10-Q 1 q210q.txt FISCAL YEAR 2002 2ND QUARTER 10Q United States SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the thirteen-week period ended: December 28, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 C-COR.net Corp. -------------------------------------------------------------------- (Exact Name of Registrant as Specified in Charter) Pennsylvania 0-10726 24-0811591 ------------------------------------------------------------------------------ (State or Other Juris- (Commission File (IRS Employer diction of Incorporation) Number) Identification No.) 60 Decibel Road State College, PA 16801 -------------------------------------------------------------------------------- (Address of Principal (Zip Code) Executive Offices) (814) 238-2461 -------------------------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $.05 Par Value - 32,422,640 shares as of January 24, 2002. C-COR.net Corp. Page ---- Part I -- FINANCIAL INFORMATION Item 1. Financial Statements Independent Accountants' Review Report 2 Condensed Consolidated Balance Sheets: As of December 28, 2001 and June 29, 2001 3 Condensed Consolidated Statements of Operations: Thirteen Weeks Ended December 28, 2001 and December 29, 2000 4 Twenty-six Weeks Ended December 28, 2001 and December 29, 2000 5 Condensed Consolidated Statements of Cash Flows: Twenty-six Weeks Ended December 28, 2001 and December 29, 2000 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Part II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 Independent Accountants' Review Report The Board of Directors C-COR.net Corp. and Subsidiaries: We have reviewed the condensed consolidated balance sheet of C-COR.net Corp. and subsidiaries as of December 28, 2001 and the related condensed consolidated statements of operations and cash flows for the thirteen-week and twenty-six week periods ended December 28, 2001 and December 29, 2000. These condensed consolidated financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America. We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of C-COR.net Corp. and subsidiaries as of June 29, 2001, and the related consolidated statements of operations, cash flows, and shareholders' equity for the year then ended (not presented herein); and in our report dated August 10, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 29, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/ KPMG LLP --------------------------- Harrisburg, Pennsylvania January 11, 2002, except as to Note 11, which is as of February 11, 2002 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements
C-COR.net Corp. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data) December 28, June 29, 2001 2001 ------------ --------- (Unaudited) ASSETS Current assets Cash and cash equivalents ........................ $ 58,214 $ 87,891 Marketable securities ............................ 5,035 13,002 Interest receivable .............................. 184 426 Accounts and notes receivables, net .............. 45,937 26,167 Inventories ...................................... 49,204 34,809 Deferred taxes ................................... 17,067 12,250 Other current assets ............................. 4,904 9,740 ------------ --------- Total current assets ............................. 180,545 184,285 Property, plant and equipment, net ............... 27,648 21,609 Intangible assets, net ........................... 29,008 22,994 Deferred taxes ................................... 7,813 6,851 Other long-term assets ........................... 3,198 2,966 ------------ --------- Total assets ..................................... $ 248,212 $ 238,705 ============ ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable ................................. $ 14,552 $ 12,723 Accrued liabilities .............................. 35,156 18,297 Current portion of long-term debt ................ 256 264 ------------ --------- Total current liabilities ........................ 49,964 31,284 Long-term debt, less current portion ............. 1,733 1,501 Other long-term liabilities ...................... 2,254 2,011 ------------ --------- Total liabilities ................................ 53,951 34,796 ------------ --------- Shareholders' equity Common stock, $.05 par; authorized shares of 100,000,000; issued shares of 35,892,102 on December 28, 2001 and 35,629,737 on June 29, 2001 ................................... 1,795 1,781 Additional paid-in capital ....................... 206,947 205,154 Accumulated other comprehensive loss ............. (3,691) (131) Retained earnings ................................ 23,428 28,302 Treasury stock at cost, 3,626,581 shares on December 28, 2001 and 3,160,516 shares on June 29, 2001 ................................... (34,218) (31,197) ------------ --------- Net shareholders' equity ......................... 194,261 203,909 ------------ --------- Total liabilities and shareholders' equity ....... $ 248,212 $ 238,705 ============ ========= See independent accountants' review report and notes to condensed consolidated financial statements.
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C-COR.net Corp. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Thirteen Weeks Ended --------------------------- December 28, December 29, 2001 2000 ----------- ------------ Net sales .................................... $ 67,171 $ 66,045 Cost of sales ................................ 46,657 48,372 -------- -------- Gross margin ................................. 20,514 17,673 -------- -------- Operating expenses: Selling and administrative ................... 11,130 7,387 Research and product development ............. 7,624 4,389 Amortization of goodwill and other intangibles 1,904 82 Restructuring costs .......................... (401) 650 -------- -------- Total operating expenses ..................... 20,257 12,508 -------- -------- Income from operations ....................... 257 5,165 Interest expense ............................. (64) (16) Investment income ............................ 497 1,902 Other income, net ............................ 502 90 -------- -------- Income before income taxes ................... 1,192 7,141 Income tax expense ........................... 695 2,857 -------- -------- Income from continuing operations ............ 497 4,284 Discontinued operations: Loss on disposal of discontinued business segment, net of tax ........................ - (5) -------- -------- Net income ................................... $ 497 $ 4,279 ======== ======== Net income per share-basic: Continuing operations ........................ $ 0.02 $ 0.13 Loss on disposal of discontinued operations .. - - -------- -------- Net income ................................... $ 0.02 $ 0.13 ======== ======== Net income per share-diluted: Continuing operations ........................ $ 0.01 $ 0.13 Loss on disposal of discontinued operations .. - - -------- -------- Net income ................................... $ 0.01 $ 0.13 ======== ======== Weighted average common shares and common share equivalents Basic ...................................... 32,129 32,955 Diluted .................................... 33,517 34,032 See independent accountants' review report and notes to condensed consolidated financial statements.
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C-COR.net Corp. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Twenty-six Weeks Ended --------------------------- December 28, December 29, 2001 2000 ----------- ------------ Net sales .................................... $119,196 $144,380 Cost of sales ................................ 85,098 105,414 -------- -------- Gross margin ................................. 34,098 38,966 -------- -------- Operating expenses: Selling and administrative ................... 21,850 16,250 Research and product development ............. 14,324 8,813 Amortization of goodwill and other intangibles 3,808 164 Restructuring costs .......................... 1,102 650 -------- -------- Total operating expenses ..................... 41,084 25,877 -------- -------- Income (loss) from operations ................ (6,986) 13,089 Interest expense ............................. (89) (29) Investment income ............................ 1,000 3,917 Other expense, net ........................... (1,259) (88) -------- -------- Income (loss) before income taxes ............ (7,334) 16,889 Income tax expense (benefit) ................. (2,460) 6,791 -------- -------- Income (loss) from continuing operations ..... (4,874) 10,098 Discontinued operations: Loss on disposal of discontinued business segment, net of tax ........................ - (4) -------- -------- Net income (loss) ............................ $ (4,874) $ 10,094 ======== ======== Net income (loss) per share-basic: Continuing operations ........................ $ (0.15) $ 0.30 Loss on disposal of discontinued operations .. - - -------- -------- Net income (loss) ............................ $ (0.15) $ 0.30 ======== ======== Net income (loss) per share-diluted: Continuing operations ........................ $ (0.15) $ 0.29 Loss on disposal of discontinued operations .. - - -------- -------- Net income (loss) ............................ $ (0.15) $ 0.29 ======== ======== Weighted average common shares and common share equivalents Basic ...................................... 32,304 33,498 Diluted .................................... 32,304 35,226 See independent accountants' review report and notes to condensed consolidated financial statements.
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C-COR.net Corp. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of dollars) (Unaudited) Twenty-six Weeks Ended --------------------------- December 28, December 29, 2001 2000 ------------ ------------ OPERATING ACTIVITIES Net income (loss) ..................................... $ (4,874) $ 10,094 Adjustments to reconcile net income (loss) to net cash and cash equivalents provided by (used in) operating activities: Depreciation and amortization ..................... 8,860 4,812 Amortization of unearned compensation ............. - 4 Gain on foreign currency transactions ............. (464) - Loss on disposal of discontinued operations, net of tax ....................................... - 4 Loss on sales and write-down of property, plant and equipment .................................... 329 250 Tax benefit deriving from exercise and sales of stock option shares .............................. 451 207 Changes in operating assets and liabilities, net of effect of acquisitions: Interest receivable ............................... 242 128 Accounts and notes receivable ..................... (17,630) (2,549) Inventories ....................................... 4,026 (7,172) Other assets ...................................... 5,364 123 Accounts payable .................................. 1,062 8,366 Accrued liabilities ............................... 766 (7,300) Deferred retirement salary plan ................... (22) (7) Deferred income taxes ............................. (4,140) 1,868 Dicontinued operations - working capital changes and noncash charges .............................. - 69 -------- -------- NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN) OPERATING ACTIVITIES .......... (6,030) 8,897 -------- -------- INVESTING ACTIVITIES Purchase of property, plant and equipment ............. (4,643) (1,746) Proceeds from the sale of property, plant and equipment 1,117 - Purchases of marketable securities and other short term investments .................................... (5,032) (54,720) Proceeds from marketable securities and other short term investments .................................... 12,999 62,525 Acquisitions, net of cash acquired .................... (26,217) - -------- -------- NET CASH AND CASH EQUIVALENTS PROVIDED BY (USED IN) INVESTING ACTIVITIES .......... (21,776) 6,059 -------- -------- FINANCING ACTIVITIES Payment of debt and capital lease obligations ......... (137) (98) Issuance of common stock to employee stock purchase plan ................................................ 98 75 Proceeds from exercise of stock options and stock warrants ...................................... 1,258 1,482 Purchase of treasury stock ............................ (3,021) (23,662) -------- -------- NET CASH AND CASH EQUIVALENTS USED IN FINANCING ACTIVITIES ........................ (1,802) (22,203) -------- -------- Effect of exchange rate changes on cash and cash equivalents .................................... (69) - -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS ................. (29,677) (7,247) Cash and cash equivalents at beginning of period ...... 87,891 95,379 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 58,214 $ 88,132 ======== ======== Supplemental cash flow information: Non-cash investing activities Fair value adjustment of available-for-sale securities $ (19) $ 63 See independent accountants' review report and notes to condensed consolidated financial statements.
6 C-COR.net Corp. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (in thousands except per share data) 1. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, in the opinion of management, contain all adjustments (consisting only of normal, recurring adjustments) necessary to fairly present the Company's financial position as of December 28, 2001, and the results of its operations for the thirteen-week and twenty-six week periods ended December 28, 2001 and December 29, 2000. Operating results for the thirteen-week and twenty-six week periods are not necessarily indicative of the results that may be expected for the year ending June 28, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-K for the year ended June 29, 2001. 2. DESCRIPTION OF BUSINESS C-COR.net Corp. (the Company) designs, manufactures and markets network distribution and transmission products and provides services and operational support systems to operators of advanced hybrid fiber coax (HFC) broadband networks. The Company operates in two industry segments: the Telecommunications Equipment segment, which consists of the Broadband Communications Products Division; and the Broadband Management Services segment, which consists of both the Broadband Management Solutions Division and the Broadband Network Services Division (see Note 10). The Broadband Communications Products Division is responsible for research, development, management, production, support and sales of advanced fiber optic and radio frequency (RF) equipment. A digital video transport product line was added to this division with the acquisition of certain operations from ADC Telecommunications, Inc. (ADC) on August 4, 2001 (see Note 4). The Broadband Management Solutions Division is responsible for the development, integration, management, implementation, support and sales of operational support systems that focus on network management and mobile workforce management solutions. The Broadband Network Services Division provides outsourced technical services, including network engineering and design, construction, activation, optimization, certification, maintenance and operations. 3. ACCOUNTING CHANGE AND ACCOUNTING PRONOUNCEMENT In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (Statement 141). Statement 141 addresses financial accounting and reporting for business combinations and requires that all business combinations within the scope of Statement 141 be accounted for using only the purchase method. Statement 141 is required to be adopted for all business combinations initiated after June 30, 2001. Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. Statement 142 also addresses how goodwill and other 7 intangible assets should be accounted for after they have been initially recognized in the financial statements. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121). The Company was required to adopt the provisions of Statement 141 as of July 2001, and will adopt Statement 142 effective June 29, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in purchase business combinations completed after June 30, 2001, but before Statement 142 is adopted in full, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement requires the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company's consolidated statement of operations. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $6,242 and unamortized identifiable intangible assets in the amount of $9,228 that will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $646 and $1,291 for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. This compares to amortization expense related to goodwill of $62 and $123, for the same respective periods of the prior year. Because of the extensive effort needed to comply with adopting Statement 142, it is not practicable to reasonably estimate the impact of adopting Statement 142 on the Company's consolidated financial statements at the date of this report, including whether the Company will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144), which supersedes both Statement 8 121 and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142. The Company is required to adopt Statement 144 effective June 29, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on the Company's consolidated financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of the Statement for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on the Company's consolidated financial statements. 4. BUSINESS COMBINATIONS On July 3, 2001, a wholly owned subsidiary of the Company acquired Aerotec Communications Inc. (Aerotec) for $2,250. Additional cash payments of up to $3,750 are required to be made to Aerotec shareholders if certain performance targets are met. The Company recorded goodwill of $671 in connection with this transaction, which represented the excess of the purchase price and related costs over the fair value of the acquired net assets of the business (see Note 3). On August 4, 2001, the Company acquired certain assets and assumed certain liabilities of ADC. The assets and operations acquired from ADC were considered the purchase of a business and have been included in the condensed consolidated financials statements since the date of purchase. The assets purchased include the Optiworx(TM) and DV6000 series product lines, as well as other related cable infrastructure products from ADC's Broadband Communications Division, located in Meriden, Connecticut, Buenos Aires, Argentina, and Klagenfurt, Austria. These facilities and their assets became part of the Company's Broadband Communications Products Division. The purchase of these assets and operations will enable the Company to increase its business volume, expand its customer base and installed equipment base both in the United States and abroad, add an established product offering, particularly in the digital video transport market, and provide the Company with a skilled workforce with extensive industry experience that enhances and expands the scope of our existing research and product development capabilities. Subsequent to December 28, 2001, the Company announced the closing of its Buenos Aires, Argentina manufacturing facility (see Note 11). Consideration for the acquisition was approximately $24,904 consisting of a cash payment of $24,596 to ADC and direct transaction costs incurred of approximately 9 $308. In addition, the Company assumed certain liabilities. The Company used its available cash to fund the acquisition. The following table summarizes the estimated fair value of the assets acquired and the liabilities assumed at the date of acquisition. The Company is in the process of obtaining a third-party valuation of certain intangible assets acquired. In addition, finalization of the fair value of assets acquired and liabilities assumed related to the Company's Buenos Aires, Argentina operation will also impact the allocation of the purchase price. As a result, the allocation of the purchase price is preliminary and subject to change. Current assets $27,079 Property and equipment 7,373 Goodwill 8,215 ------- Total assets acquired 42,667 ------- Current liabilities (17,461) Long-term debt (302) ------- Total liabilities assumed (17,763) ------- Net assets acquired $24,904 ========
The excess of the purchase price over the allocation to tangible identifiable assets and liabilities has been presumed to be goodwill, and in accordance with the provisions of Statement 142, no amortization expense related to this goodwill has been reflected in the condensed consolidated statement of operations for the thirteen-week and twenty-six week periods ended December 28, 2001 (see Note 3). The following selected unaudited pro forma information is provided to present a summary of the combined results of operations, as if the acquisition had occurred as of July 1, 2000, giving effect to purchase accounting adjustments. The pro forma data is for informational purposes only and may not necessarily reflect the results of operations of the Company had the operations acquired from ADC operated as part of the Company for the twenty-six week periods ended December 28, 2001 and December 29, 2000. December 28, December 29, 2001 2000 Net sales $ 127,481 $225,412 Net income (loss) $ (5,473) $ 5,566 Net income (loss) per diluted share $ (0.17) $ 0.16
Included in the pro forma results of operations are total restructuring charges, before the effect of taxes, of $1,981 and $2,687 for the twenty-six week periods ended December 28, 2001 and December 29, 2000, respectively. These restructuring charges include $1,102 and $650 recorded by the Company in the condensed consolidated statements of operations for the twenty-six week periods ended December 28, 2001 and December 29, 2000, respectively. 10 5. INVENTORIES Inventories as of December 28, 2001 and June 29, 2001 consisted of the following:
December 28, June 29, 2001 2001 ------- ------- Finished goods $ 24,498 $ 11,277 Work-in-process 1,866 5,576 Raw materials 22,840 17,956 ------------ ------------ Total inventories $ 49,204 $ 34,809 ============ ============
6. ACCRUED LIABILITIES Accrued liabilities as of December 28, 2001 and June 29, 2001 consisted of the following:
December 28, June 29, 2001 2001 ------------- ------------- Accrued incentive plan expense $ 2,121 $ 1,540 Accrued vacation expense 2,449 1,549 Accrued salary expense 2,124 1,568 Accrued warranty expense 13,561 3,610 Accrued workers compensation self-insurance expense 1,098 1,178 Accrued restructuring 1,874 2,456 Accrued income tax payable 1,813 315 Accrued other 10,116 6,081 ------------ ------------ $ 35,156 $ 18,297 ============ ============
11 7. RESTRUCTURING COSTS During the thirteen-week period ended September 28, 2001, the Company recorded a restructuring charge of $1,503 related to the Company's decision to consolidate manufacturing operations from its Santa Clara, California location to its operation in Meriden, Connecticut. During the thirteen-week period ended December 28, 2001, the Company adjusted its restructuring estimate, resulting in a $151 reversal of previously recorded restructuring charges. The restructuring charge represents employee termination benefits for approximately 42 employees and other costs to consolidate the operation. Other costs reflect a write-down of property, plant and equipment that were employed in the operation, which the Company anticipates disposing of over the next three months, as well as costs associated with fixed contractual obligations. Details of the first quarter restructuring charge as of December 28, 2001 are as follows:
Accrual at Restructuring December 28, Charge Cash Paid Non-Cash Adjustment 2001 ------------- --------- -------- ---------- ------------ Employee severance and termination benefits $ 461 $ 56 $ - $ (174) $ 231 Write-off of property, plant and equipment 321 - 344 23 - Contractual obligations 721 - - - 721 -------- ------ ------- -------- ------- Total $ 1,503 $ 56 $ 344 $ (151) $ 952 ======== ====== ======= ======== =======
It is expected that the employee severance and termination benefit amounts accrued as of December 28, 2001 will be paid out over the next three months. The contractual obligations will be paid in accordance with the terms of the original agreements unless terminated earlier. In fiscal year 2001, the Company recorded restructuring charges of $11,031. The restructuring charges related to the Company's decisions to consolidate its manufacturing and network management operations and to discontinue providing high-speed data helpdesk services, affecting the Company's State College and Tipton, Pennsylvania and Atlanta, Georgia facility locations. During the thirteen-week period ended December 28, 2001, the Company adjusted its restructuring estimate, resulting in a $250 reversal of previously recorded restructuring charges. The restructuring charges represented employee termination benefits for approximately 850 employees and other costs to consolidate the operations. Other costs reflected a write-down of property, plant and equipment and other long-lived assets that were employed in the operations, which the Company anticipates disposing of over the next few quarters, as well as cancellation costs associated with fixed contractual obligations. 12 Details of the fiscal year 2001 restructuring charges as of December 28, 2001 are as follows:
Accrual at Restructuring December 28, Charges Cash Paid Non-Cash Adjustment 2001 ------------ --------- -------- ---------- ------------ Employee severance and termination benefits $ 5,391 $4,509 $ - $ (395) $ 487 Write-off of property, plant and equipment 4,036 4 4,177 145 - Write-off of intangibles and other long-lived assets 490 - 490 - - Contractual obligations and other 1,114 662 17 - 435 -------- ------ ------- -------- ------- Total $ 11,031 $5,175 $ 4,684 $ (250) $ 922 ======== ====== ======= ======== =======
It is expected that the remaining employee severance and termination benefit amounts accrued as of December 28, 2001 will be paid out over the next three months. The remaining contractual obligations will be paid in accordance with the terms of the original agreements unless terminated earlier. 8. COMPREHENSIVE INCOME The components of accumulated other comprehensive income (loss), net of tax if applicable, are as follows:
December 28, June 29, 2001 2001 ------------- ------------- Unrealized gain (loss) on marketable securities $ 18 $ (1) Foreign currency translation loss (3,709) (130) ------------- ------------- Accumulated other comprehensive loss $ (3,691) $ (131) ============= =============
The components of comprehensive income (loss) of the Company for the thirteen-week and twenty-six week periods ended December 28, 2001 and December 29, 2000 are as follows:
Thirteen Weeks Ended ---------------------------- December 28, December 29, 2001 2000 ------------- ------------- Net income $ 497 $ 4,279 Other comprehensive gain (loss): Unrealized gain (loss) on marketable securities 40 (45) Foreign currency translation loss (3,576) (134) ------------ ------------ Other comprehensive loss (3,536) (179) ------------ ------------ Comprehensive income (loss) $ (3,039) $ 4,100 ============ ============
13
Twenty-six Weeks Ended ---------------------------- December 28, December 29, 2001 2000 ------------- ------------- Net income (loss) $ (4,874) $ 10,094 Other comprehensive gain (loss): Unrealized gain (loss) on marketable securities 19 (63) Foreign currency translation loss (3,579) (29) ------------ ------------ Other comprehensive loss (3,560) (92) ------------ ------------ Comprehensive income (loss) $ (8,434) $ 10,002 ============ ============
The increase in the foreign currency translation loss for the thirteen-week and twenty-six week periods relates primarily to translation adjustments for the net assets of the Company's Buenos Aires, Argentina manufacturing operation, resulting from devaluation of the Argentine peso in January 2002. 9. NET INCOME (LOSS) PER SHARE Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of options and warrants. The dilutive effect of options and warrants is calculated under the treasury stock method using the average market price for the period. Net income (loss) per share is calculated as follows:
Thirteen Weeks Ended ----------------------------- December 28, December 29, 2001 2000 ------------ ------------ Income from continuing operations $ 497 $ 4,284 Loss from discontinued operations - (5) ------------ ------------ Net income $ 497 $ 4,279 ============ ============ Weighted average common shares outstanding 32,129 32,955 Common share equivalents 1,388 1,077 ------------ ------------ Weighted average common shares and common share equivalents 33,517 34,032 ============ ============ Net income per share - basic: Continuing operations $ 0.02 $ 0.13 Discontinued operations - - ------------ ------------ Net income per share $ 0.02 $ 0.13 ============ ============ Net income per share - diluted: Continuing operations $ 0.01 $ 0.13 Discontinued operations - - ------------ ------------ Net income per share $ 0.01 $ 0.13 ============ ============
14
Twenty-six Weeks Ended ----------------------------- December 28, December 29, 2001 2000 ------------ ------------ Income (loss) from continuing operations $ (4,874) $ 10,098 Loss from discontinued operations - (4) ------------ ------------ Net income (loss) $ (4,874) $ 10,094 ============ ============ Weighted average common shares outstanding 32,304 33,498 Common share equivalents - 1,728 ------------ ------------ Weighted average common shares and common share equivalents 32,304 35,226 ============ ============ Net income (loss) per share - basic: Continuing operations $ (0.15) $ 0.30 Discontinued operations - - ------------ ------------ Net income (loss) per share $ (0.15) $ 0.30 ============ ============ Net income (loss) per share - diluted: Continuing operations $ (0.15) $ 0.29 Discontinued operations - - ------------ ------------ Net income (loss) per share $ (0.15) $ 0.29 ============ ============ For the twenty-six week period ended December 28, 2001, common share equivalents of 1,494 shares were excluded from the diluted net loss per share calculation.
15 10. SEGMENT INFORMATION Information about industry segments for the thirteen-week periods ended December 28, 2001 and December 29, 2000 are as follows:
Continuing Operations -------------------------------- Broadband Telecommunications Management Equipment Services Total ------------------------------------------------ 13 week period ended December 28, 2001 Net sales $ 56,924 $ 10,247 $ 67,171 Operating income (loss) (A) 4,542 (4,686) (144) Investment income 497 Interest expense 64 Income tax expense (A) 552 Cash equivalents and marketable securities 46,576 Identifiable assets at December 28, 2001 (B) 144,910 56,726 201,636 Capital expenditures 3,038 115 3,153 Depreciation and amortization 1,881 2,535 4,416 13 week period ended December 29, 2000 Net sales $ 53,910 $ 12,135 $ 66,045 Operating income (loss) (A) 5,957 (142) 5,815 Investment income 1,902 Interest expense 16 Income tax expense (A) 3,117 Cash equivalents and marketable securities 106,668 Identifiable assets at December 29, 2000 (B) 132,661 22,462 155,123 Capital expenditures 843 410 1,253 Depreciation and amortization 1,623 649 2,272 (A) Operating income (loss) and income tax expense for the thirteen-week periods ended December 28, 2001 and December 29, 2000 exclude the impact of the restructuring costs. (B) Identifiable assets at December 28, 2001 and December 29, 2000 exclude cash equivalents and marketable securities.
Continuing Operations -------------------------------- Broadband Telecommunications Management Equipment Services Total ------------------------------------------------ 26 week period ended December 28, 2001 Net sales $ 100,844 $ 18,352 $ 119,196 Operating income (loss) (A) 4,395 (10,279) (5,884) Investment income 1,000 Interest expense 89 Income tax benefit (A) (2,047) Cash equivalents and marketable securities 46,576 Identifiable assets at December 28, 2001 (B) 144,910 56,726 201,636 Capital expenditures 4,352 291 4,643 Depreciation and amortization 3,779 5,081 8,860 26 week period ended December 29, 2000 Net sales $ 119,143 $ 25,237 $ 144,380 Operating income (A) 13,710 29 13,739 Investment income 3,917 Interest expense 29 Income tax expense (A) 7,051 Cash equivalents and marketable securities 106,668 Identifiable assets at December 29, 2000 (B) 132,661 22,462 155,123 Capital expenditures 1,202 544 1,746 Depreciation and amortization 3,533 1,279 4,812 (A) Operating income (loss) and income tax benefit for the twenty-six week periods ended December 28, 2001 and December 29, 2000 exclude the impact of the restructuring costs. (B) Identifiable assets at December 28, 2001 and December 29, 2000 exclude cash equivalents and marketable securities.
16 Sales to unaffiliated customers by geographic region are as follows:
Thirteen weeks ended -------------------------------- December 28, December 29, 2001 2000 United States $ 58,756 $ 55,278 Other 8,415 10,767 --------- --------- Total $ 67,171 $ 66,045 ========= =========
Twenty-six weeks ended -------------------------------- December 28, December 29, 2001 2000 United States $102,356 $124,146 Other 16,840 20,234 --------- --------- Total $119,196 $144,380 ========= =========
Long-lived assets by geographic region are as follows:
December 28, December 29, 2001 2000 United States $ 52,608 $ 27,204 Other 4,048 677 -------- ---------- Total $ 56,656 $ 27,881 ========= ==========
11. SUBSEQUENT EVENT The Company announced on February 11, 2002 the closing of its Buenos Aires, Argentina manufacturing facility. This action completes the final step of the integration of cable assets purchased from ADC in August 2001. The decision to close the Argentina manufacturing facility is a result of the process the Company began, as of the acquisition date, to address redundancy in the product lines and manufacturing capacity resulting from the acquisition. The Company expects to cease manufacturing operations at this facility by March 31, 2002. Fair value adjustments for inventory and fixed assets of between $4,500 to $5,000 and exit costs of between $1,500 to $2,000 will be accounted for as an adjustment of the original purchase price. In addition, the Company expects to realize a loss of approximately $1,000 related to the shut down of the Argentina operation, due primarily to the devaluation of the Argentine peso. 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General The following discussion addresses the financial condition of C-COR.net Corp. (the Company or we) as of December 28, 2001, and the results of our operations for the thirteen-week and twenty-six week periods ended December 28, 2001, compared with the same periods of the prior fiscal year. This discussion should be read in conjunction with the Management's Discussion and Analysis section for the fiscal year ended June 29, 2001, included in the Company's Annual Report on Form 10-K. Disclosure Regarding Forward-Looking Statements Some of the information presented in this report contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, our ability to expand our product offering, reduced demand for telecommunications equipment and broadband management services, the current slowdown in network upgrade activity and the level of future network upgrade activity, the trend toward more fiber in the network, our ability to develop new and enhanced products, global demand for our products and services, our ability to expand our operations internationally, including the impact of the ADC Telecommunications, Inc. (ADC) acquisition, and statements relating to our business strategy. Forward-looking statements represent our judgment regarding future events. Although we believe we have a reasonable basis for these forward-looking statements, we cannot guarantee their accuracy and actual results may differ materially from those anticipated due to a number of uncertainties, many of which we are not aware. Factors which could cause actual results to differ from expectations include, among others, capital spending patterns of the communications industry, our ability to develop new and enhanced products, continued industry consolidation, the development of competing technology, and our ability to achieve our strategic objectives. For additional information concerning these and other important factors which may cause our actual results to differ materially from expectations and underlying assumptions, please refer to the reports filed by us with the Securities and Exchange Commission. Results of Operations Net sales for the thirteen-week period ended December 28, 2001 were $67.2 million, an increase of 2% from the prior year's sales of $66.0 million for the same period. Net sales for the twenty-six week period ended December 28, 2001 were $119.2 million, a decrease of 17% from the prior year's sales of $144.4 million for the same period. Telecommunications Equipment segment sales increased by 6% to $56.9 million during the thirteen-week period, compared to $53.9 million for the same period of the prior year. Telecommunications Equipment segment sales decreased by 15% to $100.8 million during the twenty-six week period, compared to $119.1 million for the same period of the prior year. Telecommunications Equipment segment sales resulting from the acquisition of certain operations of ADC contributed approximately 43% and 41% of total segment sales for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. The increase for the quarter was attributable primarily to increased demand from domestic cable operators. The Company continues to see shifts in product requirements from radio frequency amplifiers to more fiber optics products, including digital technology, for transporting voice, video, and data. Fiber optics products increased during the quarter by 154%, compared to the same period a year ago and 18 radio frequency amplifiers decreased 37%, compared to the same period a year ago. The decline in telecommunications equipment sales for the twenty-six week period reflects the sharp slowdown of capital spending in the telecommunications industry that began in the latter part of calendar year 2000. We believe that the reduced capital spending resulted from several factors, including high customer on-hand inventory levels, delays in construction schedules for hybrid fiber coax network system build-outs, continued customer consolidation and lack of access to financing. We expect network system upgrade activity for current build-outs to continue, as customers upgrade their systems to higher bandwidth products to support new services. Broadband Management Services (BMS) segment sales decreased by 16% to $10.3 million during the thirteen-week period, compared to $12.1 million for the same period of the prior year. BMS segment sales decreased by 27% to $18.4 million during the twenty-six week period, compared to $25.3 million for the same period of the prior year. BMS segment revenues were also negatively impacted during the quarter and year-to-date periods, compared to the same periods a year ago, due to the slowdown in upgrade activities by several customers that affected demand for technical services. Domestic sales as a percentage of total consolidated sales were 87% and 86% for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to 84% and 86% for the same periods the prior year. Sales to domestic customers increased 6% during the quarter, compared to the same period of the prior year, due to increases in Telecommunications Equipment segment sales. Sales to domestic customers decreased 18% for the twenty-six week period, compared to the same period of the prior year, as a result of decreases in both Telecommunications Equipment and BMS segment sales due to the slowdown in capital spending and upgrade activities by network operators. International sales as a percentage of total consolidated sales were 13% and 14% for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to 16% and 14% for the same periods of the prior year. For the quarter and year- to-date, sales to international customers decreased 22% and 17%, respectively, due primarily to reduced sales to a major customer in Canada. The decline in sales to Canada were partially offset by increased demand in the EuroPacific and Latin American markets during the quarter and year-to-date periods. As a result of our acquisition of certain operations of ADC, we have expanded our presence in both European and Latin American markets. We acquired operations in Klagenfurt, Austria and Buenos Aires, Argentina. These operations include manufacturing, engineering, sales and administrative support activities to provide localized versions of products and services to customers in these regions. We expect the demand for our products in international markets will continue to be highly variable. The international markets represent distinct markets in which capital spending decisions for hybrid fiber coax network distribution equipment can be impacted by a variety of factors, including access to financing and general economic conditions. Gross margins were 30.5% and 28.6% for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to 26.8% and 27.0% for the same periods of the prior year. For the Telecommunications Equipment segment, gross margins were 32.3% and 30.8% for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to 26.9% and 26.8% for the same periods of the prior year. The increases in gross margins were due primarily to product mix, which included higher sales of fiber optic products which typically carry higher gross margins than radio frequency products, and improvements in our cost structure as a result of manufacturing consolidation efforts which began in the last half of the previous fiscal year. 19 For the BMS segment, gross margins were 20.6% and 16.5% for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to 26.3% and 27.7% for the same periods of the prior year. The decrease in gross margin for the periods was due primarily to costs associated with the Broadband Management Solutions Division. Costs associated with employees that support the deployment of network management and mobile workforce management solutions are included in cost of sales for the BMS segment. For the current year periods, these costs exceeded revenues recognized, due to system deployments continuing on a pilot and trial basis, thus impacting gross margins negatively. We anticipate these system deployment costs to impact gross margins negatively for the remainder of fiscal year 2002. Selling and administrative expenses were $11.1 million (16.6% of net sales) for the thirteen-week period ended December 28, 2001, compared to $7.4 million (11.2% of net sales) for the same period of the prior year. Selling and administrative expenses were $21.9 million (18.3% of net sales) for the twenty-six week period ended December 28, 2001, compared to $16.3 million (11.3% of net sales) for the same period of the prior year. Our selling and administrative expense have increased primarily as a result of personnel costs and administrative expenses related to our acquisitions of MobileForce Technologies Inc. (MobileForce) in April 2001, and certain operations of ADC in August 2001. In addition, selling and administrative expense increased due to costs associated with the implementation of a fully integrated enterprise resource planning (ERP) system. The ERP system is a software-based management tool, which is expected to simplify and standardize business processes such as customer relationship management, manufacturing and purchasing, product development and financial systems. Costs of business process reengineering activities and training associated with this project during the first half of fiscal year 2002 were expensed as incurred. We anticipate additional costs associated with this project throughout the remainder of fiscal year 2002, but believe the majority of the activities and cost related to business process reengineering to be substantially complete as of December 28, 2001. Research and product development expenses were $7.6 million (11.4% of net sales) for the thirteen-week period ended December 28, 2001, compared to $4.4 million (6.6% of net sales) for the same period of the prior year. Research and product development expenses were $14.3 million (12.0% of net sales) for the twenty-six week period ended December 28, 2001, compared to $8.8 million (6.1% of net sales) for the same period of the prior year. Research and product development expenses in the Telecommunications Product segment were $5.2 million and $9.8 million for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. This compares to $2.6 million and $5.6 million for the same periods of the prior year. The increase was primarily due to higher personnel costs resulting from inclusion of certain operations of ADC. The additional expenses incurred were primarily for the development of fiber optic products. Research and product development expenses in the BMS segment were $2.4 million and $4.5 million for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. This compares to $1.8 million and $3.2 million for the same period of the prior year. The increase is primarily due to higher personnel costs resulting from our acquisition of MobileForce in April 2001. The additional expenses incurred were primarily for the development of mobile workforce management software solutions. We anticipate continuing investments in research and product development expenses in future periods related to ongoing initiatives in the development of fiber optic products and network management and mobile workforce software capabilities. The following discussion of operating income (loss) by segment for the thirteen-week and twenty-six week periods compared to the same periods of the prior year excludes the impact of one-time restructuring costs related to consolidating our manufacturing activities. Operating income for the 20 Telecommunications Equipment segment was $4.5 million and $4.4 million for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to operating income of $6.0 million and $13.7 million for the same periods of the prior year. Higher operating expenses resulting from inclusion of expenses related to the acquired operations from ADC, as well as the previously discussed enterprise resource planning system related expenditures, resulted in reduced operating income for the periods compared to the prior year. Operating loss for the BMS segment was $4.7 million and $10.3 million for the thirteen-week and twenty-six week periods ended December 28, 2001. This compared to an operating loss of $142,000 and operating income of $29,000, for the same periods of the prior year. For the thirteen-week and year-to-date periods ended December 28, 2001, operating results of our BMS segment include amortization of goodwill and other intangibles acquired in April 2001 related to our acquisition of MobileForce. In addition, BMS operations were negatively impacted during the thirteen-week and year-to-date periods due to lower revenue and gross margins, and continue to reflect investments and development costs associated with our network management and mobile workforce products. Amortization of goodwill and other intangibles was $1.9 million and $3.8 million for the thirteen-week and twenty-six week periods ended December 28, 2001. This compares to $82,000 and $164,000 for the same periods of the prior year. The increase in amortization expense relates to goodwill and the cost of other acquired intangibles related to the acquisition of MobileForce. The cost of other acquired intangibles, including purchased technology and assembled workforce and trademarks, are being amortized on a straight-line basis over their estimated useful lives of three years. Goodwill for acquisitions prior to June 30, 2001 is being amortized on a straight-line basis over estimated useful lives of three to ten years. These costs are related to and included as part of the Company's BMS segment. An independent valuation of intangible assets related to the acquisition of certain operations of ADC has not yet been completed, and as such, could impact amortization expense in the future. Investment income was $497,000 for the thirteen-week period ended December 28, 2001, compared to $1.9 million for the same period of the prior year. Investment income was $1.0 million for the twenty-six week period ended December 28, 2001, compared to $3.9 million for the same period of the prior year. The decreases in investment income resulted from reduced investment balances compared to the same periods of the prior year and lower interest rates currently earned on short-term investments. Other income, net was $502,000 for the thirteen-week period ended December 28, 2001, compared to $90,000 for the same period of the prior year. The increase was primarily due to a foreign currency transaction gain during the period, resulting from devaluation of the Argentine peso and its effect on the Company's U.S. denominated accounts held by its foreign operation. Other expense, net was $1.3 million for the twenty-six-week period ended December 28, 2001, compared to $88,000 for the same period of the prior year. The increase in other expense resulted primarily from the write-off of a convertible debt instrument based on the Company's assessment that there was an other than temporary reduction in the fair value of the instrument. Our overall effective income tax (benefit) rate was 58% and (34%) for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. This compares to 40% for both periods of the prior year. The higher effective income tax rate for the quarter ended December 28, 2001 resulted from limited income tax benefits deriving from losses incurred by foreign operations during the period. 21 Impact of Foreign Currencies and Economic Downturn in Argentina As part of the acquisition of certain assets and assumption of certain liabilities of ADC, we acquired manufacturing facilities in Klagenfurt, Austria and Buenos Aires, Argentina. The financial condition, results of operations, and prospects of these operations are affected in general by currency fluctuations, inflation, interest rates, taxation and other political, social and economic developments. In particular, Argentina continues to experience recessionary conditions and difficulty in accessing international capital markets, and has recently faced internal disruption and social unrest. On December 20, 2001, the Argentine government placed restrictions on the exchange of currency. Subsequently, on January 6, 2002, the government of Argentina officially ended the one-to-one peg with the U.S. dollar, which was previously in effect for many years. On January 11, 2002, the currencies began market trading and resulted in a closing exchange rate of 1.65 Argentine Pesos to one dollar U.S. currency. As a result of this devaluation, and in accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation and guidance addressed in Emerging Issues Task Force D-12 Foreign Currency Translation - Selection of Exchange Rate When Trading is Temporarily Suspended, during the thirteen-week period ended December 28, 2001, we recorded a $3.6 million write-down of net assets and a corresponding currency translation adjustment as a reduction to shareholders' equity, as part of other comprehensive loss at December 28, 2001. Restructuring Costs During the thirteen-week period ended December 28, 2001, we recorded a $401,000 reversal of previously recorded restructuring charges associated with our decisions to consolidate our manufacturing operations. The adjustment resulted from lower than anticipated employee severance and termination benefits. This compares to restructuring charges of $650,000 incurred in the previous year, related to our decision to discontinue providing high-speed data Helpdesk services. Restructuring charges were $1.1 million and $650,000 for the twenty-six week periods ended December 28, 2001 and December 29, 2000, respectively. Liquidity and Capital Resources As of December 28, 2001, cash and cash equivalents and short-term investments totaled $63.2 million, down from $100.9 million at June 29, 2001. Net cash and cash equivalents used in operating activities were $6.0 million for the twenty-six week period ended December 28, 2001, compared to net cash and cash equivalents provided by operating activities of $8.9 million for the same period of the prior year. The increase in net cash and cash equivalents used in operating activities for the twenty-six week period ended December 28, 2001 was due to the net loss incurred for the period, as well as replenishment of working capital related to the operations acquired from ADC, in particular, the accounts receivables. Net cash and cash equivalents used in investing activities were $21.8 million for the twenty-six week period ended December 28, 2001, compared to cash provided by investing activities of $6.1 million for the same period of the prior year. The increase in cash and cash equivalents used in investing activities was primarily due to utilizing $26.2 million of cash for acquisitions, as well as $4.6 million to purchase property, plant and equipment during the period. 22 Net cash and cash equivalents used in financing activities were $1.8 million for the twenty-six week period ended December 28, 2001, compared to $22.2 million for the same period of the prior year. Cash used during the periods resulted primarily from the purchase of treasury stock. On April 6, 2001, we increased by 2,000,000 shares the amount of stock that may be purchased under our stock repurchase program, to allow for a total of 4,000,000 shares to be purchased. Shares may be purchased from time to time in the open market through block or privately negotiated transactions, or otherwise. We intend to use our currently available capital resources to fund the purchases. The repurchased stock is being held by us as treasury stock to be used to meet our obligations under our present and future stock option plans and for other corporate purposes. As of December 28, 2001, 2,393,590 shares had been repurchased under the stock repurchase program. Total shares held as treasury stock were 3,626,581 as of December 28, 2001. 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. In November 2001, we amended our existing credit agreement with three banks under which we could borrow up to $70.0 million. Under the new credit agreement, $20.0 million is available as a revolving line-of-credit, subject to an aggregate sub-limit of $3.0 million for issuance of letters of credit, which is committed through February 28, 2002. The stand-by credit agreement which permitted borrowing up to $50.0 million for strategic acquisitions and/or investments expired as of November 30, 2001 and was not renewed. Borrowings under the credit agreement bear interest at various rates, at our option. Borrowings on these facilities are unsecured and subject to a negative pledge on all business assets. In addition, the Company is subject to a quarterly minimum net worth test. As of December 28, 2001, we had no borrowings outstanding under the credit agreement. Management believes that operating cash flow, current cash and cash equivalents and short-term investment balances, as well as expected borrowing capacity under the credit agreement discussed above, will be adequate to provide for all operating cash requirements for the next 12 to 24 months. In addition, we have filed a Registration Statement on Form S-3, which became effective in February 2002, covering any combination of common stock, preferred stock, debt securities and warrants up to a total dollar amount of $150.0 million, from time to time in one or more offerings. Proceeds from the offerings could be used for strategic initiatives, such as potential acquisitions. Subsequent Event We announced on February 11, 2002 the closing of our Buenos Aires, Argentina manufacturing facility. This action completes the final step of the integration of cable assets purchased from ADC in August 2001. The decision to close the Argentina manufacturing facility is a result of the process we began, as of the acquisition date, to address redundancy in the product lines and manufacturing capacity resulting from the acquisition. We expect to cease manufacturing operations at this facility by March 31, 2002. Fair value adjustments for inventory and fixed assets of between $4.5 to $5.0 million and exit costs of between $1.5 to $2.0 million, will be accounted for as an adjustment of the original purchase price. In addition, we expect to realize a loss of approximately $1.0 million related to the shut down of the Argentina operation, due primarily to the devaluation of the Argentine peso. Recent Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" (Statement 141). Statement 141 addresses financial accounting and reporting for business combinations and requires that all business combinations within the scope of Statement 141 be accounted for using only the purchase method. Statement 141 is required to be adopted for all business combinations initiated after June 30, 2001. 23 Also in July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. Statement 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with Statement 121. The Company was required to adopt the provisions of Statement 141 as of July 2001, and will adopt Statement 142 effective June 29, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in purchase business combinations completed after June 30, 2001, but before Statement 142 is adopted in full, will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-Statement 142 accounting literature. In connection with Statement 142's transitional goodwill impairment evaluation, the Statement will require us to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this, we must identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. We will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the carrying amount of the reporting unit. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an indication exists that the reporting unit goodwill may be impaired and we must perform the second step of the transitional impairment test. In the second step, we must compare the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit goodwill, both of which would be measured as of the date of adoption. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit to all of the assets (recognized and unrecognized) and liabilities of the reporting unit in a manner similar to a purchase price allocation, in accordance with Statement 141. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in our consolidated statement of operations. As of the date of adoption, we expect to have unamortized goodwill in the amount of $6.2 million and unamortized identifiable intangible assets in the amount of $9.2 million that will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $646,000 and $1.3 million for the thirteen-week and twenty-six week periods ended December 28, 2001, respectively. This compares to amortization expense related to goodwill of $62,000 and $123,000, for the same respective periods of the prior year. Because of the extensive effort needed to comply with adopting Statement 142, it is not practicable to reasonably estimate the impact of adopting Statement 142 on our financial statements at the date of this report, including whether we will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. 24 In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (Statement 144), which supersedes both SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under Statement 142. We are required to adopt Statement 144 effective June 29, 2002. Management does not expect the adoption of Statement 144 for long-lived assets held for use to have a material impact on our consolidated financial statements because the impairment assessment under Statement 144 is largely unchanged from Statement 121. The provisions of Statement 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities. Therefore, management cannot determine the potential effects that adoption of Statement 144 will have on our consolidated financial statements. 25 Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of loss that may impact the financial position, results of operations or cash flow of the Company due to adverse changes in market prices and rates. We are exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and assets and liabilities denominated in currencies other than the United States dollar. We do not currently utilize derivative financial instruments to hedge certain foreign currency exposures. We do not intend to utilize derivative financial instruments for trading or speculative purposes. The Company is exposed to market risk because of changes in interest rates and the fair market value of our marketable securities portfolio. The Company classifies its marketable securities portfolios as either available-for-sale or trading, and records them at fair value. For the Company's available-for-sale securities, unrealized holding gains and losses are excluded from income and are recorded directly to shareholders' equity in accumulated other comprehensive income (loss), net of related deferred income taxes. For the Company's trading securities, unrealized holding gains and losses are included in the statement of operations in the period they arise. 26 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Shareholders The Company's annual meeting of shareholders was held on October 16, 2001. The record date was September 7, 2001, on which there were 32,507,890 shares outstanding and entitled to vote at the annual meeting. The following items were submitted to a vote by shareholders. 1. The election of two directors for a term of three years. 2. Ratification of KPMG LLP as independent auditors for the 2002 fiscal year. Mr. John J. Omlor, and Dr. James J. Tietjen were re-elected as directors until the year 2004. The voting results for the matters noted above are set forth as follows: 1. The election of three directors for a term of three years. Name of Nominee Votes For Votes Withheld ---------------------- ---------- -------------- John J. Omlor 31,582,724 191,978 Dr. James J. Tietjen 31,582,724 191,978 2. Ratification of KPMG LLP as independent auditors for the 2002 fiscal year. Votes for Votes Against Abstained ----------- ------------- ---------- 31,566,032 168,468 40,202 Item 5. Other Information (Not Applicable) Item 6. Exhibits and Reports on Form 8-K The following exhibits are included herein: (10) Amendment dated November 29, 2001, to the 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. (15) Letter re: Unaudited Interim Financial Information. Reports on Form 8-K On October 19, 2001, the Registrant filed a Form 8-K/A dated August 4, 2001, to amend the Current Report on Form 8-K dated August 4, 2001, and filed on August 20, 2001, relating to its completed purchase of certain assets of ADC Telecommunications, Inc. cable product portfolio. The purpose of this amendment was to file the required financial statements and pro forma information required in Item 7 - Financial Statements and Exhibits. On November 2, 2001, the Registrant filed a Form 8-K dated November 2, 2001 which stated that the Registrant held an Analyst Day at its headquarters located at 60 Decibel Road, State College, Pennsylvania on Friday, November 2, 2001. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. C-COR.net Corp. (Registrant) Date: February 11, 2002 /s/ William T. Hanelly --------------------------------- Chief Financial Officer (Principal Financial Officer) Date: February 11, 2002 /s/ Joseph E. Zavacky --------------------------------- Controller & Assistant Secretary (Principal Accounting Officer) 28