UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2003 |
| o | 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
| Minnesota | 41-1356476 | |
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| (State of Incorporation) | (I.R.S. Employer Identification No.) |
6000 Nathan Lane North, Minneapolis, Minnesota 55442
Telephone Number: (763) 268-6000
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
As of December 1, 2003, the registrant had 27,230,026 shares of $.01 par value common stock issued and outstanding.
COMPUTER NETWORK TECHNOLOGY CORPORATION
INDEX
| Page | ||||||||
| PART I. |
FINANCIAL INFORMATION | |||||||
| Item 1. |
Financial Statements (unaudited) | |||||||
Consolidated Statements of Operations for the
three and nine months ended October 31, 2003 and 2002 |
3 | |||||||
Consolidated Balance Sheets as of October 31, 2003
and January 31, 2003 |
4 | |||||||
Consolidated Statements of Cash Flows for the
nine months ended October 31, 2003 and 2002 |
5 | |||||||
Notes to Consolidated Financial Statements |
6 | |||||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||||||
| Item 3. |
Market Risk | 20 | ||||||
| Item 4. |
Controls and Procedures | 20 | ||||||
| PART II |
OTHER INFORMATION | 21 | ||||||
| Item 1. |
Legal Proceedings | 21 | ||||||
| Items 2-4. |
None | 22 | ||||||
| Item 5. |
Other Information | 22 | ||||||
| Item 6. |
Exhibits and Reports on Form 8-K | 23 | ||||||
| SIGNATURES |
24 | |||||||
| EXHIBIT INDEX |
25 | |||||||
| CERTIFICATIONS |
||||||||
2
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PART I
Item 1.
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three months ended | Nine months ended | |||||||||||||||||
| October 31, | October 31, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenue: |
||||||||||||||||||
Product sales |
$ | 65,871 | $ | 39,009 | $ | 163,764 | $ | 101,891 | ||||||||||
Service fees |
33,745 | 16,894 | 84,895 | 48,090 | ||||||||||||||
Total revenue |
99,616 | 55,903 | 248,659 | 149,981 | ||||||||||||||
Cost of revenue: |
||||||||||||||||||
Cost of product sales |
37,023 | 24,842 | 97,901 | 61,822 | ||||||||||||||
Cost of service fees |
20,845 | 9,511 | 51,351 | 28,579 | ||||||||||||||
Total cost of revenue |
57,868 | 34,353 | 149,252 | 90,401 | ||||||||||||||
Gross profit |
41,748 | 21,550 | 99,407 | 59,580 | ||||||||||||||
Operating expenses: |
||||||||||||||||||
Sales and marketing |
24,353 | 13,614 | 63,426 | 43,399 | ||||||||||||||
Engineering and development |
12,229 | 7,063 | 30,174 | 20,322 | ||||||||||||||
General and administrative |
4,182 | 2,696 | 12,004 | 7,903 | ||||||||||||||
In-process research and development charge |
— | — | 19,706 | — | ||||||||||||||
Total operating expenses |
40,764 | 23,373 | 125,310 | 71,624 | ||||||||||||||
Income (loss) from operations |
984 | (1,823 | ) | (25,903 | ) | (12,044 | ) | |||||||||||
Other income (expense): |
||||||||||||||||||
Net gain on sale of marketable securities |
— | — | 747 | — | ||||||||||||||
Interest expense |
(1,116 | ) | (1,146 | ) | (3,336 | ) | (3,190 | ) | ||||||||||
Interest income and other, net |
272 | 1,344 | 1,726 | 4,817 | ||||||||||||||
Other income (expense), net |
(844 | ) | 198 | (863 | ) | 1,627 | ||||||||||||
Income (loss) before income taxes |
140 | (1,625 | ) | (26,766 | ) | (10,417 | ) | |||||||||||
Provision (benefit) for income taxes |
(97 | ) | (554 | ) | 901 | (3,543 | ) | |||||||||||
Net income (loss) before discontinued operations
and cumulative effect of change in accounting
principle |
237 | (1,071 | ) | (27,667 | ) | (6,874 | ) | |||||||||||
Discontinued operations |
— | 207 | — | 207 | ||||||||||||||
Cumulative effect of change in accounting principle |
— | — | — | (10,068 | ) | |||||||||||||
Net income (loss) |
$ | 237 | $ | (864 | ) | $ | (27,667 | ) | $ | (16,735 | ) | |||||||
Basic income (loss) per share: |
||||||||||||||||||
Net income (loss) before discontinued operations and
cumulative effect of change in accounting principle |
$ | .01 | $ | (.04 | ) | $ | (1.02 | ) | $ | (.24 | ) | |||||||
Discontinued operations |
$ | — | $ | .01 | $ | — | $ | .01 | ||||||||||
Cumulative effect of change in accounting
principle |
$ | — | $ | — | $ | — | $ | (.35 | ) | |||||||||
Net income (loss) |
$ | .01 | $ | (.03 | ) | $ | (1.02 | ) | $ | (.59 | ) | |||||||
Shares |
27,193 | 26,896 | 27,047 | 28,574 | ||||||||||||||
Diluted income (loss) per share: |
||||||||||||||||||
Net income (loss) before discontinued operations and
cumulative effect of change in accounting principle |
$ | .01 | $ | (.04 | ) | $ | (1.02 | ) | $ | (.24 | ) | |||||||
Discontinued operations |
$ | — | $ | .01 | $ | — | $ | .01 | ||||||||||
Cumulative effect of change in accounting
principle |
$ | — | $ | — | $ | — | $ | (.35 | ) | |||||||||
Net income (loss) |
$ | .01 | $ | (.03 | ) | $ | (1.02 | ) | $ | (.59 | ) | |||||||
Shares |
28,750 | 26,896 | 27,047 | 28,574 | ||||||||||||||
See accompanying notes to Consolidated Financial Statements
3
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
| October 31, | January 31, | ||||||||||
| 2003 | 2003 | ||||||||||
| (unaudited) | |||||||||||
Assets |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 62,614 | $ | 98,341 | |||||||
Marketable securities |
3,882 | 111,143 | |||||||||
Receivables, net |
94,799 | 56,040 | |||||||||
Inventories |
23,374 | 24,091 | |||||||||
Other current assets |
5,019 | 2,118 | |||||||||
Total current assets |
189,688 | 291,733 | |||||||||
Property and equipment, net |
40,458 | 22,566 | |||||||||
Field support spares, net |
11,269 | 6,009 | |||||||||
Goodwill, net |
107,612 | 14,113 | |||||||||
Other intangibles, net |
34,903 | 1,669 | |||||||||
Other assets |
6,164 | 3,079 | |||||||||
| $ | 390,094 | $ | 339,169 | ||||||||
Liabilities and Shareholders’ Equity |
|||||||||||
Current liabilities: |
|||||||||||
Accounts payable |
$ | 39,850 | $ | 16,889 | |||||||
Accrued liabilities |
48,022 | 25,060 | |||||||||
Deferred revenue |
39,630 | 19,340 | |||||||||
Current installments of capital lease |
462 | 708 | |||||||||
Total current liabilities |
127,964 | 61,997 | |||||||||
Obligations under capital lease, less current installments |
727 | — | |||||||||
Convertible subordinated debt |
125,000 | 125,000 | |||||||||
Deferred tax liability |
462 | 541 | |||||||||
Total liabilities |
254,153 | 187,538 | |||||||||
Shareholders equity: |
|||||||||||
Preferred stock |
— | — | |||||||||
Common stock, $.01 par value; authorized
100,000 shares, issued and outstanding
27,320 at October 31, 2003 and
26,921 at January 31, 2003 |
272 | 269 | |||||||||
Additional paid-in capital |
185,819 | 173,955 | |||||||||
Unearned compensation |
(436 | ) | (675 | ) | |||||||
Accumulated deficit |
(50,613 | ) | (22,946 | ) | |||||||
Accumulated other comprehensive income (loss) |
899 | 1,028 | |||||||||
Total shareholders’ equity |
135,941 | 151,631 | |||||||||
| $ | 390,094 | $ | 339,169 | ||||||||
See accompanying notes to Consolidated Financial Statements
4
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Nine months ended | ||||||||||||||||
| October 31, | ||||||||||||||||
| 2003 | 2002 | |||||||||||||||
Operating Activities: |
||||||||||||||||
Net loss |
$ | (27,667 | ) | $ | (16,735 | ) | ||||||||||
Adjustments to reconcile net loss to net cash provided by
operating activities: |
||||||||||||||||
Cumulative effect of change in accounting principle |
— | 10,068 | ||||||||||||||
Discontinued operations |
— | (207 | ) | |||||||||||||
Depreciation and amortization |
18,065 | 11,889 | ||||||||||||||
In-process research and development charge |
19,706 | — | ||||||||||||||
Non-cash compensation expense |
331 | 436 | ||||||||||||||
Net gain on sale of marketable securities |
(747 | ) | — | |||||||||||||
Changes in deferred taxes |
(4 | ) | (5,447 | ) | ||||||||||||
Changes in operating assets and liabilities, net of acquisition: |
||||||||||||||||
Receivables |
(5,431 | ) | 6,774 | |||||||||||||
Inventories |
12,139 | 1,157 | ||||||||||||||
Other current assets |
2,703 | 1,257 | ||||||||||||||
Accounts payable |
13,299 | 360 | ||||||||||||||
Accrued liabilities |
(8,930 | ) | (2,275 | ) | ||||||||||||
Deferred revenue |
(654 | ) | 2,526 | |||||||||||||
Net cash provided by continuing operations |
22,810 | 9,803 | ||||||||||||||
Net cash provided by discontinued operations |
— | 207 | ||||||||||||||
Cash provided by operating activities |
22,810 | 10,010 | ||||||||||||||
Investing Activities: |
||||||||||||||||
Additions to property and equipment |
(5,893 | ) | (4,738 | ) | ||||||||||||
Additions to field support spares |
(1,770 | ) | (4,448 | ) | ||||||||||||
Acquisition of Inrange Technologies, net of cash acquired |
(152,585 | ) | — | |||||||||||||
Acquisition of BI-Tech, net of cash acquired |
(3,868 | ) | (7,723 | ) | ||||||||||||
Net redemption (purchase) of marketable securities |
107,262 | (18,939 | ) | |||||||||||||
Other assets |
(2,466 | ) | 390 | |||||||||||||
Cash used in investing activities |
(59,320 | ) | ||||||||||||||