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United States

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $.05 Par Value - 36,409,460 shares as of April 28, 2003.

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C-COR.net Corp.

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Independent Accountants’ Review Report

The Board of Directors and Shareholders
C-COR.net Corp.:

We have reviewed the condensed consolidated balance sheet of C-COR.net Corp. and subsidiaries as of March 28, 2003, the related condensed consolidated statements of operations for the thirteen-week and thirty-nine week periods ended March 28, 2003 and March 29, 2002, and the related condensed consolidated statements of cash flows for the thirty-nine week periods ended March 28, 2003 and March 29, 2002. These condensed consolidated financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of C-COR.net Corp. and subsidiaries as of June 28, 2002, and the related consolidated statements of operations, cash flows, and shareholders’ equity for the year then ended (not presented herein); and in our report dated August 9, 2002, except as to Note U, which is as of September 16, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of June 28, 2002, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

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PART I  FINANCIAL INFORMATION

Item 1.  Financial Statements

C-COR.net Corp.
CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)

See independent accountants’ review report and notes to condensed consolidated financial statements.

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C-COR.net Corp.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)

See independent accountants’ review report and notes to condensed consolidated financial statements.

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C-COR.net Corp.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 (Unaudited)

See independent accountants’ review report and notes to condensed consolidated financial statements.

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C-COR.net Corp.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See independent accountants’ review report and notes to condensed consolidated financial statements

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C-COR.net Corp.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands except per share data)

1.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and, in the opinion of management, contain all adjustments (consisting only of normal, recurring adjustments except as noted) necessary to fairly present C-COR.net Corp.’s (the Company) consolidated financial position as of March 28, 2003 and the consolidated results of operations for the thirteen-week and thirty-nine week periods ended March 28, 2003 and March 29, 2002. Operating results for the thirteen-week and thirty-nine week periods ended March 28, 2003 are not necessarily indicative of the results that may be expected for the year ending June 27, 2003, due to the cyclical nature of the industry in which the Company operates, fluctuations in currencies related to its foreign operations, and changes in overall conditions that could affect the carrying value of its assets and liabilities. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the fiscal year ended June 28, 2002.

2.  DESCRIPTION OF BUSINESS

The Company designs, manufactures, and markets network distribution and transmission products and provides services and operational support systems to operators of advanced hybrid fiber coax broadband networks. The Company operates in three industry segments: Broadband Communications Products, Broadband Network Services, and Broadband Management Solutions.

The Broadband Communications Products Division is responsible for research, development, management, production, support, and sales of advanced fiber optic and radio frequency equipment. The Broadband Network Services Division provides outsourced technical services, including network engineering and design, construction, activation, optimization, certification, maintenance, and operations. The Broadband Management Solutions Division is responsible for the development, integration, management, implementation, support and sales of operational support systems that focus on network services management and mobile workforce management solutions.

3.  ACCOUNTING CHANGE AND ACCOUNTING PRONOUNCEMENTS

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement 144), which supersedes both SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of “(Statement 121) and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (Opinion 30), for the disposal of a segment of a business (as previously defined in that Opinion). Statement 144 retains the fundamental provisions in Statement 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with Statement 121. For example, Statement 144 provides guidance on how a long-lived asset that is used as part of a group should be evaluated for impairment, establishes criteria for when a long-lived asset is held for sale, and prescribes the accounting for a long-lived asset that will be disposed of other than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to present discontinued operations in the income statement but broadens that presentation to include a component of an entity (rather than a segment of a business). Unlike Statement 121, an impairment assessment under Statement 144 will never result in a write-down of goodwill. Rather, goodwill is evaluated for impairment under SFAS No. 142, “Goodwill and Other Intangible Assets” (Statement 142).

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The Company adopted Statement 144 effective June 29, 2002. The adoption of Statement 144 for long-lived assets held for use did not have a material impact on the consolidated financial statements. The provisions of Statement 144 for assets held for sale or other disposal generally are required to be applied prospectively after the adoption date to newly initiated disposal activities.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (Statement 146), which replaces Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Statement 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of Statement 146 are effective for exit or disposal activities that are initiated after December 31, 2002.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”(the Interpretation), which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also requires the recognition of a liability by a guarantor at the inception of certain guarantees.

The Interpretation requires the guarantor to recognize a liability for the non-contingent component of the guarantee, which is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple elements.

The Company has adopted the disclosure requirements of the Interpretation (see Note 15) and will apply the recognition and measurement provisions for all guarantees entered into or modified after December 31, 2002.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (Statement 148).  The provisions of Statement 148 amend SFAS No. 123, “Accounting for Stock Based Compensation” (Statement 123), to provide alternative methods of transitioning to a fair value-based method of accounting for stock-based employee compensation. In addition, Statement 148 also expands the disclosure requirements of Statement 123 by requiring more detailed disclosure in both annual and interim financial statements. The Company adopted Statement 148 effective December 28, 2002. The transition provisions of Statement 148 did not have a material impact on the Company’s financial results, as the Company did not adopt the fair value-based accounting provisions of Statement 123 (see Note 16).

4.  BUSINESS COMBINATIONS

Fiscal Year 2003

On September 16, 2002, the Company acquired certain assets and liabilities of Philips Broadband Networks (PBN) from Royal Philips Electronics (Philips). PBN is a provider of broadband products, including transmission products, network optimizing technologies, and element management systems. PBN is supported by sales and services organizations worldwide, with a strong customer base in Europe and the Asia Pacific region. The purchase included assets in various countries, cable infrastructure products, and a design and production facility in Manlius, New York. These assets and the facility became part of the Company’s Broadband Communications Products Division. The purchase of these net assets and operations provided the Company with an opportunity to increase its customer and installed equipment base, primarily in the international markets of Europe and Asia, and to capitalize on the combined synergies of the Company’s skilled workforce, market focus, and product offerings. The purchase price for the acquisition was 79,950 Euros, which is subject to certain adjustments. During the quarter ended December 27, 2002, the Company announced

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the closing of its Manlius, New York and Louviers, France facilities, which were acquired as part of the PBN transaction (see Note 10).

The effective date of the acquisition was August 26, 2002 (PBN’s fiscal month end). Accordingly, the results of operations of PBN are included in the consolidated financial statements from August 26, 2002. At closing on September 16, 2002, the Company made an initial cash payment of 75,000 Euros ($72,507 U.S. dollars, which was net of $200 of imputed interest) to Royal Philips Electronics, with subsequent payments subject to certain adjustments. The Company anticipates additional consideration to be paid of approximately $2,576 during the quarter ending June 27, 2003. In addition, the Company incurred direct transaction costs of approximately $1,263 to consummate the acquisition. The Company used its available cash to fund the acquisition. The acquisition was accounted for as a purchase.

The excess of the purchase price and related costs over the fair value of the acquired net assets of the business was recorded as goodwill. The following table summarizes the estimated fair value of the net assets acquired from Royal Philips Electronics, including goodwill, as of the effective date of the acquisition.

One of the acquired intangible assets was in-process research and development, representing research and development projects that were commenced but not yet completed at the date of the acquisition, and which if unsuccessful, have no alternative future use in research and development activities or otherwise. The value allocated to in-process research and development as of the acquisition date was $1,560 (subsequently adjusted to $800 based on a third-party valuation of certain intangible assets). The amount allocated to in-process research and development was charged to expense as an acquired in-process technology charge in the condensed consolidated statement of operations during the thirty-nine week period ended March 28, 2003. A significant portion of the amount of the goodwill from the acquisition is expected to be deductible for tax purposes. However, due to expected basis differences in the book versus tax purchase price allocation, which has not been completed to date, the amount of the goodwill which will be deductible has not yet been determined. As part of the annual assessment that is required under Statement 142, the Company determined that the carrying value of the Broadband Communications Products Division exceeded its fair value, and an impairment charge of $40,022 was recorded during the thirteen-week period ended March 28, 2003 (see Note 5).

As of March 28, 2003, the net book value of intangible assets with definite useful lives resulting from all of the Company’s business combinations was $4,486. These intangible assets are being amortized over their estimated useful life of 36 months. The weighted-average life remaining on these intangible assets is 24 months.

Pro Forma

The following selected unaudited pro forma information is provided to present a summary of the combined results of the Company’s operations, as if the acquisition of certain operations of Philips and ADC Telecommunications, Inc.(ADC) had occurred as of June 30, 2001, after giving effect to purchase accounting adjustments. The pro forma data are for informational purposes only and may not necessarily reflect the results of operations of the Company had the operations acquired from Philips and ADC operated as part of the Company for the thirty-nine weeks ended March 28, 2003 and March 29, 2002, respectively.

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5.  GOODWILL AND IDENTIFIABLE INTANGIBLES

In June 2001, the FASB issued Statement 142. The Company adopted the provisions of Statement 142 effective June 29, 2002. As of the date of adoption, the Company had unamortized goodwill in the amount of $7,246 and unamortized identifiable intangible assets in the amount of $1,597 that were subject to the transition provisions of Statement 142.  For purposes of applying Statement 142, management believes the Company’s operating segments (Broadband Communications Products, Broadband Network Services, and Broadband Management Solutions) represent the Company’s reporting units, although there was no goodwill or intangible assets associated with Broadband Management Solutions as of the date of adoption or as of March 28, 2003. The Company determined the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company then determined the fair value of each reporting unit. The fair value was determined based on an independent third party appraisal, using a discounted cash flow model.  As a result of this evaluation, the Company did not have an impairment of goodwill as of June 29, 2002. The Company is required to reevaluate whether goodwill is impaired on an annual basis. The Company has selected the end of its third fiscal quarter of each year to reassess the value of its reporting units and related goodwill balances, or at other times if events have occurred or circumstances exist that indicate the carrying amount of goodwill may not be recoverable. Accordingly, the Company reassessed whether goodwill was impaired as of March 28, 2003.  The Company determined that the carrying value of the Broadband Communications Products reporting unit exceeded its fair value, which was determined from an independent third-party appraisal, and as such, an impairment charge of $40,022 has been recorded during the thirteen-week period ended March 28, 2003. The decline in the fair value of the Broadband Communications Products reporting unit is largely attributable to the weakness in capital spending by cable operators in recent periods. The Company has made an estimate of the value of other intangible assets not recorded on its balance sheet as of March 28, 2003, in order to allocate the fair value of the Broadband Communications Products reporting unit to both tangible and intangible assets as of March 28, 2003.  The Company anticipates completing a third-party valuation of these unrecorded intangible assets during the fourth quarter ending June 27, 2003, and will adjust the goodwill impairment charge accordingly in its fourth quarter operating results.  As of March 28, 2003, the Company has remaining goodwill associated with Broadband Communications Products and Broadband Network Services of $26,702 and $6,977, respectively.

The following information is provided to report what net income (loss) for the thirteen-week and thirty-nine week periods ended March 28, 2003 and March 29, 2002 would have been, exclusive of amortization expense (including any related tax effects)recognized related to goodwill and intangible assets that are no longer being amortized as a result of the adoption of Statement 142:

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6.  DEFERRED TAXES

Deferred taxes arise due to temporary differences in the bases of assets and liabilities and from net operating losses and credit carryforwards.  In general, deferred tax assets represent future tax benefits to be received when certain expenses previously recognized in the Company’s income statement become deductible expenses under applicable income tax laws or loss or credit carryforwards are utilized.  Accordingly, realization of deferred tax assets is dependent on future taxable income against which these deductions, losses and credits can be utilized.  In assessing the realizability of deferred tax assets, management considers historical operating losses, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies.  As a result of the continued operating losses, a full valuation allowance in the amount of $46,890 was recorded in the thirteen-week period ending March 28, 2003 since realization of the benefit of those tax assets was uncertain at that date.

7.  INVENTORIES

Inventories include material, labor and overhead and are stated at the lower of cost or market. Cost is determined on the first-in, first-out method. Inventories as of March 28, 2003 and June 28, 2002 consisted of the following:

In the quarter ended March 28, 2003, the Company recorded a charge of $18,109 related to increasing its reserves for slow moving and obsolete inventory.  This increase reflected the reduced level of customer demand currently being experienced as well as the effect of product rationalization decisions made to eliminate product overlaps resulting from the PBN acquisition and to move certain uneconomic products to end of life status.  Additionally, the Company refined its reserve estimation process to quantify inventory reserve requirements across all inventory locations.

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8.  CREDIT AGREEMENT

On November 7, 2002, the Company entered into a new financing agreement with a commercial lender. The new financing agreement is a two-year secured revolving credit facility, to be used for working capital and general corporate purposes, and provides an initial commitment up to an aggregate amount of $20,000. The financing agreement allows for issuance of letters of credit and cash borrowings. Letters of credit outstanding are limited to no more than $6,000. Cash borrowings are limited by certain availability reserves and a borrowing base, primarily a percentage of eligible domestic trade accounts receivable, up to the facility’s maximum availability less letters of credit outstanding.

As security for the financing agreement, the Company has pledged the following collateral: trade accounts receivable, inventory, general intangibles, real estate, equipment, life insurance policies, and certain stock of a wholly owned foreign subsidiary. The financing agreement contains a number of restrictive covenants, including covenants limiting incurrence of subordinate debt, disposal of collateral, and the payment of dividends (except stock dividends). The financing agreement contains no financial covenants.

The financing agreement is committed through November 6, 2004. Borrowings under the financing agreement bear interest at an applicable bank rate or LIBOR plus two and three-quarters percent (2.75%) per annum, payable monthly. The financing agreement required the payment of a facility fee of $150 at execution of the agreement, a fee on the unused commitment of 0.375% per annum payable monthly, and an administrative fee of $36 per annum.  As of March 28, 2003, the Company had no borrowings outstanding under the financing agreement.  Based upon the eligible borrowing base at March 28, 2003, available borrowings under the financing agreement were $15,262.

As a condition to closing on the new financing agreement, the Company terminated its prior credit agreement with a bank, whereby $7,500 was available as a revolving line-of-credit, subject to an aggregate sub-limit of $5,000 for issuance of letters of credit. The Company continues to maintain letters of credit with the bank in the aggregate of $2,255 as of March 28, 2003 related to our workers compensation program, customer obligations, and equipment lease obligations.  A cash compensating balance of $2,972 is maintained to secure the letters of credit.  Of the total cash compensating balance, $2,602 has been classified as a current asset as of March 28, 2003, as the terms for the letters of credit expire in less than one year.  An additional $370 has been classified as part of other long-term assets, as it is security for a letter of credit with a term of greater than one year. Under the new financing agreement, a letter of credit has been issued for $600 related to increased requirements under our workers compensation policy.

9.  ACCRUED LIABILITIES

Accrued liabilities as of March 28, 2003 and June 28, 2002 consisted of the following:

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10.  RESTRUCTURING COSTS AND PLANT CLOSING

During the thirteen-week period ended December 27, 2002, the Company announced the closing of its Manlius, New York manufacturing facility and its Louviers, France engineering and support operations facility. The decision to close the Manlius manufacturing facility was a result of a process the Company began, as of the PBN acquisition date, to address redundancy in the product lines and manufacturing capacity resulting from its acquisition of certain assets and liabilities of PBN. The Company anticipates ceasing manufacturing and operations at each of these facilities by June 27, 2003. For the thirty-nine week period ended March 28, 2003, fair value adjustments for property, plant and equipment of $3,469 and exit costs of $8,115, which includes employee severance and termination benefits, relocation for employees offered employment transfers, and other lease commitment costs, were accounted for as an adjustment to the allocation of the original purchase price, and recorded as additional goodwill.

During the thirteen-week period ended March 28, 2003, the Company recorded an adjustment of previously recorded restructuring charges of $200.  For the thirty-nine week period ended March 28, 2003, the Company recorded $398 related to initiatives to improve its operating performance by aligning the cost structure across the Company with current business levels. The restructuring charge represents employee termination benefits for approximately 185 employees, of which $200 was unpaid as of March 28, 2003.

Details of restructuring charges as of March 28, 2003 are as follows:

Employee severance and termination benefit payments are being made on a weekly or bi-weekly basis, and as such, the Company anticipates payments for the remaining amounts accrued as of March 28, 2003 to extend through December 2003. The Company intends to continue its initiatives to achieve more cost-effective operations throughout the remainder of fiscal year 2003, which may result in additional restructuring expenses in amounts that have not yet been determined.

11.  LIQUIDITY

The Company’s primary sources of liquidity are cash on-hand, cash flow from operations, as well as our financing agreement. Based on projected sales and operating expenses, the Company expects to use cash to fund operating losses anticipated in the next quarter, however we do expect to realize cash savings from ongoing restructuring initiatives in the fourth quarter of fiscal year 2003, including the closing of our Manlius, New York manufacturing facility and our Louviers, France operation.  The Company intends to continue initiatives to achieve a more cost-effective operation in order to conserve available cash.  The Company believes that current cash and cash equivalent balances, as well as our financing agreement, will be adequate to cover operating cash requirements, restructuring costs, and additional consideration for the acquisition of PBN over the next twelve months. 

12.  COMPREHENSIVE LOSS

The components of accumulated other comprehensive income, net of tax if applicable, are as follows:

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The components of comprehensive loss for the thirteen-week and thirty-nine week periods ended March 28, 2003 and March 29, 2002 are as follows:

The Company accounts for certain intercompany loans that are denominated in various foreign currencies as being permanent in nature, as settlement is not planned or anticipated in the foreseeable future.  As such, foreign exchange translation gains and losses related to these loans are excluded from net income (loss) and reported as a component of other comprehensive income (loss).

13.  NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is  computed by dividing net income (loss) by the weighted average number of common shares outstanding plus the dilutive effect of options and warrants. The dilutive effect of options and warrants is calculated under the treasury stock method using the average market price for the period. Net income (loss) per share is calculated as follows:

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For the thirteen-week period ended March 28, 2003, stock options and warrants representing 6,869 common shares were excluded from the diluted net loss per share calculation because they were antidilutive. For the thirty-nine week periods ended March 28, 2003 and March 29, 2002, stock options and warrants representing 6,705 and 6,861 common shares, respectively, were excluded from the diluted net loss per share calculations because they were antidilutive.

14.  SEGMENT INFORMATION

The Company operates in three industry segments: Broadband Communication Products, Broadband Network Services, and Broadband Management Solutions.

The “management approach” required under SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” has been used to present the following segment information. This approach is based upon the way management organizes segments within an enterprise for making operating decisions and assessing performance.

The following costs and asset categories are not allocated to our segments, and are reflected in the table as “unallocated items”:

Information about industry segments for the thirteen-week and thirty-nine week periods ended March 28, 2003 and March 29, 2002 is as follows:

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