulted primarily from limited tax benefit from
the operating losses at SVCI and Convergence, reduced tax benefits from our
Foreign Sales Corporation and higher state income taxes. In addition,
fluctuations in the effective income tax rate from period to period reflect
other changes in permanent non-deductible amounts, the relative profitability
related to both U.S. and non-U.S. operations and differences in statutory
rates. We expect to have an effective annual tax rate that approximates
statutory rates in the future.
Results of Discontinued Operations
On July 10, 1997, we announced the discontinuation of our Digital Fiber Optics
Transmission Products segment located in Fremont, California.
We recorded gains on the disposal of the discontinued operations, net of tax,
of $1.1 million, $397,000 and $928,000, for fiscal years 2000, 1999 and 1998,
respectively.
The gain on disposal of the discontinued business segment in fiscal year 2000
resulted primarily from settlement of certain litigation with a supplier. The
gain on disposal of the discontinued business segment in fiscal year 1999
resulted primarily from the settlement of certain warranty claims. 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.
Liquidity and Capital Resources
In November 1999, we completed a follow-on public offering of our common stock,
resulting in net proceeds (after deducting issuance costs) of $133.3 million.
As of June 30, 2000, cash and cash equivalents and short-term investments
totaled $137.5 million, up from $6.3 million at June 25, 1999.
Net cash and cash equivalents provided by operating activities were $10.8
million in fiscal year 2000 compared to $4.6 million in fiscal year 1999 and
$5.0 million in fiscal year 1998. The $10.8 million of cash provided by
operations in fiscal year 2000 includes the effect of $9.0 million of
nonrecurring costs associated with the mergers completed during the year.
Excluding these costs, the operations generated $18.4 million in cash in
18
fiscal year 2000. The increase in cash and cash equivalents provided by
operating activities in fiscal year 2000 was primarily due to the increase in
net income for fiscal year 2000, compared to a net loss in fiscal year 1999,
and higher accounts payable and accrued liabilities, which was partially offset
by increases in accounts receivable and inventory.
Net cash and cash equivalents used in investing activities were $56.3 million
in fiscal year 2000 compared to $6.6 million in fiscal year 1999 and $12.2
million in fiscal year 1998. The increase in cash and cash equivalents used in
investing activities in fiscal year 2000 was primarily due to purchases of
marketable securities and other short-term investments. Other investing
activities included our purchases of property, plant and equipment for $7.9
million, as well as our purchase of substantially all the assets of ACSI for
$3.6 million, of which $3.2 million was disbursed during the fiscal year, with
the remaining balance subject to certain escrow requirements. In addition, we
invested $3.5 million in Fortress Technologies.
Net cash and cash equivalents provided by financing activities were $135.1
million in fiscal year 2000 compared to $3.4 million in fiscal year 1999 and
$1.5 million in fiscal year 1998. The increase in cash provided by financing
activities for fiscal year 2000 resulted primarily from net proceeds received
through a follow-on public offering of our common stock. Our other financing
activities consisted primarily of payments on short-term and long-term debt and
proceeds from the exercise of employee stock options and warrants.
We have a credit agreement with three banks under which we may borrow up to
$70.0 million. Under the credit agreement, $20.0 million is available as a
revolving line-of-credit, subject to an aggregate sub-limit of $2.0 million for
issuance of letters of credit which is committed through November 30, 2000. The
credit agreement also permits us to borrow up to $50.0 million, for strategic
acquisitions and/or investments, which is also committed through November 30,
2000. Credit pricing on these facilities is a function of our total funded
indebtedness to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio. Borrowings under the credit agreement bear interest at various
rates, at our option, and are limited to three times EBITDA. Borrowings on
these facilities are unsecured, subject to a negative pledge on all business
assets, and we are required to maintain certain financial ratios and comply
with indebtedness tests. As of June 30, 2000, we had no borrowings outstanding
under the credit agreement, and based on fiscal year 2000 EBITDA, the full $70
million facility was available.
Management believes that operating cash flow, proceeds received from the
follow-on public offering, as well as the aforementioned credit agreement, will
be adequate to provide for all cash requirements for the foreseeable future,
subject to requirements that strategic developments might dictate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
19
Item 8. Financial Statements and Supplementary Data
Consolidated financial statements of C-COR.net Corp. meeting the requirements
of Regulation S-X are filed on the following pages of this Item 8 of this
Annual Report on Form 10-K, as listed below:
Page
-----
Report of Independent Auditors.......................................... 21
Consolidated Balance Sheets as of June 30, 2000 and June 25, 1999....... 22
Consolidated Statements of Operations for the Years Ended June 30, 2000,
June 25, 1999 and June 26, 1998........................................ 23
Consolidated Statements of Cash Flows for the Years Ended June 30, 2000,
June 25, 1999 and June 26, 1998........................................ 24
Consolidated Statements of Shareholders' Equity for the Years Ended June
30, 2000, June 25, 1999 and June 26, 1998.............................. 25
Notes to Consolidated Financial Statements.............................. 26-50
20
Independent Auditors' Report
The Board of Directors
C-COR.net Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of C-COR.net Corp.
and subsidiaries as of June 30, 2000 and June 25, 1999, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the years in the three-year period ended June 30, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 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 30, 2000 and June 25, 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
State College, Pennsylvania
August 11, 2000
21
C-COR.net Corp.
Consolidated Balance Sheets
(In thousands, except share data)
June 30, June 25,
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents.................................. $ 95,379 $ 5,805
Marketable securities...................................... 42,154 445
Interest receivable........................................ 1,007 1
Accounts and notes receivables, less allowance of $1,148 in
2000 and $1,052 in 1999................................... 49,325 35,252
Inventories................................................ 31,760 23,565
Deferred taxes............................................. 7,470 6,352
Other current assets....................................... 3,447 3,546
Net current assets of discontinued operations.............. 379 433
-------- --------
Total current assets................................... 230,921 75,399
Property, plant and equipment, net......................... 28,322 28,821
Intangible assets, net of accumulated amortization of $242
in 2000 and $172 in 1999.................................. 2,477 1,131
Deferred taxes............................................. 4,909 1,113
Other long-term assets..................................... 6,410 2,716
-------- --------
Total assets........................................... $273,039 $109,180
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable........................................... $ 21,341 $ 16,421
Accrued liabilities........................................ 20,056 17,400
Line-of-credit and short-term credit obligations........... -- 4,638
Current portion of long-term debt.......................... 225 858
-------- --------
Total current liabilities.............................. 41,622 39,317
Long-term debt, less current portion....................... 1,527 3,741
Other long-term liabilities................................ 2,232 1,464
Commitments and contingent liabilities
-------- --------
Total liabilities...................................... 45,381 44,522
-------- --------
Series A redeemable convertible preferred stock, no par.... -- 3,393
Shareholders' equity
Preferred stock, no par; authorized shares of 2,000,000;
issued, none.............................................. -- --
Convertible preferred stock, no par........................ -- 24,304
Common stock, $.05 par; authorized shares of 100,000,000 in
2000 and 48,000,000 in 1999; issued shares of 35,219,825
in 2000 and 23,923,065 in 1999............................ 1,761 1,197
Additional paid-in capital................................. 197,240 22,416
Accumulated other comprehensive loss....................... (30) (96)
Unearned compensation...................................... (8) --
Retained earnings.......................................... 35,952 20,605
Treasury stock at cost, 1,224,941 shares in 2000 and
1,318,118 shares in 1999.................................. (7,257) (7,161)
-------- --------
Total shareholders' equity............................. 227,658 61,265
-------- --------
Total liabilities and shareholders' equity............. $273,039 $109,180
======== ========
See accompanying notes to consolidated financial statements.
22
C-COR.net Corp.
Consolidated Statements of Operations
(In thousands, except per share data)
Year Ended
----------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Net sales........................................ $281,135 $202,168 $169,852
Cost of sales.................................... 208,546 152,315 134,128
-------- -------- --------
Gross margin..................................... 72,589 49,853 35,724
Operating expenses:
Selling and administrative..................... 31,350 32,430 24,609
Research and product development............... 16,003 11,833 9,988
Merger and restructuring costs................. 9,045 -- 625
-------- -------- --------
Total operating expenses..................... 56,398 44,263 35,222
Income from operations........................... 16,191 5,590 502
Interest expense................................. (814) (1,396) (437)
Investment income................................ 4,901 318 434
Other expense, net............................... (305) (377) (402)
-------- -------- --------
Income before income taxes....................... 19,973 4,135 97
Income tax expense............................... 5,512 4,839 57
-------- -------- --------
Income (loss) from continuing operations......... 14,461 (704) 40
-------- -------- --------
Discontinued operations:
Gain on disposal of discontinued business
segment, net of tax........................... 1,063 397 928
-------- -------- --------
Net income (loss)................................ 15,524 (307) 968
Dividend requirements on preferred stocks........ -- (613) (122)
-------- -------- --------
Net income (loss) available to common
shareholders.................................... $ 15,524 $ (920) $ 846
======== ======== ========
Net income (loss) per share--basic:
Continuing operations.......................... $ 0.48 $ (0.06) --
Gain on disposal of discontinued operations.... 0.04 0.02 0.04
-------- -------- --------
Net income (loss)............................ $ 0.52 $ (0.04) $ 0.04
======== ======== ========
Net income (loss) per share--diluted:
Continuing operations.......................... $ 0.43 $ (0.06) $ --
Gain on disposal of discontinued operations.... 0.03 0.02 0.04
-------- -------- --------
Net income (loss)............................ $ 0.46 $ (0.04) $ 0.04
======== ======== ========
Weighted average common shares and common share
equivalents
Basic.......................................... 30,039 22,483 22,503
Diluted........................................ 33,968 22,483 22,503
See accompanying notes to consolidated financial statements.
23
C-COR.net Corp.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended
----------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Operating Activities:
Net income (loss)............................... $ 15,524 $ (307) $ 968
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
operating activities:
Depreciation and amortization................... 8,891 9,199 7,233
Amortization of debt discount................... 381 911 --
Amortization of unearned compensation........... 14 -- --
Gain on disposal of discontinued operations, net
of tax......................................... (1,063) (397) (928)
Provision for deferred retirement salary plan... 309 204 292
Loss (gain) on sale of property, plant, and
equipment...................................... 331 235 (20)
Incentive plan compensation expense............. 369 -- --
Tax benefit deriving from exercise and sale of
stock option shares............................ 3,859 94 57
Changes in operating assets and liabilities, net
of acquisition:
Interest receivable............................ (1,006) -- --
Accounts receivable............................ (13,188) (12,294) (1,188)
Inventories.................................... (8,195) (5,756) 2,748
Other assets................................... 468 (58) (3,064)
Accounts payable............................... 4,920 9,540 (2,609)
Accrued liabilities............................ 2,983 6,084 3,818
Deferred income taxes.......................... (4,917) (2,303) (3,357)
Discontinued operations--working capital
changes and noncash charges................... 1,117 (553) 1,051
-------- -------- --------
Net cash and cash equivalents provided by
operating activities........................... 10,797 4,599 5,001
-------- -------- --------
Investing Activities:
Purchase of property, plant and equipment....... (7,891) (8,669) (10,808)
Purchase of marketable securities and other
short-term investments......................... (41,709) (84) --
Proceeds from sale of (investment in) equity
securities..................................... (3,501) -- 15
Issuance of (payments on) notes receivable,
net............................................ -- 1,972 (2,011)
Change in other assets.......................... -- 94 (146)
Asset purchase of ACSI.......................... (3,185) -- --
Proceeds from sale of property, plant and
equipment...................................... 8 48 51
Proceeds from discontinued operations........... -- -- 656
-------- -------- --------
Net cash and cash equivalents used in investing
activities..................................... (56,278) (6,639) (12,243)
-------- -------- --------
Financing Activities:
Payment of debt and capital lease obligations... (2,847) (5,107) (1,136)
Proceeds from long-term debt borrowing.......... -- 3,097 52
Proceeds from (payments on) short-term credit
facilities, net................................ (5,019) 5,019 (3,573)
Proceeds from issuance of convertible preferred
stock.......................................... -- 1,355 6,180
Proceeds from issuance of common stock to
employee stock purchase plan................... 130 76 51
Proceeds from exercise of stock options......... 6,272 1,202 277
Proceeds from exercise of stock warrants........ 3,485 -- --
Proceeds from issuance of common stock, net..... 133,311 -- --
Purchase and retirement of convertible preferred
stock.......................................... -- (1,000) --
Purchase of treasury stock...................... (277) (1,265) (312)
-------- -------- --------
Net cash and cash equivalents provided by
financing activities........................... 135,055 3,377 1,539
-------- -------- --------
Increase (decrease) in cash and cash
equivalents.................................... 89,574 1,337 (5,703)
Elimination of duplicated activity.............. -- 1,014 (6)
Cash and cash equivalents at beginning of year.. 5,805 3,454 9,163
-------- -------- --------
Cash and cash equivalents at end of year........ $ 95,379 $ 5,805 $ 3,454
======== ======== ========
Supplemental cash flow information:
Non-cash investing and financing activities
Fair value adjustment of available-for-sale
securities.................................... $ 75 -- --
Conversion of convertible preferred stock...... 27,697 -- --
Exercise of warrants........................... 247 -- --
Retirement of treasury stock................... 181 -- --
See accompanying notes to consolidated financial statements.
24
C-COR.net Corp.
Consolidated Statements of Shareholders' Equity
(In thousands)
Accumulated
Other
Additional Comprehensive
Comprehensive Preferred Common Paid-in Income Unearned Retained Treasury
Income Stock Stock Capital (Loss) Compensation Earnings Stock
------------- --------- ------ ---------- ------------- ------------ -------- --------
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 --
Shares adjustment....... -- -- (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.............. $15,524 -- -- -- -- -- 15,524 --
Other comprehensive
income:
Net unrealized holding
gains on marketable
securities............. 75 -- -- -- -- -- -- --
Foreign currency
translation loss....... (9) -- -- -- -- -- -- --
-------
Other comprehensive
income................. 66 -- -- -- 66 -- -- --
-------
Comprehensive income.... $15,590 -- -- -- -- -- -- --
=======
Shares issued for
secondary public
offering............... -- 322 132,989 -- -- -- --
Conversion of preferred
stock and retirement of
treasury shares........ (24,304) 161 27,532 -- -- (177) 181
Exercise of stock
options................ -- 45 6,227 -- -- -- --
Exercise of stock
warrants............... -- 35 3,697 -- -- -- --
Tax benefit deriving
from exercise and sale
of stock option
shares................. -- -- 3,859 -- -- -- --
Issue shares to employee
stock purchase plan.... -- -- 130 -- -- -- --
Issue performance
shares................. -- 1 368 -- -- -- --
Issue restricted stock.. -- -- 22 -- (22) -- --
Purchase of treasury
stock to deferred
compensation plan...... -- -- -- -- -- -- (277)
Amortization of unearned
compensation expense... -- -- -- -- 14 -- --
------- ------ -------- ----- ---- ------- -------
Balance, June 30, 2000.. $ -- $1,761 $197,240 $ (30) $(8) $35,952 $(7,257)
======= ====== ======== ===== ==== ======= =======
See accompanying notes to consolidated financial statements.
25
C-COR.net Corp.
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
For the three fiscal years ended June 30, 2000
Description of Business
C-COR.net Corp. (the Company) designs, manufactures and markets network
transmission products and provides services and support to HFC network
operators. The Company operates in two industry segments; the
Telecommunications Equipment segment which provides a comprehensive range of
products, including radio frequency (RF) amplifiers and fiber optic equipment
for the network headend, node and RF plant; and the Broadband Management
Services segment which focuses on enabling reliable, high-speed, broadband
communications over hybrid fiber coax (HFC) networks and includes network
management and enabling services, high-speed data certification, system
integration services, data security solutions, network engineering and design,
system activation, network optimization, and system maintenance.
A. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its foreign and domestic subsidiaries. Intercompany accounts and
transactions have been eliminated in consolidation.
Reporting Periods
Management has adopted a fiscal year that ends on the last Friday in June. For
reporting periods presented herein, the periods ended on June 30, 2000, June
25, 1999 and June 26, 1998. These years contained 53, 52 and 52 weeks,
respectively (see Note B).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain amounts in the financial statements and related notes have been
reclassified to conform to the fiscal year 2000 classifications.
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.
26
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
Cash Equivalents
The Company considers all highly liquid investments, with a maturity of three
months or less when purchased, to be cash equivalents. Cash equivalents are
reflected at the lower of cost or market.
Marketable Securities
Marketable securities at June 30, 2000 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 loss, net
of related deferred income taxes.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment, which includes leased property under capital
leases, is stated at cost. Depreciation or amortization is calculated on the
straight-line method for financial statement purposes based upon the following
estimated useful lives:
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
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. The Company
did not capitalize any software development costs during fiscal year 2000. For
fiscal years 1999 and 1998, the Company capitalized $389 and $670,
respectively, of purchased software development costs, which is included in
other long-term assets in the consolidated financial statements. Amortization
expense for fiscal years 2000, 1999 and 1998 was $353, $0 and $0, respectively.
Intangible Assets
Patent, trademark and license costs relate to purchased and internally
developed product lines and 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. Goodwill acquired in connection with the asset
purchase of Advanced Communications Services, Inc. (ACSI) in January 2000 is
being amortized on a straight-line basis over the estimated useful life of ten
years. Amortization expense for the fiscal years 2000, 1999 and 1998, was $273,
$172 and $0, respectively.
27
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
Investment
On October 6, 1999, the Company invested $501 in Fortress Technologies, Inc.
(Fortress), a security networking company, and subsequently on January 11,
2000, increased its investment to $3,501. The investment in Fortress represents
approximately a 5 percent ownership interest. In connection with the
investment, the Company and Fortress 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, which does not fall within the guidelines of Statement 115, is being
carried at cost, since the Company does not exert significant influence over
Fortress.
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 6,440,000 shares of common stock were issued and sold at
a price of $22.00 per share. This offering resulted in net proceeds (after
deducting issuance costs) to the Company of $133,311. 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.
At June 30, 2000 and June 25, 1999, treasury stock consisted of 1,224,941 and
1,318,118 shares of common stock, respectively. In fiscal year 2000, the
Company retired 116,672 shares of treasury stock upon the mergers with
Convergence.com Corporation (Convergence) and Worldbridge Broadband Services,
Inc. (Worldbridge). In addition, 23,495 shares of the Company's common stock
purchased under a non-qualified deferred compensation arrangement, held in a
Rabbi Trust, have been presented in a manner similar to treasury stock as of
June 30, 2000. In fiscal years 1999 and 1998, the Company repurchased 180,762
shares of its common stock for $1,084 and 44,628 shares of its common stock for
$312, respectively, under stock repurchase programs. The Company used its
available capital resources to fund the purchases. The repurchased stock is
being held by the
28
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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.
Net Income (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
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:
Year Ended
---------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Income (loss) from continuing operations........... $14,461 $ (704) $ 40
Less:
Accretion of convertible preferred stock......... -- (613) (122)
------- ------- ------
Continuing income (loss) available to common
shareholders...................................... $14,461 $(1,317) $ (82)
Gain from discontinued operations.................. 1,063 397 928
------- ------- ------
Net income (loss) available to common
shareholders...................................... $15,524 $ (920) $ 846
======= ======= ======
Weighted average common shares outstanding......... 30,039 22,483 22,503
Common share equivalents........................... 3,929 -- --
------- ------- ------
Weighted average common shares and common share
equivalents....................................... 33,968 22,483 22,503
======= ======= ======
Net income (loss) per share--basic:
Continuing operations............................ $ 0.48 $ (0.06) $ --
Discontinued operations.......................... 0.04 0.02 0.04
------- ------- ------
Net income (loss) available to common
shareholders.................................. $ 0.52 $ (0.04) $ 0.04
======= ======= ======
Net income (loss) per share--diluted:
Continuing operations............................ $ 0.43 $ (0.06) $ --
Discontinued operations.......................... 0.03 0.02 0.04
------- ------- ------
Net income (loss) available to common
shareholders.................................. $ 0.46 $ (0.04) $ 0.04
======= ======= ======
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 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
29
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
employees affected by the plant closing. The work force reduction occurred
during the first quarter of fiscal year 1999, thereby eliminating the
restructuring accrual at June 25, 1999.
At June 26, 1998, the Company had a Lease/Option to Purchase Agreement with the
Mifflin County Industrial Development Corporation (MCIDC) for the building and
improvements located in Reedsville, Pennsylvania. On August 10, 1998, the
Company purchased the facility using its available capital resources and
expects to sell the facility at a price in excess of its net carrying value.
The facility has been reclassified from property, plant and equipment to
property held-for-sale, which is included in other current assets on the
consolidated balance sheet as of June 30, 2000, with a carrying value of
$1,100.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," requires net unrealized investment gains or losses on the Company's
available-for-sale securities and net foreign exchange gains or losses on
translation to be included in accumulated other comprehensive loss in the
consolidated balance sheet and in the disclosure of comprehensive income
(loss). The totals of other comprehensive income (loss) items and comprehensive
income (loss) (which includes net income) are displayed separately in the
consolidated statements of shareholders' equity.
The components of other comprehensive income (loss) and the related tax effects
are as follows:
Income
Amount Tax Amount
Before Expense Net
Tax (Benefit) of Taxes
------ --------- --------
Fiscal year ended June 30, 2000:
Unrealized holding gain during the fiscal year.... $125 $50 $75
Net foreign currency translation loss............. (15) (6) (9)
---- --- ---
Total other comprehensive income.................. $110 $44 $66
==== === ===
Fiscal year ended June 25, 1999:
Unrealized holding gain during the fiscal year.... $ 7 $ 3 $ 4
Net foreign currency translation 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 currency translation gain............. 15 6 9
---- --- ---
Total other comprehensive income.................. $ 27 $11 $16
==== === ===
Accounting and Disclosure Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (Statement 133), which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, which amends the required adoption date of Statement 133 to
all fiscal quarters of all fiscal years beginning after June 15, 2000. 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.
30
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
B. Business Combinations
Pooling of Interests:
On July 9, 1999, the Company consummated a merger with Convergence, whereby
Convergence became a wholly owned subsidiary of the Company. As consideration
in the merger, the outstanding shares of common stock of Convergence were
converted into 2,866,646 shares of the Company's common stock. Outstanding
warrants to acquire Convergence common stock were converted into warrants to
acquire an aggregate of 733,860 shares of the Company's common stock.
Prior to the merger, Convergence had operated on a calendar year basis.
Operating results for fiscal years 1999 and 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 consolidated
financial statements for the fiscal year ended June 26, 1998. Accordingly, the
consolidated statement of shareholders' equity for fiscal year 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), whereby SVCI became a wholly owned subsidiary of
the Company. As consideration in the merger, the outstanding shares of common
stock of SVCI were converted into 3,090,162 shares of the Company's common
stock (including 350,418 shares that were issued into escrow). Outstanding
stock options and warrants to acquire SVCI common stock were converted into
stock options and warrants to acquire an aggregate of 767,688 shares of the
Company's common stock.
Prior to the merger, SVCI had operated on a fiscal year ending in June.
Operating results for fiscal years 1999 and 1998 include the operations of SVCI
for the 12-month periods ended June 25, 1999 and June 30, 1998, respectively.
On February 18, 2000, the Company consummated a merger with Worldbridge,
whereby Worldbridge became a wholly owned subsidiary of the Company. As
consideration in the merger, the outstanding shares of common stock of
Worldbridge were converted into 1,603,584 shares of the Company's common stock
(including 160,356 shares that were issued into escrow). Outstanding stock
options to acquire Worldbridge common stock were converted into stock options
to acquire an aggregate of 196,416 shares of the Company's common stock.
Prior to the merger, Worldbridge had operated on a calendar year basis.
Operating results for fiscal year 1999 includes the operations of Worldbridge
for the 12-month period ended June 30, 1999. Operating results for fiscal year
1998 include the operations of Worldbridge for the 12-month period ended
December 31, 1998. This results in an overlapping period (July 1998 through
December 1998) for Worldbridge's results of operations being included in the
consolidated financial statements for the fiscal year ended June 25, 1999.
Accordingly, the consolidated statement of shareholders' equity for fiscal year
1999 includes a $712 adjustment to eliminate the impact on retained earnings
for the overlap period.
The Company recorded one-time charges of $9,045 related to the business
combinations with Convergence, SVCI and Worldbridge during fiscal year 2000.
The one-time charges include the merger transaction and other related 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. At June 30, 2000, a liability of $489 related to these
business combination costs is included in accrued liabilities.
31
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(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:
Year Ended
------------------
June 25, June 26,
1999 1998
-------- --------
Net sales:
C-COR.net Corp......................................... $171,281 $152,144
Convergence............................................ 6,635 1,276
SVCI................................................... 5,509 621
Worldbridge............................................ 18,743 15,811
-------- --------
Combined................................................. $202,168 $169,852
======== ========
Net income (loss):
C-COR.net Corp......................................... $ 10,852 $ 8,245
Convergence............................................ (2,516) (979)
SVCI................................................... (8,622) (5,420)
Worldbridge............................................ (21) (878)
-------- --------
Combined................................................. $ (307) $ 968
======== ========
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 ACSI for $3,610. The Company did not assume
any material liabilities of ACSI in the transaction. The impact of the
acquisition on the Company's historical results of operations was not material.
C. Discontinued Operations
On July 10, 1997, the Company announced the discontinuation of its Digital
Fiber Optics Transmission Products segment located in Fremont, California.
The Company recorded gains on the disposal of the discontinued operations, net
of tax, of $1,063, $397 and $928, for fiscal years 2000, 1999 and 1998,
respectively.
32
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
The assets and liabilities of the discontinued operations have been
reclassified in the accompanying consolidated financial statements to
separately identify them as net current assets related to the discontinued
operations. These net assets consist of net working capital and other assets,
less related liabilities as follows, as of June 30, 2000 and June 25, 1999:
June 30, June 25,
2000 1999
-------- --------
Current assets:
Accounts receivable...................................... $ 16 $ 16
Note receivable.......................................... 70 796
Deferred tax assets...................................... 493 474
----- -----
579 1,286
----- -----
Current liabilities:
Accrued warranty and other............................... (150) (728)
Allowance for disposal of discontinued operations........ (50) (125)
----- -----
(200) (853)
----- -----
Net current assets of discontinued operations.............. $ 379 $ 433
===== =====
D. Marketable Securities
Marketable securities as of June 30, 2000 and June 25, 1999 consisted of the
following:
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
June 30, 2000:
Available-for-sale:
Municipal bonds.................. $ 335 $ -- $ (12) $ 323
Corporate obligations............ 41,828 -- -- 41,828
Equity securities................ 1 2 -- 3
------- ----- ----- -------
Total classified as current
assets............................ $42,164 $ 2 $ (12) $42,154
======= ===== ===== =======
Available-for-sale:
Mutual funds..................... $ 612 $ 91 $ (13) $ 690
------- ----- ----- -------
Total classified as noncurrent
assets............................ $ 612 $ 91 $ (13) $ 690
======= ===== ===== =======
June 25, 1999:
Available-for-sale:
Municipal bonds.................. $ 351 $ -- $ (9) $ 342
Equity securities................ 101 2 -- 103
------- ----- ----- -------
Total classified as current
assets............................ $ 452 $ 2 $ (9) $ 445
======= ===== ===== =======
33
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
Maturities of investment securities classified as available-for-sale at June
30, 2000, were as follows:
Amortized Fair
Cost Value
--------- -------
Available-for-sale:
Due in one year or less................................. $42,163 $42,151
E. Inventories
Inventories as of June 30, 2000 and June 25, 1999 consisted of the following:
June 30, June 25,
2000 1999
-------- --------
Finished goods............................................. $ 5,288 $ 3,287
Work-in-process............................................ 6,841 3,038
Raw materials.............................................. 19,631 17,240
------- --------
$31,760 $ 23,565
======= ========
Included in the amounts above were reserves of $3,094 at June 30, 2000, and
$2,231 at June 25, 1999.
F. Property, Plant and Equipment
Property, plant and equipment as of June 30, 2000 and June 25, 1999 consisted
of the following:
June 30, June 25,
2000 1999
-------- --------
Land....................................................... $ 468 $ 468
Buildings.................................................. 11,027 10,760
Machinery and equipment under capital lease................ 173 485
Machinery and equipment.................................... 60,053 52,367
Leasehold improvements..................................... 1,584 1,326
------- -------
73,305 65,406
Less accumulated depreciation and amortization............. 44,983 36,585
------- -------
$28,322 $28,821
======= =======
34
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
G. Intangible Assets
Intangible assets as of June 30, 2000 and June 25, 1999 consisted of the
following:
June 30, June 25,
2000 1999
-------- --------
Cost of intangibles:
Goodwill................................................. $2,461 $ --
Patents and trademarks................................... 8 1,053
Licensing costs.......................................... 250 250
------ ------
2,719 1,303
------ ------
Less accumulated amortization:
Goodwill................................................. (103) --
Patents and trademarks................................... -- (116)
Licensing costs.......................................... (139) (56)
------ ------
(242) (172)
------ ------
Net book value............................................. $2,477 $1,131
====== ======
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 comply with indebtedness tests. As of June 30,
2000, the Company had no borrowings outstanding under this credit agreement.
As a result of the Company's acquisition of SVCI, the Company had 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 Company terminated the loans on September 24,
1999, by paying the remaining principal balances of the various loans. The
principal balances on the line of credit, the bridge loan and the term loan
were $2,715, $1,000 and $150, respectively, on the date of payoff.
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 had a fair value of $41 and were 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 7,940 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 had a fair value of $13 and
were amortized over the life of the related debt instruments.
35
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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 had a fair value of $4 and were amortized over
the life of the related debt instruments.
From March to May 1999, SVCI borrowed $1,817 from certain founders and
shareholders of SVCI under promissory notes payable. As of June 30, 2000, the
balance on these loans was $0. 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.
I. Long-term Debt
June 30, June 25,
2000 1999
-------- --------
Notes payable.............................................. $1,633 $4,392
Capital lease obligations.................................. 119 207
------ ------
1,752 4,599
Less current portion....................................... 225 858
------ ------
$1,527 $3,741
====== ======
Notes Payable: The Company obtained funding through the Pennsylvania Industrial
Development Authority (PIDA) of $539 for construction of the Tipton,
Pennsylvania, manufacturing facility. The PIDA borrowing has an interest rate
of 3%, which is contingent upon meeting certain job creation commitments.
Monthly payments of principal and interest of $4 are required through 2006.
Certain property, plant and equipment collateralize the borrowing. The
principal balance at June 30, 2000, was $227.
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 June
30, 2000, was $1,406.
On October 19, 1998, the Company borrowed $3,000 under a term loan facility
with a bank. On November 12, 1999, the Company paid off the remaining principal
balance of $1,350 on this term loan.
36
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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. At June 30, 2000, the
future minimum payments required under capital lease arrangements were as
follows:
Fiscal year ending:
2001................................................................. $ 77
2002................................................................. 46
2003................................................................. 18
2004................................................................. --
2005................................................................. --
Thereafter........................................................... --
----
141
Less amount representing interest...................................... 22
----
Present value of future minimum lease payments......................... 119
Less current portion of obligation under capital leases................ 62
----
Long-term obligations under capital lease.............................. $ 57
====
Long-term debt at June 30, 2000, had scheduled maturities as follows:
Fiscal year ending:
2001................................................................ $ 225
2002................................................................ 207
2003................................................................ 185
2004................................................................ 173
2005................................................................ 177
Thereafter.......................................................... 785
------
$1,752
======
Total interest paid on the short-term credit facilities (see Note H) and long-
term debt was $433, $399 and $410 for fiscal years 2000, 1999 and 1998,
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 2000, the Company issued performance units to certain
officers of the Company pursuant to the 1998 Incentive Plan. The performance
units will be awarded based upon certain performance criteria. Compensation
expense of $197 was recorded in fiscal year 2000 related to the performance
units.
37
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
During fiscal year 1999, 4,000 restricted 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. Also during fiscal
year 1999, 22,000 performance shares were awarded to certain officers and key
employees pursuant to the Company's 1998 Incentive Plan. During fiscal year
2000, 18,000 of the performance share awards were earned based upon achievement
of certain performance criteria and 4,000 were cancelled. Compensation expense
of $554 related to the performance shares was recorded in fiscal year 2000
based upon the current market price of the Company's common stock at the time
the performance criteria were 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. Incentive stock options
generally vest over four or five years, with 25% or 20% vesting after one year
and the remainder monthly thereafter, and expire ten years from the date of
grant. Nonqualified options are generally fully vested upon issuance and expire
ten 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. The incentive and
nonqualified stock options expire upon the earlier of the date of termination
of employment or ten years from the date of grant. The options vested
immediately upon assumption by the Company.
38
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
The Company has adopted the disclosure requirements of the Statement 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:
Year Ended
---------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Net income (loss)
As reported................................... $15,524 $ (307) $ 968
Pro forma..................................... $11,438 $(3,781) $ (566)
Net income (loss) per share:
Basic
As reported................................. $ 0.52 $ (0.04) $ 0.04
Pro forma................................... $ 0.38 $ (0.20) $(0.03)
Diluted
As reported................................. $ 0.46 $ (0.04) $ 0.04
Pro forma................................... $ 0.34 $ (0.20) $(0.03)
The per share weighted-average fair values of stock options granted during
fiscal years 2000, 1999 and 1998, were $14.01, $8.66 and $5.55, respectively,
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
Fiscal year 2000-expected dividend yield of 0%, risk-free interest rate of
6.25%, a volatility factor of the expected market price of the Company's common
stock of .7742, and a weighted-average expected life of approximately 4 years.
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.
The fair value of stock options included in the pro forma amounts for fiscal
years 2000, 1999 and 1998 is not necessarily indicative of future effects on
net income (loss) and net income (loss) per share.
39
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
A summary of the status of the Company's stock option plans, as of June 30,
2000, June 25, 1999 and June 26, 1998, and changes during the years ended on
those dates is presented below:
June 30, 2000 June 25, 1999 June 26, 1998
------------------------- ------------------------- -------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
--------- -------------- --------- -------------- --------- --------------
Outstanding at beginning
of year................ 4,365,279 $ 7.66 3,161,234 $6.25 1,671,054 $6.63
Granted................. 1,590,599 $21.55 1,820,625 $9.04 2,267,913 $5.27
Exercised............... (921,617) $ 6.73 (256,438) $4.77 (91,759) $2.89
Canceled................ (445,039) $ 8.99 (360,142) $3.78 (470,095) $4.76
--------- --------- ---------
Outstanding at end of
year................... 4,589,222 $12.53 4,365,279 $7.66 3,377,113 $6.08
========= ========= =========
Options exercisable at
end of year............ 1,484,376 1,675,146 1,244,096
Stock option plan information as of June 25, 1999, includes stock option
activity of Worldbridge for the period of July 1, 1998 through June 30, 1999.
Stock option activity for Worldbridge as of June 26, 1998, 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 30, 2000:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Number Weighted-Avg. Weighted-Avg. Number Weighted-Avg.
Outstanding Remaining Exercise Exercisable Exercise
Range of Exercise Prices at 6/30/00 Contractual Life Price at 6/30/00 Price
- ------------------------ ----------- ---------------- ------------- ----------- -------------
$ 0.06.................. 2,172 5.8 years $ 0.06 1,794 $ 0.06
$ 0.86 to $ 1.06........ 94,121 8.1 years $ 1.04 23,862 $ 0.97
$ 1.38 to $ 2.00........ 9,800 0.7 years $ 1.66 9,800 $ 1.66
$ 3.00 to $ 4.25........ 309,320 3.0 years $ 3.37 309,320 $ 3.37
$ 4.56 to $ 6.81........ 455,134 5.3 years $ 5.19 145,612 $ 5.30
$ 6.88 to $10.06........ 943,755 6.0 years $ 7.62 393,915 $ 7.57
$10.50 to $15.63........ 1,489,453 6.7 years $11.28 593,073 $11.23
$16.06 to $22.94........ 1,044,117 7.8 years $21.25 7,000 $21.83
$25.75 to $38.50........ 231,600 7.6 years $31.94 0 $ 0.00
$39.13 to $49.72........ 9,750 7.7 years $41.46 0 $ 0.00
--------- ---------
4,589,222 6.5 years $12.53 1,484,376 $ 7.85
========= =========
40
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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:
Authorized
Shares as Issued and outstanding at:
of --------------------------------
June 30, June 30, June 25, June 26,
2000 2000 1999 1998
----------- ---------- ---------- ----------
Preferred stock, no par.......... 2,000,000 -- -- --
Series A redeemable convertible
preferred stock................. -- -- 300,000 295,000
Series B convertible perferred
stock........................... -- -- 378,136 378,136
Series C convertible perferred
stock........................... -- -- 694,352 694,352
Series D convertible perferred
stock........................... -- -- 9,534 11,725
Common stock, $.05 par value per
share, net of treasury stock.... 100,000,000 33,994,884 22,604,947 22,525,071
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).
During fiscal year 2000, the Series A through D convertible preferred stocks
were converted into common stock, in conjunction with the acquisitions of
Convergence, SVCI and Worldbridge.
(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 were originally
issued in connection with various financing and employment arrangements.
The following table summarizes information about warrants outstanding as of
June 30, 2000:
Warrants issued in connection with:
Warrants Warrants Fiscal Year --------------------------------------
Originally Outstanding Exercise Warrants Debt Equity Employment
Issued Issued as of 6/30/00 Prices Expire Financing Financing Services
- ------ ---------- ------------- -------- ----------- ----------- ----------- ------------
Fiscal Year 1997........ 264,696 229,361 $10.58 2001 -- 264,696 --
Fiscal Year 1998........ 600,000 6,000 $ 5.00 2005 -- 600,000 --
Fiscal Year 1998........ 6,050 -- $ 6.56 2002 6,050 -- --
Fiscal Year 1999........ 133,860 80,316 $ 5.00 2003 -- -- 133,860
Fiscal Year 1999........ 14,180 2,836 $ 6.56 2002 14,180 -- --
Fiscal Year 1999........ 207,030 199,468 $15.87 2002 207,030 -- --
Fiscal Year 1999........ 7,562 7,562 $37.02 2002 7,562 -- --
--------- ------- ----------- ----------- -----------
1,233,378 525,543 234,822 864,696 133,860
========= ======= =========== =========== ===========
The fair value of the warrants issued in connection with debt financing
transactions was 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 were issued in connection with these debt financing
arrangements. The warrants had a fair value of $1,292 which was amortized over
the life of the related loans. Amortization in fiscal years 2000 and 1999
totaled $381 and $911, respectively, which was included in interest expense in
the accompanying consolidated statements of operations. No separate fair values
were calculated in connection with the 864,696 warrants in fiscal years 1998
and 1997, as these were issued in connection with an equity financing
transaction. Also in fiscal year 1999, the Company recognized compensation
expense of $247
41
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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:
Year Ended
--------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Income from continuing operations............... $5,512 $4,839 $ 57
Gain (loss) on disposal of discontinued
operations..................................... 668 477 (94)
Shareholders' equity, for tax benefit derived
from exercise and sale of stock option shares.. (3,859) (94) (57)
------ ------ ----
$2,321 $5,222 $(94)
====== ====== ====
Income tax expense (benefit) attributable to continuing operations consisted of
the following components:
Year Ended
--------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Current:
Federal....................................... $7,510 $6,466 $ 2,891
State......................................... 1,740 617 142
Foreign....................................... 165 59 39
------ ------ -------
9,415 7,142 3,072
------ ------ -------
Deferred:
Federal....................................... (3,200) (1,914) (2,539)
State......................................... (703) (389) (476)
------ ------ -------
(3,903) (2,303) (3,015)
------ ------ -------
$5,512 $4,839 $ 57
====== ====== =======
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:
Year Ended
--------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Statutory rate.................................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax.......... 5.4 (10.8) (389.7)
Tax effect of foreign income and losses......... 0.3 -- --
Tax effect of foreign sales corporation......... (1.1) -- (300.0)
Loss of net operating loss attributable to S
corporation period............................. -- -- 19.6
Increase (decrease) in the valuation allowance
for deferred tax assets........................ (23.6) 92.8 921.6
Permanent differences........................... 10.1 -- 30.9
Other........................................... 1.5 -- (258.6)
------ ------ -------
27.6% 117.0% 58.8%
====== ====== =======
42
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 2000 and
June 25, 1999, relating to continuing operations, are presented below:
June 30, June 25,
2000 1999
-------- --------
Gross deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts......................................... $ 431 $ 405
Inventories, principally due to additional costs for tax
purposes.................................................. -- 220
Inventories, principally due to accrual for obsolescence... 1,229 809
Compensated absences, principally due to accrual for
financial reporting purposes.............................. 768 837
Workers' compensation expense accrual for financial
reporting purposes........................................ 631 689
Warranty expense accrual for financial reporting purposes.. 893 650
Employee benefit plan accrual for financial reporting
purposes.................................................. 498 375
Deferred research and development for tax purposes......... 1,446 3,180
Net operating loss carryforwards........................... 8,410 8,690
Alternative minimum tax credit carryforwards............... -- 600
Research and development tax credit carryforwards.......... 890 --
Deferred benefit of nonqualified stock options............. 1,084 --
Other...................................................... 597 381
------- -------
Total gross deferred tax assets.......................... 16,877 16,836
Less valuation allowance..................................... (2,727) (7,433)
------- -------
Net total deferred tax assets............................ 14,150 9,403
------- -------
Gross deferred tax liabilities
Plant and equipment, principally due to differences in
depreciation.............................................. (1,550) (1,842)
Other...................................................... (221) (96)
------- -------
Total gross deferred tax liabilities..................... (1,771) (1,938)
------- -------
Net deferred tax assets...................................... $12,379 $ 7,465
======= =======
Reflected in consolidated balance sheets as:
Current deferred tax assets................................ $ 7,470 $ 6,352
Non-current deferred tax assets............................ 4,909 1,113
------- -------
Net deferred tax assets pertaining to continuing
operations.............................................. $12,379 $ 7,465
======= =======
The valuation allowance for deferred tax assets as of the beginning of fiscal
year 2000 and 1999 was $7,433 and $2,851, respectively. The net change in
valuation allowance for the years ended June 30, 2000 and June 25, 1999 was a
(decrease) increase of $(4,706) and $4,582, 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
43
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
is more likely than not the Company will realize the benefits of these deferred
tax assets, net of the valuation allowance at June 30, 2000. 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 30, 2000, will be allocated to income tax
benefit that would be reported in the consolidated statements of operations.
At June 30, 2000, the Company had federal net operating loss carryforwards of
approximately $19,990 and state net operating loss carryforwards of
approximately $18,950, which are available to offset future federal and state
taxable income, and expire at various dates through fiscal year 2019. In
addition, at June 30, 2000, the Company has research and development credit
carryovers for federal and state income tax purposes of approximately $634 and
$256, respectively. The federal credit carryforwards expire in the years 2010
and 2019, and the state carryforwards can be carried forward indefinitely.
The Company has not recognized a deferred tax liability for the basis
differences and the undistributed earnings related to its foreign subsidiaries
since the investment is essentially permanent in duration. Undistributed
earnings were approximately $638 at June 30, 2000.
Cash paid for income taxes was $6,603, $2,915 and $1,915 in fiscal years 2000,
1999 and 1998, respectively.
M. Retirement Plans
The Company has retirement savings and profit sharing plans, which qualify
under Section 401(k) of the Internal Revenue Code. Participation is available
to all employees meeting minimum service 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 $1,325 and $464 at June 30, 2000 and June
25, 1999, 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 estimated service period from the
date of the agreements. The accrued balance of these plans, included in other
long-term liabilities, was $907 and $865 at June 30, 2000 and June 25, 1999,
respectively.
Total expenses for these plans were $1,840, $1,158 and $1,349 for fiscal years
2000, 1999 and 1998 respectively.
44
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
N. Accrued Liabilities
Accrued liabilities as of June 30, 2000 and June 25, 1999 consisted of the
following:
June June
30, 25,
2000 1999
------- -------
Accrued incentive plan expense.............................. $ 3,510 $ 2,285
Accrued vacation expense.................................... 1,880 2,000
Accrued salary expense...................................... 2,678 1,704
Accrued payroll and sales tax expense....................... 972 1,639
Accrued sales commissions and rebates payable............... 419 951
Accrued warranty expense.................................... 2,232 1,742
Accrued workers' compensation self-insurance expense........ 1,577 1,724
Accrued merger-related costs................................ 489 --
Accrued income tax payable.................................. 4,199 3,383
Accrued other............................................... 2,100 1,972
------- -------
$20,056 $17,400
======= =======
O. Other Expense, Net
Year Ended
--------------------------
June 30, June 25, June 26,
2000 1999 1998
-------- -------- --------
Loss on foreign currency transactions............. $ 81 $ 4 $164
Other, net........................................ 224 373 238
---- ---- ----
$305 $377 $402
==== ==== ====
P. Concentration of Credit Risk
The Company's customers are primarily in the cable television industry. The
Company performs periodic credit evaluations of its customers' financial
conditions and generally does not require collateral. At June 30, 2000 and June
25, 1999, accounts receivables from customers in the cable industry were
approximately $50,309 and $35,178, respectively. Receivables are generally due
within 30 days. Credit losses are provided for in the consolidated financial
statements and have consistently been within management's expectations.
Sales to three customers were $54,592 (19%), $52,020 (19%) and $35,929 (13%),
respectively, in fiscal year 2000. 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. All of these principal customers
purchase both products and services.
Q. Commitments and Contingencies
The Company had an established letter of credit of $1,700 at June 30, 2000, for
its self-insured workers' compensation program.
45
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
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 30, 2000, the future minimum lease
payments for noncancelable leases with remaining lease terms in excess of one
year were as follows:
Fiscal year ending:
2001................................................................ $3,281
2002................................................................ 3,197
2003................................................................ 1,622
2004................................................................ 811
2005................................................................ 555
Thereafter.......................................................... 425
------
$9,891
======
Rent expense relating to continuing operations was $3,080, $3,412 and $2,271
for fiscal years 2000, 1999 and 1998, respectively.
R. Quarterly Results of Operations (Unaudited)
Quarterly results of operations for fiscal years 2000 and 1999 were as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
Fiscal Year 2000
Net sales............................. $70,281 $68,381 $62,936 $79,537 $281,135
Gross profit.......................... 18,033 17,399 16,266 20,891 72,589
Income from continuing operations..... 341 4,294 4,635 5,191 14,461
Discontinued operations............... 36 6 780 241 1,063
Net income............................ $ 377 $ 4,300 $ 5,415 $ 5,432 $ 15,524
======= ======= ======= ======= ========
Net income per share--basic:
Continuing operations............... $ 0.01 $ 0.15 $ 0.14 $ 0.15 $ 0.48
Discontinued operations............. -- -- 0.02 0.01 0.04
------- ------- ------- ------- --------
Net income........................ $ 0.01 $ 0.15 $ 0.16 $ 0.16 $ 0.52
======= ======= ======= ======= ========
Net income per share--diluted:
Continuing operations............... $ 0.01 $ 0.13 $ 0.13 $ 0.14 $ 0.43
Discontinued operations............. -- -- 0.02 0.01 0.03
------- ------- ------- ------- --------
Net income........................ $ 0.01 $ 0.13 $ 0.15 $ 0.15 $ 0.46
======= ======= ======= ======= ========
46
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
R. Quarterly Results of Operations (Unaudited) (Continued)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- --------
Fiscal Year 1999
Net sales......................... $38,464 $44,718 $51,819 $67,167 $202,168
Gross profit...................... 8,249 10,549 12,385 18,670 49,853
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 -- -- 0.01 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 -- -- -- 0.02
------- ------- ------- ------- --------
Net income (loss)............. $ (0.06) $ (0.07) $ 0.03 $ 0.05 $ (0.04)
======= ======= ======= ======= ========
S. Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," in
fiscal year 1999. For the three fiscal years ended June 30, 2000, the Company
operated in two industry segments; the Telecommunications Equipment segment,
which provides a comprehensive range of products, including RF amplifiers and
fiber optic equipment for the network headend, node and RF plant; and the
Broadband Management Services segment which focuses on enabling reliable, high-
speed, broadband communications over HFC networks and includes network
management and enabling services, high-speed data certification, system
integration services, data security solutions, network engineering and design,
system activation, network optimization, and system maintenance.
47
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(In thousands, except share and per share data)
Information about industry segments for fiscal years 2000, 1999 and 1998 is as
follows:
Continuing Operations
-----------------------------
Broadband
Telecommunications Management
Equipment Services Total
------------------ ---------- --------
Year ended June 30, 2000
Total revenue......................... $239,279 $41,856 $281,135
Operating income (loss)(A)............ 28,053 (2,817) 25,236
Investment income..................... 4,901
Interest expense...................... 814
Income tax expense(A)................. 6,930
Cash equivalents and marketable
securities........................... 119,848
Identifiable assets at June 30,
2000(B).............................. 132,070 20,742 152,812
Capital expenditures.................. 5,623 2,268 7,891
Depreciation and amortization......... 7,111 1,780 8,891
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 4,839
Identifiable assets at June 25, 1999.. 95,672 13,075 108,747
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) 57
Identifiable assets at June 26, 1998.. 82,319 7,841 90,160
Capital expenditures.................. 9,287 1,521 10,808
Depreciation and amortization......... 6,792 441 7,233
- --------
(A) Operating income (loss) and income tax expense for fiscal year 2000
excludes the impact of the one-time merger costs related to the
Convergence, SVCI and Worldbridge mergers (see Note B).
(B) Identifiable assets at June 30, 2000, exclude cash equivalents and
marketable securities related to the Company's follow-on public offering.
48
C-COR.net Corp.
Notes to Consolidated Financial Statements--(Continued)
(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:
U.S. Canada Europe Eliminations Total
-------- ------ ------ ------------ --------
Year ended June 30, 2000
Sales to unaffiliated
customers:
Domestic...................... $250,345 $ 42 $1,356 $ -- $251,743
Export........................ 29,392 -- -- -- 29,392
Transfers between geographic
areas......................... 170 -- -- (170) --
Total revenue.................. 279,907 42 1,356 (170) 281,135
Operating income(A)............ 25,086 100 50 -- 25,236
Investment income.............. 4,900 -- 1 -- 4,901
Interest expense............... 789 -- 25 -- 814
Income tax expense
(benefit)(A).................. 6,952 -- (22) -- 6,930
Identifiable assets at June 30,
2000.......................... 271,217 60 1,383 -- 272,660
Capital expenditures........... 7,862 -- 29 -- 7,891
Depreciation and amortization.. 8,870 -- 21 -- 8,891
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 (loss)........ 23 290 189 -- 502
Investment income.............. 432 -- 2 -- 434
Interest expense............... 436 -- 1 -- 437
Income tax expense (benefit)... 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
- --------
(A) Operating income and income tax expense for fiscal year 2000 excludes the
impact of the one-time merger costs related to the Convergence, SVCI and
Worldbridge mergers (see Note B).
49
Financial Report
To the Shareholders:
The management of C-COR.net Corp. is responsible for the preparation of all
financial statements in this Annual Report on Form 10-K. These statements were
prepared in accordance with generally accepted accounting principles from the
books and records maintained by the Company. Adequate accounting systems and
financial controls are maintained to assure that these records reflect the
transactions of the Company and that its assets are protected from loss or
unauthorized use. In addition, the Audit Committee of the Board of Directors
meets periodically with management and KPMG LLP to discuss financial reporting
matters, the internal controls, and the scope and results of the audit.
/s/ William T. Hanelly
William T. Hanelly
Vice President - Finance,
Secretary and Treasurer
August 11, 2000
50
Item 9. Changes and Disagreements on Accounting and Financial Disclosure
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The information with respect to Directors required by this item is incorporated
herein by reference to pages 3 and 4 of the Registrant's Proxy Statement dated
September 13, 2000.
The information with respect to Executive Officers required by this item is set
forth in Part I of this report.
To the Company's knowledge, based solely on a review of the copies of such
reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended June 30, 2000, its officers,
directors and ten-percent shareholders complied with all applicable Section
16(a) filing requirements, with the exception of those filings listed on page
23 of the Registrant's Proxy Statement dated September 13, 2000, incorporated
by reference herein.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference to
pages 16 through 22 of the Registrant's Proxy Statement dated September 13,
2000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to
pages 14 and 15 of the Registrant's Proxy Statement dated September 13, 2000.
Item 13. Certain Relationships and Related Transactions
None
PART IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements are included in Item 8 of this
report:
Report of Independent Auditors
Consolidated Balance Sheets as of June 30, 2000 and June 25, 1999
Consolidated Statements of Operations for the Years Ended June 30,
2000, June 25, 1999 and June 26, 1998
Consolidated Statements of Cash Flows for the Years Ended June 30,
2000, June 25, 1999 and June 26, 1998
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 2000, June 25, 1999 and June 26, 1998
51
Notes to Consolidated Financial Statements
(2) Schedule II--Valuation and Qualifying Accounts
Report of KPMG LLP
Schedules, other than the one listed above, have been omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or notes thereto.
(3) Exhibits*
Number Description of Documents
------ ------------------------
(2)(a) Agreement and Plan of Merger dated May 15, 1999, among C-COR
Electronics, Inc., C-COR Acquisition Corp. and Convergence.com
Corporation (incorporated by reference to the Registrant's 8-K filed on
July 26, 1999).
(2)(b) Agreement and Plan of Merger dated July 13, 1999, among C-COR.net
Corp., C-COR.net Acquisition Corp. and Silicon Valley Communications,
Inc. (incorporated by reference to Exhibit (2)(b) to the Registrant's
Form 10-K for the year ended June 25, 1999, Securities and Exchange
Commission File No. 0-10726).
(2)(c) Agreement and Plan of Merger dated February 18, 2000, among C-COR.net
Corp., C-COR.net Services Acquisition Corp. and Worldbridge Broadband
Services, Inc. (incorporated by reference to the Registrant's 8-K filed
on March 3, 2000).
(3)(a) Amended and Restated Articles of Incorporation of Registrant (the
"Articles of Incorporation") filed with the Secretary of State of the
Commonwealth of Pennsylvania on February 19, 1981 (incorporated by
reference to Exhibit (3)(a) to Registrant's Form 10-Q for the quarter
ended December 24, 1999, Securities and Exchange Commission File No. 0-
10726).
(3)(b) Amendment to the Articles of Incorporation of Registrant filed with the
Secretary of State of the Commonwealth of Pennsylvania on November 14,
1986 (incorporated by reference to Exhibit (3)(b) to Registrant's Form
10-Q for the quarter ended December 24, 1999, Securities and Exchange
Commission File No. 0-10726).
(3)(c) Amendment to the Articles of Incorporation filed with the Secretary of
State of the Commonwealth of Pennsylvania on September 21, 1995
(incorporated by reference to Exhibit (3)(c) to Registrant's Form 10-Q
for the quarter ended December 24, 1999, Securities and Exchange
Commission File No. 0-10726).
(3)(d) Amendment to the Articles of Incorporation filed with the Secretary of
State of the Commonwealth of Pennsylvania on July 9, 1999 (incorporated
by reference to Exhibit (3)(d) to Registrant's Form 10-Q for the
quarter ended December 24, 1999, Securities and Exchange Commission
File No. 0-10726).
(3)(e) Statement with Respect to Shares of Series A Junior Participating
Preferred Stock filed with the Secretary of State of the Commonwealth
of Pennsylvania on August 30, 1999 (incorporated by reference to
Exhibit (3)(e) to Registrant's Form 10-Q for the quarter ended December
24, 1999, Securities and Exchange Commission File No. 0-10726).
(3)(f) Amendment to the Articles of Incorporation filed with the Secretary of
State of the Commonwealth of Pennsylvania on October 20, 1999
(incorporated by reference to Exhibit (3)(f) to Registrant's Form 10-Q
for the quarter ended December 24, 1999, Securities and Exchange
Commission File No. 0-10726).
(3)(g) Amendment to Articles of Incorporation filed with the Secretary of
State of the Commonwealth of Pennsylvania on December 22, 1999
(incorporated by reference to Exhibit (3)(g) to Registrant's Form 10-Q
for the quarter ended December 24, 1999, Securities and Exchange
Commission File No. 0-10726).
52
Number Description of Documents
------- ------------------------
(3)(h) Bylaws of Registrant, as amended through August 17, 1999 (incorporated
by reference to Exhibit (3)(e) to the Registrant's Form 10-K for the
year ended June 25, 1999, Securities and Exchange Commission File No.
0-10726).
(4)(a) Specimen of Common Stock Certificate (incorporated by reference to
Exhibit 4 to Amendment No. 1 of Form S-1 Registration Statement, File
No. 2-70661).
(4)(b) Rights Agreement, dated as of August 17, 1999, between C-COR.net Corp.
and American Stock Transfer and Trust Co, as Rights Agent, including
the Form of Statement with Respect to Shares as Exhibit A, the Form of
Right Certificate as Exhibit B and the Summary of Rights as Exhibit C
(incorporated by Reference to Registrant's 8-K filed on August 30,
1999).
(10)(a) Deferred Compensation Plan between the Registrant and Richard E. Perry
dated December 6, 1989, (incorporated by reference to Exhibit (10)(y)
to the Registrant's Form 10-K for the year ended June 30, 1990,
Securities and Exchange Commission File No. 0-10726).
(10)(b) 1989 Non-Employee Directors' Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 28 to Form S-8 Registration
Statement, File No. 33-35208).
(10)(c) Indemnification Agreement dated February 3, 1992, between the
Registrant and Gerhard B. Nederlof (incorporated by reference to
Exhibit (10)(gg) to the Registrant's Form 10-K for the year ended June
26, 1992, Securities and Exchange Commission File No. 0-10726).
(10)(d) Supplemental Retirement Plan Participation Agreement dated April 20,
1993, between the Registrant and Gerhard B. Nederlof (incorporated by
reference to Exhibit (10)(bb) to the Registrant's Form 10-K for the
year ended June 25, 1993, Securities and Exchange Commission File No.
0-10726).
(10)(e) Form of Indemnification Agreement dated August 22, 1994, between the
Registrant and David J. Eng (incorporated by reference to Exhibit
(10)(pp) to the Registrant's Form 10-K for the year ended June 24,
1994, Securities and Exchange Commission File No. 0-10726).
(10)(f) Supplemental Retirement Plan Participation Agreement dated August 22,
1994, between the Registrant and David J. Eng (incorporated by
reference to Exhibit (10)(qq) to the Registrant's Form 10-K for the
year ended June 24, 1994, Securities and Exchange Commission File
No. 0-10726).
(10)(g) Supplemental Retirement Plan Participation Agreement dated August 24,
1995, between the Registrant and Donald F. Miller (incorporated by
reference to Exhibit (10)(ll) to the Registrant's Form 10-K for the
year ended June 30, 1995, Securities and Exchange Commission File
No. 0-10726).
(10)(h) Form of Indemnification Agreement dated August 24, 1995, between the
Registrant and Donald F. Miller (incorporated by reference to Exhibit
(10)(nn) to the Registrant's Form 10-K for the year ended June 30,
1995, Securities and Exchange Commission File No. 0-10726).
(10)(i) Registrant's Retirement Savings and Profit Sharing Plan as Amended
July 1, 1989, and including amendments through April 19, 1994
(incorporated by reference to Exhibit 99.B14 to Form S-8 Registration
Statement, File No. 333-02505).
(10)(j) Supplemental Retirement Plan Participation Agreement dated August 13,
1996, between the Registrant and Lawrence R. Fisher, Jr. (incorporated
by reference to Exhibit (10)(aa) to the Registrant's Form 10-K for the
year ended June 28, 1996, Securities and Exchange Commission File No.
0-10726).
(10)(k) Form of Indemnification Agreement dated August 13, 1996, between the
Registrant and Lawrence R. Fisher, Jr. (incorporated by reference to
Exhibit (10)(cc) to the Registrant's Form 10-K for the year ended June
28, 1996, Securities and Exchange Commission File No. 0-10726).
53
Number Description of Documents
----------- ------------------------
(10)(l) Registrant's Supplemental Executive Retirement Plan effective May
1, 1996 (incorporated by reference to Exhibit (10)(ff) to the
Registrant's Form 10-K for the year ended June 28, 1996,
Securities and Exchange Commission File No. 0-10726).
(10)(m)(i) 1988 Stock Option Plan (incorporated by reference to Exhibit
(10)(kk)(i) to the Registrant's Form 10-K for the year ended June
28, 1996, Securities and Exchange Commission File No. 0-10726).
(10)(m)(ii) Amendment to 1988 Stock Option Plan (incorporated by reference to
Exhibit (10)(kk)(ii) to the Registrant's Form 10-K for the year
ended June 28, 1996, Securities and Exchange Commission File No.
0-10726).
(10)(n)(i) 1992 Stock Purchase Plan (incorporated by reference to Exhibit
(10)(ll)(i) to the Registrant's Form 10-K for the year ended June
28, 1996, Securities and Exchange Commission File No. 0-10726).
(10)(n)(ii) Amendment to 1992 Stock Purchase Plan (incorporated by reference
to Exhibit (10)(ll)(ii) to the Registrant's Form 10-K for the year
ended June 28, 1996, Securities and Exchange Commission File No.
0-10726).
(10)(o) Amended and Restated Employment Agreement dated July 21, 1997,
between the Registrant and Richard E. Perry (incorporated by
reference to Exhibit (10)(nn) to the Registrant's Form 10-K for
the year ended June 27, 1997, Securities and Exchange Commission
File No. 0-10726).
(10)(p) Amendment to Employment Agreement dated January 18, 2000, between
the Registrant and Richard E. Perry.
(10)(q) Amended and Restated Employment Agreement dated July 30, 1997,
between the Registrant and Gerhard B. Nederlof (incorporated by
reference to Exhibit (10)(oo) to the Registrant's Form 10-K for
the year ended June 27, 1997, Securities and Exchange Commission
File No. 0-10726).
(10)(r) Amendment to Employment Agreement dated January 18, 2000, between
the Registrant and Gerhard B. Nederlof.
(10)(s) C-COR Electronics, Inc. Incentive Plan (incorporated by reference
to Exhibit (10)(tt) to the Registrant's Form 10-K for the year
ended June 26, 1998, Securities and Exchange Commission File No.
0-10726).
(10)(t) Supplemental Retirement Plan Participation Agreement dated
November 9, 1998, between the Registrant and Mary G. Beahm
(incorporated by reference to Exhibit (10)(ii) to the Registrant's
Form 10-K for the year ended June 25, 1999, Securities and
Exchange Commission File No. 0-10726).
(10)(u) Form of Indemnification Agreement dated November 9, 1998, between
the Registrant and Mary G. Beahm (incorporated by reference to
Exhibit (10)(kk) to the Registrant's Form 10-K for the year ended
June 25, 1999, Securities and Exchange Commission File No. 0-
10726).
(10)(v) Supplemental Retirement Plan Participation Agreement dated October
19, 1998, between the Registrant and William T. Hanelly
(incorporated by reference to Exhibit (10)(ll) to the Registrant's
Form 10-K for the year ended June 25, 1999, Securities and
Exchange Commission File No. 0-10726).
(10)(w) Form of Indemnification Agreement dated October 19, 1998, between
the Registrant and William T. Hanelly (incorporated by reference
to Exhibit (10)(nn) to the Registrant's Form 10-K for the year
ended June 25, 1999, Securities and Exchange Commission File No.
0-10726).
54
Number Description of Documents
-------- ------------------------
(10)(x) Credit Agreement dated August 9, 1999, between the Registrant and
Broadband Capital Corporation as borrowers, and The Banks Parties
Hereto From Time to Time and Mellon Bank, N.A. as Agent (incorporated
by reference to Exhibit (10)(oo) to the Registrant's Form 10-K for
the year ended June 25, 1999, Securities and Exchange Commission File
No. 0-10726).
(10)(y) Fiscal Year 2000 Profit Incentive Plan (PIP) (incorporated by
reference to Exhibit (10)(pp) to the Registrant's Form 10-K for the
year ended June 25, 1999, Securities and Exchange Commission File No.
0-10726).
(10)(z) Amended and Restated Employment Agreement dated September 14, 1999,
between the Registrant and David A. Woodle (incorporated by reference
to Exhibit (10)(qq) to the Registrant's Form 10-K for the year ended
June 25, 1999, Securities and Exchange Commission File No. 0-10726).
(10)(aa) Amendment to Employment Agreement dated January 18, 2000, between the
Registrant and David A. Woodle.
(10)(bb) Form of Amended and Restated Change of Control Agreement (Registrant
entered into eight of such agreements, each dated January 18, 2000,
with William T. Hanelly, Mary G. Beahm, David J. Eng, Lawrence R.
Fisher, Jr., Donald F. Miller, David A. Woodle, Gerhard B. Nederlof
and Richard E. Perry respectively).
(10)(cc) Fiscal Year 2001 Profit Incentive Plan (PIP).
(10)(dd) First Amendment to Credit Agreement dated August 9, 1999, between the
Registrant and Broadband Capital Corporation as borrowers, and The
Banks Parties Hereto From Time to Time and Mellon Bank, N.A. as
Agent, dated December 29, 1999.
(10)(ee) Second Amendment to Credit Agreement dated August 9, 1999, between
the Registrant and Broadband Capital Corporation as borrowers, and
The Banks Parties Hereto From Time to Time and Mellon Bank, N.A. as
Agent, dated May 4, 2000.
(11) Statement re Computation of Earnings Per Share.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors of C-COR.net Corp.
(27) Financial Data Schedule.
- --------
* All exhibits listed herein and not otherwise incorporated by reference to
reports or registration statements of the Registrant were filed with the
Registrant's report on Form 10-K for the fiscal ended June 30, 2000. Such
exhibits are incorporated herein by reference and made a part hereof.
(b) Reports on Form 8-K filed in the fourth quarter of the fiscal year 2000:
None
(c) Exhibits: See (a) (3) above.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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)
/s/ David A. Woodle
_____________________________________
President and Chief Executive
Officer
(principal executive officer)
September 15, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 15th day of September 2000.
/s/ Richard E. Perry
______________________________________
Director, Chairman
/s/ Donald M. Cook, Jr. /s/ John J. Omlor
______________________________________ ______________________________________
Director Director
/s/ Michael J. Farrell /s/ Frank Rusinko, Jr.
______________________________________ ______________________________________
Director Director
/s/ I.N. Rendall Harper, Jr. /s/ James J. Tietjen
______________________________________ ______________________________________
Director Director
/s/ Joseph E. Zavacky /s/ William T. Hanelly
______________________________________ ______________________________________
Controller and Assistant Secretary Vice President--Finance, Secretary
(principal accounting officer) and Treasurer (principal financial
officer)
56
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C
------ ------------------- -------------------------------
ADDITIONS
-------------------------------
Charged to Charged to
Balance at Costs Costs
DESCRIPTION Beginning of Period and Expenses Accounts-Describe
----------- ------------------- ------------ -----------------
Year ended June 30, 2000
Reserves deducted from
assets to which they apply:
Allowance for Doubtful
Accounts................. $ 1,052,000 $ 286,000 $--
Inventory Reserve--
Continuing Operations.... $ 2,231,000 $ 2,150,000 $--
----------- ----------- ----
$ 3,283,000 $ 2,436,000 $--
=========== =========== ====
Reserves not deducted from
assets:
Product Warranty Reserve--
Continuing Operations.... $ 1,742,000 $ 1,855,000 $--
Product Warranty Reserve--
Discontinued Operations.. $ 410,000 $ -- $--
Workers' Compensation
Self-insurance........... $ 1,724,000 $ 449,000 $--
Allowance for Disposal of
Discontinued Operations.. $ 125,000 $ (75,000) $--
----------- ----------- ----
$ 4,001,000 $ 2,229,000 $--
=========== =========== ====
Year ended June 25, 1999
Reserves deducted from
assets to which they apply:
Allowance for Doubtful
Accounts................. $ 923,000 $ 370,000 $--
Inventory Reserve--
Continuing Operations.... $ 3,213,000 $ 1,757,000 $--
Inventory Reserve--
Discontinued Operations.. $ 845,000 $ -- $--
----------- ----------- ----
$ 4,981,000 $ 2,127,000 $--
=========== =========== ====
Reserves not deducted from
assets:
Product Warranty Reserve--
Continuing Operations.... $ 1,733,000 $ 1,184,000 $--
Product Warranty Reserve--
Discontinued Operations.. $ 2,291,000 $ (301,000) $--
Workers' Compensation
Self-insurance........... $ 1,319,000 $ 837,000 $--
Allowance for Disposal of
Discontinued Operations.. $ 600,000 $ (475,000) $--
----------- ----------- ----
$ 5,943,000 $ 1,245,000 $--
=========== =========== ====
Year ended June 26, 1998
Reserves deducted from
assets to which they apply:
Allowance for Doubtful
Accounts................. $ 756,000 $ 168,000 $--
Inventory Reserve--
Continuing Operations.... $ 1,233,000 $ 2,900,000 $--
Inventory Reserve--
Discontinued Operations.. $ 3,630,000 $(1,573,000) $--
----------- ----------- ----
$ 5,619,000 $ 1,495,000 $--
=========== =========== ====
Reserves not deducted from
assets:
Product Warranty Reserve--
Continuing Operations.... $ 2,185,000 $ 983,000 $--
Product Warranty Reserve--
Discontinued Operations.. $ 3,429,000 $ 1,283,000 $--
Workers' Compensation
Self-insurance........... $ 1,162,000 $ 921,000 $--
Allowance for Disposal of
Discontinued Operations.. $ 3,375,000 $ -- $--
----------- ----------- ----
$10,151,000 $ 3,187,000 $--
=========== =========== ====
57
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. D COL. E
------ ------------------- -------------
Balance at
DESCRIPTION Deductions-Describe End of Period
----------- ------------------- -------------
Year ended June 30, 2000
Reserves deducted from assets to which they
apply:
Allowance for Doubtful Accounts............ $ 190,000(1) $1,148,000
Inventory Reserve--Continuing Operations... $1,287,000(2) 3,094,000
---------- ----------
$1,477,000 $4,242,000
========== ==========
Reserves not deducted from assets:
Product Warranty Reserve--Continuing
Operations................................ $1,365,000(3) $2,232,000
Product Warranty Reserve--Discontinued
Operations................................ $ 260,000(3) 150,000
Workers' Compensation Self-insurance....... $ 596,000(4) 1,577,000
Allowance for Disposal of Discontinued
Operations................................ $ -- (5) 50,000
---------- ----------
$2,221,000 $4,009,000
========== ==========
Year ended June 25, 1999
Reserves deducted from assets to which they
apply:
Allowance for Doubtful Accounts............ $ 241,000(1) $1,052,000
Inventory Reserve--Continuing Operations... $2,739,000(2) 2,231,000
Inventory Reserve--Discontinued
Operations................................ $ 845,000(2) --
---------- ----------
$3,825,000 $3,283,000
========== ==========
Reserves not deducted from assets:
Product Warranty Reserve--Continuing
Operations................................ $1,175,000(3) $1,742,000
Product Warranty Reserve--Discontinued
Operations................................ $1,580,000(3) 410,000
Workers' Compensation Self-insurance....... $ 432,000(4) 1,724,000
Allowance for Disposal of Discontinued
Operations................................ $ -- (5) 125,000
---------- ----------
$3,187,000 $4,001,000
========== ==========
Year ended June 26, 1998
Reserves deducted from assets to which they
apply:
Allowance for Doubtful Accounts............ $ 1,000(1) $ 923,000
Inventory Reserve--Continuing Operations... $ 920,000(2) 3,213,000
Inventory Reserve--Discontinued
Operations................................ $1,212,000(2) 845,000
---------- ----------
$2,133,000 $4,981,000
========== ==========
Reserves not deducted from assets:
Product Warranty Reserve--Continuing
Operations................................ $1,435,000(3) $1,733,000
Product Warranty Reserve--Discontinued
Operations................................ $2,421,000(3) 2,291,000
Workers' Compensation Self-insurance....... $ 764,000(4) 1,319,000
Allowance for Disposal of Discontinued
Operations................................ $2,775,000(5) 600,000
---------- ----------
$7,395,000 $5,943,000
========== ==========
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory disposal.
(3) Warranty claims honored during year.
(4) Workers compensation claims paid.
(5) Expenses for Discontinued Operations incurred from measurement date to
disposal date.
Note: Unless otherwise indicated, reserves relate to continuing operations.
58
Independent Auditors' Report
The Board of Directors and Stockholders
C-COR.net Corp.:
Under date of August 11, 2000, we reported on the consolidated balance sheets of
C-COR.net Corp. as of June 30, 2000 and June 25, 1999, and the related
consolidated statements of operations, cash flows and shareholders' equity for
each of the years in the three-year period ended June 30, 2000, which are
included herein. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedule included herein. This financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
KPMG LLP
State College, Pennsylvania
August 11, 2000
59