-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W1UDpHYrHX12PnipXWuiM5iS1DAYnHIyp51F1xkOoJJOC/3i7NEtA8uutZpjbMzB Lx7c9K3NWwsIQXgieYHiPg== 0001036050-99-001956.txt : 19990927 0001036050-99-001956.hdr.sgml : 19990927 ACCESSION NUMBER: 0001036050-99-001956 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990917 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990924 FILER: COMPANY DATA: COMPANY CONFORMED NAME: C COR NET CORP CENTRAL INDEX KEY: 0000350621 STANDARD INDUSTRIAL CLASSIFICATION: RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT [3663] IRS NUMBER: 240811591 STATE OF INCORPORATION: PA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-10726 FILM NUMBER: 99717086 BUSINESS ADDRESS: STREET 1: 60 DECIBEL RD CITY: STATE COLLEGE STATE: PA ZIP: 16801 BUSINESS PHONE: 8142382461 MAIL ADDRESS: STREET 1: 60 DECIBEL ROAD CITY: STATE COLLEGE STATE: PA ZIP: 16801 FORMER COMPANY: FORMER CONFORMED NAME: C COR ELECTRONICS INC DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K FOR C-COR.NET CORP. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported)......September 17, 1999 C-COR.net Corp. (Exact name of Registrant as specified in its charter) Pennsylvania 0-10726 24-0811591 (State or other jurisdiction of (Commission File (I.R.S. Employer incorporation or organization) Number) Identification No.) 60 Decibel Road, State College, Pennsylvania 16801 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (814) 238-2461 (Former name or former address, if changed since last report.) Item 2. Acquisition or Disposition of Assets On September 17, 1999, the Registrant consummated its acquisition of Silicon Valley Communications, Inc., a California corporation ("SVCI"), pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of July 13, 1999 by and among the Registrant, SVCI and C-COR.net Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of the Registrant ("Acquisition Sub"). Pursuant to the Merger Agreement, Acquisition Sub was merged (the "Merger") with and into SVCI, with SVCI being the surviving entity as a wholly owned subsidiary of the Registrant. As consideration for the Merger, each outstanding share of common stock of SVCI was converted into the right to receive .094534 shares of the Registrant's common stock for an aggregate of 1,542,215 shares of the Registrant's common stock (subject to reduction pursuant to certain escrow arrangments). Outstanding options and warrants to acquire SVCI common stock were converted into stock options and warrants to acquire the Registrant's common stock, using the same conversion ratio with an appropriate adjustment to the exercise price, for an aggregate of stock options and warrants to acquire 387,227 shares of the Registrant's common stock. The Registrant's only relationship with SVCI prior to the Merger was through a teaming relationship in which the Registrant and SVCI jointly marketed their respective products to a customer. The nature and amount of consideration paid in connection with the Merger was determined based on arms length negotiations between the Registrant and SVCI. The foregoing summary of the Merger is qualified in its entirety by reference to the Merger Agreement filed as Exhibit 2.1 to this report and incorporated herein by reference. The merger is being accounted for under the pooling-of-interests method of accounting and is a tax-free reorganization. Item 7. Financial Statements, Pro Forma Information and Exhibits The following financial information and exhibits are filed as part of this report: (a) Financial Statements of Silicon Valley Communications, Inc. as of and for the years ended June 25, 1999 and June 30, 1998. (audited) Report of Independent Auditors (b) In addition to the merger with SVCI, the Registrant consummated a merger with Convergence.com Corporation, a Georgia Corporation ("Convergence") on July 9, 1999 pursuant to which Convergence became a wholly owned subsidiary of the Registrant. Included below are the following consolidated financial statements of C-COR.net Corp., restated to reflect the pooling-of-interest combinations with both Convergence and SVCI. Consolidated Balance Sheets -- Years ended June 25, 1999, and June 26, 1998. Consolidated Statements of Operations -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Consolidated Statements of Cash Flows -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Consolidated Statements of Shareholders' Equity -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Notes to Consolidated Financial Statements. Report of Independent Auditors (c) Exhibits 2.1 Agreement and Plan of Merger dated as of July 13, 1999 between the Registrant, C-COR.net Acquisition Corp. and Silicon Valley Communications, Inc. (incorporated by reference to the Registrant's annual report on Form 10-K for the fiscal year ended June 25, 1999, File No. O-10726). 23.1 Consent of KPMG LLP (State College, PA) 23.2 Consent of KPMG LLP (Mountain View, CA) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. C-COR.net Corp. (Registrant) /s/ William T. Hanelly ---------------------------------------------- Date: September 24, 1999 By: William T. Hanelly Title: Vice President-Finance, Secretary and Treasurer Financial Statement Index (a) Financial Statements of Silicon Valley Communications, Inc. as of and for the years ended June 25, 1999 and June 30, 1998. (audited) Report of Independent Auditors (b) In addition to the merger with SVCI, the Registrant consummated a merger with Convergence.com Corporation, a Georgia Corporation ("Convergence") on July 9, 1999 pursuant to which Convergence became a wholly owned subsidiary of the Registrant. Included below are the following consolidated financial statements of C-COR.net Corp., restated to reflect the pooling-of-interest combinations with both Convergence and SVCI. Consolidated Balance Sheets -- Years ended June 25, 1999, and June 26, 1998. Consolidated Statements of Operations -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Consolidated Statements of Cash Flows -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Consolidated Statements of Shareholders' Equity -- Years ended June 25, 1999, June 26, 1998, and June 27, 1997. Notes to Consolidated Financial Statements. Report of Independent Auditors F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders C-COR.net Corp.: We have audited the accompanying supplemental consolidated balance sheets of C- COR.net Corp. as of June 25, 1999, and June 26, 1998, and the related supplemental consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 25, 1999. These supplemental consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these supplemental consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The supplemental consolidated financial statements give retroactive effect to the mergers of C-COR.net Corp. and Convergence.com and Silicon Valley Communications, Inc. on July 9, 1999 and September 17, 1999, respectively, which have been accounted for as poolings-of-interests as described in the description of business section of the notes to consolidated financial statements to the supplemental consolidated financial statements. Generally accepted accounting principles proscribe giving effect to consummated business combinations accounted for by the pooling-of-interests method in financial statements that do not include the dates of consummation. These financial statements do not extend through the dates of the consummation. However, they will become the historical consolidated financial statements of C-COR.net. after financial statements covering the dates of consummation of the business combinations are issued. In our opinion, the supplemental consolidated financial statements referred to above present fairly, in all material respects, the financial position of C- COR.net Corp. as of June 25, 1999, and June 26, 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 25, 1999, in conformity with generally accepted accounting principles applicable after financial statements are issued for a period which includes the dates of consummation of the business combinations. KPMG LLP State College, Pennsylvania September 20, 1999 F-2 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Consolidated Balance Sheets (in thousands of dollars except share data)
June 25, June 26, 1999 1998 -------- -------- ASSETS Current Assets Cash and cash equivalents.................................. $ 4,695 $ 3,030 Marketable securities...................................... 445 356 Accounts and notes receivables, less allowance of $1,007 in 1999; $923 in 1998........................................ 31,314 19,823 Inventories................................................ 23,565 17,809 Deferred taxes............................................. 6,335 2,797 Other current assets....................................... 3,457 2,575 Net current assets of discontinued operations.............. 433 -- -------- ------- Total current assets................................... 70,244 46,390 Property, plant, and equipment, net........................ 27,792 29,853 Intangible assets, net of accumulated amortization of $172 in 1999; $-0- in 1998..................................... 1,131 1,295 Other long-term assets..................................... 3,782 6,536 -------- ------- Total assets........................................... $102,949 $84,074 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable........................................... $ 16,286 $ 6,532 Accrued liabilities........................................ 16,242 10,831 Line-of-credit and short-term credit obligations........... 4,638 -- Current portion of long-term debt.......................... 832 926 Net current liabilities of discontinued operations......... -- 517 -------- ------- Total current liabilities.............................. 37,998 18,806 Long-term debt, less current portion....................... 3,708 5,567 Other long-term liabilities................................ 1,329 1,041 Commitments and Contingent Liabilities..................... -- -------- ------- Total liabilities...................................... 43,035 25,414 -------- ------- Shareholders' equity Preferred Stock, no par; authorized 2,000,000 shares; issued, none.............................................. -- -- Common Stock, $.10 par; authorized shares 24,000,000; issued shares of 12,761,485 in 1999 and 12,631,166 in 1998...................................................... 1,276 1,263 Additional paid-in capital................................. 44,649 42,041 Accumulated other comprehensive loss....................... (96) (99) Retained earnings.......................................... 21,065 21,351 Treasury stock at cost, shares of 600,723 in 1999 and 510,342 in 1998........................................... (6,980) (5,896) -------- ------- Total shareholders' equity............................. 59,914 58,660 -------- ------- Total liabilities and shareholders' equity............. $102,949 $84,074 ======== =======
See notes to consolidated financial statements. F-3 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Consolidated Statements of Operations (in thousands except per share data)
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Net sales....................................... $183,425 $154,041 $133,780 Cost and expenses Cost of sales.................................. 138,793 121,986 106,485 Selling and administrative..................... 27,153 19,724 18,521 Research and product development............... 11,833 9,988 7,706 Provision for restructuring costs.............. -- 625 -- Interest....................................... 1,384 399 380 Other expense (income), net.................... 110 19 (861) -------- -------- -------- 179,273 152,741 132,231 -------- -------- -------- Income from continuing operations before income taxes.......................................... 4,152 1,300 1,549 Income tax expense (benefit) Current........................................ 7,133 3,565 1,299 Deferred....................................... (2,298) (3,183) (648) -------- -------- -------- 4,835 382 651 -------- -------- -------- Income (loss) from continuing operations........ (683) 918 898 -------- -------- -------- Discontinued operations: Loss from operations of discontinued business segment, net of tax........................... -- -- (6,605) Gain (loss) on disposal of discontinued business segment, net of tax.................. 397 928 (3,830) -------- -------- -------- Net income (loss)......................... $ (286) $ 1,846 $ (9,537) ======== ======== ======== Net income (loss) per share--(basic): Continuing operations.......................... $ (0.06) $ 0.08 $ 0.07 Discontinued operations Loss from operations........................ -- -- (0.54) Gain (loss) on disposal..................... 0.04 0.08 (0.32) -------- -------- -------- Net income (loss)......................... $ (0.02) $ 0.16 $ (0.79) ======== ======== ======== Net income (loss) per share--(diluted): Continuing operations.......................... $ (0.06) $ 0.07 $ 0.07 Discontinued operations Loss from operations........................ -- -- (0.53) Gain (loss) on disposal..................... 0.04 0.08 (0.31) -------- -------- -------- Net income (loss)......................... $ (0.02) $ 0.15 $ (0.77) ======== ======== ======== Weighted Average Common Shares and Common Share Equivalents Basic.......................................... 12,098 11,895 12,143 Diluted........................................ 12,098 12,340 12,402
See notes to consolidated financial statements. F-4 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Consolidated Statements of Cash Flows (in thousands of dollars)
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Operating Activities Net income (loss)............................... $ (286) $ 1,846 $(9,537) Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Depreciation and amortization.................. 8,860 6,967 5,433 Amortization of debt discount.................. 911 -- -- (Gain) loss on disposal of discontinued operations, net of tax........................ (397) (928) 3,830 Provision for deferred retirement salary plan.. 204 292 252 Loss (gain) on sale of property, plant, and equipment..................................... 229 (14) 22 Changes in operating assets and liabilities: Accounts receivable........................... (11,491) (50) 1,127 Inventories................................... (5,756) 2,748 (1,454) Other assets.................................. (165) (2,793) (221) Accounts payable.............................. 9,754 (2,574) 3,005 Accrued liabilities........................... 5,493 3,801 (113) Deferred income taxes......................... (2,298) (3,189) (929) Discontinued operations--working capital changes and noncash charges.................. (553) 1,051 3,236 -------- -------- ------- Net cash and cash equivalents provided by operating activities........................... 4,505 7,157 4,651 -------- -------- ------- Investing Activities Purchase of property, plant, and equipment...... (8,159) (10,053) (7,244) Purchase of marketable securities............... (84) -- (200) Proceeds from sale of marketable securities..... -- 15 258 Issuance of (payments on) notes receivable, net............................................ 1,972 (2,011) 7 Change in other assets.......................... 94 (146) (317) Proceeds from sale of property, plant, and equipment...................................... 28 14 15 Proceeds from (investing activites of) discontinued operations........................ -- 656 (698) -------- -------- ------- Net cash and cash equivalents used in investing activities..................................... (6,149) (11,525) (8,179) -------- -------- ------- Financing Activities Payment of debt and capital lease obligations... (5,050) (966) (941) Proceeds from long-term debt borrowing.......... 3,097 -- -- Proceeds from (payments on) short-term credit facilities, net................................ 4,638 (3,466) 1,127 Proceeds from issuance of convertible preferred stock.......................................... 336 2,780 15,710 Tax benefit deriving from exercise and sale of stock option shares............................ 94 57 71 Issue common stock to employee stock purchase plan........................................... 76 51 88 Proceeds from exercise of stock options......... 1,202 277 278 Purchase of treasury stock...................... (1,084) (131) (5,765) -------- -------- ------- Net cash and cash equivalents provided by (used in) financing activities....................... 3,309 (1,398) 10,568 -------- -------- ------- Increase (decrease) in cash and cash equivalents.................................... 1,665 (5,766) 7,040 Cash and cash equivalents at beginning of year.. 3,030 8,796 1,762 -------- -------- ------- Cash and cash equivalents at end of year........ $ 4,695 $ 3,030 $ 8,802 ======== ======== =======
See notes to consolidated financial statements. F-5 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Consolidated Statements of Shareholders' Equity (in thousands of dollars)
Accumulated Additional Other Comprehensive Common Paid-in Comprehensive Retained Treasury Income Stock Capital Income (Loss) Earnings Stock ------------- ------ ---------- ------------- -------- -------- Balance, June 28, 1996, as reported............ $ 960 $19,602 $ (55) $32,810 $ -- Poolings of interest with Convergence and SVCI................... 252 4,082 -- (4,200) -- ------ ------- ----- ------- ------- Balance, June 28, 1996, as restated............ 1,212 23,684 (55) 28,610 -- Net loss................ $(9,537) -- -- -- (9,537) -- Other comprehensive income: -- -- -- -- -- Net unrealized holding gains on marketable securities............ 7 -- -- -- -- -- Foreign currency translation gain (loss)................ (67) -- -- -- -- -- ------- Other comprehensive income................. (60) -- -- (60) -- -- ------- Comprehensive income (loss)................. $(9,597) -- -- -- -- -- ======= Shares issued........... 21 15,698 -- -- -- Exercise of stock options................ 4 273 -- -- -- Tax benefit deriving from exercise and sale of stock option shares................. -- 71 -- -- -- Issue shares to employee stock purchase plan.... 1 87 -- -- -- Purchase of treasury stock.................. -- -- -- -- (5,765) ------ ------- ----- ------- ------- Balance, June 27, 1997.. 1,238 39,813 (115) 19,073 (5,765) Net income.............. $ 1,846 -- -- -- 1,846 -- Other comprehensive income: -- -- -- -- -- Net unrealized holding gains on marketable securities............ 7 -- -- -- -- -- Foreign currency translation gain...... 9 -- -- -- -- -- ------- Other comprehensive income................. 16 -- -- 16 -- -- ------- Comprehensive income.... $ 1,862 -- -- -- -- -- ======= Adjustment related to merger (Note A)........ -- -- -- 432 -- Shares issued........... 17 1,850 -- -- -- Exercise of stock options................ 8 270 -- -- -- Tax benefit deriving from exercise and sale of stock option shares................. -- 57 -- -- -- Issue shares to employee stock purchase plan.... -- 51 -- -- -- Purchase of treasury stock.................. -- -- -- -- (131) ------ ------- ----- ------- ------- Balance, June 26, 1998.. 1,263 42,041 (99) 21,351 (5,896) Net loss................ $ (286) -- -- -- (286) -- Other comprehensive income: -- -- -- -- -- Net unrealized holding gains on marketable securities............ 4 -- -- -- -- -- Foreign currency translation loss...... (1) -- -- -- -- -- ------- Other comprehensive income................. 3 -- -- 3 -- -- ------- Comprehensive income (Loss)................. $ (283) -- -- -- -- -- ======= Shares issued........... 1 1,254 -- -- -- Exercise of stock options................ 11 1,185 -- -- -- Tax benefit deriving from exercise and sale of stock option shares................. -- 94 -- -- -- Issue shares to employee stock purchase plan.... 1 75 -- -- -- Purchase of treasury stock.................. -- -- -- -- (1,084) ------ ------- ----- ------- ------- Balance, June 25, 1999.. $1,276 $44,649 $ (96) $21,065 $(6,980) ====== ======= ===== ======= =======
See notes to consolidated financial statements. F-6 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements For the three fiscal years ended June 25, 1999 (in thousands of dollars except share and per share data) Description of Business The Company designs and manufactures network distribution products and provides technical services in support of two-way hybrid fiber coax (HFC) networks. The Company has predominately operated in the Electronic Distribution Products segment, which provides HFC equipment for signal distribution applications primarily to the cable television (CATV) market. In order to expand the Company's product offering in the Electronics Distribution Products segment, on September 17, 1999, subsequent to the fiscal year ended June 25, 1999, the Company completed a merger with Silicon Valley Communications, Inc. ("SVCI"), whereby SVCI became a wholly-owned subsidiary of the Company. In addition, on July 9, 1999, also subsequent to the fiscal year ended June 25, 1999, the Company completed a merger with Convergence.com Corporation ("Convergence"), whereby Convergence became a wholly owned subsidiary of the Company. These transactions were accounted for under the pooling-of-interest method of accounting and accordingly, the accompanying financial statements have been retroactively restated to give effect to the Convergence and SVCI mergers as if they had occurred on June 28, 1996. As a result of the merger with Convergence, the Company now operates a separate business unit called Broadband Management Services, which provides Internet enabling technical services and support to broadband operators in the United States. A. Summary of Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its foreign and domestic subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Reporting Periods Management has adopted a fiscal year which ends on the last Friday in June. For the 52-week reporting periods presented herein, the years ended on June 25, 1999, June 26, 1998, and June 27, 1997. Convergence had operated and reported on a calendar year basis prior to the merger. Operating results for the fiscal year ended June 25, 1999 and June 26, 1998, include the operations of Convergence for the 12-month periods ended June 30, 1999 and June 30, 1998, respectively. Operating results for the fiscal year ended June 27, 1997, include the operations of Convergence for the 12-month period ended December 31, 1997. This results in an overlapping period (July 1997 through December 1997) for Convergence's results of operations being included in the restated consolidated financial statements. Accordingly, the statement of shareholders' equity for the year ended June 26, 1998 includes a $432 adjustment to eliminate the impact on retained earnings for the overlap period. Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition The Company's revenues derive principally from equipment sales, which are generally recognized when the equipment has been shipped. Revenue from Internet service is recognized monthly as services are provided to subscribers. Other service revenues, consisting of system design, field services and other consulting engagements, are generally recognized as services are rendered. F-7 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Fair Value of Financial Instruments The carrying value of cash, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the short-term nature of those instruments. The carrying value of the Company's long-term borrowings approximates fair value. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. Property, Plant and Equipment Property, plant and equipment, which includes leased property under capital leases, is stated at cost. Cost includes interest associated with capital additions. Capitalized interest was $-0- for fiscal years 1999, 1998 and 1997, respectively. Depreciation or amortization is calculated on the straight-line method for financial statement purposes based upon the following estimated useful lives: Building and improvements under capital lease................. 15 years Buildings..................................................... 15 to 25 years Machinery and equipment under capital lease................... 5 years Machinery and equipment....................................... 3 to 10 years Leasehold improvements........................................ 7 to 15 years
Computer Software Under Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" (Statement 86), the Company capitalizes certain internal and purchased software development and production costs once technological feasibility has been achieved. For the fiscal years ended 1999 and 1998, the Company capitalized $389 and $670, respectively, of purchased software development costs, which is included in other long-term assets in the consolidated financial statements. The Company did not capitalize any software development costs during fiscal year 1997. Amortization will commence upon initial product release, which the Company anticipates will occur during the first quarter of its fiscal year 2000, and as such no amortization has been recorded in fiscal years 1999 and 1998. Intangible Assets Patents, trademarks and licenses are carried at cost less accumulated amortization, which is calculated on a straight-line basis over the estimated three year useful life of the asset. The patents, trademarks and license costs relate to purchased and internally developed product lines. For fiscal years ended 1999, 1998 and 1997, the Company recorded $172, $-0- and $-0- of amortization, respectively. Income Taxes Under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. F-8 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Shareholders' Equity In fiscal years 1999 and 1998, the Company repurchased 90,381 shares for $1,084 and 10,342 shares for $131, respectively, of its common stock under a stock repurchase program adopted in September 1997. In fiscal year 1997, the Company repurchased 500,000 shares of its common stock for $5,765, under a stock repurchase program adopted in December 1996. The Company used its available capital resources to fund the purchases under both repurchase programs. The repurchased stock is being held by the Company as treasury stock and is available to be used in meeting the Company's obligations under its present and future stock option plans and for other corporate purposes. In May 1999, the Company terminated the stock repurchase program adopted in September 1997. Cash Equivalents The Company considers all highly liquid investments, with a maturity of three months or less when purchased, to be cash equivalents. Cash equivalents are reflected at the lower of cost or market. Marketable Securities Marketable securities at June 25, 1999, consisted of municipal bonds and equity securities. The Company follows the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (Statement 115), in accounting for marketable securities. Under Statement 115, the Company classifies all of its marketable securities as available-for-sale and records them at fair value. Unrealized holding gains and losses are excluded from income and are recorded directly to shareholders' equity in accumulated other comprehensive income, net of related deferred income taxes. Net income (loss) per share Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (Statement 128), became effective for financial statements issued for periods ending after December 15, 1997. The Company adopted this statement in the second quarter of fiscal year 1998, and has restated prior periods presented as required. Implementation of this Statement did not have a material effect on the Company's consolidated financial statements. F-9 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Basic earnings (loss) per share are computed based on the weighted average number of common shares outstanding, excluding any dilutive options and awards. Dilutive net income (loss) per share is computed based on the weighted average number of common shares outstanding plus the dilutive effect of options. The dilutive effect of options is calculated under the treasury stock method using the average market price for the period. Net income (loss) per share is calculated as follows:
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Income (loss) from continuing operations.... $ (683) $ 918 $ 898 Gain (loss) from discontinued operations.... 397 928 (10,435) ------- ------- -------- Net income (loss)........................... $ (286) $ 1,846 $ (9,537) ------- ------- -------- Basic shares outstanding.................... 12,098 11,895 12,143 Common stock equivalents.................... -- 445 259 ------- ------- -------- Dilutive potential common shares............ 12,098 12,340 12,402 ------- ------- -------- Net income (loss) per share--(basic) Continuing operations...................... $ (0.06) $ 0.08 $ 0.07 Discontinued operations.................... 0.04 0.08 (0.86) ------- ------- -------- Net income (loss)........................... $ (0.02) $ 0.16 $ (0.79) ------- ------- -------- Net income (loss) per share--(diluted) Continuing operations...................... $ (0.06) $ 0.07 $ 0.07 Discontinued operations.................... 0.04 0.08 (0.84) ------- ------- -------- Net income (loss)........................... $ (0.02) $ 0.15 $ (0.77) ------- ------- --------
Product Warranty The Company warrants its products against defects in materials and workmanship, generally for three to five years depending upon product lines. A provision for estimated future costs relating to warranty expense is recorded when product is shipped, based upon historical claims history and specifically identified warranty exposures. Restructuring Costs On June 25, 1998, the Company announced the closing of its manufacturing plant located in Reedsville, Pennsylvania. As a result of this action, the Company incurred restructuring charges in the fourth quarter of its fiscal year 1998 of $625. The restructuring charge represented salaries and benefits for approximately 143 employees affected by the plant closing. The work force reduction occurred during the first quarter of fiscal year 1999, thereby eliminating the restructuring accrual at June 25, 1999. At June 26, 1998, the Company had a Lease/Option to Purchase Agreement with the Mifflin County Industrial Development Corporation (MCIDC) for the building and improvements located in Reedsville, Pennsylvania. On August 10, 1998, the Company purchased the facility using its available capital resources and expects to sell the facility at a price in excess of its net carrying value. The facility has been reclassified from property, plant and equipment to property held-for-sale, which is included in other current assets on the consolidated balance sheet as of June 25, 1999, with a carrying value of $1,281. F-10 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Comprehensive Income In fiscal year 1999, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (Statement 130), which requires net unrealized investment gains or losses on the Company's available- for-sale securities and net foreign exchange gains or losses on translation, which previously were reported directly in shareholders' equity, to be included in accumulated other comprehensive income in the consolidated balance sheet and in the disclosure of comprehensive income. The totals of other comprehensive income items and comprehensive income (which includes net income) are displayed separately in the consolidated statements of shareholders' equity. The adoption of this statement had no effect on net income or shareholders' equity. The components of other comprehensive income (loss) and the related tax effects are as follows:
Income Amount Tax Amount Before Expense Net of Tax (Benefit) Taxes ------ --------- ------ Fiscal year ended June 25, 1999 Unrealized holding gain during the fiscal year..... $ 7 $ 3 $ 4 Net foreign exchange loss.......................... (2) (1) (1) ----- ---- ---- Total other comprehensive income................... $ 5 $ 2 $ 3 ===== ==== ==== Fiscal year ended June 26, 1998 Unrealized holding gain during the fiscal year..... $ 12 $ 5 $ 7 Net foreign exchange gain.......................... 15 6 9 ----- ---- ---- Total other comprehensive income................... $ 27 $ 11 $ 16 ===== ==== ==== Fiscal year ended June 27, 1997 Unrealized holding gain during the fiscal year..... $ 12 $ 5 $ 7 Net foreign exchange loss.......................... (112) (45) (67) ----- ---- ---- Total other comprehensive income (loss)............ $(100) $(40) $(60) ===== ==== ====
Accounting and Disclosure Changes In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (Statement 133), which was effective for fiscal years beginning after June 15, 1999. In July 1999, the FASB announced it was delaying the effective date of Statement 133 for one year, to fiscal years beginning after June 15, 2000. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company anticipates adopting this Statement in its fiscal year 2001 consolidated financial statements as required. Implementation of this Statement is not expected to have a material effect on the Company's consolidated financial statements. B. Discontinued Operations On July 10, 1997, the Company announced that it would discontinue its Digital Fiber Optics Transmission Products segment located in Fremont, California, in a nine-month wind-down process. An estimated loss on disposal, including write- offs of inventory and fixed assets and other costs from the measurement to the disposal date, were recorded in fiscal year 1997. The estimated loss, net of tax benefit of $1,974 on the disposal of the discontinued business segment, was $3,830 in fiscal year 1997. F-11 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) The Company completed the phase-down of this operation as of March 1998. A gain on disposal of the discontinued business segment of $397, net of tax expense of $477, was recorded during the fiscal year ended 1999. The gain in fiscal year 1999 resulted primarily from settlement of certain warranty claims. The Company recorded a gain of $928, which includes a net tax benefit of $94 on the disposal of the discontinued segment in fiscal year 1998. In fiscal year 1998, the gain derived primarily from higher than anticipated proceeds associated with the disposal of assets, primarily inventory, and lower than anticipated operating costs from the measurement date to the disposal date. The after-tax loss from operations of the discontinued business segment was $6,605 for fiscal year 1997. The primary factors contributing to the loss from operations of the discontinued business segment in fiscal year 1997 were increased warranty costs of $3,300 and an impairment loss on goodwill of $571, recorded in the fourth quarter of fiscal year 1997. Operating results for the discontinued business segment are segregated and reported as discontinued operations in the accompanying consolidated statements of operations. Summarized information relating to the discontinued operation for fiscal year 1997 is as follows:
June 27, 1997 -------- Net sales......................................................... $ 7,994 Costs and expenses................................................ (17,351) -------- Loss before income taxes.......................................... (9,357) Income tax benefit................................................ 2,752 -------- Net loss.......................................................... $ (6,605) ========
The assets and liabilities of the discontinued operations have been reclassified in the accompanying consolidated financial statements to separately identify them as net current assets (liabilities) related to the discontinued operations. These net assets consist of net working capital and other assets, less related liabilities as follows as of June 25, 1999, and June 26, 1998:
June 25, June 26, 1999 1998 -------- -------- Current assets: Accounts receivable.................................... $ 16 $ 150 Notes receivable....................................... 796 981 Deferred tax assets.................................... 474 1,602 Other assets........................................... -- 156 ----- ------ 1,286 2,889 ----- ------ Current liabilities: Accrued warranty and other............................. (728) (2,806) Allowance for disposal of discontinued operations...... (125) (600) ----- ------ (853) (3,406) ----- ------ Net current assets (liabilities) of discontinued operations.............................................. $ 433 $ (517) ===== ======
F-12 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) C. Marketable Securities Marketable securities as of June 25, 1999, and June 26, 1998, consisted of the following:
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair Cost Gains Losses Value --------- ---------- ---------- ----- June 25, 1999: Available-for-sale: Municipal bonds....................... $351 $-- $ (9) $342 Equity securities..................... 101 2 -- 103 ---- ---- ---- ---- $452 $ 2 $ (9) $445 ==== ==== ==== ==== June 26, 1998: Available-for-sale: Municipal bonds....................... $366 $-- $(12) $354 Equity securities..................... 2 -- -- 2 ---- ---- ---- ---- $368 $-- $(12) $356 ==== ==== ==== ====
Maturities of investment securities classified as available-for-sale at June 25, 1999, were as follows:
Fair Cost Value ---- ----- Available-for-sale: Due after one year through five years............................ $351 $342 Equity securities................................................ 101 103 ---- ---- $452 $445 ==== ====
D. Inventories
June 25, June 26, 1999 1998 -------- -------- Finished goods............................................. $ 3,287 $ 2,850 Work-in-process............................................ 3,038 1,874 Raw materials.............................................. 17,240 13,085 ------- ------- $23,565 $17,809 ======= =======
Included in the amounts above are reserves of $2,231 at June 25, 1999, and $3,213 at June 26, 1998. F-13 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) E. Property, Plant, and Equipment
June June 25, 26, 1999 1998 ------- ------- Land........................................................ $ 468 $ 468 Building and improvements under capital lease............... -- 1,727 Buildings................................................... 10,760 10,683 Machinery and equipment under capital lease................. 343 217 Machinery and equipment..................................... 50,874 44,393 Leasehold improvements...................................... 1,326 1,123 ------- ------- 63,771 58,611 Less accumulated depreciation and amortization.............. 35,979 28,758 ------- ------- $27,792 $29,853 ======= =======
F. Intangible Assets
June 25, June 26, 1999 1998 -------- -------- Cost of intangibles: Patents and trademarks................................... $1,045 $1,045 Licensing costs.......................................... 258 250 ------ ------ 1,303 1,295 ------ ------ Less accumulated amortization: Patents and trademarks................................... $ (116) $ -- Licensing costs.......................................... (56) -- ------ ------ (172) -- ------ ------ Net book value............................................. $1,131 $1,295 ====== ======
G. Credit Facilities The Company has a line-of-credit with a bank, whereby the Company may borrow the lesser of $25,000, net of outstanding letters of credit up to a $2,000 sub- limit, or a percentage of eligible accounts receivable and inventory. The borrowings bear interest at various rates generally equal to the London Interbank Offered Rate (LIBOR) plus 1.00% and require compliance with certain covenants. Interest is payable in 30 days as billed. The line-of-credit agreement is committed through December 31, 1999. Accounts receivable and inventory collateralize the borrowings. At June 25, 1999, and June 26, 1998, the Company had no short-term borrowings outstanding on this revolving line-of- credit. Based upon the Company's analysis of eligible accounts receivable and inventory, approximately $23,300 was available to borrow as of June 25, 1999. On August 9, 1999, the Company replaced this revolving line-of-credit agreement with a new credit agreement (Reference Note T). As a result of the Company's merger with SVCI, the Company has an additional line of credit with a bank, which provided for borrowings of up to $3,000, a bank bridge loan, which provided for borrowings of up to $1,000, and a bank equipment term loan of $300. The line of credit and term loan bear annual interest at the bank's prime rate plus 0.50% (8.25% as of June 25, 1999), with maturity dates of June 30, 1999, and August 30, 2000, respectively. The bridge loan bears interest at the bank's prime rate plus 1.5% (9.25% as of June 25, 1999), with a maturity date of September 4, 1999. The outstanding balances on the line of credit, bridge loan, and the term loan are $2,515, $500, and $188, respectively, as of June 25, 1999. The line of credit and loans F-14 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) are fully collateralized by a continuing security interest in substantially all assets presently owned or subsequently acquired by SVCI. The line of credit and loans contain certain restrictive financial covenants. As of June 25, 1999, the SVCI was not in compliance with certain of the covenants. The bank agreed to defer action on the noncompliance event pending the signing of a merger agreement. A merger agreement was signed with the Company on July 13, 1999. From March to May 1999, the Company borrowed $1,817 from certain founders and shareholders of SVCI under promissory notes payable. As of June 25, 1999, the balance was $1,435. The notes bear interest at an annual rate of 9% and are due in July 1999. In connection with these notes, the Company issued warrants to purchase the Company's common stock (See Note J). In connection with the bridge loan, warrants to purchase 4,727 shares of the Company's common stock were issued at an exercise price of $42.31 per share. These warrants have a fair value of $41 and are being amortized over the life of the bridge loan. In fiscal year 1998, in connection with the line of credit and term loan, warrants to purchase 3,025 shares of the Company's common stock were issued at an exercise price of $74.05 per share. The purchase rights represented by these warrants expire on January 4, 2002. The warrants have a fair value of $13 and are being amortized over the life of the related debt instruments. On October 21, 1998, a then existing bank line of credit and term loan was restructured. In consideration for the restructuring, warrants to purchase 945 shares of the Company's common stock were issued at an exercise price of $74.05 per share. The warrants are exercisable upon issuance and expire on January 4, 2002. The warrants have a fair value of $4 and are being amortized over the life of the related debt instruments. H. Long-term Debt
June 25, June 26, 1999 1998 -------- -------- Notes payable.............................................. $4,392 $4,909 Capital lease obligations.................................. 148 1,584 ------ ------ 4,540 6,493 Less current portion....................................... 832 926 ------ ------ $3,708 $5,567 ====== ======
Notes Payable: The Company obtained funding through the Pennsylvania Industrial Development Authority (PIDA) of $539 for construction of the Tipton, Pennsylvania, manufacturing facility. The PIDA borrowing has an interest rate of 3%, which is contingent upon meeting certain job creation commitments. Monthly payments of principal and interest of $4 are required through 2006. Certain property, plant and equipment collateralize the borrowing. The principal balance at June 25, 1999, was $264. The Company obtained funding through the Pennsylvania Industrial Development Authority (PIDA) of $1,952 for 40% of the cost of building expansion at its manufacturing facility in State College, Pennsylvania. The PIDA borrowing has an interest rate of 2%, which is contingent upon meeting certain job creation commitments. Monthly payments of principal and interest of $13 are required through 2010. Certain property, plant and equipment collateralize the borrowing. The principal balance at June 25, 1999, was $1,528. On October 19, 1998, the Company borrowed $3,000 under a term loan facility with a bank. The term loan requires monthly principal payments of $50, plus interest based on a one-to-three month variable rate at LIBOR F-15 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) plus 1.15%, through 2003. The Company is using a derivative financial instrument to reduce its exposure to market risk resulting from interest rates. On October 20, 1998, the Company entered into an interest rate swap agreement that fixes the interest rate at 6.14% on the notional amount of floating rate debt through October 21, 2003. The financial institution, as counterparty to the agreement, will pay the Company a floating interest rate based on a one- month LIBOR rate during the term of the agreement in exchange for the Company paying the fixed interest rate. Interest payments are made monthly. The Company is at risk of loss from this swap agreement in the event of nonperformance by the counterparty. The Company believes this risk to be minimal. The principal balance under this term loan at June 25, 1999, was $2,600. On August 20, 1998, the Company paid off the remaining balances of two loans obtained from the Pennsylvania Sunny Day Fund. The original principal balance of the loans totaled $4,500, which funded the expansion and renovation of the Company's State College facility. The two notes evidencing the funding had an interest rate of 2%, which was contingent upon meeting certain job creation commitments. The first note was for $488 with an original maturity of 15 years, and the second was for $4,012 with an original maturity of 7 years. Monthly payments of principal and interest of $3 and $51, respectively, were required on these notes through the years 2010 and 2002, respectively. Certain equipment collateralized the borrowing. The loan balances were paid off in order to eliminate certain restrictive covenants associated with the loan agreements. The principal balances of the two loans paid off were $409 and $2,506, respectively. Capital Lease Obligations: As a result of the Company's decision on June 25, 1998, to close its manufacturing facility located in Reedsville, Pennsylvania, the Company executed its option to purchase the building and improvements for approximately $1,454, plus closing costs, under the Lease/Option to Purchase Agreement it had with the MCIDC on August 10, 1998. The Company was the guarantor of several borrowing commitments by the MCIDC for financing the $1,727 cost of the project. The lease called for a monthly payment of $14, which was equal to the monthly principal and interest of the various borrowing commitments by the MCIDC through 2010. The original term of the lease was for 15 years with the option to purchase the leased premises at any time during the lease term for the outstanding balance of the borrowing commitments plus closing costs. The borrowing commitments carried a weighted-average interest rate of 4.7%. For financial accounting purposes, the lease was accounted for during fiscal year 1998 as a capital lease and, accordingly, an asset and liability were recorded. As of June 25, 1999, the building and improvements were reclassified as property held-for-sale, as part of other current assets in the consolidated balance sheet. As a result of the mergers with Convergence and SVCI, the Company acquired various capital leases for machinery and equipment, office equipment and furniture and fixtures that expire through 2003. Long-term debt at June 25, 1999, had scheduled maturities as follows: Fiscal year ending: 2000................................................................ $ 832 2001................................................................ 788 2002................................................................ 796 2003................................................................ 789 2004................................................................ 173 Thereafter.......................................................... 1,162 ------ $4,540 ======
F-16 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) At June 25, 1999, the future minimum payments required under capital lease arrangements are as follows: Fiscal year ending: 2000................................................................. $ 91 2001................................................................. 36 2002................................................................. 36 2003................................................................. 22 ---- $185 Less amount representing interest...................................... 37 ---- Present value of future minimum lease payments......................... 148 Less current portion of obligation under capital leases................ 73 ---- Long-term obligations under capital lease.............................. $ 75 ====
Total interest paid on the short-term credit facilities (Reference Note G) and long-term debt was $387, $372 and $341 for fiscal years ended 1999, 1998 and 1997, respectively. Operating Leases: The Company leases real property and other equipment under operating leases. Certain leases are renewable and provide for the payment of real estate taxes and other occupancy expenses. At June 25, 1999, the future minimum lease payments for noncancelable leases with remaining lease terms in excess of one year were as follows: Fiscal year ending: 2000................................................................ $2,096 2001................................................................ 2,123 2002................................................................ 2,090 2003................................................................ 861 2004................................................................ 572 Thereafter.......................................................... 1,129 ------ $8,871 ======
Rent expense relating to continuing operations was $2,132, $1,226 and $866 for fiscal years ended 1999, 1998 and 1997, respectively. I. Stock Award Plans In October 1998, the Company adopted a Stock Incentive Plan ("1998 Incentive Plan"), which provides for several types of equity-based incentive compensation awards. Awards, when made, may be in the form of stock options, restricted shares, performance shares and performance units. Stock options granted to employees and directors are at a price not less than 100% of the fair market value of such shares on the date of grant. Stock options granted to certain employees begin vesting in cumulative annual installments of 25% per year beginning one year after the date of grant. Options granted to non-employee directors are exercisable one year after grant. During fiscal year 1999, 2,000 restricted shares and 11,000 performance shares were awarded under the 1998 Incentive Plan. The restricted shares had an aggregate value of $22, which is being amortized over a vesting period through June 2001. The performance shares represent a right to receive common stock of the Company based upon achievement of certain performance criteria over a performance period through June 2000. Compensation expense related to the performance shares is based on current market price of the Company's common stock at the time the performance criteria is satisfied. F-17 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) The Company's previous stock option plans provided for the grant of options to employees with an exercise price per share of at least the fair market value of such shares on the date prior to grant, and to directors with an exercise price equal to the fair market value on the date of grant. Stock options granted to certain employees vest in cumulative annual installments of either 20% or 25% per year beginning one year after the date of grant. Options granted to non- employee directors were exercisable one year after grant. Certain options held by the Chairman were exercisable immediately. In connection with the merger with SVCI, outstanding incentive and non qualified stock options to acquire SVCI common stock were converted into stock options to acquire the Company's common stock at a conversion ratio of .094534 (with appropriate adjustment to the exercise price). Incentive stock options generally vest over 4 or 5 years, with 25% or 20% vesting after one year and the remainder monthly thereafter, and expire 10 years from the date of grant. Nonqualified options are generally fully vested upon issuance and expire 10 years from date of grant. The Company adopted the disclosure requirements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement 123). As allowed by Statement 123, the Company has chosen to continue to account for stock based compensation using Accounting Principles Board Opinion No 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the grant date over the amount an employee must pay to acquire the stock. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's plans been determined under Statement 123, the Company's net income (loss) and net income (loss) per share would have been adjusted to the pro forma amounts indicated below:
Year Ended ------------------------- June June 25, June 26, 27, 1999 1998 1997 ------- -------- ------- Net income (loss): As reported.................................... $ (286) $1,846 $(9,537) Pro forma...................................... $(3,392) $ 381 $(9,789) Net income (loss) per share: Basic As reported.................................. $ (0.02) $ 0.16 $ (0.79) Pro forma.................................... $ (0.28) $ 0.03 $ (0.81) Diluted As reported.................................. $ (0.02) $ 0.15 $ (0.77) Pro forma.................................... $ (0.28) $ 0.03 $ (0.79)
The per share weighted-average fair values of stock options granted during fiscal years 1999, 1998 and 1997, were $16.49, $10.92 and $4.36, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighed-average assumptions: Fiscal year 1999-expected dividend yield 0%, risk-free interest rate of 5.0 %, a volatility factor of the expected market price of the Company's common stock of .7395, and a weighted-average expected life of approximately 4 years. Fiscal year 1998-expected dividend yield 0%, risk-free interest rate of 5.72%, a volatility factor of the expected market price of the Company's common stock of .4913, and a weighted-average expected life of approximately 4 years. F-18 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Fiscal year 1997-expected dividend yield 0%, risk-free interest rate of 6.38%, a volatility factor of the expected market price of the Company's common stock of .5941, and a weighted-average expected life of approximately 4 years. The fair value of stock options included in the pro forma amounts for fiscal years 1999, 1998 and 1997 is not necessarily indicative of future effects on net income and net income per share. A summary of the status of the Company's stock option plans, as of June 25, 1999, June 26, 1998, and June 27, 1997, and changes during the years ended on those dates is presented below:
Fiscal years ended ---------------------------------------------------------------------------- June 25, 1999 June 26, 1998 June 27, 1997 ------------------------- ------------------------- ------------------------ Weighted- Weighted- Weighted- Average Average Average Shares Exercise Price Shares Exercise Price Shares Exercise Price --------- -------------- --------- -------------- -------- -------------- Outstanding at beginning of year................ 1,565,166 $12.61 804,624 $13.74 873,048 $13.42 Granted................. 819,778 $18.40 1,031,168 $10.83 118,000 $14.99 Exercised............... (128,219) $ 9.54 (45,879) $ 6.13 (44,893) $ 5.08 Canceled................ (169,676) $ 7.52 (224,747) $ 9.42 (141,531) $15.59 --------- --------- -------- Outstanding at end of year................... 2,087,049 $15.48 1,565,166 $12.67 804,624 $13.74 ========= ========= ======== Options exercisable at end of year............ 646,197 498,658 451,147
The following table summarizes information about the Company's stock option plans as of June 25, 1999:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Number Weighted-Avg. Number Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 6/25/99 Contractual Life Exercise Price at 6/25/99 Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $ 0.11 to $ 8.38....... 329,068 6.0 years $ 4.71 223,041 $ 5.95 $ 8.50 to $14.13....... 386,209 6.2 years $10.60 102,802 $10.86 $14.375 to $19.75....... 587,699 7.0 years $15.23 156,187 $15.00 $20.12 to $25.50....... 712,363 7.7 years $21.89 112,299 $21.89 $25.75 to $31.25....... 71,710 6.1 years $27.31 51,868 $27.32 --------- --------- ------ ------- ------ 2,087,049 6.9 years $15.48 646,197 $13.40 ========= ========= ====== ======= ======
J. Warrants As a result of the consummated mergers with Convergence and SVCI, warrants to acquire Convergence and SVCI common stock were converted into warrants to acquire common stock of the Company. These warrants have been issued in connection with various financing and employment arrangements. F-19 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) The following table summarizes information about warrants issued and outstanding as of June 25, 1999:
Warrants issued in connection with: Fiscal Year ------------------------------ Warrants Issued Range of Warrants Debt Equity Employment Issued as of 6/25/99 Exercise Prices Expire Financing Financing Services ------ --------------- ---------------- ----------- --------- --------- ---------- Fiscal Year 1997........ 132,348 $21.16 2001 132,348 Fiscal Year 1998........ 3,025 $74.05 2002 3,025 300,000 $10.00 2005 300,000 Fiscal Year 1999........ 114,386 $31.73 to $74.05 2002 114,386 66,930 $ 0.75 to $10.00 2003 66,930 ------- ------- ------- ------ 616,689 117,411 432,348 66,930 ======= ======= ======= ======
The fair value of the warrants issued in fiscal years 1998 and 1999, in connection with debt financing transactions, were calculated by the Company using the Black-Scholes pricing model. In fiscal year 1999, warrants to purchase 114,386 shares of the Company's stock, in connection these debt financing arrangements, had a fair value of $1,293 which is being amortized over the life of the related loans. Amortization in fiscal year 1999 totaled $911, which is included in interest expense in the accompanying statement of operations. In fiscal year 1998, in connection with these debt financing arrangements, the Company had calculated the estimated fair value of warrants issued and determined that the amount was not significant to the accompanying financial statements taken as a whole, and as such, no amortization expense has been included. No separate fair values were calculated in connection with the 432,348 warrants in fiscal years 1997 and 1998, as these were issued in connection with an equity financing transaction. Also in fiscal year 1999, the Company recognized compensation expense of $248 in connection with the issuance of warrants to an employee, as the exercise price was less than the fair value of the stock on the date of grant. K. Income Taxes Total income tax expense (benefit) was allocated as follows:
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Income from continuing operations.............. $4,835 $382 $ 651 Results of discontinued operations............. -- -- (2,752) Gain (loss) on disposal of discontinued operation..................................... 477 (94) (1,974) Stockholders' equity, for tax benefit derived from exercise and sale of stock option shares........................................ (94) (57) (71) ------ ---- ------- $5,218 $231 $(4,146) ====== ==== =======
F-20 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Income tax expense (benefit) attributable to continuing operations consisted of the following components:
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Current: Federal....................................... $ 6,459 $ 3,262 $1,493 State......................................... 615 264 (96) Foreign....................................... 59 39 (98) ------- ------- ------ 7,133 3,565 1,299 ------- ------- ------ Deferred: Federal....................................... (1,910) (2,675) (531) State......................................... (388) (508) (117) ------- ------- ------ (2,298) (3,183) (648) ------- ------- ------ $ 4,835 $ 382 $ 651 ======= ======= ======
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 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Statutory rate................................ 35.0% 35.0% 35.0% State income taxes, net of federal tax........ (10.7) (26.5) (19.8) Tax effect of foreign income and losses....... -- -- (10.3) Tax effect of foreign sales corporation....... (0.4) (24.6) (42.7) Loss of net operating loss attributable to S corporation period........................... -- 1.6 3.6 Increase in the valuation allowance for deferred tax assets.......................... 92.3 66.2 55.0 Permanent differences......................... 0.3 1.9 11.0 Other......................................... -- (24.2) 10.2 ----- ----- ----- 116.5% 29.4% 42.0% ===== ===== =====
A tax benefit of $593, deriving from the Company's Foreign Sales Corporation (FSC), was recorded in the third quarter of fiscal year 1997. The tax benefit resulted from reassessment of the Company's foreign sales transactions for fiscal years 1994, 1995 and 1996. F-21 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 25, 1999, and June 26, 1998, relating to continuing operations are presented below:
June 25, June 26, 1999 1998 -------- -------- Gross deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts..................................... $ 391 $ 255 Inventories, principally due to additional costs for tax purposes.......................................... 220 168 Inventories, principally due to accrual for obsolescence.......................................... 809 628 Compensated absence, principally due to accrual for financial reporting purposes.......................... 837 483 Workers' compensation expense accrual for financial reporting purposes.................................... 689 449 Warranty expense accrual for financial reporting purposes.............................................. 650 583 Employee benefit plan accrual for financial reporting purposes.............................................. 375 224 Deferred research and development for tax purposes..... 3,180 2,286 Net operating loss carryforwards....................... 8,676 4,647 Alternative minimum tax credit carryforwards........... 600 228 Other.................................................. 392 142 ------- ------- Total gross deferred tax assets....................... 16,819 10,093 ------- ------- Less valuation allowance................................ (7,433) (2,740) ------- ------- Net total deferred tax assets......................... 9,386 7,353 ------- ------- Gross deferred tax liabilities Plant and equipment, principally due to differences in depreciation.......................................... (1,707) (1,850) Other.................................................. (96) (218) ------- ------- Total gross deferred tax liabilities.................. (1,803) (2,068) ------- ------- Net deferred tax assets................................. $ 7,583 $ 5,285 ------- ------- Reflected on attached consolidated balance sheets as: Current deferred tax assets............................ $ 6,335 $ 2,797 Non-current deferred tax assets........................ 1,248 2,488 ------- ------- Net deferred tax assets, pertaining to continuing operations............................................. $ 7,583 $ 5,285 ======= =======
The valuation allowance for deferred tax assets as of the beginning of the fiscal year was $2,740 and $1,957 in 1999 and 1998, respectively. The net change in valuation allowance for the years ended June 25, 1999 and June 26, 1998 was an increase of $4,693 and $783, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the net total deferred tax assets, the Company will need to generate future taxable income prior to the expiration of the net operating loss carryforwards which expire at various years through 2019. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the valuation allowance at June 25, 1999. The amount of the deferred tax asset considered F-22 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. Subsequently recognized tax benefits relating to the valuation allowance for deferred tax assets as of June 25, 1999 will be allocated to income tax benefit that would be reported in the consolidated statements of operations. At June 25, 1999, the Company had a federal net operating loss carryforward of approximately $20,850 and state net operating loss carryforwards of approximately $26,650, which are available to offset future federal and state taxable income, and expire at various dates through fiscal year 2019. In addition, at June 25, 1999, the Company has research and development credit carryovers for federal and state income tax purposes of approximately $400 and $200, respectively. The federal credit carryforwards expire in the years 2010 and 2019, and the state carryforwards can be carried forward indefinitely. The Company has not recognized a deferred tax liability for the basis differences and the undistributed earnings related to its foreign subsidiaries since the investment is essentially permanent in duration. Undistributed earnings were approximately $720 at June 25, 1999. Cash paid for income taxes was $2,897, $1,915, and $1,072 in fiscal years 1999, 1998, and 1997, respectively. L. Retirement Plans The Company has a retirement savings and profit sharing plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participation is available to all employees meeting minimum service and age requirements. The Company has a deferred compensation plan that does not qualify under Section 401 of the Internal Revenue Code, which provides officers and key executives with the opportunity to participate in an unqualified deferred compensation plan. The total of net participant deferrals, which is reflected in other long-term liabilities, was $464 and $382 at June 25, 1999, and June 26, 1998, respectively. The Company also has a deferred retirement salary plan, which is limited to certain officers. The Company has accrued the present value of the estimated future retirement benefit payments over the periods from the date of the agreements. The accrued balance of these plans, included in other long-term liabilities, was $865 and $659 at June 25, 1999, and June 26, 1998, respectively. Total expenses for these plans were $1,158, $1,349 and $1,375 for fiscal years ended 1999, 1998 and 1997, respectively. F-23 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) M. Accrued Liabilities
June June 25, 26, 1999 1998 ------- ------- Accrued incentive plan expense.............................. $ 2,285 $ 1,716 Accrued vacation expense.................................... 2,000 1,512 Accrued salary expense...................................... 1,297 835 Accrued payroll and sales tax expense....................... 1,519 917 Accrued sales commissions and rebates payable............... 951 789 Accrued warranty expense.................................... 1,742 1,733 Accrued workers compensation self-insurance expense......... 1,724 1,319 Accrued restructuring costs................................. -- 625 Accrued income tax payable.................................. 3,304 473 Accrued other............................................... 1,420 912 ------- ------- $16,242 $10,831 ======= =======
N. Other Expense (Income)
Year Ended June 25, June 26, June 27, 1999 1998 1997 -------- ---------- -------- Investment income.............................. $(259) $(392) $(721) Loss (gain) on foreign currency transactions... 4 164 (58) Other, net..................................... 365 247 (82) ----- ----- ----- $ 110 $ 19 $(861) ===== ===== =====
O. Concentration of Credit Risk The Company's customers are primarily in the cable television CATV industry. The Company performs periodic credit evaluations of its customers' financial conditions and generally does not require collateral. At June 25, 1999 and June 26, 1998, accounts receivables from customers in the CATV industry were approximately $31,240 and $19,705, respectively. Receivables are generally due within 30 days. Credit losses are provided for in the consolidated financial statements and have consistently been within management's expectations. Sales to two customers were $47,700 (26%) and $31,304 (17%), respectively, in fiscal year 1999. Sales to one customer were $47,098 (31%) in fiscal year 1998. Sales to one customer were $48,026 (36%) in fiscal year 1997. P. Commitments and Contingencies The Company had an established letter of credit of $1,700 at June 25, 1999, for its self-insured workers' compensation program. F-24 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) Q. Quarterly Results of Operations (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter 1999 ------- ------- ------- ----------- -------- 1999 Net sales..................... $34,654 $39,651 $47,291 $61,829 $183,425 Gross profit.................. 7,526 9,599 10,878 16,629 44,632 Income (loss) from continuing operations................... (1,116) (992) 588 837 (683) Discontinued operations....... 288 16 -- 93 397 ------- ------- ------- ------- -------- Net income (loss)............. (828) (976) 588 930 (286) ------- ------- ------- ------- -------- Net income (loss) per share-- (basic): Continuing operations....... $ (0.09) $ (0.08) $ 0.05 $ 0.07 $ (0.06) Discontinued operations..... 0.02 0.00 0.00 0.01 0.04 ------- ------- ------- ------- -------- Net income (loss)............. $ (0.07) $ (0.08) $ 0.05 $ 0.08 $ (0.02) ------- ------- ------- ------- -------- Net income (loss) per share-- (diluted): Continuing operations....... $ (0.09) $ (0.08) $ 0.05 $ 0.06 $ (0.06) Discontinued operations..... 0.02 0.00 0.00 0.01 0.04 ------- ------- ------- ------- -------- Net income (loss)............. $ (0.07) $ (0.08) $ 0.05 $ 0.07 $ (0.02) ------- ------- ------- ------- -------- First Second Third Fourth Quarter Quarter Quarter Quarter (1) 1998 ------- ------- ------- ----------- -------- 1998 Net sales..................... $37,559 $37,758 $40,607 $38,117 $154,041 Gross profit.................. 8,334 7,957 8,318 7,446 32,055 Income (loss) from continuing operations................... 1,175 672 847 (1,776) 918 Discontinued operations....... -- -- 363 565 928 ------- ------- ------- ------- -------- Net income (loss)............. 1,175 672 1,210 (1,211) 1,846 ------- ------- ------- ------- -------- Net income (loss) per share-- (basic): Continuing operations....... $ 0.10 $ 0.06 $ 0.07 $ (0.15) $ 0.08 Discontinued operations..... 0.00 0.00 0.03 0.05 0.08 ------- ------- ------- ------- -------- Net income (loss)............. $ 0.10 $ 0.06 $ 0.10 $ (0.10) $ 0.16 ------- ------- ------- ------- -------- Net income (loss) per share-- (diluted): Continuing operations....... $ 0.10 $ 0.06 $ 0.07 $ (0.14) $ 0.07 Discontinued operations..... 0.00 0.00 0.03 0.04 0.08 ------- ------- ------- ------- -------- Net income (loss)............. $ 0.10 $ 0.06 $ 0.10 $ (0.10) $ 0.15 ------- ------- ------- ------- --------
- -------- (1) Results from continuing operations for the fourth quarter of fiscal year 1998 include a provision for restructuring costs of $625. R. Litigation As previously reported in the Company's Annual Report for the fiscal year ended June 27, 1997, on or about March 31, 1995, certain shareholders of the Company filed a complaint in the United States District Court for the Eastern District of Pennsylvania against the Company and its Chief Executive Officer alleging violations of Sections 10 (b) and 20 (a) of the Securities Exchange Act of 1934 and common law. On September 27, 1997, a tentative settlement was reached with respect to this litigation and the settlement amount was recorded in the financial statements during the first quarter of fiscal year 1998. On July 14, 1998, the United States District Court for the Eastern District of Pennsylvania approved the settlement reached by the parties and dismissed the case with prejudice. F-25 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) S. Segment Information The Company adopted the Statement of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" (Statement 131), in fiscal year 1999. In fiscal year 1999 and 1998, the Company operated in two industry segments; the Electronic Distribution Products segment, which provides HFC equipment for signal distribution applications and technical services primarily to the CATV market and the Broadband Management Services segment, which provides Internet enabling technical services and support to broadband operators in the United States. In fiscal year 1997, the Company operated in three industry segments: the Electronic Distribution Products segment, the Broadband Management Services segment, and the Digital Fiber Optics Transmission Products segment, which has been reported as a discontinued business segment and provided products for long-distance, point- to-point video, voice and data signal transmission applications, primarily for telephony, distance-learning and other non-CATV markets. On July 10, 1997, the Company announced the discontinuations of its Digital Fiber Optics Transmission Products segment. Information about industry segments for fiscal years 1999, 1998, and 1997 is as follows:
Discontinued Continuing Operations Operations ----------------------- ------------ Digital Electronic Broadband Fiber Optics Distribution Management Transmission Products Services Products Total ------------ ---------- ------------ -------- Year ended June 25, 1999 Total revenue................. $176,790 $6,635 $ -- $183,425 Operating income.............. 8,044 (2,508) -- 5,536 Interest income............... 150 109 -- 259 Interest expense.............. 1,376 8 -- 1,384 Income tax expense............ 4,835 -- 477 5,312 Identifiable assets at June 25, 1999..................... 101,105 1,844 1,286 104,235 Capital expenditures.......... 6,828 1,331 -- 8,159 Depreciation and amortization................. 9,407 364 -- 9,771 Year ended June 26, 1998 Total revenue................. $152,765 $1,276 $ -- $154,041 Operating income.............. 3,259 (1,560) -- 1,699 Interest income............... 370 23 -- 393 Interest expense.............. 390 9 -- 399 Income tax expense (benefit).. 972 (590) (94) 288 Identifiable assets at June 26, 1998..................... 82,319 1,755 2,889 86,963 Capital expenditures.......... 9,287 766 -- 10,053 Depreciation and amortization................. 6,792 175 -- 6,967 Year ended June 27, 1997 Total revenue................. $132,676 $1,104 $7,994 $141,774 Operating income (loss)....... 2,362 (433) (9,357) (7,428) Interest income............... 712 9 -- 721 Interest expense.............. 371 9 -- 380 Income tax expense (benefit).. 788 (137) (2,752) (2,101) Identifiable assets at June 27, 1997..................... 82,099 815 7,530 90,444 Capital expenditures.......... 6,989 255 698 7,942 Depreciation and amortization................. 5,371 62 1,388 6,821
F-26 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) The Company and subsidiaries operate in various geographic areas as indicated by the following:
U.S. Canada Europe Eliminations Total -------- ------ ------ ------------ -------- Year ended June 25, 1999 Sales to unaffiliated customers: Domestic..................... $164,256 $ 421 $236 $ -- $164,913 Export....................... 18,512 -- -- -- 18,512 Transfers between geographic areas......................... 162 -- -- (162) -- Total revenue.................. 182,930 421 236 (162) 183,425 Operating income (loss)........ 5,848 (280) (32) -- 5,536 Interest income................ 259 -- -- -- 259 Interest expense............... 1,384 -- -- -- 1,384 Income tax expense............. 4,835 -- -- -- 4,835 Identifiable assets at June 25, 1999.......................... 101,957 509 483 -- 102,949 Capital expenditures........... 8,159 -- -- -- 8,159 Depreciation and amortization.. 9,735 12 24 -- 9,771 Year ended June 26, 1998 Sales to unaffiliated customers: Domestic..................... $122,134 $1,635 $146 $ -- $123,915 Export....................... 30,126 -- -- -- 30,126 Transfers between geographic areas......................... 798 -- -- (798) -- Total revenue.................. 153,058 1,635 146 (798) 154,041 Operating income............... 1,220 290 189 -- 1,699 Interest income................ 390 -- 2 -- 392 Interest expense............... 398 -- 1 -- 399 Income tax expense............. 405 8 (31) -- 382 Identifiable assets at June 26, 1998.......................... 82,839 954 281 -- 84,074 Capital expenditures........... 10,052 1 -- -- 10,053 Depreciation and amortization.. 6,931 12 24 -- 6,967 Year ended June 27, 1997 Sales to unafifiliated customers: Domestic..................... $108,624 $1,523 $751 $ -- $110,898 Export....................... 22,882 -- -- -- 22,882 Transfers between geographic areas......................... (95) -- -- 95 -- Total revenue.................. 131,411 1,523 751 95 133,780 Operating income............... 1,750 162 17 -- 1,929 Interest income................ 716 -- 5 -- 721 Interest expense............... 379 -- 1 -- 380 Income tax expense............. 553 100 (2) -- 651 Identifiable assets at June 27, 1997.......................... 80,774 1,542 598 -- 82,914 Capital expenditures........... 7,212 6 26 -- 7,244 Depreciation and amortization.. 5,370 12 51 -- 5,433
T. Subsequent Events Business Combinations On July 9, 1999, the Company consummated a merger with Convergence, a Georgia corporation, whereby Convergence became a wholly-owned subsidiary of the Company. As consideration for the merger, each F-27 C-COR.net Corp. (as restated to reflect pooling-of-interest combinations with Convergence.com Corporation and Silicon Valley Communications, Inc.) Notes to Consolidated Financial Statements--(Continued) (in thousands of dollars except share and per share data) outstanding share of common stock of Convergence was converted into one share of the Company's common stock for an aggregate of 1,433,323 shares of the Company's common stock. Each outstanding warrant to acquire Convergence common stock was converted into a warrant to acquire the Company's common stock for an aggregate of warrants to acquire 366,930 shares of the Company's common stock. The merger is being accounted for under the pooling-of-interests method of accounting. On September 17, 1999, the Company consummated a merger with SVCI, a California corporation, whereby SVCI became a wholly-owned subsidiary of the Company. As consideration for the merger, each outstanding share of common stock of SVCI was converted into the right to receive .094534 shares of the Company's common stock for an aggregate of 1,542,215 shares of the Company's common stock (subject to reduction pursuant to certain escrow arrangements). Outstanding stock options and warrants to acquire SVCI common stock was converted into stock options and warrants to acquire the Company's common stock, using the same conversion ratio (with appropriate adjustment to the exercise price) for an aggregate of stock options and warrants to acquire 387,227 shares of the Company's common stock. The merger is being accounted for under the pooling-of- interests method of accounting. The Company anticipates recording a one-time charge related to the business combinations in its first quarter of fiscal year 2000. The one-time charge will include the transaction costs, as well as employee severance payments and write-off of assets related to existing fiber optic products that will become obsolete and be replaced by the SVCI product line. Credit Facilities On August 9, 1999, the Company replaced its $25,000 revolving line-of-credit agreement, with a new credit agreement established with three banks under which it may borrow up to $70,000. The agreement has two parts; $20,000 is available as a revolving line-of-credit, subject to an aggregate sub-limit of $2,000 for issuance of letters of credit. This revolving line-of-credit is committed through December 31, 1999. A pricing matrix has been established for credit pricing on this facility as a function of the Company's total funded indebtedness to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, and is subject to adjustment quarterly. Interest on the borrowings under the credit agreement is determined at the Company's option by (a) LIBOR plus a margin ranging from .75%-1.35%, (b) Federal funds rate plus a margin ranging from 1.15%-1.75% or (c) Prime rate plus a margin ranging from .25%-.50%. The second part is a 364 day standby acquisition facility which enables the Company to borrow up to $50,000, for strategic acquisitions and/or investments. Each draw on the facility may be extended for up to 84 months. A pricing matrix has also been established for credit pricing on this facility which is also a function of the Company's total funded indebtedness to EBITDA ratio, and is subject to adjustment quarterly. Interest on the borrowings under this part of the credit agreement would be determined, at the Company's option by (a) LIBOR plus a margin ranging from .90%-1.50% (b) Prime rate plus a margin ranging from .25%-.50% or (c) fixed at the bank 5 or 7 year fixed rates through an interest rate swap. In addition, the Company amended its existing $3,000 term loan to eliminate terms and conditions that govern that facility and replaced them with terms and conditions that have been entered into the revolving line-of-credit and the standby facility. The outstanding balance on the term loan will be split among the three participating banks based on their pro-rated share of the total balance of combined credit facilities. Borrowings on these facilities are unsecured, subject to a negative pledge on all business assets, and the Company is required to maintain certain financial ratios and indebtedness tests. F-28 SILICON VALLEY COMMUNICATIONS, INC. (Formerly Qualop Systems Corporation) Financial Statements June 25, 1999 and June 30, 1998 (With Independent Auditors' Report Thereon) F-29 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Table of Contents
Page ---- Independent Auditors' Report............................................... F-31 Balance Sheets............................................................. F-32 Statements of Operations................................................... F-33 Statements of Shareholders' (Deficit) Equity............................... F-34 Statements of Cash Flows................................................... F-35 Notes to Financial Statements.............................................. F-36
F-30 Independent Auditors' Report The Board of Directors Silicon Valley Communications, Inc.: We have audited the accompanying balance sheets of Silicon Valley Communications, Inc. (formerly Qualop Systems Corporation) as of June 25, 1999 and June 30, 1998, and the related statements of operations, shareholders' (deficit) equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Silicon Valley Communications, Inc. as of June 25, 1999 and June 30, 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has negative working capital and an accumulated deficit, and is in violation of certain debt covenants that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. KPMG LLP July 30, 1999, except as to Note 2, which is as of August 4, 1999 F-31 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Balance Sheets June 30, 1999 and 1998
1999 1998 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................... $ 66,991 $ 322,033 Accounts receivable, net of allowance for doubtful accounts of $-0- and $223,127 in 1999 and 1998, respectively...................................... 948,030 8,000 Inventories........................................ 2,087,782 434,269 Prepaid expenses and other current assets.......... 16,583 76,527 ------------ ------------ Total current assets........................... 3,119,386 840,829 Other receivables.................................. 32,562 2,012,284 Property and equipment, net........................ 1,533,537 1,357,759 Other assets....................................... 57,160 102,410 ------------ ------------ $ 4,742,645 $ 4,313,282 ============ ============ LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current liabilities: Notes payable to bank.............................. $ 3,202,500 $ -- Notes payable to related parties................... 1,685,438 -- Current portion of capital lease obligations....... 50,550 72,622 Accounts payable................................... 3,058,184 630,872 Accrued compensation............................... 1,038,804 198,813 Accrued expenses................................... 818,474 239,966 ------------ ------------ Total current liabilities...................... 9,853,950 1,142,273 Capital lease obligations, excluding current portion........................................... -- 54,118 ------------ ------------ Total liabilities.............................. 9,853,950 1,196,391 ------------ ------------ Commitments Shareholders' (deficit) equity: Convertible preferred stock: Series A, no par value; 4,000,000 shares authorized; 4,000,000 shares issued and outstanding; liquidation preference of $4,400,000...................................... 3,900,000 3,900,000 Series B, no par value; 10,000,000 shares authorized; 7,345,000 shares issued and outstanding; liquidation preference of $14,690,000..................................... 16,052,525 14,760,000 Common stock, no par value; 21,000,000 shares authorized; 4,968,871 and 4,794,329 shares issued and outstanding in 1999 and 1998, respectively.... 150,932 144,945 Accumulated deficit................................ (25,214,762) (15,688,054) ------------ ------------ Total shareholders' (deficit) equity........... (5,111,305) 3,116,891 ------------ ------------ $ 4,742,645 $ 4,313,282 ============ ============
See accompanying notes to financial statements. F-32 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Statements of Operations Years ended June 25, 1999 and June 30, 1998
1999 1998 ----------- ----------- Net revenues......................................... $ 5,508,900 $ 620,689 Cost of revenues..................................... 4,816,027 3,290,981 ----------- ----------- 692,873 (2,670,292) ----------- ----------- Operating expenses: Research and development............................ 2,795,362 2,529,508 Selling and marketing............................... 4,494,490 1,868,420 General and administrative.......................... 1,834,085 1,115,191 ----------- ----------- Total operating expenses......................... 9,123,937 5,513,119 ----------- ----------- Loss from operations............................. (8,431,064) (8,183,411) Interest income...................................... 52,310 316,361 Interest expense..................................... (1,143,668) (27,980) Other income (expense), net.......................... (3,486) -- ----------- ----------- Loss before income taxes......................... (9,525,908) (7,895,030) Income taxes......................................... 800 800 ----------- ----------- Net loss......................................... $(9,526,708) $(7,895,830) =========== ===========
See accompanying notes to financial statements. F-33 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Statements of Shareholders' (Deficit) Equity Years ended June 25, 1999 and June 30, 1998
Convertible preferred stock ------------------------------------------ Total Series A Series B Common stock shareholders' -------------------- --------------------- ------------------ Accumulated (deficit) Shares Amount Shares Amount Shares Amount deficit equity --------- ---------- --------- ----------- --------- -------- ----------- ------------- Balances as of June 30, 1997................... 4,000,000 $3,900,000 7,345,000 $14,760,000 4,669,705 $141,637 (7,792,224) 11,009,413 Exercise of stock options................ -- -- -- -- 124,624 3,308 -- 3,308 Net loss................ -- -- -- -- -- -- (7,895,830) (7,895,830) --------- ---------- --------- ----------- --------- -------- ----------- ---------- Balances as of June 30, 1998................... 4,000,000 3,900,000 7,345,000 14,760,000 4,794,329 144,945 (15,688,054) 3,116,891 Exercise of stock options................ -- -- -- -- 174,542 5,987 -- 5,987 Issuance of warrants.... -- -- -- 1,292,525 -- -- -- 1,292,525 Net loss................ -- -- -- -- -- -- (9,526,708) (9,526,708) --------- ---------- --------- ----------- --------- -------- ----------- ---------- Balances as of June 30, 1999................... 4,000,000 $3,900,000 7,345,000 $16,052,525 4,968,871 $150,932 (25,214,762) (5,111,305) ========= ========== ========= =========== ========= ======== =========== ==========
See accompanying notes to financial statements. F-34 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Statements of Cash Flows Years ended June 25, 1999 and June 30, 1998
1999 1998 ----------- ----------- Cash flows from operating activities: Net loss............................................ $(9,526,708) $(7,895,830) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discount...................... 911,124 -- Loss on disposal of fixed assets................... 12,961 -- Depreciation and amortization...................... 518,278 692,156 Provision for doubtful accounts.................... -- 223,127 Write-off of inventory............................. 206,569 1,226,000 Changes in operating assets and liabilities: Accounts receivable............................... (940,030) 88,711 Inventories....................................... (1,860,082) (243,162) Prepaid expenses and other current assets......... 59,944 (50,497) Other assets...................................... 45,250 119,649 Accounts payable.................................. 2,427,312 265,441 Other current liabilities......................... 1,418,499 236,222 ----------- ----------- Net cash used in operating activities............ (6,726,883) (5,338,183) ----------- ----------- Cash flows from investing activities: Purchases of property and equipment................. (707,017) (504,582) Repayment of note receivable........................ 1,979,722 -- Issuance of note receivable......................... -- (2,003,708) ----------- ----------- Net cash provided by (used in) investing activities...................................... 1,272,705 (2,508,290) ----------- ----------- Cash flows from financing activities: Principal payments on obligations under capital lease.............................................. (76,190) (132,326) Proceeds from the exercise of common stock options.. 5,987 3,308 Proceeds from the issuance of loans and warrants.... 5,269,339 -- ----------- ----------- Net cash provided by (used in) financing activities...................................... 5,199,136 (129,018) ----------- ----------- Net decrease in cash and cash equivalents............ (255,042) (7,975,491) Cash and cash equivalents at beginning of year....... 322,033 8,297,524 ----------- ----------- Cash and cash equivalents at end of year............. $ 66,991 $ 322,033 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year: Interest........................................... $ 149,764 $ 27,980 =========== =========== Income taxes....................................... $ 800 $ 800 =========== ===========
See accompanying notes to financial statements. F-35 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements June 25, 1999 and June 30, 1998 (1) Summary of Significant Accounting Policies (a) The Company Silicon Valley Communications, Inc. (the Company) was incorporated in California in July 1994 under the name Qualop Systems Corporation. In November 1998, the Company changed its name to Silicon Valley Communications, Inc. The Company designs, develops, manufactures, and markets fiberoptic components and optical communication products for the cable television, data communications, and telecommunications markets. During fiscal 1999, the Company changed to a 52-53 week fiscal year, ending on the Friday closest to June 30. (b) Cash Equivalents The Company considers all highly liquid investments with remaining maturities of three months or less at date of purchase to be cash equivalents. As of June 25, 1999 and June 30, 1998, cash equivalents included certificates of deposit of $-0- and $50,000, respectively, and money market funds of $10,710 and $244,436, respectively. (c) Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. The Company periodically reviews its inventories for potential slow- moving and obsolete items and writes down impaired items to net realizable value. (d) Property and Equipment Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are depreciated over the shorter of their estimated useful lives, generally five years, or the remaining term of the related lease. Equipment held under capital leases is amortized over the shorter of the lease term or the estimated useful life of the asset, generally three years. (e) Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded to reduce deferred tax assets to an amount for which realization is more likely than not. (f) Employee Stock-Based Compensation The Company accounts for its stock option plan using the intrinsic value method. As such, compensation expense is recorded if on the date of grant, the current fair value of the underlying stock exceeds the exercise price. F-36 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 (g) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (h) Impairment of Long-Lived Assets The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value. To date, no adjustments to the carrying amount of property and equipment have been required. (i) Revenue Recognition Revenue is recognized upon product shipment when there is no significant uncertainty regarding customer acceptance and payment. The Company has determined that no significant uncertainties exist regarding customer acceptance and payment when the Company has received signed evidence of an arrangement with the customer, the product has been shipped, and collection is probable. (j) Warranty Upon shipment to its customers, the Company provides for the estimated cost to repair or replace products to be returned under warranty. The Company's warranty period is generally three years from the date of shipment. (k) Concentrations of Credit Risk Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents, trade receivables, and notes receivable. The Company's cash and cash equivalents consist of checking, certificate of deposit, and money market accounts with financial institutions. The Company performs ongoing credit evaluations of its customers' financial condition. The Company establishes reserves for potential credit losses and such losses have historically been within management's expectations. (l) Foreign Currency Transactions All transactions with foreign suppliers and purchases are denominated in U.S. dollars. As a result, the Company's exposure to foreign currency gains and losses is not significant. (m) Certain Significant Risks and Uncertainties The Company operates in a dynamic industry, and accordingly, can be affected by a variety of factors, many of which are outside the Company's control, including the ability to obtain additional financing, level of capital spending in the cable television industry, changes in the regulatory environment, changes in market demand, the timing of customer orders, the mix of products to be sold, competitive market conditions, lengthy sales cycles, new product introductions by the Company's competitors, delays in the development of new products, F-37 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 fundamental changes in the technology used in the CATV and telecommunications markets, market acceptance of new or existing products, the cost and availability of components, the hiring, training and retention of key employees, the mix of the Company's future customer base and sales channels, litigation or other claims against the Company, the level of future international sales, and general economic conditions. (n) Comprehensive Income Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, which establishes requirements for the reporting and display of comprehensive income and its components. The Company had no components of other comprehensive income (loss) and, thus, comprehensive income (loss) consists entirely of net loss for the years ended June 25, 1999 and June 30, 1998. (o) Financial Instruments The carrying value of the Company's cash equivalents, accounts receivable, accounts payable, notes payable to banks, and notes payable to related parties approximates fair value due to the short-term nature of these balances. (p) Recent Accounting Pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company does not expect the adoption of SOP 98-1 to have a material impact on its results of operations. (2) Basis of Presentation The Company has suffered recurring losses from operations, has negative working capital and an accumulated deficit, and is in violation of certain debt covenants that raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon obtaining additional financing from banks or investors and receiving a waiver from the bank. The bank has agreed to take no action on the noncompliance event due to the pending merger agreement. On August 4, 1999, the Company entered into a private placement memorandum with a third party (the Acquirer) whereby the Company will sell 100% of its outstanding common and preferred stock in exchange for common stock. In connection with this transaction, the Company has obtained a loan from the Acquirer in the amount of $250,000 and a $3,000,000 line of credit (Note 5). The signing of the merger agreement is contingent on the approval of the agreement by the shareholders of the Company. There can be no assurance that management will be successful in its endeavors to obtain such approval. The accompanying financial statements have been prepared assuming the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. F-38 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 (3) Inventories Inventories as of June 25, 1999 and June 30, 1998, consisted of the following:
1999 1998 ---------- ------- Raw materials............................................. $1,144,953 315,007 Work in process........................................... 450,419 119,262 Finished goods............................................ 492,410 -- ---------- ------- Total................................................... $2,087,782 434,269 ========== =======
In September 1998, the Company canceled the shipment of certain transmitter products deliverable under a large contract with a single customer due to a credit issue. The Company anticipates selling a significant quantity of these units to existing and new customers. Inventories as of June 25, 1999, include approximately $383,000 of these finished goods, net of reserves. (4) Property and Equipment Property and equipment as of June 25, 1999 and June 30, 1998, consisted of the following:
1999 1998 ---------- --------- Computer and office equipment........................... $2,041,965 1,819,544 Furniture and fixtures.................................. 467,561 448,326 Computer software....................................... 91,842 80,770 ---------- --------- 2,601,368 2,348,640 Accumulated depreciation................................ 1,067,831 990,881 ---------- --------- Net property and equipment............................ $1,533,537 1,357,759 ========== =========
As of June 25, 1999 and June 30, 1998, leased equipment totaled approximately $178,000, with related accumulated amortization of approximately $99,000 and $71,000, respectively. (5) Credit Facilities In May 1999, the Company signed a letter of intent regarding a private placement memorandum with the Acquirer regarding a proposed merger whereby the Company will become a wholly owned subsidiary of the Acquirer. In connection with the merger, the Acquirer loaned the Company $250,000 to provide financing for operations through the closing. The note bears interest at an annual rate of prime plus 2% (9.75% as of June 25, 1999), and is due and payable on September 1, 1999. The note is guaranteed by an officer of the Company. In addition, in June 1999, the Company obtained a discretionary line of credit from the Acquirer, with an available amount of $3,000,000. The line bears interest at an annual rate of prime plus 2% (9.75% as of June 25, 1999) and expires on June 22, 2000. The Acquirer retains the right to decline requests for advances and may terminate the line of credit at any time. The line of credit is guaranteed by an officer of the Company. As of June 25, 1999, the Company has not drawn against this line of credit. As of June 25, 1999, the Company has a bank line of credit, which provides for borrowings of up to $3,000,000, a bank bridge loan, which provides for borrowings of up to $1,000,000, and a bank equipment term loan of $300,000. The line of credit and term loan bear annual interest at the bank's prime rate plus 0.50% (8.25% as of June 25, 1999), with maturity dates of June 30, 1999, and August 30, 2000, respectively. The bridge loan bears interest at the bank's prime rate plus 1.5% (9.25% as of June 25, 1999), with a maturity date F-39 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 of September 4, 1999. The outstanding balances on the line of credit, bridge loan, and the term loan are $2,515,000, $500,000, and $187,500, respectively, as of June 25, 1999. The line of credit and loans are fully collateralized by a continuing security interest in substantially all assets presently owned or subsequently acquired by the Company. The line of credit and loans contain certain restrictive financial covenants. As of June 25, 1999, the Company was not in compliance with certain of the covenants. The bank has agreed to defer action on the noncompliance event due to the pending merger agreement (see Note 2). In connection with the bridge loan, the Company issued warrants to purchase 50,000 shares of Series B preferred stock at an exercise price of the lower of $4.00, or 50% of an initial public offering price or acquisition price. These warrants have a fair value of $41,000 and are being amortized over the life of the bridge loan. In fiscal 1998, in connection with the line of credit and term loan, the Company issued warrants to purchase 32,000 shares of Series B preferred stock at an exercise price of the lowest of 50% of an IPO or acquisition price, the closing price of a Series C preferred stock round, or $7.00 per share. The purchase rights represented by these warrants expire on January 4, 2002. The warrants have a fair value of $13,000 and are being amortized over the life of the related debt instruments. On October 21, 1998, the Company restructured its then existing bank line of credit and term loan. In consideration for the restructuring, the Company issued additional warrants to purchase 10,000 shares of the Company's Series B preferred stock at an exercise price of the lowest of 50% of an IPO or acquisition price, the closing price of a Series C preferred stock round, or $7.00 per share. The warrants are exercisable upon issuance and expire on January 4, 2002. The warrants have a fair value of $4,000 and are being amortized over the life of the related debt instruments. (6) Shareholders' (Deficit) Equity (a) Convertible Preferred Stock Each preferred share is convertible, at the option of the holder, into one share of common stock, subject to adjustment for stock splits, stock dividends, and other events. Each share automatically converts to common stock upon the closing of an underwritten initial public offering of the Company's common stock. Upon conversion, all declared and unpaid dividends on the preferred stock shall be paid in cash. Dividends, when and if declared, are payable to the holders of preferred stock on the basis of the relative preference to which each such series is entitled. Such dividends are noncumulative. Each share of preferred stock is entitled to the same voting rights as each share of common stock into which it is convertible. As long as any shares of preferred stock are outstanding, a majority of the shareholders of preferred stock must approve certain significant events as defined in the articles of incorporation, such as amendments of the Company's articles of incorporation or by-laws that materially alter preferred shareholder's rights or increases or decreases in the authorized number of shares of preferred stock. In the event of liquidation, dissolution, or winding up of the Company, holders of Series A and B preferred stocks are entitled to receive $1.10 and $2.00 per share, respectively, plus all declared but unpaid dividends, prior to any distribution to holders of common stock. F-40 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 (b) Stock Option Plan Under the Company's 1995 Stock Option Plan (the Plan), the Board of Directors has authorized the granting of up to 2,800,000 shares of nonqualified or incentive stock options to employees, directors, or consultants of the Company. Options are granted with exercise prices at fair value at date of grant for incentive stock options and not less than 85% of fair value for nonqualified options. If at the time an option is granted, the optionee owns greater than 10% of outstanding voting stock, the price of the incentive option is not less than 110% of the fair value of the stock at the date of grant. Incentive stock options generally vest over 4 or 5 years, with 25% or 20% vesting after one year and the remainder monthly thereafter, and expire 10 years from date of grant. Nonqualified options are generally fully vested upon issuance and expire 10 years from date of grant. A summary of all option activity under the Plan is as follows:
Weighted- average Number of exercise price shares per share --------- -------------- Outstanding as of June 30, 1997.................... 562,500 $0.01 Granted.......................................... 2,060,250 0.20 Canceled......................................... (938,126) 0.15 Exercised........................................ (130,624) 0.03 --------- Outstanding as of June 30, 1998.................... 1,554,000 0.17 Granted.......................................... 958,500 0.20 Canceled......................................... (883,895) 0.20 Exercised........................................ (174,542) 0.03 --------- Outstanding as of June 25, 1999.................... 1,454,063 0.19 =========
The following table summarizes information about stock options outstanding as of June 25, 1999:
Weighted- average Weighted- Weighted- remaining average average Exercise Number contractual exercise Number exercise price outstanding life (years) price exercisable price -------- ----------- ------------ --------- ----------- --------- $0.01 53,375 6.40 $0.01 41,240 $0.01 0.20 1,400,688 9.19 0.20 291,247 0.20 --------- ------- 1,454,063 332,487 ========= =======
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income or loss had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models. The Company's calculations of fair value were made using the Black-Scholes option pricing model with the following weighted-average assumptions: 1999--expected life 4 years; volatility, none; risk-free interest rate 5.21%; and no dividends during the expected term; 1998--expected life 5 years; volatility, none; risk-free interest rate, 5.48%; and no dividends during the expected term. The per share weighted-average fair value of stock options granted during both the years ended June 25, 1999 and June 30, 1998, was $0.04 on the date of grant. If the Company had applied the fair value method under SFAS No. 123, pro forma net losses would have been $9,538,708 and $7,906,830 in fiscal 1999 and 1998, respectively. F-41 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 (c) Warrants In March 1999, the Company issued to certain founders and holders of preferred stock, warrants to purchase up to 1,150,000 shares of Series B preferred stock at prices ranging from $3.00 to $7.00 per share in connection with a bridge financing (see Note 9). These warrants expire in January 2002. In addition, in March 1999, the Company issued to a bank warrants to purchase 50,000 shares of Series B preferred stock at the lower of $4.00 or 50% of an initial public offering or acquisition price in connection with a bridge loan obtained from the bank (see Note 5). These warrants expire in January 2002. In April 1999, in connection with the restructuring of its line of credit and term loan, the Company issued warrants to purchase 10,000 shares of Series B preferred stock at an exercise price of $7.00 per share (see Note 5). The fair value of the warrants issued in fiscal 1999 to purchase 1,210,000 shares of Series B preferred stock was calculated by the Company using the Black-Scholes pricing model. The fair value of $1,292,525 is being amortized over the life of the related loans. Amortization in fiscal 1999 totaled $911,124, which is included in interest expense in the accompanying statement of operations. In fiscal 1998, in connection with the line of credit and term loan, the Company issued warrants to purchase 32,000 shares of Series B preferred stock at an exercise price of the lowest of 50% of an IPO or acquisition price, the closing price of a Series C preferred stock round, or $7.00 per share (see Note 5). In July 1996, the Company issued to certain holders of preferred stock, warrants to purchase up to 1,400,000 shares of Series B preferred stock at $2.00 per share for assistance with the Series B equity financing, and establishment and maintenance of manufacturing partner relationships. The warrants expire in January 2001. The Company has calculated the estimated fair value of warrants issued and determined that the amount was not significant to the accompanying financial statements taken as a whole. In July 1996, the Company sold for $70,000 to certain shareholders warrants to purchase up to 350,000 shares of Series B preferred stock at $2.00 per share. The warrants expired in July 1998. (7) Income Taxes Total income tax expense differs from expected tax expense (computed by multiplying the U.S. income statutory rate of 34% to loss before income tax) for the years ended June 25, 1999 and June 30, 1998, as a result of the following:
1999 1998 ----------- ---------- Expected tax benefit.............................. $(3,239,000) (2,684,000) Losses and temporary differences for which no tax benefit was realized............................. 2,887,000 2,666,000 Nondeductible expenses............................ 352,800 18,800 ----------- ---------- Total tax expense............................... $ 800 800 =========== ==========
F-42 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows:
1999 1998 ----------- --------- Deferred tax assets: Loss and research and development credit carryover......................................... $ 7,818,000 3,781,000 Research and development expenses deferred for tax purposes.......................................... 2,227,000 618,000 Other.............................................. 455,000 801,000 ----------- --------- Total gross deferred tax assets.................. 10,500,000 5,200,000 Less valuation allowance............................. 10,500,000 5,200,000 ----------- --------- Net deferred tax assets.......................... -- -- =========== =========
The net change in the total valuation allowance for the years ended June 25, 1999 and June 30, 1998, was a net increase of $5,300,000 and $2,300,000, respectively. As of June 25, 1999, the Company has net operating loss carryforwards for federal and California income tax purposes of approximately $17,000,000. The federal net operating loss carryforwards expire primarily in the years 2010 through 2019. The California net operating loss carryforwards expire primarily in the years 2003 through 2004. As of June 25, 1999, the Company has research and development credit carryovers for federal and California income tax purposes of approximately $400,000 and $200,000, respectively. The federal carryforwards expire in the years 2010 and 2019, and the California carryforwards can be carried forward indefinitely. The Company had a gross deferred tax asset of approximately $10,500,000 and $5,200,000 as of June 25, 1999 and June 30, 1998, respectively. Management does not believe it is more likely than not that the deferred tax assets will be realized; accordingly, a full valuation allowance has been established against the Company's net deferred tax asset balance and no tax benefit is shown in the accompanying statement of operations. Federal and state tax laws limit the use of net operating loss carryforwards in certain situations where changes occur in the stock ownership of a company. The Company believes that two such ownership changes, as defined, have occurred from inception to June 25, 1999. Approximately $710,000 of the Company's net operating loss is limited to an annual allowance of $2,360. Accordingly, nearly all of this loss will expire unutilized. An additional $2,640,000 of the net operating loss is subject to an annual allowance of approximately $256,000. The remaining net operating loss of $13,650,000 is not subject to a change of ownership limitation until the date of the pending merger. The Company has not determined the ownership change limitation on the remaining loss due to the pending merger of the Company. F-43 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 (8) Commitments The Company is obligated under certain noncancelable operating leases for office space expiring in 2003. The Company also leases certain equipment under capital lease arrangements, which expire through 2000. Future minimum payments required under noncancelable operating and capital lease arrangements are as follows:
Capital Operating Year ending leases leases ----------- ------- ---------- 2000................................................... $53,114 549,780 2001................................................... -- 568,400 2002................................................... -- 588,980 2003................................................... -- 301,350 ------- ---------- 53,114 $2,008,510 ========== Less amount representing interest...................... 2,564 ------- Present value of future minimum lease payments......... 50,550 Less current portion of obligations under capital leases................................................ 50,550 ------- Long-term obligations under capital lease.............. $ -- =======
Rent expense for the years ended June 25, 1999 and June 30, 1998, was approximately $595,000 and $259,000, respectively. In connection with the private placement memorandum signed by the Company with the Acquirer, either the Company or the Acquirer will incur break-up fees of $3,000,000 and other penalties if either the Company or the Acquirer cancels the agreement for cause, other than as specifically allowed under the agreement. The Company is party to litigation and claims arising in the ordinary course of its business, which the Company does not believe will have a material adverse impact on its business. (9) Related Party Transactions On September 25, 1997, the Company issued a $2,000,000 note receivable to an officer of the Company, who is also a board member. The note accrued interest at a rate of 8% per annum with the principal and accrued interest to be paid within 36 months. As of June 25, 1999, the entire balance was repaid. From March to May 1999, the Company borrowed $1,816,839 from certain founders and shareholders under promissory notes payable. The notes bear interest at an annual rate of 9% and are due in July 1999. In connection with these notes, the Company issued warrants to purchase 1,150,000 shares of Series B preferred stock (see Note 6). Subsequent to year-end, the term of the notes was extended to August 1999. (10) Segment and Geographic Information During 1999, the Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing their performance. The Company operates in one F-44 Silicon Valley Communications, Inc. (Formerly Qualop Systems Corporation) Notes to Financial Statements--(Continued) June 25, 1999 and June 30, 1998 industry segment: the Electronic Distribution Products segment, which provides HFC equipment for signal distribution applications primarily to the CATV market. Substantially all revenues result from the sale of fiber optic and communications products in the CATV industry. The Company's chief operating decision maker reviews financial information presented on a Company-wide basis for purposes of making operating decisions and assessing financial performance. The Company's assets are primarily located in the United States and are not allocated to any specific region. The Company does not produce reports for, or measure the performance of, its geographic regions based on any asset-based metrics, and, therefore, segment information is not provided for assets. Two domestic customers accounted for approximately 90% of the Company's revenues in fiscal 1999. Two international customers accounted for approximately 53% of the Company's revenues in fiscal 1998. International sales as a percentage of gross revenues were not significant in fiscal 1999 and were 96% for fiscal 1998. International sales in fiscal 1998 were principally sales to Asian distributors. Domestic sales are made primarily to end users. Two domestic customers comprise 93% of the accounts receivable balance as of June 25, 1999. There were no customers with a significant accounts receivable balance as of June 30, 1998. F-45 EX-23.1 2 CONSENT OF KPMG LLP (STATE COLLEGE, PA) Exhibit 23.1 Consent of Independent Auditors The Board of Directors and Stockholders C-COR.net Corp: We consent to incorporation by reference in the registration statements (Nos. 2-95959, 33-27440, 33-35208, 33-66590, 333-02505, 333-65805) on Form S-8 and (No. 333-82697) on Form S-3 of C-COR.net Corp. of our report dated September 20, 1999 relating to the supplemental consolidated balance sheets of C-COR.net Corp. as of June 25, 1999 and June 26, 1998, and the related supplemental consolidated statements of operations, cash flows and shareholders' equity for each of the years in the three-year period ended June 25, 1999, which report appears in the Form 8-K of C-COR.net Corp. dated September 17, 1999. The supplemental consolidated financial statements give retroactive effect to the mergers of C-COR.net Corp. and Convergence.com, which occurred on July 9, 1999, and Silicon Valley Communications, Inc., which occurred on September 17, 1999. KPMG LLP State College, Pennsylvania September 24, 1999 EX-23.2 3 CONSENT OF KPMG LLP (MOUNTAIN VIEW, CA) Exhibit 23.2 Consent of Independent Auditors The Board of Directors and Stockholders C-COR.net Corp. and Subsidiaries: We consent to incorporation herein by reference in the registration statements (Nos. 2-95959, 33-27440, 33-35208, 33-66590, 333-65805, and 333-02505) on Form S-8 and (No. 333-82697) on Form S-3 of C-COR.net Corp. of our report dated July 30, 1999, except as to Note 2, which is as of August 4, 1999, with respect to the balance sheets of Silicon Valley Communications, Inc. (formerly Qualop Systems Corporation) as of June 25, 1999 and June 30, 1998, and the related statements of operations, shareholders' (deficit) equity, and cash flows for the years then ended, which report appears in the Form 8-K of C-COR.net Corp. dated September 17, 1999. KPMG LLP Mountain View, California September 23, 1999 -----END PRIVACY-ENHANCED MESSAGE-----