Computer Network Technology (CMNT) 10-Q 2002 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
	July 31, 2001 OR
	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
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

Minnesota	41-1356476
(State of Incorporation)	(I.R.S. Employer Identification No.)

6000 Nathan Lane North, Minneapolis, Minnesota 55442
(Address of principal executive offices) (Zip Code)

                     Telephone Number: (763) 268-6000                    
(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  No 

As of August 31, 2001, the registrant had 29,926,836 shares of $.01 par value common stock issued and outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2001 AND 2000
	CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 2001 AND JANUARY 31, 2001
	CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JULY 31, 2001 AND 2000
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
ITEM 1-3. NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Computation of Net Income Per Basic & Diluted Shr

COMPUTER NETWORK TECHNOLOGY CORPORATION

INDEX

PART I FINANCIAL INFORMATION

		Page
Item 1.	Financial Statements (unaudited)
	Consolidated Statements of Operations for the three and six months ended July 31, 2001 and 2000	3
	Consolidated Balance Sheets as of July 31, 2001 and January 31, 2001	4
	Consolidated Statements of Cash Flows for the three and six months ended July 31, 2001 and 2000	5
	Notes to Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
PART II	OTHER INFORMATION	17
Item 1-3.	None
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	None
Item 6.	Exhibits and Reports on Form 8-K	18
SIGNATURES		19

2

COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

					Three months ended July 31,						Six months ended July 31,
					2001			2000			2001			2000
Revenue:
		Product sales			$	27,682		$	31,728		$	43,719		$	59,040
		Service fees				13,901			12,613			27,277			23,908
				Total revenue		41,583			44,341			70,996			82,948
	Cost of revenue:
			Cost of product sales			15,556			12,844			25,017			24,407
			Cost of service fees			9,467			7,406			18,954			14,118
				Total cost of revenue		25,023			20,250			43,971			38,525
	Gross profit					16,560			24,091			27,025			44,423
	Operating expenses:
			Sales and marketing			11,854			10,384			22,749			19,994
			Engineering and development			5,134			5,790			11,418			11,532
			General and administrative			2,169			2,216			4,937			4,309
			Restructuring charge			—			—			996			—
				Total operating expenses		19,157			18,390			40,100			35,835
	Income (loss) from operations					(2,597	)		5,701			(13,075	)		8,588
	Other income (expense):
			Interest income			1,489			394			3,465			668
			Interest expense			(60	)		(88	)		(128	)		(176	)
			Loss on sale and write-down of webMethods stock			—			—			(10,283	)		—
			Other			(58	)		(102	)		(114	)		(271	)
				Other income (expense)		1,371			204			(7,060	)		221
	Income (loss) from continuing operations before income taxes					(1,226	)		5,905			(20,135	)		8,809
	Provision (benefit) for income taxes					(405	)		1,949			(6,336	)		2,907
	Income (loss) from continuing operations					(821	)		3,956			(13,799	)		5,902
	Discontinued Operations:
			Loss from discontinued operations, net of tax			—			(1,903	)		—			(2,019	)
			Gain of $21,390 on sale of IntelliFrame, (net of tax, $8,770)			—			—			12,620			—
			Provision of $9,250 for losses until divesture of Propelis Software, (net of tax $3,053)			—			—			(6,197	)		—
						—			(1,903	)		6,423			(2,019	)
		Net income (loss)			$	(821	)	$	2,053		$	(7,376	)	$	3,883
	Basic income (loss) per share:
		Continuing operations			$	(.03	)	$	.16		$	(.46	)	$	.25
		Discontinued operations			$	—		$	(.08	)	$	.22		$	(.08	)
		Net income			$	(.03	)	$	.09		$	(.25	)	$	.16
		Shares				29,729			24,102			29,746			24,020
	Diluted income (loss) per share:
		Continuing operations			$	(.03	)	$	.15		$	(.46	)	$	.23
		Discontinued operations			$	—		$	(.07	)	$	.22		$	(.08	)
		Net income			$	(.03	)	$	.08		$	(.25	)	$	.15
		Shares				29,729			25,925			29,746			26,152

See accompanying Notes to Consolidated Financial Statements

3

COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

			July 31,			January 31,
			2001			2001
ASSETS
Current assets:
	Cash and cash equivalents		$	21,800		$	39,444
	Marketable securities			89,248			111,033
	Receivables, net			36,308			43,613
	Inventories			39,885			22,447
	Net current assets of discontinued operations			—			5,430
	Deferred tax asset			11,482			11,415
	Other current assets			2,615			2,226
		Total current assets		201,338			235,608
Property and equipment, net				25,848			25,215
Field support spares, net				4,894			4,446
Deferred tax asset				2,454			—
Goodwill and other intangibles, net				14,669			1,200
Other assets				1,632			2,154
			$	250,835		$	268,623
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	13,602		$	20,293
	Accrued liabilities			13,499			15,780
	Deferred revenue			14,241			15,489
	Net current liabilities of discontinued operations			254			—
	Current installments of obligations under capital lease			1,404			1,421
		Total current liabilities		43,000			52,983
Deferred tax liability				—			586
Obligations under capital lease, less current installments				1,198			1,952
		Total liabilities		44,198			55,521
Shareholders’ equity:
	Undesignated preferred stock, authorized 965 shares; none issued and outstanding			—			—
	Series A Junior participating preferred stock, authorized 40 shares, none issued & outstanding			—			—
	Common stock, $.01 par value; authorized 100,000 shares, issued and outstanding 29,922 at July 31, 2001 and 29,656 at January 31, 2001			299			297
	Additional paid-in capital			197,767			195,910
	Unearned compensation			(1,939	)		(1,304	)
	Retained earnings			11,789			19,165
	Accumulated other comprehensive income — Foreign currency translation			(1,279	)		(966	)
		Total shareholders’ equity		206,637			213,102
			$	250,835		$	268,623

See accompanying Notes to Consolidated Financial Statements.

4

COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

				Six months ended
				July 31
				2001			2000
Operating Activities:
	Net income (loss)			$	(7,376	)	$	3,883
	Discontinued operations				(6,423	)		2,019
	Depreciation and amortization				7,421			5,216
	Compensation expense				286			25
	Loss on sale and write-down of webMethods stock				10,283			—
	Changes in operating assets and liabilities:
		Receivables			17,676			(5,197	)
		Inventories			(12,992	)		341
		Other current assets			(52	)		(875	)
		Accounts payable			(25,517	)		2,217
		Accrued liabilities			(14,079	)		9,685
		Deferred revenue			(1,316	)		2,653
		Net cash provided by (used in) continuing operations			(32,089	)		19,967
		Net cash provided by (used in) discontinued operations			(3,566	)		613
			Cash provided by (used in) operating activities		(35,655	)		20,580
Investing Activities:
	Additions to property and equipment				(3,635	)		(7,500	)
	Additions to field support spares				(1,717	)		(847	)
	Acquisition of Articulent, net of cash acquired				(11,132	)		—
	Net proceeds from the sale of IntelliFrame				5,800			—
	Proceeds from the sale of webMethods stock				6,281			—
	Net purchase and redemption of marketable securities				21,876			(2,748	)
	Other assets				577			(599	)
	Discontinued operations — additions to long-term assets				—			(110	)
			Cash provided by (used in) investing activities		18,050			(11,804	)
Financing Activities:
	Proceeds from issuance of common stock				1,625			2,235
	Repayments of obligations under capital leases				(771	)		(549	)
	Repurchase of common stock				(687	)		—
			Cash provided by financing activities		167			1,686
Effects of exchange rate changes					(206	)		(245	)
Net increase (decrease) in cash and cash Equivalents					(17,644	)		10,217
Cash and cash equivalents — beginning of Period					39,444			7,974
Cash and cash equivalents — end of Period				$	21,800		$	18,191

See accompanying Notes to Consolidated Financial Statements

5

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 of the information and notes required by accounting principles generally accepted in the United States of America 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 included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2001 as filed with the Securities and Exchange Commission.

(2)  DISCONTINUED OPERATIONS

Propelis Software, Inc., formerly known as the Enterprise Integration Solutions Division develops and sells EAI software that automates the integration of computer software applications, and business workflow processes. The Company previously determined to divest Propelis Software Inc. and focus on its core storage networking and storage solutions businesses. Accordingly, Propelis Software, Inc. has been accounted for as discontinued operations in the accompanying financial statements.

During the first quarter of 2001, the Company completed the sale of IntelliFrame, which was affiliated with Propelis Software, Inc, including the technology underlying the Propelis BPm™ product to webMethods for $8.8 million in cash and 273,542 shares of webMethods stock. The sale resulted in an after tax gain of $12.6 million in the first quarter of 2001.

In the first quarter of 2001, the Company accrued $9.3 million for the estimated future operating losses of Propelis Software, Inc. through the potential date of divestiture, resulting in an after tax loss of $6.2 million.

On August 23, 2001 the Company sold substantially all of the remaining assets and liabilities of Propelis Software, Inc. to Jacada LTD. for $6.0 million in cash, plus a warrant to purchase 350,0000 ordinary shares of Jacada LTD. stock at a price of $3.26 per share. The final purchase price is subject to adjustment based on the closing balance sheet of Propelis. The transaction will result in a gain in the third quarter of 2001.

6

Condensed Consolidated Statements of Net Assets (Liabilities) of Discontinued Operations:

		July 31,			January 31,
		2001			2001
Receivables, net		$	2,441		$	4,419
Goodwill and other intangibles, net			375			1,497
Other assets			1,857			1,934
	Total assets		4,673			7,850
All other liabilities			4,927			2,420
	Net assets (liabilities) of discontinued operations	$	(254	)	$	5,430

(3)  MARKETABLE SECURITIES

During the first quarter of 2001, the Company sold 232,511 shares of webMethods stock received from the sale of Intelliframe for approximately $6.3 million, resulting in a pre-tax loss of approximately $8.7 million. The Company also wrote-down the carrying value of the remaining 41,031 shares of webMethods stock that it still owns, resulting in a pre-tax loss of approximately $1.5 million.

The Company’s remaining investments in marketable securities primarily consist of bank certificates of deposit, U.S. government and agency securities and commercial paper. Excluding the sale of webMethods stock noted above, the Company did not realize any gains or losses from the sale of marketable securities in the first or second quarters of 2001. The amount of gross unrealized gains and losses with respect to investments in marketable securities at July 31, 2001 was not significant.

(4)  INVENTORIES

Inventories, stated at the lower of cost (first-in, first-out method) or market, consist of:

	July 31,		January 31,
	2001		2001
Components and subassemblies	$	27,574	$	15,218
Work in process		2,787		2,813
Finished goods		9,524		4,416
	$	39,885	$	22,447

7

(5)  COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of the following:

	Six months ended July 31,
	2001			2000
Net income (loss)	$	(7,376	)	$	3,883
Foreign currency translation adjustment, net of tax effect of $0		(313	)		(435	)
Total comprehensive income (loss)	$	(7,689	)	$	3,448

(6)  SEGMENT INCOME

The Company has two reportable segments consisting of its Networking Solutions business unit and Storage Solutions business unit. The Networking Solutions business unit consists of our storage and channel networking products and related services. The Storage Solutions business consists of our SAN services and the storage management business we acquired from Articulent in April of 2001. 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 market strategies. The Company evaluates performance based on operating profit or loss before special charges and income taxes.

		Three months ended July 31,					Six months ended July 31,
		2001			2000		2001			2000
Revenue:
	Networking Solutions	$	30,024		$	41,058	$	55,180		$	77,509
	Storage Solutions		11,559			3,283		15,816			5,439
		$	41,583		$	44,341	$	70,996		$	82,948
Income (loss) from operations:
	Networking Solutions	$	(1,494	)	$	5,490	$	(6,930	)	$	8,775
	Storage Solutions		(1,103	)		211		(2,824	)		(187	)
	Special Charges		—			—		(3,321	)		—
		$	(2,597	)	$	5,701	$	(13,075	)	$	8,588

(7)  ACQUISITION OF ARTICULENT

On April 3, 2001 the Company acquired all of the outstanding stock of Articulent Inc., a privately held, leading provider of storage solutions and services for $12 million in cash, plus the assumption of approximately $24 million of liabilities and the acquisition of approximately $19 million of tangible assets. The agreement includes a potential $10 million incentive payout based upon meeting certain revenue and earnings milestones over the next twelve months. The acquisition was accounted for as a purchase and the consolidated financial statements of the Company include the results of Articulent since April 3, 2001. The purchase price was allocated to the fair value of the assets and liabilities acquired as follows:

Purchase Price:
	Cash paid	$	12,360
Fair Values of Assets Acquired and Liabilities Assumed:
	Cash	$	624
	Accounts receivable		10,287
	Inventory		4,446
	Fixed assets		3,393
	Goodwill		14,314
	Deferred taxes		3,107
	Other assets		583
	Accounts payable		(18,302	)
	Accrued expenses		(2,324	)
	Note payable		(3,768	)
	Total Purchase Consideration	$	12,360

The following table presents the consolidated results of operations of the Company for the six months ended July 31, 2001 on an unaudited pro forma basis as if the acquisition of Articulent took place as the beginning of the year:

Total revenue	$	78,713
Net loss	$	(9,442	)
Net loss per share	$	(.32	)

The unaudited pro forma results are for comparative purposes only and do not necessarily reflect the results that would have been recorded had the acquisition occurred at the beginning of the period presented or the results which might occur in the future.

(8)  NEW ACCOUNTING PRONOUNCEMENT

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations," and SFAS No. 142 "Goodwill and Other Intangible Assets," which change the accounting for business combinations and goodwill. SFAS No. 141 requires that the purchase method of accounting be used for business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will therefore cease upon adoption of SFAS No. 142.

The Company will adopt SFAS No. 142 on February 1, 2002. The Company is in the process of evaluating whether it will have any transitional impairment losses which would be required to be recognized as a cumulative effect of a change in accounting principle. During the quarter ended July 31, 2001, the Company had goodwill amortization of $200,000, which under SFAS No. 141 it would not have after February 1, 2002.

8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     We are a leading provider of hardware and software products and related services in the rapidly growing storage networking and solutions market. We focus primarily on helping our clients design, develop, deploy and manage storage networks and solutions.

     The current global economic slowdown makes it difficult to predict the demand for our products as we cannot forecast the length, duration and impact of the slowdown. Slower growth throughout the economy has caused our customers to reevaluate their capital spending plans, and to defer previously planned projects for information technology infrastructure. However, we believe the need for storage networking solutions is significant and will continue to increase.

     Due to the slowdown in customer spending for information technology infrastructure, we took cost reduction actions that reduced our quarterly expense run rate at the end of April 2001, including:

     •              a 10 percent workforce reduction

     •              a wage freeze for all employees

     •              a 10 percent pay cut for executive management

     •              a 5 percent pay cut for other employees; and

     •              significant reductions in discretionary spending

     The reduction in demand for our products and services also resulted in the following charges in the first quarter of 2001:

     •              $2.0 million to write-down slow moving inventory

     •              $325,000 for the write-off of our Filespeed product; and

     •              $996,000 for restructuring, principally severance

Sale and Write-down of webMethods Stock

     During the first quarter of 2001, the Company sold 232,511 shares of webMethods stock received from the sale of Intelliframe for approximately $6.3 million, resulting in a pre-tax loss of approximately $8.7 million. The Company also wrote-down the carrying value of the remaining 41,031 shares of webMethods stock that it still owns, resulting in a pre-tax loss of approximately $1.5 million.

Acquisition of Articulent

     On April 3, 2001 we acquired all of the outstanding stock of Articulent Inc., a privately held, leading provider of storage solutions and services for $12 million in cash, plus the assumption of approximately $24 million of liabilities and the acquisition of approximately $19 million of tangible assets. The agreement includes a $10 million incentive payout based upon meeting certain revenue and earnings milestones over the next twelve months. The acquisition further strengthens our

9

storage services organization, which provides companies with the expertise to manage information enterprise-wide.

Discontinued Operations — Divestiture of Propelis Software, Inc.

     Propelis Software, Inc., formerly known as the Enterprise Integration Solutions Division develops and sells EAI software that automates the integration of computer software applications, and business workflow processes. The Company previously determined to divest Propelis Software Inc. and focus on its core storage networking and storage solutions businesses. Accordingly, Propelis Software, Inc. has been accounted for as discontinued operations in the accompanying financial statements, meaning that the division’s revenues, costs and expenses are not shown and its net income (loss) for all periods are included under the “Discontinued Operations” caption in our statement of operations.

     During the first quarter of 2001, we completed the sale of IntelliFrame, which was affiliated with Propelis Software, Inc, including the technology underlying the Propelis BPm™ product to webMethods for $8.8 million in cash and 273,542 shares of webMethods stock. The sale resulted in an after tax gain of $12.6 million in the first quarter of 2001.

     In the first quarter of 2001, we accrued $9.3 million for the estimated future operating losses of Propelis Software, Inc. through the potential date of divestiture, resulting in an after tax loss of $6.2 million.

     In the second quarter, on August 23, 2001 we sold substantially all of the remaining assets and liabilities of Propelis Software, Inc. to Jacada LTD. for $6.0 million in cash, plus a warrant to purchase 350,0000 ordinary shares of Jacada LTD. stock at a price of $3.26 per share. The final purchase price is subject to adjustment based on the closing balance sheet of Propelis. The transaction will result in a gain in the third quarter of 2001.

     For additional information regarding Propelis Software, Inc., see note 2, “Discontinued Operations” to the consolidated financial statements included in this Form 10-Q. Certain general and administrative, facility and information technology infrastructure costs that had previously been allocated to and reported in the operating results of Propelis Software, Inc. have been reallocated and reported in the results for continuing operations.

10

Results of Continuing Operations

     The following table sets forth financial data for our continuing operations for the periods indicated as a percentage of total revenue except for gross profit, which is expressed as a percentage of the related revenue.

     The segment operating information for the three and six months ended July 31, 2001 and 2000 is for illustrative purposes only and such segment information has been adjusted to eliminate the effects of special items and other charges recognized during the first quarter of 2001, including a $2.0 million write-down of inventory, a $325,000 write-off of our Filespeed product and a $1.0 million restructuring charge.

Networking															Storage Solutions
Three			Three			Six			Six						Three			Three			Six			Six
months			months			months			months						months			months			months			months
ended			ended			ended			ended						ended			ended			ended			ended
July 31,			July 31,			July 31,			July 31,						July 31,			July 31,			July 31,			July 31,
2001			2000			2001			2000						2001			2000			2001			2000
												Revenue:
	63.9	%		74.9	%		59.4	%		74.4	%		Product sales			73.4	%		29.4	%		69.2	%		25.2	%
	36.1			25.1			40.6			25.6			Service fees			26.6			70.6			30.8			74.8
	100.0			100.0			100.0			100.0				Total revenue		100.0			100.0			100.0			100.0
												Gross profit:
	52.7			59.4			56.2			58.5			Product sales			23.7			64.9			23.7			67.5
	48.5			44.0			44.8			44.7			Service fees			(26.7	)		29.3			(35.2	)		22.5
	51.2			55.5			51.6			54.9				Total gross profit		10.3			39.8			5.6			33.8
												Operating expenses:
	32.5			22.6			35.3			23.3			Sales and marketing			18.1			33.4			20.6			37.2
													Engineering and
	17.1			14.1			20.7			14.8			development			0.0			0.0			0.0			0.0
													General and
	6.6			5.4			8.1			5.6			administrative			1.7			0.0			2.8			0.0
														Total operating
	56.2			42.1			64.1			43.6				expenses		19.9			33.4			23.5			37.2
	(5.0	)%		13.4	%		(12.6	)%		11.3	%	Income (loss) from operations				(9.5	)%		6.4	%		(17.9	)%		(3.4	)%

11

Revenue

     Networking Solutions:

          Our networking solutions business generated revenues of $30.0 million and $55.2 million in the second quarter and first half of 2001, respectively, down 27% and 29%, respectively, from $41.1 million and $77.5 million for the second quarter and first half of 2000. Storage networking product revenues totaled $16.1 million and $23.8 million in the second quarter and first half of 2001, respectively, down 23% and 34%, respectively, from $20.9 million and $36.1 million in the second quarter and first half of 2000. Channel networking product revenues totaled $3.1 million and $8.9 million in the second quarter and first half of 2001, respectively, down 69% and 59%, respectively, from $9.8 million and $21.6 million in the second quarter and first half of 2000. The decrease in revenue from sales of both storage and channel networking products resulted from the global slow down in capital spending for information technology equipment by our customers.

          Service revenues associated with our networking business totaled $10.8 million and $22.4 million for the second quarter and first half of 2001, respectively, increases of 5% and 13%, respectively, from $10.8 million and $22.4 million in the second quarter and first half of 2000. The increases in both periods are due to the larger installed base of customers using our networking products.

     Storage Solutions:

          Our storage solutions business, consisting of our SAN services and the storage solutions and services business we acquired from Articulent in April of 2001, generated revenue of $11.6 million and $15.8 million in the second quarter and first half of 2001, respectively, up 252% and 191%, respectively, from $3.3 million and $5.4 million in the second quarter and first half of 2000. Articulent accounted for a significant portion of the increase.

     General:

          Revenue generated from the sale of products and services outside the United States for the second quarter and first half of 2001 totaled $10.6 million and $20.1 million, respectively, decreases of 10% and 7%, respectively, from the second quarter and first half of 2000. The reduction was attributable to the global slow down in capital spending for information technology equipment by our customers.

          No single customer accounted for more than 10% of our revenue during the second quarter and first half of 2001. The revenue decline in the second quarter and first half of 2001 was primarily due to a decline in sales of products and services. Price discounting had a small impact on our product revenue during these periods.

          During the six months ended July 31, 2001, approximately 25%, 8%, and 20% of our product revenue was derived from businesses in the financial services, telecommunications and information outsourcing industries, respectively.

12

          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 Margin

     Networking:

          Excluding the $2.0 million write-down of slow moving inventory and the $325,000 write-off of our Filespeed product in the first quarter of 2001, gross product margins from the sale of networking products for the second quarter and first half of 2001 were 53% and 56%, respectively, down from 59% in both the second quarter and first half of 2000. The decline in gross margin percentage was due to a higher percentage of sales coming from lower margin third party products, primarily Wave Division Multiplexers, the continued movement in sales mix toward our UltraNet product, which carries a lower margin than our older Channelink products, and higher levels of sales discounts.

          Gross service margins for our networking business improved in the second quarter and first half of 2001 to 49% and 45%, respectively, from 44% and 45%, respectively, in the second quarter and first half of 2000. The improvement in gross margins is due to economies of scale resulting from the growing installed base of customers using our products, and the cost reduction actions that were taken in April 2001.

     Storage Solutions:

          Gross product margins for our storage solutions business for both the second quarter and first half of 2001 were 24%, compared to 65% and 68%, respectively, in the second quarter and first half of 2000. The decrease was due to the different mix of products sold by Articulent, compared to our SAN services business in 2000.

          Gross service margins for our storage solutions business for the second quarter and first half of 2001 were a negative 27% and a negative 35%, respectively, compared to a positive 29% and 23%, respectively, in the second quarter and first half of 2000. The decline in gross margin percentage and negative gross margins in 2001 is due to the fixed cost structure of the services business and low levels of service revenue. The service costs for the solutions business, mainly people, tend to be fixed in nature. We expect to generate a gross profit in the future once business volumes pick up.

13

Operating Expenses

     Networking:

          Sales and marketing expense for the second quarter and first half of 2001 totaled $9.8 million and $19.5 million, respectively, increases of 5% and 8%, respectively, from $9.3 million and $18.0 million for the second quarter and first half of 2000. Since the beginning of 2001, we have increased our sales force by over 20% and have added additional sales management to increase revenue and grow our business.

          Engineering and development expense for the second quarter and first half of 2001 totaled $5.1 million and $11.4 million, respectively, down 11% and 1%, respectively, from $5.8 million and $11.5 million for the second quarter and first half of 2000. The decrease in spending was primarily the result of the cost reduction actions that were taken in April 2001.

     Storage Solutions:

          Sales and marketing expense for the second quarter and first half of 2001 totaled $2.1 million and $3.3 million, respectively, increases of 91% and 61%, respectively, from $1.1 million and $2.0 million for the second quarter and first half of 2000. The increases in both periods were due to the incremental sales and marketing costs associated with the acquisition of Articulent.

     General and administrative:

          General and administrative expenses for the second quarter and first half of 2001 totaled $2.1 million and $4.9 million, respectively, down 2% and up 15%, respectively, from $2.2 and $4.3 million for the second quarter and first half of 2000. The decline in general and administrative expense compared to the second quarter of 2000 was due to the cost reduction actions that were initiated in April 2001. The increase in expense for the first six months of 2001 was due to the acquisition of Articulent, including charges for goodwill amortization in the first six months of 2001 totaling $265,000.

Other:

          Excluding the $10.3 million loss from the sale and write-down of webMethods stock in the first quarter of 2001, other income for the second quarter and first half of 2001 totaled $1.4 million and $3.2 million, respectively, up from $204,000 and $221,000, in the second quarter and first half of 2000, respectively. We raised $110 million from a common stock offering in October 2000, resulting in higher balances of cash and marketable securities available for investment and more interest income when compared to the second quarter and first half of 2000. Pending use of the offering proceeds for general corporate purposes or complementary acquisitions, the funds will be invested in investment grade, interest-bearing securities.

          We recorded a provision for income taxes for the first half of 2001 at an effective income tax rate of 31%, compared to 33% for the first half of 2000. The $10.3 million loss on the sale and write-down of the webMethods stock in the first quarter of 2001 was taxed at an effective tax rate of 30%. Excluding this item, our effective tax rate for the

14

first half of 2001 would have been 33%. Our effective tax rate for the second quarter of both 2001 and 2000 was 33%. Based on an assessment of our taxable earnings history and prospective future taxable income, we have determined it to be more likely than not that our net deferred tax asset will be realized in future periods. We may be required to provide a valuation allowance for this asset in the future if we do not generate sufficient taxable income as planned.

Liquidity and Capital Resources

          We have historically financed our operations through the public and private 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 at July 31, 2001 totaled $111.0 million, a decrease of $39.4 million since January 31, 2001. The decrease in cash and cash equivalents is primarily do to the acquisition of Articulent, payments to reduce Articulent’s outstanding liabilities at the time of acquisition and higher levels of inventory at July 31, 2001.

          Expenditures for capital equipment and field support spares have been, and will likely continue to be, a significant capital requirement. 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 current anticipated aggregate capital requirements, at least through the next year.

          We believe that inflation has not had a material impact on our operations or liquidity to date.

15

Market Risk

          We have no derivative financial instruments in our cash and cash equivalents. We mainly invest our cash and cash equivalents in investment grade, highly liquid investments, consisting of money market instruments, bank certificates of deposits, U.S. government and agency securities and commercial paper.

          At July 31, 2001, our marketable securities included a $131,000 investment in a Standard and Poors 500 stock price index fund and a $127,000 investment in a NASDAQ 100 index tracking stock. These investments were purchased to directly offset any investment gains or losses owed to participants under our executive deferred compensation plan which has been established for selected key employees.

          We are exposed to 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. As of July 31, 2001, we had open forward exchange contracts for one million British pounds sterling and 8 million French Francs that settle at various times through October 2001.

Forward Looking Statements

          This Form 10-Q and other documents we have filed with the Securities and Exchange Commission 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, gross margins, expenses, operating margins and earnings per share;

• timing of and plans for the introduction or phase-out of products or services;

• enhancements of existing products or services;

• plans for hiring or reducing personnel;

• entering into strategic partnerships;

• ability to integrate Articulent, Inc. with our existing businesses;

• other plans, objectives, expectations and intentions contained in this Form 10-Q that are not historical facts.

When used in this Form 10-Q, 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. These forward-looking statements involve risks and uncertainties. Actual results could differ materially from those expressed or implied by these forward-looking statements as a result of certain risk factors, including but not limited to (i) competitive factors, including pricing pressures; (ii) variability in quarterly sales; (iii) economic trends generally and in various geographic markets; (iv) relationships with our strategic partners; (v) technological change affecting our products; (vi) our ability to integrate Articulent Inc. with our existing businesses, and, (vii) other events and other important factors, including those discussed under cautionary statements in Exhibit 99 to our Form 10-K filing with the Securities and Exchange Commission for the year ended January 31, 2001. 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.

16

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 June 28, 2001
(b)	Elected as directors of the company:
	Thomas G. Hudson Erwin A. Kelen John A. Rollwagen Patrick W. Gross
(c)	Matters voted upon

		Affirmative	Negative	Abstain	Broker
		Votes	Votes	Votes	Non-Votes
1.	Election of Directors
	Thomas G. Hudson	24,228,396	2,079,022	—	—
	Erwin A. Kelen	25,560,261	747,157	—	—
	John A. Rollwagen	25,560,013	747,405	—	—
	Patrick W. Gross	25,570,218	737,200	—	—
2.	Proposal to amend the
	1992 stock award plan
	increasing the number
	of shares authorized
	for issuance by
	1,450,000	15,167,341	11,088,708	63,469	—
3.	Proposal to ratify and
	approve the appointment
	of KPMG LLP as
	independent auditors for
	the fiscal year ending
	January 31, 2002	25,801,283	463,844	42,416	—

Item 5. None

17

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits filed herewith.

3A.	Second Restated Articles of Incorporation of the
	Company. (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.)
4.1	Rights Agreement between the Company and Chase Mellon
	Shareholder Services, L.L.C., as Rights Agent including
	the form of Rights Certificate and the Summary of Rights
	to Purchase Preferred Shares and First Amendment of Rights
	Agreement dated November 21, 2000.
	(Incorporated by reference to Exhibit 1 to
	Form 8-A dated July 29, 1998 and Exhibit 1
	to Form 8-A/A dated November 27, 2000.)
4.2	Form of Common Stock Certificate. (Incorporated by
	reference to Exhibit 4.2 to Form S-3 Registration
	Statement No. 333-80841.)
11.	Statement Re: Computation of Net Income per Basic and
	Diluted Share.

(b)	Reports on Form 8-K
	On June 15, 2001 the Company filed a Form 8-K/A amending
	its Form 8-K filing on April 17, 2001 announcing the
	acquisition of Articulent. The Form 8-K/A incorporated the
	audited financial statements and related pro forma
	information for Articulent in the original Form 8-K
	filing.

18

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:	September 10, 2001	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)

19

EXHIBIT INDEX

Item	Description
3A.	Second Restated Articles of Incorporation of the Company. (Incorporated by reference to Exhibit 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.)
4.1	Rights Agreement between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares and First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1 to Form 8-A dated July 29, 1998 and Exhibit 1 to Form 8-A/A dated November 27, 2000.)
4.2	Form of Common Stock Certificate. (Incorporated by reference to Exhibit 4.2 Form S-3 Registration Statement No. 333-80841.)
11.	Statement Re: Computation of Net Income per Basic and Diluted Share                                         Electronically Filed

20