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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
June 30, 1999 OR
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission file number: 0-13994
Computer Network Technology Corporation
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(Exact name of registrant as specified in its charter)
Minnesota 41-1356476
------------------------ ----------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
605 North Highway 169, Minneapolis, Minnesota 55441
--------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Telephone Number: (612) 797-6000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes [X] No [ ]
As of August 6, 1999, the registrant had 23,441,893 shares of $.01 par value
common stock issued and outstanding.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
INDEX
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PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements (unaudited)
Consolidated Statements of Operations for the three and six
months ended June 30, 1999 and 1998............................3
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998..............................................4
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 1999 and 1998............................5
Notes to Consolidated Financial Statements ......................6
Item 2. Management's Discussion and Analysis of
Results of Operations .........................................8
Liquidity and Capital Resources ..............................12
PART II. OTHER INFORMATION ..............................................16
Item 1-3. None
Item 4. Submission of matters to a vote of security holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES .................................................................18
2
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share data)
Three months ended Six months ended
June 30 June 30
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue:
Product sales $ 26,377 $ 24,189 $ 52,134 $ 46,526
Service fees 11,479 9,277 22,635 18,106
-------- -------- -------- --------
Total revenue 37,856 33,466 74,769 64,632
-------- -------- -------- --------
Cost of revenue:
Cost of product sales 9,051 7,992 17,663 14,846
Cost of service fees 6,522 5,957 13,009 11,635
-------- -------- -------- --------
Total cost of revenue 15,573 13,949 30,672 26,481
-------- -------- -------- --------
Gross profit 22,283 19,517 44,097 38,151
-------- -------- -------- --------
Operating expenses:
Sales and marketing 11,604 11,088 22,304 22,218
Engineering and development 6,159 5,477 12,093 11,062
General and administrative 1,749 1,693 3,467 3,090
-------- -------- -------- --------
Total operating expenses 19,512 18,258 37,864 36,370
-------- -------- -------- --------
Income from operations 2,771 1,259 6,233 1,781
-------- -------- -------- --------
Other income (expense):
Interest income 125 113 226 200
Interest expense (56) (12) (102) (51)
Other, net (136) 44 435 65
-------- -------- -------- --------
Other income (expense), net (67) 145 559 214
-------- -------- -------- --------
Income before income taxes 2,704 1,404 6,792 1,995
Provision for income taxes 918 534 2,309 756
-------- -------- -------- --------
Net income $ 1,786 $ 870 $ 4,483 $ 1,239
======== ======== ======== ========
Basic:
- ------
Net income per share $ .08 $ .04 $ .20 $ .06
======== ======== ======== ========
Shares 23,062 22,107 22,773 22,080
======== ======== ======== ========
Diluted:
- --------
Net income per share $ .07 $ .04 $ .17 $ .06
======== ======== ======== ========
Shares 26,226 22,257 25,649 22,223
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
3
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets (unaudited)
Current assets:
Cash and cash equivalents $ 21,662 $ 11,786
Marketable securities 673 576
Receivables, net 33,616 30,225
Inventories 15,807 19,241
Deferred tax asset 3,138 3,138
Other current assets 2,175 1,274
--------- ---------
Total current assets 77,071 66,240
Property and equipment, net 17,114 16,360
Field support spares, net 3,890 3,739
Deferred tax asset 2,517 2,517
Goodwill and other intangibles, net 4,255 4,737
Other assets 345 434
--------- ---------
$ 105,192 $ 94,027
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 8,473 $ 7,565
Accrued liabilities 12,580 14,527
Deferred revenue 9,987 7,235
Current installments of obligations under capital lease 469 326
Current installments of long-term debt 1,000 1,000
--------- ---------
Total current liabilities 32,509 30,653
Obligations under capital lease, less current installments 1,604 1,816
Long term debt, less current installments -- 1,000
--------- ---------
Total liabilities 34,113 33,469
--------- ---------
Shareholders' equity:
Undesignated preferred stock, authorized 965
shares, none issue and outstanding -- --
Series A junior participating preferred stock,
authorized 35 shares, none issued and
outstanding -- --
Common stock, $.01 par value; authorized 100,000 shares,
issued and outstanding 23,414 at June 30, 1999 and
22,254 at December 31, 1998 234 223
Additional paid-in capital 61,778 54,921
Unearned compensation (844) (355)
Retained earnings 10,624 6,141
Accumulated other comprehensive income -
foreign currency translation adjustment (713) (372)
--------- ---------
Total shareholders' equity 71,079 60,558
--------- ---------
$ 105,192 $ 94,027
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
4
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended June 30
------------------------
1999 1998
-------- --------
Operating activities:
Net income $ 4,483 $ 1,239
Depreciation and amortization 5,006 4,488
Compensation expense 161 70
Changes in operating assets and liabilities:
Receivables (3,391) 578
Inventories 3,434 (2,888)
Other current assets (901) 238
Accounts payable 908 2,140
Accrued liabilities (1,947) (1,091)
Deferred revenue 2,752 1,517
-------- --------
Cash provided by operating activities 10,505 6,291
-------- --------
Investing activities:
Additions to property and equipment (4,300) (3,219)
Additions to purchased technology -- (275)
Additions to field support spares (1,129) (1,164)
Net purchase and redemption of marketable securities (97) 4,815
Other 89 31
-------- --------
Cash provided by (used in) investing activities (5,437) 188
-------- --------
Financing activities:
Repayment of obligations under capital lease (69) (89)
Repayment of long-term debt (1,000) --
Proceeds from issuance of common stock 6,218 548
Payments for repurchase of common stock -- (1,249)
-------- --------
Cash provided by (used in) financing activities 5,149 (790)
-------- --------
Effects of exchange rate changes (341) 2
-------- --------
Net increase in cash and cash equivalents 9,876 5,691
Cash and cash equivalents - beginning of period 11,786 4,790
-------- --------
Cash and cash equivalents - end of period $ 21,662 $ 10,481
======== ========
See accompanying Notes to Consolidated Financial Statements.
5
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and do not include all the information
and notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and accompanying notes
incorporated by reference in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 as filed with the Securities and Exchange
Commission.
(2) Inventories
Inventories, stated at the lower of cost (first-in, first-out method) or market,
consist of:
June 30, December 31,
1999 1998
------------- ----------
Components and subassemblies $ 7,993 $ 9,490
Work in process 2,245 4,095
Finished goods 5,569 5,656
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$ 15,807 $ 19,241
============= ==========
(3) Comprehensive Income
Comprehensive income consists of the following:
Six months ended June 30,
-------------------------
1999 1998
---------- ----------
Net income $ 4,483 $ 1,239
Translation adjustment, net of tax effect of $0 (341) 2
---------- ----------
Total comprehensive income $ 4,142 $ 1,241
========== ==========
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(4) Segment Information
The Company has two reportable segments consisting of its Network Solutions
Division and Enterprise Integration Solutions Division. The Network Solutions
Division provides products and services that offer high-speed open systems
connectivity, access to legacy data and guaranteed data integrity for
applications such as remote storage, disk mirroring, remote tape vaulting and
disaster recovery. The Enterprise Integration Solutions Division provides
products and services that integrate legacy systems with client/server and
internet technologies, including e-commerce and customer relationship management
applications. The Company's two reportable segments are strategic business units
that offer different products and services. They are managed separately because
each business requires different technology and market strategies. The Company
evaluates performance based on operating profit or loss before special charges
and income taxes.
Three months ended June 30
--------------------------
1999 1998
-------- --------
Revenue:
Network Solutions Division $ 30,492 $ 26,829
Enterprise Integration Solutions Division 7,364 6,637
-------- --------
$ 37,856 $ 33,466
======== ========
Operating Profit (Loss):
Network Solutions Division $ 2,803 $ 1,767
Enterprise Integration Solutions Division (32) (508)
-------- --------
$ 2,771 $ 1,259
======== ========
Six months ended June 30
------------------------
1999 1998
-------- --------
Revenue:
Network Solutions Division $ 59,737 $ 51,028
Enterprise Integration Solutions Division 15,032 13,604
-------- --------
$ 74,769 $ 64,632
======== ========
Operating Profit (Loss):
Network Solutions Division $ 5,584 $ 4,614
Enterprise Integration Solutions Division 649 (2,833)
-------- --------
$ 6,233 $ 1,781
======== ========
7
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The following table sets forth financial data for the periods indicated as a
percentage of total revenue except for gross profit, which is expressed as a
percentage of the related revenue.
<TABLE>
<CAPTION>
Enterprise Integration
Solutions Division Network Solutions Division
- -------------------------------------- --------------------------------------
Three Months Six Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
- ------------------ ------------------ ----------------- -----------------
1999 1998 1999 1998 1999 1998 1999 1998
----- ----- ----- ----- ----- ----- ----- -----
<C> <C> <C> <C> <S> <C> <C> <C> <C>
Revenue:
62.5% 62.3% 63.5% 63.7% Product sales 71.4% 74.7% 71.3% 74.2%
37.5 37.7 36.5 36.3 Service fees 28.6 25.3 28.7 25.8
----- ----- ----- ----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 Total revenue 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit:
87.7 88.0 89.5 81.4 Product sales 61.0 62.6 60.9 65.0
31.1 40.9 32.8 38.0 Service fees 47.0 33.9 45.6 34.9
----- ----- ----- ----- ----- ----- ----- -----
66.5 70.3 68.8 65.6 Total gross profit 57.0 55.4 56.5 57.3
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
37.4 44.2 36.5 31.3 Sales and marketing 29.0 30.5 28.2 30.2
24.5 28.7 23.0 50.2 Engineering and development 14.3 13.2 14.5 13.2
5.0 5.0 5.0 5.0 General and administrative 4.5 5.1 4.5 4.8
----- ----- ----- ----- ----- ----- ----- -----
66.9 77.9 64.5 86.5 Total operating expenses 47.8 48.8 47.2 48.2
----- ----- ----- ----- ----- ----- ----- -----
(0.4) (7.6) 4.3 (20.9) Income (loss) from operations 9.2 6.6 9.3 9.1
(0.3) 0.5 4.2 0.1 Other income (expense), net (0.1) 0.4 (0.1) 0.4
----- ----- ----- ----- ----- ----- ----- -----
(0.7) (7.1) 8.5 (20.8) Income (loss) before income taxes 9.1 7.0 9.2 9.5
(0.3) (2.9) 2.9 (7.9) Provision (benefit) for income taxes 3.1 2.7 3.1 3.6
----- ----- ----- ----- ----- ----- ----- -----
(0.4)% (4.2)% 5.6% (12.9)% Net income (loss) 6.0% 4.3% 6.1% 5.9%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
8
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REVENUE
Revenue from Network Solutions Division products for the second quarter and
first half of 1999 totaled $21.8 million and $42.6 million, respectively,
increases of 9% and 12%, respectively, when compared to the same periods of
1998. Storage Area Networking (SAN) applications for both open systems and
mainframes continued to drive new product revenue. Revenue from SAN product
applications for the second quarter and first half of 1999 totaled $13.6 million
and $25.4 million, respectively, increases of 67% and 77%, respectively, when
compared to the same periods of 1998. Revenue from channel extension product
applications for the second quarter and first half of 1999 totaled $8.1 million
and $17.2 million, respectively, decreases of 31% and 27%, respectively, when
compared to the same periods of 1998. While we expect the sale of channel
extension products to decrease in the future, we do not expect the decline per
quarter to be as substantial as it was in the second quarter of 1999.
Service revenue, including maintenance and professional services, from the
Network Solutions Division for the second quarter and first half of 1999 totaled
$8.7 million and $17.1 million, respectively, increases of 29% and 30%,
respectively, when compared to the same periods of 1998. Professional service
revenue for the second quarter and first half of 1999 totaled $1.0 million and
$2.2 million, respectively, increases of 228% and 514%, respectively, when
compared to the same periods of 1998. The growing installed base of customers
using our products accounted for the remaining increase in service revenue.
Revenue from Enterprise Integration Solutions Division products for the second
quarter and first half of 1999 totaled $4.6 million and $9.5 million,
respectively, increases of 11% and 10%, respectively, when compared to the same
periods of 1998. Revenue from the sale of Enterprise Application Integration
(EAI) products for the second quarter and first half of 1999 totaled $1.5
million and $2.6 million, respectively, increases of 112% and 98%, respectively,
when compared to the same periods of 1998. The increase is primarily due to
growing customer demand for products that integrate legacy applications and
networks with new networks and applications so that users can access
business-critical information. Sales of server gateways and tools for the second
quarter and first half of 1999 totaled $3.1 million and $6.9 million,
respectively, decreases of 10% and 6%, respectively, when compared to the same
periods of 1998. The acquisition of IntelliFrame did not have a significant
impact on second quarter or first half 1999 revenue.
Service revenue, including maintenance and professional services, from the
Enterprise Integration Solutions Division for the second quarter and first half
of 1999 totaled $2.8 million and $5.5 million, respectively, increases of 11%
for both periods when compared to the same periods of 1998. Professional
services revenue for the second quarter and first half of 1999 totaled $1.1
million and $2.1 million, respectively, increases of 125% and 99%, respectively,
when compared to the same periods of 1998.
Revenue generated from the sale of products and services outside the United
States for the second quarter and first half of 1999 totaled $14.5 million and
$26.0 million, respectively, increases of 18% and 17%, respectively, when
compared to same periods of 1998. The increase is primarily due to growing
demand from international customers for SAN and EAI product applications.
Fluctuations in revenue for the second quarter and first half of 1999 were
primarily due to changes in sales volume.
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Price increases did not have a significant impact on revenue.
We expect continued quarter-to-quarter fluctuations in revenue in both domestic
and international markets. The timing of sizable orders, because of their
relative impact on total quarterly sales, may contribute to such fluctuations.
The level of product sales reported by us in any given period will continue to
be affected by the receipt and fulfillment of sizable new orders in both
domestic and international markets.
GROSS PROFIT
Gross profit margin from the sale of Network Solutions Division products for the
second quarter and first half of 1999 were 61%, compared to 63% and 65%,
respectively, for the same periods of 1998. The decrease in gross profit margin
for both periods is primarily due to an increase in UltraNet product sales that
have a slightly lower gross margin during the product introduction period than
our traditional Channelink products. The decrease in gross profit margin during
the first half of 1999 was also due to favorable purchases of raw materials that
were realized in the first half of 1998.
Gross profit margin from Network Solutions Division services for the second
quarter and first half of 1999 were 47% and 46%, respectively, compared to 34%
and 35%, respectively, for the same periods of 1998. The improvement in gross
profit margin is attributable to new incremental revenue from professional
services which offer a higher gross margin than our traditional service
business.
Gross profit margin from the sale of Enterprise Integration Solutions Division
products for the second quarter and first half of 1999 were 88% and 90%,
respectively, compared to 88% and 81%, respectively, for the same periods of
1998. The increase in gross profit margin for the first half of 1999 can be
attributed to lower margin hardware sales accounting for a smaller percentage of
total product revenue.
Gross profit margin from Enterprise Integration Solutions Division services for
the second quarter and first half of 1999 were 31% and 33%, respectively,
compared to 41% and 38%, respectively, for the same periods of 1998. The
decrease in gross profit margin for both periods is primarily due to a reduced
installed base of server and gateway and tools products.
Actual gross profit margins on product sales in the second half of 1999 will
depend on a number of factors, including the mix of products, acceptance of our
new products, particularly in the SAN and EAI markets, the relative amount of
products sold through sales channels other than our direct sales force,
primarily OEM sales, and the level of price competition.
OPERATING EXPENSES
Sales and marketing expenses related to our Network Solutions Division for the
second quarter and first half of 1999 increased by $692,000 and $1.4 million,
respectively, increases of 8% and 9%, respectively, when compared to the same
periods of 1998. The increase resulted from the additional expense associated
with the higher level of product sales.
Engineering and development expense primarily relates to costs associated with
development of new products and enhancements to existing products. Engineering
and development expense related to our Network Solutions Division for the second
quarter and first half of 1999 increased by $788,000 and $1.8
10
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million, respectively, increases of 22% and 27%, respectively, when compared to
the same periods of 1998. The increases are primarily due to continued
development of our UltraNet family of products that provide customers with
additional applications to satisfy their growing need for SAN capabilities.
Engineering and development and sales and marketing expense for our Enterprise
Integration Solutions Division for the second quarter and first half of 1999
decreased by $282,000 and $2.1 million, respectively, decreases of 6% and 19%,
respectively, when compared to the same periods of 1998. The decrease is due to
the completion of our initiatives in 1998 to reduce headcount and expense
associated with this division.
We anticipate investing approximately 15% of total revenue on engineering and
development in 1999, which includes investments in current and future products.
We believe a sustained high level of investment in engineering and development
is essential to customer satisfaction and future revenue. During 1999, we intend
to continue to invest in our UltraNet product line, particularly in the areas of
open systems and Fibre Channel to further enhance our SAN offerings. We also
intend to complete development of the Process Dynamics product that was acquired
as in-process research and development from IntelliFrame in December of 1998.
General and administrative expenses for the second quarter and first half of
1999 increased by $56,000 and $377,000, respectively, increases of 3% and 12%,
respectively, when compared to the same periods of 1998. The increase is
primarily attributable to the additional expense associated with the higher
level of revenue for the second quarter and first half of 1999 when compared to
the same periods of 1998.
The operating margin as a percentage of total revenue for our Network Solutions
Division for both the second quarter and first half of 1999 was 9%, compared to
7% and 9%, respectively, for the same periods of 1998. Operating margin as a
percentage of total revenue for our Enterprise Integration Solutions Division
for the second quarter and first half of 1999 improved to 0% and 4%,
respectively, compared to a negative 8% and a negative 21%, respectively, for
the same periods of 1998.
OTHER
We recognized other expense for the second quarter of 1999 of $67,000, compared
to other income of $145,000 for the same period of 1998. The decrease was
primarily due to recognition of foreign exchange losses. Other income for the
first half of 1999 increased to $559,000 from $214,000 for the same period of
1998 due to recognition of a $667,000 payment received in connection with the
sale of our vision product line. We presently anticipate, but cannot assure,
that two additional payments of $667,000 and $630,000 will be received and
recognized as other income in March 2000 and March 2001, respectively.
We recorded a provision for income taxes for the second quarter and first half
of 1999 at an effective rate of 34%, compared to 38% for the same periods of
1998. Fluctuations in our effective income tax rate are primarily due to the
amount of non-deductible foreign losses and fluctuations in the level of benefit
from our foreign sales corporation.
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LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations through the private and public sale
of equity securities, bank borrowings under lines of credit, capital and
operating leases and cash generated by operations.
Cash, cash equivalents and marketable securities as of June 30, 1999 totaled
$22.3 million, an increase of $10.0 million since December 31, 1998. Operations
and proceeds from the exercise of stock options provided cash during the first
half of 1999 of $10.5 million and $6.2 million, respectively. Uses of cash in
the first half of 1999 included the purchase of property and equipment and field
support spares totaling $5.4 million. We also made a $1.0 million installment
payment in the first quarter of 1999 relating to our 1998 purchase of
IntelliFrame.
Expenditures for capital equipment and field support spares have been, and will
likely continue to be, a significant capital requirement. We have leased a new
building, presently under construction, for our principal business operations
with occupancy scheduled for the 1999 fourth quarter. We believe that our
current balances of cash, cash equivalents and marketable securities, when
combined with anticipated cash flows from operations, will be adequate to fund
our operating plans and meet our currently anticipated aggregate capital
requirements, at least for the next twelve months.
We believe that inflation has not had a material impact on our operations or
liquidity to date.
YEAR 2000
We are aware of the issues relating to the year 2000 and continue to assess the
impact that year 2000 issues will have on our business. We have also initiated
corrective action with respect to the year 2000 issues uncovered during our
assessment. The following information outlines the current status of our plans
regarding year 2000 issues.
OUR STATE OF READINESS
We have established a cross functional team that has been charged with assessing
our year 2000 readiness and identifying year 2000 related issues that could
impact our business. The activities include a review of all year 2000 issues
relating to our internal business systems, products and third party suppliers
and vendors.
We have assessed our internal information systems to determine if they will meet
our needs into and beyond the year 2000. Based on this assessment, we determined
that one of our primary internal business systems was not year 2000 compliant.
We spent approximately $2.3 million on new hardware, software and services in
1998 to acquire and implement a new year 2000 compliant business system which
was installed and became operational in January 1999. Our old non-compliant
business system was fully depreciated by the end of 1998. We are continuing to
test and assess our internal information and business systems to ensure year
2000 compliance.
12
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The primary purpose of our products is to carry data between systems. We define
year 2000 readiness for our products to mean that, as a result of date
transition relating to the year 2000, our products will not fail in their task
of transmitting data, or corrupt the data stream that they carry. To date, based
on our activities to assess the year 2000 readiness of our products, we have
determined that certain third party software imbedded in our products is not
year 2000 compliant. We are currently implementing a program that is expected to
correct the deficiency by August 31, 1999. A secondary issue relates to the
cosmetic appearance of displays and status reports produced by our products. Our
products utilize dates for logging alerts, messages, displays and reporting
network traffic. These functions are ancillary to the products' primary
operation of data transmission, and therefore are excluded from our definition
of year 2000 readiness. We are committed to making displays and reports from our
products clear and accurate. We tested our products for cosmetic appearance at
the same time we tested our products for year 2000 readiness. The dates
presented in certain versions of our software products are shown as two digits
or contain other report anomalies. The appearance related anomalies have been or
will be corrected in subsequent versions of our products that are scheduled to
ship prior to January 1, 2000.
We are also conducting an assessment of our key vendors and suppliers to ensure
that no interruption of material, service or product functionality occurs due to
year 2000 date transitions. Our assessment is ongoing and a completion date has
not been identified. However, we believe that alternate vendors could be
utilized to replace the products and services that are currently provided by our
key suppliers and vendors.
To date, the cost of the new business system and the allocation of employee
resources have been the only costs incurred by us to address year 2000
readiness. Based on the assessment activities completed to date, we do not
believe that we will incur significant extra expense relating to year 2000
issues.
YEAR 2000 RELATED RISKS
A worst case scenario relative to the year 2000 issue would be the discovery of
additional year 2000 deficiencies in our products that require significant extra
time and expense to correct. In addition, sales could be materially impacted in
1999 if customers were to stop, or significantly reduce, procurement of new
equipment for their data centers and networks until after the start of the year
2000. A critical year 2000 deficiency by a key supplier, coupled with a failure
to locate a suitable alternative source of supply, could have a material impact
on our business.
CONTINGENCY PLANS
We believe that we are addressing all known year 2000 related risks. While we do
not believe that developing a remediation plan for the worst case year 2000
risks noted above is practical, we are attempting to mitigate further risk by
continuing to test and assess our products, and the products and services of our
key suppliers and vendors, for year 2000 readiness. We continually work to
identify suitable alternative sources of supply for key products and services to
mitigate the risks relative to the year 2000 and other business interruption
issues. We intend to address any additional year 2000 related risks as they
become known.
ADDITIONAL INVENTORY PURCHASES
Two of our suppliers may not be year 2000 compliant. As a result, we are
purchasing additional inventory of approximately $500,000 from those suppliers
in advance of the year 2000. We believe this additional inventory allows us to
continue to operate without any disruption or delay caused by those suppliers'
13
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potential failure to be year 2000 compliant. We anticipate that this additional
inventory will be consumed in the ordinary course of business during 2000.
NEW EUROPEAN CURRENCY
On January 1, 1999, eleven of the fifteen member countries of the European Union
established fixed conversion rates between their existing currencies and the
euro, a new European currency, and adopted the euro as their common legal
currency . Either the euro or a participating country's present currency will be
accepted as legal tender from January 1, 1999 to January 1, 2002, from which
date forward only the euro will be accepted. We have a significant number of
customers located in European Union countries participating in this conversion.
The conversion may have competitive implications for our pricing and marketing
strategies, which could be material in nature; however, any such impact is not
known at this time. Our new business system implemented as of January 1999 is
capable of handling the new euro currency. There is no assurance, however, that
all problems related to the conversion will be foreseen and corrected, or that
no material disruptions of our business will occur.
MARKET RISK
We have no derivative financial instruments in our cash and cash equivalents. We
invest our cash and cash equivalents in investment grade, highly liquid
investments, consisting of money market instruments, bank certificates of
deposit and investments in commercial paper.
We are exposed to certain market risks related to fluctuations in foreign
exchange rates because some sales transactions, and the assets and liabilities
of our foreign subsidiaries, are denominated in foreign currencies, primarily
French francs, the euro and British pounds sterling. We have not invested in any
derivitive financial instruments to manage this risk.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), effective for us on January
1, 2001, establishes new standards for recognizing all derivatives as either
assets or liabilities, and measuring those instruments at fair value. Currently,
we do not anticipate that SFAS No. 133 will have a material impact on our
financial position or results of operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, other documents filed with the Securities
and Exchange Commission, our press releases and oral statements made by or with
the approval of our executive officers contain forward looking statements, which
may include statements about our anticipated receipt of orders and their impact
on quarterly sales, business strategy, expectations regarding future revenue
levels, timing of and plans for the introduction or phase-out of products or
services, enhancements of existing products or services, plans for hiring
additional personnel, entering into strategic partnerships, and other plans,
objectives, expectations and intentions that are not historical fact.
14
<PAGE>
The words "may," "should," "expect," "plan," "anticipate," "believe," estimate,"
"predict," "intend," "potential" or "continue" and similar expressions are
generally intended to identify forward-looking statements. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements. We assume no obligation to update any forward-looking statements.
These statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1-3. None
Item 4. Submission of matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 13, 1999
(b) Elected as Directors of the Company:
Thomas G. Hudson
Erwin A. Kelen
Lawrence Perlman
John A. Rollwagen
Patrick W. Gross
(c) Matters voted upon
<TABLE>
<CAPTION>
Affirmative Negative Broker
Votes Votes Abstain Non-Votes
----- ----- ------- ---------
<S> <C> <C> <C> <C>
1. Election of Directors
Thomas G. Hudson 17,378,225 1,747,477 0 0
Erwin A. Kelen 17,372,525 1,742,427 0 0
Lawrence Perlman 17,377,575 1,742,927 0 0
John A. Rollwagen 17,377,075 1,751,327 0 0
Patrick W. Gross 17,368,675 1,741,777 0 0
2. To amend and restate
the articles of
incorporation of the
Company to increase
the number of shares
authorized from
30,000,000 to
100,000,000 14,273,651 4,764,123 82,228 0
3. To amend the 1992
Stock Award Plan to
increase the number
of shares authorized
by 800,000 13,063,668 5,962,806 93,528 0
4. To amend the 1992
Employee Stock
Purchase Plan to
increase the number
of shares authorized
by 300,000 17,826,383 1,218,081 75,538 0
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
5. To ratify and approve
the appointment of
KPMG LLP as
independent auditors
for the year ending
December 31, 1999. 19,020,632 35,233 64,137 0
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed herewith.
3A. Second Restated Articles of Incorporation of the
Corporation. (Incorporated by reference to Exhibits 3(i)-1
and 3(i)-2 to current report on Form 8-K dated May 25,
1999.)
3B. By-laws of the Company. (Incorporated by reference to
Exhibit 3(ii)-1 to current report on Form 8-K dated May 25,
1999.)
4. Form of Certificate of Designations, Preferences and Rights
of Series A Junior Participating Preferred Stock.
(Incorporated by reference to Exhibit A of Exhibit 1 to Form
8-A dated July 29, 1998.)
10A. Minutes of Annual Meeting of Shareholders on May 13, 1999 to
amend the 1992 Stock Award Plan to increase the number of
shares authorized for issuance thereunder from 6,200,000 to
7,000,000, and to amend the 1992 Employee Stock Purchase
Plan to increase the number of shares authorized for
issuance thereunder from 800,000 to 1,100,000.
11. Statement Re: Computation of Net Income per Basic and
Diluted Share.
27. Financial Data Schedule.
(b) During the second quarter of 1999 the Company filed a form 8-K to
reflect the increase in the number of authorized shares from
30,000,000 to 100,000,000.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers.
COMPUTER NETWORK TECHNOLOGY CORPORATION
(Registrant)
Date: August 13, 1999 By: /s/ Gregory T. Barnum
----------------------------------
Gregory T. Barnum
Chief Financial Officer
(Principal financial officer)
By: /s/ Jeffrey A. Bertelsen
----------------------------------
Jeffrey A. Bertelsen
Corporate Controller and Treasurer
(Principal accounting officer)
18
<PAGE>
Exhibit Index
-------------
3A. Second Restated Articles of Incorporation of the
Corporation. (Incorporated by reference to Exhibits
3(i)-1 and 3(i)-2 to current report on Form 8-K dated
May 25, 1999.)
3B. By-laws of the Company. (Incorporated by reference to
Exhibit 3(ii)-1 to current report on Form 8-K dated
May 25, 1999.)
4. Form of Certificate of Designations, Preferences and
Rights of Series A Junior Participating Preferred
Stock. (Incorporated by reference to Exhibit A of
Exhibit 1 to Form 8-A dated July 29, 1998.)
10A. Minutes of Annual Meeting of Shareholders on May 13,
1999 to amend the 1992 Stock Award Plan to increase
the number of shares authorized for issuance
thereunder from 6,200,000 to 7,000,000, and to amend
the 1992 Employee Stock Purchase Plan to increase the
number of shares authorized for issuance thereunder
from 800,000 to 1,100,000............................... Electronically
Filed
11. Statement Re: Computation of Net Income per Basic and
Diluted Share........................................... Electronically
Filed
27. Financial Data Schedule................................. Electronically
Filed
<PAGE>
Exhibit 10A
MINUTES OF THE ANNUAL MEETING OF THE
SHAREHOLDERS OF COMPUTER NETWORK TECHNOLOGY
The 1998 annual meeting of the shareholders of Computer Network Technology (the
"Company"), was held on May 13, 1999 at the Marriott City Center Hotel in
Minneapolis Minnesota. Present as representatives of the Company, were Board
members, John A. Rollwagen, Patrick W. Gross, Thomas G. Hudson, Erwin A. Kelen
and Lawrence Perlman. Mr. Hudson acted as Chairman for the meeting. Greg Barnum
the Company's Chief Financial Officer, was also present and was asked to act as
Secretary for the meeting.
Minutes
-------
Meeting Called to Order:
At approximately 10:00 am (Minneapolis time), Mr. Hudson called the 1998 annual
meeting of shareholders to order. Mr. Hudson introduced the Board and the
Executive Officers of the Company to the shareholders. Mr. Hudson also
introduced Steve Zenz, a partner of KPMG Peat Marwick, the Corporation's
independent auditor, and stated that Mr. Zenz would be available to answer
questions at the conclusion of the meeting. Mr. Hudson indicated that the
minutes from the previous Annual Meeting of Shareholders were available for
inspection and appointed Suzanne M. Nelson as inspector for the purpose of
counting ballots. Mr. Hudson then reported on the proof of the mailing of the
Annual Report, the Proxy material and the Notice of this annual meeting and
whether the necessary quorum was present.
Mr. Hudson stated that the notice of this meeting, proxy statement, form of
proxy and Annual Report were mailed on April 5, 1999, to all holders of Common
Stock of record at the close of business on March 15, 1999. Mr. Hudson also
reported that present at the meeting, by proxy and in person, were holders of
more than 77% of the shares of the Company's outstanding Common Stock entitled
to vote at this meeting and therefore a quorum was present.
Items to be Voted On:
Mr. Hudson first addressed the election of directors for the coming year and
indicated that each of Messrs. Gross, Hudson, Kelen, Perlman, and Rollwagen were
standing for re-election. Mr. Hudson asked if there were any other nominations
and, there being none, the nominations were closed. Mr. Hudson then stated that
the remaining four items on the agenda, as set forth in the Notice and discussed
in the Proxy Statement, were:
o To approve the proposed amendment to the Restated Articles of
Incorporation to increase the number of authorized shares of Common
Stock from 30 million to 100 million.
o To amend the 1992 Stock Award Plan to increase the number of shares
authorized for issuance
<PAGE>
thereunder by 800,000 shares.
o To amend the 1992 Employee Stock Purchase Plan to increase the number
of shares authorized for issuance thereunder by 300,000.
o to ratify and approve the appointment of KPMG Peat Marwick as
independent auditors for the year ending December 31, 1999.
Mr. Hudson then reviewed each item to be voted on at the meeting, as set forth
in the Proxy Statement, and offered to answer any questions relating to an item
of business.
Mr. Hudson asked if there were any other items of business to be voted upon. No
other proposals were raised and Mr. Hudson declared the opportunity for
proposals closed. Mr. Hudson then asked if any shareholders of record desired to
vote in person or change their vote. While the Inspector of Elections tabulated
the vote, Mr. Hudson and Mr. Barnum reported to the shareholders the progress of
the Company.
Company Update:
Mr. Hudson and Mr. Barnum reported to the shareholders the progress of Company
in 1998 and the first quarter of 1999. Mr. Hudson and Mr. Barnum then responded
to questions from shareholders.
Inspectors Report:
Mr. Hudson then explained that over 74% of the shares voted had voted in favor
of each item on the agenda. As no one voted in person, Mr. Hudson declared that
each item had passed and, there being no further business to come before the
meeting, Mr. Hudson adjourned the meeting.
Respectfully submitted,
/S/ Greg Barnum
-----------------------------------
Greg Barnum
Secretary
<PAGE>
Exhibit 11
COMPUTER NETWORK TECHNOLOGY CORPORATION
Statement Re: Computation of Net Income Per Basic and Diluted Share
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Weighted
Average Shares Per Share
Net Income Outstanding Amount
----------- ---------- --------
<S> <C> <C> <C>
Three Months Ended June 30,
1999:
Basic $1,786 23,062 $.08
Dilutive effect of employee stock purchase
awards and options(1) -- 3,164 (.01)
----------- ---------- --------
Diluted $1,786 26,226 $.07
=========== ========== ========
1998:
Basic $ 870 22,107 $.04
Dilutive effect of employee stock purchase
awards and options(1) -- 150 --
----------- ---------- --------
Diluted $ 870 22,257 $.04
=========== ========== ========
Six Months Ended June 30,
1999:
Basic $4,483 22,773 $.20
Dilutive effect of employee stock purchase
awards and options(1) -- 2,876 (.03)
----------- ---------- --------
Diluted $4,483 25,649 $.17
=========== ========== ========
1998:
Basic $1,239 22,080 $.06
Dilutive effect of employee stock purchase
awards and options(1) -- 143 --
----------- ---------- --------
Diluted $1,239 22,223 $.06
=========== ========== ========
</TABLE>
(1) For the second quarter and first half of 1999 and 1998, potential dilutive
securities primarily consisting of outstanding stock options and shares
issuable under the employee stock purchase plan are included in the
computation of net income per diluted share using the treasury stock
method.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMPUTER NETWORK TECHNOLOGY AND IS
QUALIFIED IN ITS ENTRIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 21,662
<SECURITIES> 673
<RECEIVABLES> 34,849
<ALLOWANCES> 1,233
<INVENTORY> 15,803
<CURRENT-ASSETS> 77,071
<PP&E> 47,829
<DEPRECIATION> 30,715
<TOTAL-ASSETS> 105,192
<CURRENT-LIABILITIES> 32,509
<BONDS> 1,604
0
0
<COMMON> 234
<OTHER-SE> 70,845
<TOTAL-LIABILITY-AND-EQUITY> 105,192
<SALES> 52,134
<TOTAL-REVENUES> 74,769
<CGS> 17,663
<TOTAL-COSTS> 30,672
<OTHER-EXPENSES> 12,093<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 102
<INCOME-PRETAX> 6,792
<INCOME-TAX> 2,309
<INCOME-CONTINUING> 4,483
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,483
<EPS-BASIC> .20<F2>
<EPS-DILUTED> .17
<FN>
<F1>Amount presented represents engineering and development expense.
<F2>Amount presented represents basic EPS.
</FN>
</TABLE>
