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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
COMMISSION FILE NUMBER: 0-13994
COMPUTER NETWORK TECHNOLOGY CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
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MINNESOTA 41-1356476
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
605 NORTH HIGHWAY 169, MINNEAPOLIS,
MINNESOTA 55441
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(Address of Principal Executive Offices) (Zip Code)
(612) 797-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section
12(b) of the Act: NONE
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Securities registered pursuant to Section
12(g) of the Act: COMMON STOCK $.01 PAR VALUE
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(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant as of February 28, 1999 was approximately $262,763,000 based on a
closing price of $11.875 per share as reported by the Nasdaq National Market on
such date.
As of February 28, 1999, Registrant had 22,545,533 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Computer Network Technology Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 13, 1999 are
incorporated by reference into Part III of this Form 10-K.
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1998 are incorporated by reference into Parts I and II of this Form 10-K.
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TABLE OF CONTENTS
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PART 1
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Item 1. Business.................................................................................. 1
Overview............................................................................... 1
Markets................................................................................ 3
Products............................................................................... 5
Customer Services...................................................................... 9
Marketing and Sales.................................................................... 9
Revenue Recognition Policy............................................................. 10
Engineering and Development............................................................ 10
Manufacturing and Suppliers............................................................ 11
Competition............................................................................ 12
Intellectual Property Rights........................................................... 12
Employees.............................................................................. 13
Item 2. Properties................................................................................ 14
Item 3. Legal Proceedings......................................................................... 14
Item 4. Submission of Matters to Vote of Security Holders......................................... 14
Item 4.A Executive Officers of the Company......................................................... 15
PART II
Item 5. Market for the Registrant's Securities and Related Shareholder Matters.................... 18
Item 6. Selected Consolidated Financial Information............................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 18
Item 7.A Quantitative and Qualitative Disclosures about Market Risk................................ 18
Item 8. Consolidated Financial Statements and Supplementary Data.................................. 18
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure.................... 18
PART III
Item 10. Directors and Executive Officers.......................................................... 19
Item 11. Executive Compensation.................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 19
Item 13. Certain Relationships and Related Transactions............................................ 19
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K............. 20
SIGNATURES.......................................................................................... 26
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PART I
ITEM 1. BUSINESS
OVERVIEW
Computer Network Technology Corporation ("CNT" or the "Company") designs,
manufactures, markets and supports a range of hardware and software products for
Storage Area Networking (SAN), Enterprise Application Integration (EAI) and
business process automation solutions for large, business-critical networks and
enterprise applications. These products are or will be marketed by CNT under the
UltraNet(R), Channelink(R), FileSpeed(TM), Enterprise/Connect,
Enterprise/Access, and Process Dynamics trade names.
CNT's Networking 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, disaster
recovery and data migration. The UltraNet, Channelink and FileSpeed family of
products offered by the Networking Solutions Division create high-speed, wide
area enterprise networks that connect traditional data centers to peripherals
and remote users by integrating open systems with traditional mainframes. The
ability to move and share data among diverse servers, storage systems and
traditional mainframes allows data centers to enable access to stored mission-
critical information, and full business recovery in case of disasters.
CNT's Enterprise Integration Solutions Division provides products and services
that integrate legacy systems, client/server and internet technologies with
frameworks, new environments or packaged applications. CNT's Enterprise/Connect
family of products enable desktop computer and terminal users operating
different networking protocols (i.e. TCP/IP and SNA) to share the same physical
networks and to access applications and data on different types of mainframe and
open systems servers. The Enterprise/Access family of products provides access
from the Internet or an Intranet to mainframe databases and applications,
including e-commerce and customer relationship management applications. The
acquisition of IntelliFrame in December 1998 (see notes to the consolidated
financial statements) expand CNT's capabilities in the enterprise application
market, including new tools that manage software development and deployment,
network communications, business logic and process workflow. In 1999, CNT
intends to complete development of the Process Dynamics product line acquired in
connection with the December 1998 acquisition of IntelliFrame Corporation.
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CNT markets its products and services worldwide to end users, system
integrators, and value-added resellers through a direct sales force and a
network of authorized distributors. Select hardware and software products are
also remarketed by original equipment manufacturers ("OEMs") under other trade
names.
CNT emphasizes comprehensive customer support and training designed to maximize
quality and customer satisfaction. CNT believes that its customer service
programs provide significant added value to its customer base, enhance the
reputation of the Company, and accelerate selling products and services to
prospective customers.
CNT is a successor to a Minnesota corporation organized in 1979, and has been
engaged it its present business since 1983. CNT's corporate offices are located
at 605 North Highway 169, Minneapolis, Minnesota 55441 and its telephone number
is 612-797-6000. Its World Wide Web site is http://www.cnt.com. Unless the
context otherwise requires, "CNT" or the "Company" refers to Computer Network
Technology Corporation and its subsidiaries.
This annual report includes trade names, trademarks and registered trademarks of
companies other than CNT.
Certain statements included in this Form 10-K constitute "forward-looking
statements," including the dates of general availability and planned features
for new products. All forward-looking statements involve risks and
uncertainties, and actual results may be materially different. The timely
completion of required engineering activities and unforeseen technological
barriers and expense, as well as the factors listed in Management's Discussion
and Analysis of Financial Condition and Results of Operations, may cause the
Company's actual results to be materially different from those set forth in any
such forward-looking statements.
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MARKETS
CNT is a leading provider of solutions for SAN, Channel Networking, SNA
Connectivity and EAI solutions. Products and services offered by CNT
seamlessly integrate a heterogeneous mix of technology, architectures, vendors
and communication standards that allow enterprises to preserve their investments
in traditional mainframe data processing systems and today's open systems to
create enterprise-wide networks and Intranets.
NETWORKING SOLUTIONS
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The Company's Networking Solutions Division is primarily focused on two key
markets, SAN and Channel Networking. The Company's SAN related product revenue
increased to $31.9 million in 1998 from $6.6 million in 1997. Channel
Networking product revenue decreased to $43.1 million in 1998 from $49.5 million
in 1997.
A SAN is a high-speed network that establishes a direct connection between
storage devices, thereby externalizing storage from the server and allowing
information to be shared among multiple `host' servers without affecting
performance of the primary network. SAN's are currently used to connect shared
storage arrays, cluster servers for failover, interconnect mainframe disk or
tape resources to distributed network servers and clients, and create parallel
or alternate data paths for high performance computing environments. With SAN
architecture, data becomes more accessible to users anywhere on the network, and
different kinds of storage resources can be shared among different applications
and servers. A SAN bypasses traditional network bottlenecks and supports
direct, high-speed transfer in three ways: server-to-storage, server-to-server,
and storage-to-storage. Applications that benefit significantly from SANs
include backup and restore, archiving and retrieval, data migration, database
mirroring and shared data.
Channel Networking facilitates data center consolidation and centralization,
data center load balancing and remote high-speed digital printing and imaging
which enables certain input and output peripherals to be more conveniently
housed with geographically dispersed regional customer operations.
Increasingly, these new solutions are being constructed by customers in
conjunction with business process changes being driven for cost efficiencies,
improved customer services, or the penetration of new markets with new services.
Reducing the total number of data centers while interconnecting the remaining
centers for stability and workload sharing has extended the life of legacy
systems while deferring costly investments in these centers as new, distributed
computing systems are brought online.
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CNT's Ultranet, Channelink and FileSpeed products enable construction of highly
scalable local or remote SANs for transparent connection between open systems
and mainframes. The Company's products enable users to access all information
across all platforms and provide the any-to-any-to-anywhere connections (hosts,
servers, and peripherals) that make true seamless integration possible. The
Company's UltraNet and Channelink products also facilitate Channel Networking
applications by enabling data centers and remotely located peripherals to
communicate over wide areas without significant degradation of performance.
ENTERPRISE INTEGRATION SOLUTIONS
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The Company's Enterprise Integration Solutions Division is primarily focused on
the SNA Connectivity and EAI markets. The Company experienced a significant
increase in the sale of products related to both the SNA Connectivity and EAI
markets in 1998 due to the October 1997 acquisition of the Internet Solutions
Division of Apertus Technologies, Inc. (ISD). Revenue from the sale of
Enterprise Integration products increased 62 percent in 1998, including a 528
percent increase in revenue from the sale of EAI products. A single transaction
with a tier one systems integrator accounted for 60 percent of the increase in
EAI product revenue.
The SNA Connectivity market is characterized by the need to provide application
access over open networks, including the need to connect SNA devices to SNA
applications, SNA devices to open systems applications, TCP/IP clients to SNA
applications and SNA device emulation for open systems desktop computers.
While performing 3270 and 5250 emulation using personal computers has been
available since 1983, these systems continue to limit efficient growth by
requiring proprietary dedicated SNA networks. Similarly, even after several
years of migration from legacy data bases to client-server application
architectures, practical and operational limits require that mainframe-based
data remain resident in centralized "Information Warehouses." CNT serves this
market, which is represented by almost all of the 2,000 largest organizations
world-wide, by linking personal computers to legacy mainframes in a fashion that
reduces the number of physical mainframe connections required, replaces SNA with
open TCP/IP protocols, and facilitates the combination and sharing of expensive
data communication channels with voice and other data networks.
The EAI market is characterized by the need to integrate multiple independent
and/or distributed applications into a single enterprise system. The ability to
link information residing on older legacy applications with new business
applications, and to make that information available to users via the Internet
or Intranet, allows organizations to increase the value of information by making
it available real-time and useable by key enterprise applications. Intelligent
access to data integrated from multiple applications is the critical capability
that supports customer relationship management (CRM) and electronic commerce (e-
commerce). CRM represents the integration of information and applications that
affect a company's customers, particularly sales, marketing and customer
service.
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An organization is able to improve the quality of its service delivery to
customers by giving its employees and others real time and easy-to-use access to
customer information from legacy applications. In addition, the ability to
access information from legacy applications has allowed organizations to
increasingly conduct more of their business via e-commerce over the Internet,
thereby improving efficiency and lowering transaction costs.
CNT's Enterprise/Connect products address the SNA connectivity market by
providing application access over open networks (e.g. SNA devices to SNA
applications; SNA devices to open systems applications; and TCP/IP and Netware
clients to SNA applications). CNT's Enterprise/Access and Process Dynamics
products address the EAI market by providing a powerful set of tools for re-
engineering legacy applications and the integration of multiple independent
and/or distributed applications.
PRODUCTS
NETWORKING SOLUTIONS
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UltraNet
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CNT's UltraNet family of products offers superior price/performance for storage
applications that are increasingly important in distributed enterprise networks
and SANs. The UltraNet family includes both single-board and multi-slot chassis
products that are driven and managed by UltraNet SAN Software residing at the
core of the UltraNet family of products. UltraNet SAN software provides high-
level functionality and management that is critical for meeting customers'
growing requirements for SAN related product applications.
The UltraNet Storage Director (USD) is a multi-gigabit switching platform
providing very high performance and scalable solutions that uniquely integrate
channel technology, high-speed network technology and open systems hardware and
software technology in a single platform. The USD offers an open architecture
incorporating industry standard hardware, network protocols, management and
operating software to provide a tightly integrated, fault-tolerant, and highly
manageable platform for use in mission critical storage networking applications.
The USD is a multi-slot chassis product, driven and managed by UltraNet SAN
Software for the operation, configuration and management of its central system
components, mid-plane switch and system service monitors. In addition,
application specific software grooms each configuration for the particular needs
of the customer, including dynamic load leveling, data compression, error
detection and recovery, pipelining and device prioritization.
The USD provides a high-performance SAN infrastructure with support for Fibre
Channel, SCSI, and ESCON technology, along with interoperability between these
differing channel architectures. The USD also leverages high-speed networks with
support for ATM, T3/E3 and FDDI.
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The USD switched mid-plane architecture supports multi-ported I/O interface
processors, with the full bandwidth of each switch port available for each I/O
processor. The USD offers hot-swappable components and full power redundancy to
reduce down time.
The UltraNet Open Systems Director (OSD) is based on the same technical
architecture as the USD. The OSD provides high performance and scalable
networking solutions that allow SCSI and Fibre Channel technologies to be shared
and intermixed in Windows NT and Unix open systems environments. The OSD extends
the capabilities and advantages of SANs to open systems by providing a high
performance SAN infrastructure with support for SCSI and Fibre Channel
technologies, with interoperability between these differing channel
architectures. The network capabilities of the OSD provide campus and wide-area
options for traditionally direct-attached devices. High speed ATM/Sonet,
Compressed T3/E3, and Point-to-Point Fibre combined with the OSD's multi-gigabit
switch enables data transmissions at rated speeds over unlimited distances.
The UltraNet Storage Gateway (USG) and the UltraNet Open Systems Gateway (OSG)
are single board entry level products that provide much of the same
functionality and high performance of the USD and OSD products at a lower cost.
Channelink
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CNT's traditional product line has been the Channelink family of network
processors and software for SAN and Channel Networking product applications. The
Channelink product is focused on mainframe data center applications and is
uniquely suited to support applications that involve bus-and-tag data channels
and T1/E1 network interfaces. To support mission-critical wide area networks
("WANs'), Channelink networks can be configured with redundancy. CNT channel
networks generally operate at "channel speed", which means end users may operate
a number of periphreal devices concurrently and remotely at speeds comparable to
speeds that would be achieved with direct local connections to the host.
Channelink software is based on a real-time distributed operating system to
support a variety of concurrent device or channel interfaces and networking
software tasks. Channelink enables protocol processing to be off-loaded from
the host and permits peripheral devices that previously were not included in
networks to be connected in enterprise-wide systems. Channelink products
support widely used industry standard communication protocols, such as TCP/IP,
and a number of de facto industry standard, device specific and peripheral
interface data transfer protocols. Channelink products incorporate software
drivers, network software functionality, error recovery functions, network
management software, pipelining, data priority and, for many types of data
transfer applications, application-specific software, to facilitate high speed
communication of information with low application processor overhead and
efficient, cost effective use of expensive, high bandwidth communication
facilities.
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Channelink products support a variety of mainframes and peripheral devices,
including disk drives, optical storage devices, magnetic tape controllers,
printers, check sorters, document processors, imaging systems, microfiche
recorders, terminal and graphic controllers, plotters, database computers and
front-end processors. Wan interface modules provide connectivity between
network nodes over unlimited distances using common carrier communication links
such as T1, E1, E3 and DS-3.
FileSpeed
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FileSpeed is a software solution that is well positioned to solve key data
sharing and backup/restore problems in both the open systems and enterprise
environments. FileSpeed's Application Programming Interface (API) can be used
to move database records between two heterogeneous databases even if one exists
on a mainframe and the other on an open system (Unix or NT). FileSpeed has the
ability to move data to/from open systems to mainframe disk or tape devices at
high speeds and solves many problems encountered in backup and recovery at most
enterprise sites.
FileSpeed works over both OS/390, ESCON and bus-and-tag channels and SCSI
channels. It can be configured to provide multiple data paths between systems
and data integrity features, such as, checkpoint/restart and CRCs. Thus, data
is moved between a mainframe using an ESCON channel and an open system using a
SCSI channel (direct ESCON connections are also supported) with its integrity
constantly being monitored. Data rates over a single ESCON line have reached
nearly 15MB/sec. Given its high speed and ability to interface with databases,
many enterprises are interested in FileSpeed's capability to solve data movement
problems in the data warehousing industry.
ENTERPRISE INTEGRATION SOLUTIONS
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Enterprise/Connect
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Enterprise/Connect is a complete, easy-to-implement inter-operability package
that provides the necessary network infrastructure to connect any standard Web
browser to legacy system applications and data. Enterprise/Connect is a
complete IP-to-SNA connectivity solution, with all the components to enable
3270/5250 emulators or Web browsers to access applications on IBM mainframe and
midrange computers. With Enterprise/Connect, an intuitive point-and-click
interface provides universal, centralized management access. Superior load-
balancing technology ensures guaranteed access to business-critical access, and
Java-based client software enables browsers to function as universal clients for
interactive access to mainframe terminal, file transfer, and print services.
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Enterprise/Connect provides complete TN3270/3270E and TN5250 terminal access to
IBM host computers with maximum flexibility and performance in connecting
diverse networks and communications environments. It supports a wide range of
SNA host connections and LAN connectivity. Simplifying mainframe printing,
Enterprise/Connect allows you to send SNA print jobs to local or TCP/IP network
printers without any special hardware or software on your PC or browser.
Enterprise/Access
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Enterprise/Access is a powerful set of tools for re-engineering legacy
applications to open networking environments. Based on open systems and object-
oriented technologies, Enterprise/Access allows you to integrate your front-end
applications and networks with your back-end corporate applications and data,
with no changes to existing applications, security, or business logic. This
non-intrusive approach reduces time, cost, and risk while increasing
performance.
With Enterprise/Access, users get the scalability, manageability, and security
they need to easily extend corporate applications and data into new content-rich
environments. Enterprise/Access is server-based and can easily be deployed on
multiple, connected servers to support large networks. It supports a variety of
standard protocols, insulating users from the communications details and
eliminating the need to program communications code. Enterprise/Access enables
users to easily encapsulate and extend the functionality of application systems.
The Code Generator automatically and rapidly produces stored interfaces. Host
screen changes are activated in production without having to modify or
regenerate the interface code. Enterprise/Access has also been integrated with
the leading Web development tools, including Java and CGI interfaces, and
automatically generates C code and HTML templates. In addition,
Enterprise/Access includes a 32-bit DLL and ActiveX library for integration into
Windows-based GUI applications. Enterprise/Access has a graphical interface that
supports centralized configuration, performance, and fault management, and
operates behind the Web server and leverages any security schemes the Web
clients use.
Process Dynamics is a new technology that was acquired as in-process research
and development in connection with the acquisition of IntelliFrame Corporation
in December 1998 (see note 4 to the consolidated financial statements). Process
Dynamics manages software development and deployment, network communications,
business logic and process workflow for large e-commerce and CRM applications.
The Company anticipates that new products based on the capabilities of
IntelliFrame will be available in mid-1999.
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CUSTOMER SERVICES
The Company has developed a comprehensive support strategy designed to maximize
quality and customer satisfaction. A high level of continuing customer service
is integral to the Company's commitment to developing long-term, 100 percent
satisfied, customer relationships. The Company supports the commitment of its
employees to achieve this strategy through extensive training and the delegation
of authority and responsibility. CNT's Networking Solutions Division offers
technical support and professional services employees who are skilled in the
design and support of SANs and Channel Networking applications. Similarly,
CNT's Enterprise Integration Solutions Division offers technical support and
professional services employees who are skilled in the design and support of SNA
connectivity and EAI applications. CNT networks incorporate state-of-the-art
technology for robust and dynamic routing to ensure continuous operations.
The Company's technical support and professional services groups for both the
Networking and Enterprise Integration Solutions Divisions become involved with
end users during initial presales activities by analyzing their requirements,
developing proposed solutions, and providing project management guidance during
implementation, or enhancement of the customer's enterprise-wide computing
network.
CNT uses remote diagnostic tools to support customer networks. One of the
company's service options provides customers with seven days per week, 24 hours
per day technical support through the unique ability to dial into these networks
worldwide and perform on-line troubleshooting. In the majority of cases opened,
the Company provides timely resolution to customer problems without having to
visit the customer's site. Our software products come with on-line help,
comprehensive documentation, and diagnostic tools to allow users to monitor
their lines. When necessary, CNT dispatches trained field service personnel,
through third party maintenance providers, to provide repairs at the customer's
facility.
MARKETING AND SALES
The Company, along with its subsidiaries, markets its products in the United
States, Canada, the United Kingdom, France, Germany, Australia, Hong Kong and
Japan primarily through a direct sales force. The Company markets its products
in the countries noted above and throughout the rest of the world through
Original Equipment Manufacturers, systems integrators, value-added resellers and
independent distributors.
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The Company derived approximately $45.2 million, $28.8 million, and $29.0
million, or 34 percent, 29 percent, and 30 percent, of its revenue from
operations outside of the United States for the years ended December 31, 1998,
1997, and 1996, respectively. International operations are subject to various
risks common to international businesses, including exposure to currency
fluctuations, political and economic instability, the greater difficulty of
administering business internationally, and the need to comply with a wide
variety of U.S. export and foreign import laws and regulations. No single
customer accounted for more than 10% of the Company's revenue in 1998 or 1997.
Sales to IBM and its multiple divisions accounted for 18% of the Company's total
revenue in 1996. See note 13 to the Company's Consolidated Financial Statements
for additional information regarding the Company's operations by geographic
region and major customers.
The Company manufactures its products based on a schedule of forecasted orders.
The Company's customers generally place orders for immediate delivery and
generally not in advance of need. Customers may generally cancel or reschedule
orders without penalties. Accordingly, the Company believes that backlog is
generally not meaningful for purposes of predicting its revenue for any fiscal
period.
The Company expects 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 revenue reported by the Company in any given
period will continue to be affected by the receipt and fulfillment of sizable
new orders in both domestic and international markets.
REVENUE RECOGNITION POLICY
Revenue from product sales is generally recognized by the Company upon shipment
or signed customer acceptance depending on the terms of the contract or purchase
order. Revenue from software license agreements with original equipment
manufacturers (OEM) for redistribution to the OEM's customers is recognized when
the OEM reports delivery of the software to their customer. Service fees are
recognized as revenue when earned, which is generally on a straight-line basis
over the contracted service period.
ENGINEERING AND DEVELOPMENT
The SAN, Channel Networking, SNA Connectivity and EAI markets are characterized
by rapidly changing technology, new standards, and changing customer
requirements. The Company believes that its long-term success in these markets
depends upon its continuing ability to develop and integrate advanced network
hardware and software technologies.
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To meet the future demands of its customers, the Company expects to continue to:
(i) increase the compatibility and interoperability of its products with the
products of other vendors; (ii) emphasize the flexible and modular architecture
of its products to permit the introduction of new capabilities in a manner that
can be used within existing networks and applications and to provide a framework
for existing customers to incorporate and install new CNT products, features,
and functions; (iii) continue to focus on providing sophisticated diagnostic
support tools to help deliver both high network availability and, in the event
of failure, rapid return to service; and (iv) develop additional products to
meet the demands of its customers. Engineering and development expense was
equal to 16% of CNT's total revenue in 1998, compared to 18% and 14% of total
revenue in 1997 and 1996, respectively. The Company currently intends to
continue to apply a significant portion of its resources to product enhancements
and new product development for the foreseeable future.
MANUFACTURING AND SUPPLIERS
The Company manufactures its products and systems from subassemblies, parts, and
components, such as integrated circuits, printed circuit boards, power supplies,
and metal parts manufactured by other vendors. Certain items manufactured by
suppliers are made to the Company's specific design criteria. In-house
manufacturing activities for the Company's products primarily involve quality
assurance testing of subassemblies and final system assembly, integration, and
quality assurance testing. Since 1993, CNT has been certified under ISO 9002,
an international standard of quality, for the manufacture and support services
of high-electronic communications devices and computer networking systems.
The Company believes that it currently possesses adequate supply channels.
Components and subassemblies used in the Company's products and systems are
generally available from a number of different suppliers; however, certain key
components in the Company's products are currently purchased from only one
source or from a limited number of sources. The Company does not anticipate any
difficulty in obtaining an adequate supply of required components. An
interruption in its existing supplier relationships or delays by some suppliers,
however, could result in production delays and have an adverse effect on the
Company.
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COMPETITION
The SAN, Channel Networking, SNA Connectivity and EAI markets are characterized
by rapidly advancing technology and evolving industry standards, resulting in
frequent product and feature introductions and improvements in the relative
price/performance of products. CNT competes with several companies that have
greater engineering and development resources, marketing resources, financial
resources, manufacturing capability, customer support resources, and name
recognition than those of the Company.
The principal competitive factors affecting the markets for the Company's
products include customer service, flexibility, price/performance, reliability,
ease of use, and functionality. In many situations, the potential customer has
an installed base of a competitor's products, which can be difficult to
dislodge. IBM, Microsoft, and others can significantly influence customers and
control technology in the Company's markets.
Rapid change, new technologies and worldwide deregulation of the
telecommunications industry are generally positive developments for the Company
because they should have the impact of reducing carrier costs and increasing
bandwidth speeds and capacity. However, the many and unpredictable nature of
the changes also carries with it some risk of dislocation for CNT.
There can be no assurance that the Company can compete successfully with its
current competitors or with competitors that may subsequently enter the market,
particularly the software market, which is characterized by low barriers to
entry. There also can be no assurance that CNT will affect technological
changes necessary to maintain its competitive position.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of trade secret, copyright, patent, and
trademark law, nondisclosure agreements, and technical measures to establish and
protect its proprietary rights to its products. Such protection may not
preclude competitors from developing products with features similar to the
Company's products. Because of the rapid pace of technological change in the
SAN, Channel Networking, SNA Connectivity and EAI markets, the Company believes
that patent and copyright protection are less significant to the Company's
competitive position than factors such as the effectiveness and quality of its
support services; the knowledge, experience, and ability of its employees; and
the frequency of product enhancements.
The Company has from time to time received, and may in the future receive,
communications from third parties asserting patents against the Company which
may relate to certain of the Company's products. Although the Company believes
that it possesses all required proprietary rights to the technology involved in
its products and that its products, trademarks, and other intellectual property
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that others will not claim a proprietary interest in all or a
part of such technology or assert claims of infringement. Any such claim,
regardless of its merits, could involve the Company in costly litigation and
have a material adverse effect on the Company.
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Because of the existence of a large number of patents in the SAN, Channel
Networking, SNA Connectivity and EAI fields and the rapid rate of issuance of
new patents, it is not economically practical to determine in advance whether a
product infringes patent rights of others. The Company believes that, based
upon industry practice, any necessary license or rights under such patents may
be obtained on terms that would not have a material adverse effect on the
Company's consolidated financial position or results of operations; however,
there can be no assurance in this regard.
EMPLOYEES
As of December 31, 1998, the Company had 601 full-time employees, including 67
full-time employees of its wholly-owned foreign subsidiaries. The Company
considers its ability to attract and retain qualified employees and to motivate
such employees to be essential to the future success of the Company. Competition
for such highly skilled personnel is particularly intense in the computer and
data communications industry, and no assurance may be given that the Company
will continue to attract and retain qualified employees.
13
<PAGE>
ITEM 2. PROPERTIES
The Company's principal administrative offices, manufacturing, engineering, and
development functions are located in leased facilities in the Minneapolis
suburbs of Maple Grove and Plymouth, Minnesota. The Company has leased a new
building, presently under construction in Plymouth Minnesota, for its principal
administrative offices, manufacturing, engineering and development functions.
The Company is scheduled to occupy the new building beginning in the fourth
quarter of 1999. The Company also leases space in Westborough, Massachusetts,
primarily related to the development and support of software products for its
Enterprise Integration Solutions Division. The Company's subsidiaries lease
office space in England, France, Germany, Australia, Hong Kong and Japan. The
Company leases sales offices for its direct sales staff and systems consultants
in a number of locations throughout the United States and Canada. The Company
believes that its facilities are adequate to meet its current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings that could have a material
adverse effect on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
14
<PAGE>
ITEM 4.A EXECUTIVE OFFICERS OF THE COMPANY
The following table contains certain information regarding the current executive
officers of the Company.
Name Position Served Age
Thomas G. Hudson President, Chief Executive Officer, and 52
Director
Gregory T. Barnum Vice President of Finance, Chief 44
Financial Officer and Corporate Secretary
Jeffrey A. Bertelsen Corporate Controller and Treasurer 36
Richard E. Carlson Vice President of Manufacturing 61
William C. Collette Vice President of Engineering and Chief 55
Technology Officer
Peter Dixon Vice President of Worldwide Business 49
Development
Nick V. Ganio Vice President of Worldwide Sales 39
Martin G. Hahn Vice President and General Manager 41
Enterprise Integration Solutions Division
Mark R. Knittel Vice President of Marketing 44
Kristine E. Ochu Vice President of Human Resources 37
15
<PAGE>
Thomas G. Hudson has been President and Chief Executive Officer since June 1996
and a director since August 1996. From 1993 to June 1996, Mr. Hudson was Senior
Vice President of McGraw Hill Companies, a leading information services
provider, serving as General Manager of its F.W. Dodge Division, and as Senior
Vice President, Corporate Development. From 1968 to 1993, Mr. Hudson served in a
number of management positions at IBM Corporation, most recently as Vice
President Services Sector Division. Mr. Hudson's IBM career included varied
product development, marketing and strategic responsibilities for IBM's
financial services customers and extensive international and large systems
experience. He is a graduate of the University of Notre Dame and New York
University. He attended the Harvard Advanced Management Program in 1990.
Gregory T. Barnum was appointed Vice President of Finance, Chief Financial
Officer and Corporate Secretary in July 1997. From September 1992 to July 1997,
Mr. Barnum served as Senior Vice President of Finance and Administration, Chief
Financial Officer and Corporate Secretary at Tricord Systems, Inc., a
manufacturer of enterprise servers. From May 1988 to September 1992, Mr. Barnum
served as the Executive Vice President, Finance, Chief Financial Officer,
Treasurer and Corporate Secretary for Cray Computer Corporation, a development
stage company engaged in the design of supercomputers. Prior to that, Mr. Barnum
served in various accounting and financial management capacities for Cray
Research, Inc., a leading manufacturer of supercomputers. He is a graduate of
the University of St. Thomas.
Jeffrey A. Bertelsen was appointed Corporate Controller and Treasurer in
December 1996. Mr. Bertelsen served as the Company's Controller from March 1995
to December 1996. From 1985 to March 1995, Mr. Bertelsen was employed by KPMG
Peat Marwick, most recently as a Senior Audit Manager. He is a graduate of the
University of Minnesota.
Richard E. Carlson was appointed Vice President of Manufacturing in January
1992. Mr. Carlson served as Director of Manufacturing from August 1990 to
January 1992. From 1981 to 1990, Mr. Carlson was employed by Zycad Corporation,
a manufacturer of special purpose computers, most recently as Vice President of
Product Development and Operations. Mr. Carlson holds a bachelor of science
degree in mechanical engineering from the University of Minnesota.
William C. Collette was appointed Vice President of Engineering in December 1995
and Chief Technology Officer in December 1998. Mr. Collette served as Director
of Future Software Development and as a Software Development Manager from June
1993 to December 1995. From 1990 to 1993, Mr. Collette was employed by
SuperComputer Systems, Inc. as a Senior Software Engineer, where he worked with
Steve Chen to design the networking for the SS1 Supercomputer. Mr. Collette
holds a bachelors degree in business management from Metro State University.
16
<PAGE>
Peter Dixon was appointed Vice President of Worldwide Business Development in
November 1998. Mr. Dixon served as Vice President of Worldwide Distribution
from March 1998 to November 1998, Vice President of International from January
1990 to March 1998, Vice President of Strategic Account Marketing from January
1989 to January 1990 and as Director of Distribution Marketing and Sales from
February 1988 to January 1989. From 1985 to 1988, Mr. Dixon served as an
Account Manager with National Advanced Systems Canada, Inc. and its predecessor,
Sand Technology Systems, Inc., companies involved in the marketing of mainframe
peripherals.
Nick V. Ganio was appointed Vice President of Worldwide Sales in November 1998,
and served as Vice President of Direct Sales Worldwide from April 1998 to
November 1998. From September 1996 to February 1998, Mr. Ganio served as Vice
President of Worldwide Sales and Marketing for Xyplex, Inc. From March 1987 to
September 1996, Mr. Ganio held various high-level positions with Digital
Equipment Corporation, including Vice President of Operations in Japan, Vice
President and General Manager of the Americas Networks Product business, and
Vice President and Executive Assistance to the Office of President. Mr. Ganio
held various sales positions with IBM from May 1981 to February 1987. Mr. Ganio
holds a bachelors degree and graduated Magna Cum Laude from Bernard Baruch
College.
Martin G. Hahn was appointed Vice President and General Manager of the
Enterprise Integration Solutions Division in October 1997. Mr. Hahn served as
President of the Internet Solutions Division at Apertus Technologies Inc., prior
to its acquisition by the Company, from June 1995 to October 1997. He also held
a variety of executive marketing and sales positions at Apertus Technologies
Inc. from July 1987 to May 1995. Prior to that, he served as Assistant Vice
President of the Corporate Finance and Development Business Unit at First Bank
Systems. He is a graduate of the University of Minnesota and University of
Chicago Graduate School of Business (MBA).
Mark R. Knittel was appointed Vice President of Marketing in May 1997.
Mr.Knittel served as Vice President of Architecture and Business Development
from March 1997 to May 1997. From July 1977 to March 1997, Mr. Knittel was
employed with IBM where he held several development executive positions for both
hardware and software networking products, as well as multiple strategy
positions. Most recently, Mr. Knittel held the position of Director of Campus
Product Marketing within the Network Hardware Division of IBM. Mr. Knittel has
a masters degree in philosophy from the University of Chicago.
Kristine E. Ochu was appointed Vice President of Human Resources in March 1996,
and served as Director of Human Resources from May 1995 to March 1996. From
January 1994 to May 1995, Ms. Ochu was employed by Data Systems and Management,
a software development company, as Manager of Human Resources. From 1991 to
1994, Ms. Ochu was employed as a Director of Human Resources by DataCard, Inc.,
a diversified high technology manufacturing company. Ms. Ochu holds a bachelors
degree in psychology and a masters degree in industrial relations from the
University of Minnesota. She attended the University of Michigan Advanced Human
Resources Executive Program in 1996.
17
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED SHAREHOLDER MATTERS
The information set forth under the captions "Price Range of the Company's
Common Stock" and "Dividends" on page 39 of the 1998 Annual Report to
Shareholders is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The information set forth under the captions "Selected Consolidated Statements
of Operations Data" and "Selected Consolidated Balance Sheets Data" on page 12
of the 1998 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 13 through
19 of the 1998 Annual Report to Shareholders is incorporated herein by
reference.
ITEM 7.A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the caption "Market Risk" on page 18 of the 1998
Annual Report to Shareholders is incorporated herein by reference.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements on pages 20 through 36 of the 1998 Annual Report to
Shareholders are incorporated herein by reference. The information set forth
under the caption "Quarterly Financial Data" on page 38 of the 1998 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE
None.
18
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information set forth under the captions "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive
Proxy Statement for the Annual Meeting of Shareholders to be held on May 13,
1999, to be filed with the Securities and Exchange Commission (the "Commission")
on or before April 30, 1999, is incorporated herein by reference. For
information concerning the executive officers, see Item 4.A. of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Summary Compensation Table",
"Option Tables", "Employment Agreements" and "Election of Directors -
Compensation of Directors" in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 13, 1999, to be filed with the
Commission on or before April 30, 1999, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 13, 1999, to be filed with the
Commission on or before April 30, 1999, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
19
<PAGE>
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(A) 1. CONSOLIDATED FINANCIAL STATEMENTS OF REGISTRANT
The following consolidated financial statements of the Company are incorporated
by reference to the 1998 Annual Report to Shareholders.
<TABLE>
<CAPTION>
Pages in 1998
Annual Report to
Shareholders
------------
<S> <C>
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.................................. 20
Consolidated Balance Sheets as of December 31, 1998 and 1997........ 21
Consolidated Statements of Shareholders' Equity and
Comprehensive Income for the Years Ended
December 31, 1998, 1997 and 1996.................................. 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................. 23
Notes to Consolidated Financial Statements.......................... 24-36
Independent Auditors' Report........................................ 37
</TABLE>
(A) 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULE OF REGISTRANT
Independent Auditors' Report on Consolidated Financial
Statement Schedule
Schedule II: Valuation and Qualifying Accounts for the years
ended December 31, 1998, 1997 and 1996.
All other schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial
statements or related notes thereto.
20
<PAGE>
(A) 3. EXHIBITS
Of the exhibits listed below, the following are management
contracts or compensatory plans or arrangements with the Company:
Exhibit Description
-------- -----------
10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated
by reference to Exhibit 10F Form S-2 Registration
Statement No. 33-41985.)
10D. Amended 1992 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 99 Form S-8
Registration Statement No. 333-59947.)
10E. Amended 1992 Stock Award Plan. (Incorporated by
reference to Exhibit 99 Form S-8 Registration Statement
No. 333-59949.)
10I. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)
10J. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8
Registration Statement No. 33-83266.)
10L. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by reference
to Exhibit 10Z Form 10-Q for the quarterly period ended
June 30, 1996.)
10N. Description of Success Sharing Bonus Plan (Incorporated
by reference to Exhibit 10Y Form 10-K for the year
ended December 31, 1997.)
10O. Employment Agreement by and between the Company and
Mark Knittel (Incorporated by reference to Exhibit 10AA
Form 10-K for the year ended December 31, 1997).
10P. Executive Deferred Compensation Plan.
21
<PAGE>
10Q. Employment/Non-Compete Agreement by and between the
Company and Nick V. Ganio.
The following exhibits are filed herewith:
Exhibit Description
------- -----------
2A. Agreement for Sale of Shares among Computer Network
Technology Corporation and each of Scott Opitz and
Alexsandr Elkin dated December 3, 1998. (Incorporated
by reference to Exhibit 2.1 to current report on Form
8-K dated December 3, 1998)
2B. Asset Purchase Agreement by and between CNT Acquisition
I Corporation, Computer Network Technology Corporation
and Apertus Technologies Inc. dated October 24, 1997.
(Incorporated by reference to Exhibit 2.1 to current
report on Form 8-K dated October 24, 1997.)
3A. Restated Articles of Incorporation of the Company, as
amended. (Incorporated by reference to Exhibit 2 to
current report on Form 8-K dated June 22, 1992.)
3B. By-laws of the Company, as amended. (Incorporated by
reference to Exhibit 3B Annual Report on Form 10-K for
the year ended December 31, 1991 and Exhibit 3.1 to
current report on Form 8-K dated July 29, 1998.
4. 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. (Incorporated by
reference to Exhibit 1 to Form 8-A dated July 29,
1998).
10A. Lease Agreement dated November 30, 1990 by and between
TOLD Development Company, a general partnership, and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10C Form S-2 Registration
Statement No. 33-41985.)
10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated
by reference to Exhibit 10F Form S-2 Registration
Statement No. 33-41985.)
22
<PAGE>
10C. Subscription Agreements of Kanematsu Electronics Ltd.
and Kanematsu USA Inc. dated October 22, 1990.
(Incorporated by reference to Exhibit 10G Form S-2
Registration Statement No. 33-41985.)
10D. Amended 1992 Employee Stock Purchase Plan.
(Incorporated by reference to Exhibit 99 Form S-8
Registration Statement No. 333-59947.)
10E. Amended 1992 Stock Award Plan. (Incorporated by
reference to Exhibit 99 Form S-8 Registration Statement
No. 333-59949.)
10F. Sublease Agreement by and between ITT Consumer
Financial Corporation and Computer Network Technology
Corporation dated October 1, 1993. (Incorporated by
reference to Exhibit 10X Annual Report on Form 10-K for
the year ended December 31, 1993.)
10G. First Amendment to Sublease Agreement by and between
ITT Consumer Financial Corporation and Computer Network
Technology Corporation dated October 26, 1993.
(Incorporated by reference to Exhibit 10Y Annual Report
on Form 10-K for the year ended December 31, 1993.)
10H. Amendment No. 1 to Sublease Agreement by and between
ITT Consumer Financial Corporation and Computer Network
Technology Corporation dated February 9, 1994.
(Incorporated by reference to Exhibit 10CC Form 10Q for
the quarterly period ended March 31, 1994.)
10I. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)
10J. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8
Registration Statement No. 33-83266.)
10K. Building Lease by and between Opus Northwest, L.L.C.,
and Computer Network Technology Corporation
(incorporated by reference to Exhibit 10A Form 10Q for
the quarterly period ended September 30, 1998).
23
<PAGE>
10L. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by
reference to Exhibit 10Z Form 10-Q for the quarterly
period ended June 30, 1996.)
10M. Lease Agreement between Teachers Realty Corporation and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10AA Form 10-Q for the
quarterly period ended June 30, 1996.)
10N. Description of Success Sharing Bonus Plan (Incorporated
by reference to Exhibit 10Y Form 10-K for the year
ended December 31, 1997.)
10O. Employment Agreement by and between the Company and
Mark Knittel (Incorporated by reference to Exhibit 10AA
Form 10-K for the year ended December 31, 1997).
10P. Executive Deferred Compensation Plan.
10Q. Employment/Non-Compete Agreement by and between the
Company and Nick V. Ganio.
13. Annual Report to Shareholders for the year ended
December 31, 1998. (Only those portions specifically
incorporated by reference herein shall be deemed filed
with the Commission.)
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
27. Financial Data Schedule
(B) REPORTS ON FORM 8-K.
During the 1998 fourth quarter, a Current Report on Form 8-K dated
December 3, 1998 was filed regarding the Company's acquisition of
IntelliFrame Corporation.
24
<PAGE>
Schedule II
-----------
COMPUTER NETWORK TECHNOLOGY CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning of costs & other end of
Description period expenses account Deductions period
- ------------------------------------ ---------------- -------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Allowance for doubtful accounts
and sales returns $2,979 690 - (2,444) $1,225
Year ended December 31, 1997
Allowance for doubtful accounts
and sales returns (1) $ 899 121 2,354 (395) $2,979
Year ended December 31, 1996
Allowance for doubtful accounts
and sales returns $1,131 - - (232) $ 899
</TABLE>
/(1)/ In connection with its acquisition of the Internet Solutions Division of
Apertus Technologies, Inc. the Company recorded an allowance for doubtful
accounts and sales returns in the amount of $2,354.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMPUTER NETWORK TECHNOLOGY CORPORATION
Dated: March 24, 1999 By: /s/ Thomas G. Hudson
--------------------------------------
Thomas G. Hudson, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Thomas G. Hudson
- -------------------------------
Thomas G. Hudson President and Chief March 24, 1999
Executive Officer
(Principal Executive
Officer) and Director
/s/ Gregory T. Barnum
- -------------------------------
Gregory T. Barnum Vice President of Finance, March 24, 1999
Chief Financial Officer
and Secretary
(Principal Financial
Officer)
/s/ Jeffrey A. Bertelsen
- -------------------------------
Jeffrey A. Bertelsen Corporate Controller and March 24, 1999
Treasurer (Principal
Accounting Officer)
/s/ Patrick W. Gross
- -------------------------------
Patrick W. Gross Director March 24, 1999
/s/ Erwin A. Kelen
- -------------------------------
Erwin A. Kelen Director March 24, 1999
/s/ Lawrence Perlman
- -------------------------------
Lawrence Perlman Director March 24, 1999
/s/ John A. Rollwagen
- -------------------------------
John A. Rollwagen Director March 24, 1999
</TABLE>
26
<PAGE>
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Computer Network Technology Corporation:
Under the date of January 26, 1999, we reported on the consolidated balance
sheets of Computer Network Technology Corporation and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, shareholders' equity and comprehensive income and cash flows for
each of the years in the three-year period ended December 31, 1998, as contained
in the 1998 annual report to shareholders. These consolidated financial
statements and our report thereon are incorporated by reference in the annual
report on Form 10-K for the year 1998. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1999
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
2A. Agreement for Sale of Shares among Computer Network
Technology Corporation and each of Scott Opitz and
Alexsandr Elkin dated December 3, 1998. (Incorporated
by reference to Exhibit 2.1 to current report on Form
8-K dated December 3, 1998).
2B. Asset Purchase Agreement by and between CNT Acquisition
I Corporation, Computer Network Technology Corporation
and Apertus Technologies Inc. dated October 24, 1997.
(Incorporated by reference to Exhibit 2.1 to current
report on Form 8-K dated October 24, 1997.)
3A. Restated Articles of Incorporation of the Company, as
amended. (Incorporated by reference to Exhibit 2 to
current report on Form 8-K dated June 22, 1992.)
3B. By-laws of the Company, as amended. (Incorporated by
reference to Exhibit 3B Annual Report on Form 10-K for
the year ended December 31, 1991 and Exhibit 3.1 to
current report on Form 8-K dated July 29, 1998.)
4. 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. (Incorporated by
reference to Exhibit 1 to Form 8-A dated July 29,
1998).
10A. Lease Agreement dated November 30, 1990 by and between
TOLD Development Company, a general partnership, and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10C Form S-2 Registration
Statement No. 33-41985.)
10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated
by reference to Exhibit 10F Form S-2 Registration
Statement No. 33-41985.)
10C. Subscription Agreements of Kanematsu Electronics Ltd.
and Kanematsu USA Inc. dated October 22, 1990.
(Incorporated by reference to Exhibit 10G Form S-2
Registration Statement No. 33-41985.)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10D. Amended 1992 Employee Stock Purchase Plan. (Incorporated
by reference to Exhibit 99 Form S-8 Registration Statement
No. 333-59947.)
10E. Amended 1992 Stock Award Plan. (Incorporated by reference
to Exhibit 99 Form S-8 Registration Statement No. 333-
59949.)
10F. Sublease Agreement by and between ITT Consumer Financial
Corporation and Computer Network Technology Corporation
dated October 1, 1993. (Incorporated by reference to
Exhibit 10X Annual Report on Form 10-K for the year ended
December 31, 1993.)
10G. First Amendment to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated October 26, 1993.
(Incorporated by reference to Exhibit 10Y Annual Report on
Form 10-K for the year ended December 31, 1993.)
10H. Amendment No. 1 to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated February 9, 1994.
(Incorporated by reference to Exhibit 10CC Form 10Q for
the quarterly period ended March 31, 1994.)
10I. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)
10J. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8
Registration Statement No. 33-83266.)
10K. Building Lease by and between Opus Northwest, L.L.C., and
Computer Network Technology Corporation ( Incorporated by
reference to Exhibit 10A Form 10Q for the quarterly period
ended September 30, 1998).
10L. Employment Agreement by and between the Company and Thomas
G. Hudson as amended. (Incorporated by reference to
Exhibit 10Z Form 10Q for the quarterly period ended June
30, 1996.)
10M. Lease Agreement between Teachers Realty Corporation and
Computer Network Technology Corporation. (Incorporated by
reference to Exhibit 10AA Form 10-Q for the quarterly
period ended June 30, 1996.)
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10N. Description of Success Sharing Bonus Plan ( Incorporated by
reference to Exhibit 10Y Form 10-K for the year ended
December 31, 1997.)
10O. Employment Agreement by and between the Company and Mark Knittel
(Incorporated by reference to Exhibit 10AA Form 10-K for the year
ended December 31, 1997).
10P. Executive Deferred Compensation Plan...........Electronically Filed
10Q. Employment/Non-Compete Agreement by and between the Company and
Nick V. Ganio..................................Electronically Filed
13. Annual Report to Shareholders for the year ended December 31, 1998.
(Only those portions specifically incorporated by reference
herein shall be deemed filed with the
Commission.)...................................Electronically Filed
21. Subsidiaries of the Registrant.................Electronically Filed
23. Independent Auditors' Consent..................Electronically Filed
27. Financial Data Schedule........................Electronically Filed
</TABLE>
<PAGE>
EXHIBIT 10P
CNT EXECUTIVE DEFERRED COMPENSATION PLAN
(AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 1999)
1
<PAGE>
CNT EXECUTIVE DEFERRED COMPENSATION PLAN
ARTICLE I
GENERAL
-------
SEC. 1.1 NAME OF PLAN. The name of this plan is the "CNT Executive
------------
Deferred Compensation Plan" (referred to hereinafter as the "Plan").
SEC. 1.2 PURPOSE. The Plan has been established to provide
-------
additional future income to certain select management or highly compensated
employees through voluntary deferrals of Compensation.
SEC. 1.3 EFFECTIVE DATE. The "Effective Date"
--------------
of the Plan, the date as of which the Plan was established, is July 1, 1997.
SEC. 1.4 COMPANY. For purposes of this Plan, "Company" means
-------
Computer Network Technology Corporation, a Minnesota corporation, and any
Successor Employer thereof.
SEC. 1.5 CONSTRUCTION AND APPLICABLE LAW. The Plan is intended to be
-------------------------------
an unfunded plan maintained primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated employees,
within the meaning of section 201(2), 301(a)(3) and 401(a)(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan shall be
administered and construed consistent with said intent. This Plan also shall be
governed and construed in accordance with the laws of the State of Minnesota as
applied to contracts executed and to be wholly performed within said state to
the extent that such laws are not preempted by the laws of the United States of
America.
ARTICLE II
DEFINITIONS
-----------
SEC. 2.1 ACCOUNTS. "Accounts" shall be established for each eligible
--------
Participant reflecting the deferred Compensation and Matching Credits owed to
the Participant or the Participant's Beneficiary under the terms of this Plan.
The following Accounts shall be established for each Participant:
(a) Deferral Account. A Deferral Account shall be established to which
----------------
shall be credited the amounts of Compensation deferred under Sec. 4.1 and
the Earnings Credits under Sec. 4.3 related to those deferrals.
1
<PAGE>
(b) Matching Account. A Matching Account shall be established to which
----------------
shall be credited the Matching Credits determined under Sec. 4.2 and the
Earnings Credits under Sec. 4.3 related to the Matching Credits.
The Company may maintain sub-accounts for a Participant within each Account
to reflect the amount deferred or credited for each Plan Year and Earnings
Credits on that amount.
SEC. 2.2 BENEFICIARY. "Beneficiary" means the person or persons
-----------
designated as such pursuant to the provisions of Sec. 5.4.
SEC. 2.3 CHANGE OF CONTROL. "Change of Control" means the occurrence
-----------------
of an "Event" as defined in the Company's 1992 Stock Award Plan, as amended, or
in any successor or replacement to said plan.
SEC. 2.4 CODE. "Code" means the Internal Revenue Code of 1986, as
---
amended.
SEC. 2.5 COMPENSATION. "Compensation" for a Plan Year means the
------------
compensation to which the Participant is entitled from the Company with respect
to the Plan Year, excluding sales commissions and sales bonuses. For purposes
of this Plan, Compensation shall be separated into the following two categories:
(a) Base Compensation means the Compensation classified as such by the
-----------------
Company which is paid to the Participant on a regular periodic basis
during the Plan Year.
(b) Incentive Compensation means the amounts earned for a Plan Year (and
----------------------
normally paid during the following January) under the Company-wide annual
incentive plan or under any individual arrangements that create annual
payments based on factors such as the achievement of individual
objectives, provided that such arrangement has been designated by the
Chief Executive Officer of the Company as covered by this Plan.
SEC. 2.6 EARNINGS CREDITS. "Earnings Credits" are the credits
----------------
allocable to Accounts of Participants under Sec. 4.3 based on the investment
indexes elected by the Participant.
SEC. 2.7 MATCHING CREDITS. "Matching Credits" are the credits
----------------
allocable to the Participant's Matching Account pursuant to Sec. 4.2 based on
the deferrals of Compensation elected by Participants under Sec. 4.1.
SEC. 2.8 PARTICIPANT. A "Participant" is an individual described as
-----------
such in Article III.
SEC. 2.9 PLAN YEAR. A "Plan Year" is the 12-consecutive-month period
---------
commencing on each January 1 and ending on the following December 31. However,
the first Plan Year began on July 1, 1997 and ended on December 31, 1997.
2
<PAGE>
SEC. 2.10 QUALIFIED EMPLOYEE. "Qualified Employee" for a Plan Year
------------------
means the Chief Executive Officer of the Company and any select management or
highly compensated employee of the Company who meets all of the following
requirements:
(a) The employee's annual rate of Base Compensation (prior to any
deferrals under this Plan) for the current Plan Year is equal to or
greater than $100,000.
(b) The employee has been designated in writing by the Chief Executive
Officer of the Company as eligible for this Plan for the current Plan
Year.
(c) The employee qualifies as a "highly compensated employee" under Code
Section 414(q) for the current Plan Year based on his or her Compensation
during the preceding Plan Year. If the employee was hired by the Company
during the preceding Plan Year, the employee's Compensation during the
preceding Plan Year shall be annualized for purposes of applying this
subsection. This subsection shall not apply during the Plan Year in
which the employee is first employed by the Company.
SEC. 2.11 SUCCESSOR EMPLOYER. A "Successor Employer" is any entity
------------------
that succeeds to the business of the Company through merger, consolidation,
acquisition of all or substantially all of its assets, or any other means and
which elects before or within a reasonable time after such succession, by
appropriate action evidenced in writing, to continue the Plan.
SEC. 2.12 TERMINATION OF EMPLOYMENT. The "Termination of Employment"
-------------------------
of an employee for purposes of the Plan shall be deemed to occur upon the
employee's resignation, discharge, retirement, death, failure to return to
active work at the end of an authorized leave of absence or the authorized
extension or extensions thereof, failure to return to work when duly called
following a temporary layoff, or upon the happening of any other event or
circumstance which, under the policy of the Company as in effect from time to
time, results in the termination of the employer-employee relationship.
ARTICLE III
PARTICIPATION
-------------
SEC. 3.1 ELIGIBILITY FOR PARTICIPATION. An employee of the Company
-----------------------------
shall become a Participant in the Plan on the earliest date (on or after the
Effective Date) on which he or she is a Qualified Employee and has elected to
make deferrals under Sec. 4.1.
SEC. 3.2 DURATION OF PARTICIPATION. A Participant shall continue to
-------------------------
be eligible to make elections under Sec. 4.1 until the earliest of:
3
<PAGE>
(a) The date the Participant's Termination of Employment
occurs.
(b) The date on which the Participant ceases to be a Qualified
Employee.
(c) The date the Participant fails to meet the requirements of
any regulations which may be issued by the Department of Labor
that define the phrase "select group of management or highly
compensated employees" under ERISA.
No deferrals under Sec. 4.1 shall be made from any Compensation that is payable
to the Participant for a Plan Year beginning after the earliest of said dates
unless he or she again meets the requirements for being a Qualified Employee for
a subsequent Plan Year. However, an individual shall continue to be a
Participant for purposes of the provisions of the Plan other than Sec. 4.1 until
the date all of his or her Accounts have been distributed.
SEC. 3.3 NO GUARANTEE OF EMPLOYMENT. Participation in the Plan does
--------------------------
not constitute a guarantee or contract of employment with the Company. Such
participation shall in no way interfere with any rights the Company would have
in the absence of such participation to determine the duration of the employee's
employment with the Company.
ARTICLE IV
DEFERRED COMPENSATION AND ACCOUNTS
----------------------------------
SEC. 4.1 ELECTION TO DEFER COMPENSATION. Prior to the first day of
------------------------------
any Plan Year beginning on or after the Effective Date, a Participant may elect
to have part or all of the Base Compensation and/or Incentive Compensation
payable with respect to that Plan Year credited to the Participant's Deferral
Account rather than being paid in cash. The Compensation actually payable for
the Plan Year to a Participant who elects deferred compensation under this
section shall be reduced by the percentage or amount so elected, subject to the
following:
4
<PAGE>
(a) Elections for a particular Plan Year must be filed by the
preceding December 31. However, an election by an individual who
first becomes a Qualified Employee during a Plan Year may be
filed within 30 days after the date he or she becomes a Qualified
Employee and shall apply to Base Compensation payable for payroll
periods beginning after the date the election is filed and to any
Incentive Compensation with respect to that Plan Year which is
subject to a requirement that the individual remain employed to a
date that is after the date the election is filed. Elections
shall be made on forms specified by the Company for purposes of
this Plan.
(b) The election filed prior to the beginning of each Plan Year will
apply to the Base Compensation payable during that Plan Year and
the Incentive Compensation for that Plan Year which is payable
during December of the current Plan Year or during the following
Plan Year.
(c) The Participant may elect to defer a fixed dollar amount of Base
Compensation during each pay period. However, the deferral may
not reduce the Participant's rate of Base Compensation for the
Plan Year to less than $80,000 (or such higher amount for the
Plan Year equal to the amount specified for that Plan Year under
Code Section 414(q)(1)).
(d) A Participant may elect to have one of the following types
of deferrals made from the Participant's Incentive Compensation:
(1) The Participant may elect to contribute a percentage (up to
100%) of the payment of Incentive Compensation.
(2) The Participant may elect to contribute a specific dollar
amount of the Incentive Compensation payment (or 100% of the
payment, if less than the specified amount).
Notwithstanding the foregoing, the amount deferred may not exceed the
Incentive Compensation that remains after the deduction of any taxes
attributable to the amounts deferred which are required to be withheld
and which are not withheld from other compensation payable to the
Participant.
5
<PAGE>
(e) The Participant must file a separate election with the Company for
each Plan Year for which deferrals are to be made under this Plan. An
election for a Plan Year shall become irrevocable on the first day of
that year, subject to subsection (g). Elections will not carry over
into subsequent Plan Years.
(f) The deferred compensation credited under the Plan by the Company on
behalf of a Participant for a Plan Year shall be allocated to the
Deferral Account of the Participant as of the date that the Base
Compensation or Incentive Compensation would otherwise have been paid
to the Participant in cash.
(g) Notwithstanding the foregoing provisions of this section, all
deferrals by a Participant shall cease as of (i) the date the
Participant receives a hardship withdrawal under any qualified defined
contribution plan subject to Code Section 401(k) maintained by the
Company or any of its affiliates which requires that deferrals be
suspended for a certain period of time following such withdrawal, or
(ii) the date the Participant receives a distribution for unforeseeable
emergency under Sec. 5.5. Deferrals under this section may not
recommence until the first day of the second Plan Year beginning after
the date deferrals ceased under clause (i) of the previous sentence, or
the first day of the Plan Year beginning after the date deferrals
ceased under clause (ii).
SEC. 4.2 MATCHING CREDITS. The Company will credit to the Matching
----------------
Account of each Participant for each Plan Year a Matching Credit equal to 20% of
the amount the Participant defers under Sec. 4.1 with respect to that Plan Year,
subject to the following:
(a) The total Matching Credit for each Participant with respect to any
Plan Year (based on deferrals of Base Compensation during that year and
of Incentive Compensation for that year paid during the following year)
shall be limited to $10,000.
(b) Matching Credits shall be allocated to Matching Accounts on the same
date that the deferrals on which they are based are credited to
Deferral Accounts, but shall stop for each Participant on the date the
Participant reaches the $10,000 limit under subsection (a) for the Plan
Year.
SEC. 4.3 VALUATION OF ACCOUNTS. As of any date as of which an Account
---------------------
is to be valued, the value of the Account shall be adjusted to reflect the
effect of additional credits under Sec. 4.1 or Sec. 4.2 and any Earnings Credits
with respect to that Account, less any distributions under the Plan with respect
to said Account, since the last date the value of the Account was determined.
6
<PAGE>
(a) Earnings Credits on each Account will be based on the rate of return
under the investment index or indexes made available by the Company from
time to time for purposes of this Plan and selected by the Participant to
be applied to measure the deemed investment return on his or her Accounts
for the period that amounts are credited to the Participant's Accounts
under the terms of this Plan. As of January 1, 1999, the following
investment indexes are available to Participants:
(1) The rate of return on ten-year U.S. Treasury securities on the first
business day of each calendar quarter, as published in the New York
--------
Times, which shall apply throughout that quarter.
-----
(2) The total shareholder return on the First American Equity Index Fund
Class Y.
(b) The Participant shall file an election of investment indexes prior to
the date an amount is first credited to his or her Accounts. The
Participant may change an existing election effective as of the first day
of any calendar quarter by filing a new election with the Company on a
form prescribed by the Company prior to the first day of the quarter. The
Participant may file separate investment elections for existing Account
balances and amounts to be added to his or her Accounts in the future,
but each election shall apply to all of the Participant's Accounts.
Elections must be stated in 10% increments for each index. The Company
may prescribe a default index for the deemed investment of any Account or
portion of an Account for which the Participant fails to file an
election.
(c) All investment elections shall be in accordance with such rules and
procedures as the Company may establish from time to time. The Company
may also establish such procedures for the valuation of Accounts as the
Company determines in its sole discretion will reasonably reflect the
period of time amounts were credited to each Account and deemed to have
been invested in a particular index.
(d) Notwithstanding the foregoing, the Company may modify or disregard an
investment election filed by a Participant to the extent the Company
determines that such action is necessary to comply with the terms of this
Plan or the procedures established by the Company, or to avoid adverse
tax consequences to the Participant or the Company.
(e) Notwithstanding anything in the Plan to the contrary, the Company
shall be under no obligation to purchase any investments used for
determining Earnings Credits. The investment indexes are used solely for
the recordkeeping purpose of measuring gains and losses on each
Participant's Accounts, and the Participant's Accounts are not actually
being invested in the indexes.
7
<PAGE>
SEC. 4.4 UNSECURED OBLIGATIONS. A Participant's credits in his or her
---------------------
Accounts shall be an unsecured obligation of the Company to pay the Participant
(or the Participant's Beneficiary, in the event of the Participant's death) the
actual amount of the credits (to the extent vested) at the time designated in
Article V. Each Participant or Beneficiary is only a general creditor of the
Company with respect to his or her Accounts. Accounts are maintained for
recordkeeping purposes only. Notwithstanding the foregoing, obligations of the
Company to pay benefits under this Plan may be satisfied by distributions from a
grantor trust created by the Company in its sole discretion for such purpose.
If the Company obtains an insurance contract in connection with its obligations
under this Plan, each Participant shall cooperate with the Company and shall
execute any documents or submit to any physical examination reasonably required
by the Company to obtain such coverage.
ARTICLE V
DISTRIBUTION OF ACCOUNTS
------------------------
SEC. 5.1 DISTRIBUTION ON TERMINATION OF EMPLOYMENT Upon a Participant's
-----------------------------------------
Termination of Employment for a reason other than death, the entire balance in
the Participant's Deferral Account at that time, plus the vested percentage of
the balance in the Participant's Matching Account, shall be paid to the
Participant in a single lump sum as of the last day of the month in which the
Termination of Employment occurred, or as soon thereafter as administratively
feasible.
(a) The Participant's vested percentage shall be based on the number of
full years of employment with the Company since the later of (i) July 1,
1997, or (ii) the date the Participant was first employed by the Company,
and shall be determined from the following schedule:
FULL YEARS OF EMPLOYMENT VESTED PERCENTAGE
------------------------ -----------------
Less than 1 0%
1 but less than 2 25%
2 but less than 3 50%
3 but less than 4 75%
4 or more 100%
Notwithstanding the foregoing, the vested percentage shall be
100% if the Participant's Termination of Employment occurs
after a Change of Control.
8
<PAGE>
(b) The portion of the Participant's Matching Account that is not vested
will be forfeited and canceled on the date the Participant's Termination
of Employment occurs, and will not be reinstated if the Participant is
subsequently reemployed by the Company.
(c) If the Participant dies after his or her Termination of Employment but
before the benefit has been distributed, the remaining benefit to which
the Participant was entitled will be distributed as soon as
administratively feasible following the last day of the month in which
the death occurs to the Beneficiary determined under Sec. 5.4.
(d) No Earnings Credits will be made to the Participant's Accounts with
respect to any period following the last day of the month as of which the
distribution is made.
SEC. 5.2 DISTRIBUTIONS PRIOR TO TERMINATION OF EMPLOYMENT The
------------------------------------------------
Participant may elect on the election form for a Plan Year that the amount
deferred into his or her Deferral Account for that Plan Year, and Earnings
Credits on that amount, shall be paid in one to five annual installments,
commencing with a calendar year specified by the Participant, even though the
Participant's Termination of Employment has not yet occurred. The calendar year
specified must commence at least four years after the date the election is
filed.
(a) Each in-service distribution will be paid as of the Participant's
first normal payroll date occurring on or after January 1 of the calendar
year in which the installment is to be paid. No Earnings Credits will be
made on the amount distributed for the portion of January preceding the
payment date.
(b) The amount of each installment shall be equal to the amount credited
to the Deferral Account or sub-account being distributed at the time the
installment is to be paid divided by the number of installments remaining
to be paid. Installment payments shall cease when the Participant's
Deferral Account or sub-account has been reduced to zero.
(c) Upon the Participant's Termination of Employment, all installment
payments shall cease, and the balance of the Participant's Deferral
Account shall be distributed pursuant to Sec. 5.1.
9
<PAGE>
SEC. 5.3 DISTRIBUTION ON DEATH. Upon the death of a Participant while
---------------------
employed by the Company, the Participant's Accounts shall be 100% vested, and
the Company shall pay to the Participant's Beneficiary or Beneficiaries an
amount equal to the entire balance of the Participant's Accounts. Such payment
shall be made in a single sum payment to the Participant's Beneficiary or
Beneficiaries as soon as administratively feasible following the last day of the
month in which the Participant's death occurred. No Earnings Credits will be
made to the Participant's Accounts with respect to any period following said
last day of the month.
SEC. 5.4 BENEFICIARY DESIGNATION. Each Participant shall have the right,
-----------------------
at any time, to designate any person or persons as Beneficiary or Beneficiaries
to whom payments under this Plan shall be made in the event of the Participant's
death prior to complete distribution of the vested amount credited to the
Participant's Accounts. Each Participant shall have the right to change his or
her Beneficiary designation at any time. Each Beneficiary designation shall
become effective only when filed in writing with the Company during the
Participant's life on a form prescribed by the Company. If a Participant fails
to designate a Beneficiary as provided above, or if all designated Beneficiaries
predecease the Participant, then the Participant's Beneficiary shall be the
Participant's estate.
SEC. 5.5 DISTRIBUTIONS FOR UNFORESEEABLE EMERGENCY. Notwithstanding the
-----------------------------------------
foregoing sections of this Article V, the Company in its sole discretion may
approve a request by a Participant for a withdrawal from the Participant's
Deferral Account due to an unforeseeable emergency. An "unforeseeable
emergency" is an unanticipated emergency that is caused by an event beyond the
control of the Participant and that would result in severe financial hardship to
the Participant if an early withdrawal is not permitted. Any such early
withdrawal approved by the Company may not exceed the amount necessary to meet
the emergency. The distribution will be made as soon as administratively
feasible following the last day of the month in which the request is approved by
the Company, and no Earnings Credits will be made to the Participant's Accounts
with respect to the amount distributed for any period following the said last
day of the month.
SEC. 5.6 WITHHOLDING AND TAXES. The benefits payable under this Plan
---------------------
shall be subject to the deduction of any federal, state, or local income taxes
or other taxes which are required to be withheld from such payments by
applicable laws and regulations. Any Social Security (FICA) taxes which must be
withheld prior to the distribution of benefits to the Participant shall be
withheld from the amounts deferred, or from the Participant's other
compensation, as determined by the Company. The Company provides no assurances
or guarantees regarding the tax treatment of amounts deferred under this Plan.
Each Participant is solely responsible for any applicable taxes, penalties or
interest.
10
<PAGE>
SEC. 5.7 DISTRIBUTIONS FOLLOWING A CHANGE OF CONTROL. If a Change of
-------------------------------------------
Control occurs, all deferrals under Sec. 4.1 and Matching Credits under Sec. 4.2
shall cease immediately, all Accounts of all Participants will become 100%
vested and will be revalued as of the last day of the month coinciding with or
immediately preceding the date the Change of Control occurred using procedures
similar to those provided in Sec. 4.3(e), and all of a Participant's Accounts
shall be paid to the Participant in a single lump sum payment as soon as
administratively feasible following the date the Change of Control occurred.
ARTICLE VI
ADMINISTRATION
--------------
SEC. 6.1 ADMINISTRATION BY THE COMPANY. The Company shall administer
-----------------------------
the Plan, shall establish, adopt, or revise such rules and regulations as it may
deem necessary or advisable for the administration of the Plan, and shall have
discretionary authority to interpret the provisions of the Plan. The
interpretations of the Company shall be conclusive on all parties.
SEC. 6.2 CLAIMS PROCEDURE. A Participant or Beneficiary may make a
----------------
claim for Plan benefits within the time and in the manner described herein. Such
claim shall be made within 60 days after the claim arises by filing a written
request with the Company. The claim shall be determined by the Company within 90
days after the receipt of the written claim (unless the Company extends the
period for up to an additional 90 days).
(a) Notice of the Company's decision shall be communicated to the claimant
in writing. If the claim is denied, the notice shall include the specific
reasons for the denial (including reference to pertinent Plan
provisions), a description of any additional material or information
necessary for the Company to reconsider the claim, the reasons for any of
such additional material or information, and an explanation of the review
procedure.
(b) The claimant or a duly authorized representative may, within 60 days
after receiving such written notice, request the Company to review its
decision. The Company may afford the claimant a hearing and shall afford
the claimant the opportunity to review all pertinent documents and submit
issues and comments orally or in writing. The Company shall render a
review decision in writing within 60 days after receipt of request for
review (unless the Company extends the review period for up to an
additional 60 days). The review proceeding shall be conducted in
accordance with the rules and regulations adopted from time to time by
the Company.
ARTICLE VII
11
<PAGE>
AMENDMENT AND TERMINATION
-------------------------
SEC. 7.1 AMENDMENT. The Plan may be amended in whole or in part at
---------
any time for any reason by action of the Board of Directors of the Company, or
by action of any person to whom that authority has been delegated by the Board.
No amendment shall decrease the benefits under the Plan which have accrued prior
to the date of such amendment. An amendment may modify the investment index
options under Sec. 4.3 to be used to determine Earnings Credits following the
adoption of the amendment, but shall not change the Earnings Credits to be
credited to Accounts for periods prior to the date the amendment was adopted.
SEC. 7.2 TERMINATION OF PLAN. The Company, by action of its Board of
-------------------
Directors, may terminate the Plan at any time. After such termination, no
employee of the Company shall become a Participant, and no further amounts shall
be credited pursuant to Sec. 4.1 or Sec. 4.2 to Accounts of Participants. At
the discretion of the Company, the amounts credited to the Accounts of
Participants may be either (i) distributed to Participants as soon as reasonably
possible after the date of termination or (ii) distributed in accordance with
Article V.
ARTICLE VIII
MISCELLANEOUS
-------------
SEC. 8.1 BENEFITS MAY NOT BE ASSIGNED OR ALIENATED. Neither a
-----------------------------------------
Participant nor any Beneficiary shall have the right to sell, assign, transfer,
encumber or otherwise convey any right to receive any payment hereunder. No part
of the amounts payable hereunder shall be subject to seizure or sequestration
for the payment of any debts or judgments owed by a Participant or any other
person (other than the Company). However, the Company may offset its obligations
to the Participant or the Participant's Beneficiary hereunder by any amounts the
Participant owes to the Company.
SEC. 8.2 INCOMPETENCY. Every person receiving or claiming benefits
------------
under this Plan shall be conclusively presumed to be mentally competent until
the date on which the Company receives a written notice in a form and manner
acceptable to the Company that such person is incompetent and that a guardian,
conservator or other person legally vested with the care of his or her estate
has been appointed. In such event, the Company may direct payments of benefits
to such guardian, conservator or other person legally vested with the care of
the person's estate and any such payments so made shall be a complete discharge
of the Company to the extent so made.
SEC. 8.3 NOTICES. Notices required by this Plan to be given to the
-------
Company or a Participant shall be in writing and shall be considered to have
been duly given or served if personally delivered, or sent by first class,
certified or registered mail.
12
<PAGE>
SEC. 8.4 SEVERABILITY. The invalidity or partial invalidity of any
------------
portion of this Plan shall not invalidate the remainder thereof, and said
remainder shall remain in full force and effect.
SEC. 8.5 HEADINGS. Headings at the beginning of articles and sections
--------
hereof are for convenience of reference, shall not be considered a part of the
text of the Plan, and shall not influence its construction.
SEC. 8.6 CAPITALIZED DEFINITIONS. Capitalized terms used in the Plan
----------------------
shall have their meaning as defined in the Plan unless the context clearly
indicates to the contrary.
SEC. 8.7 GENDER. Any references to the masculine gender include the
------
feminine and vice versa.
SEC. 8.8 USE OF COMPOUNDS OF WORD "HERE". Use of the words "hereof",
-------------------------------
"herein", "hereunder", or similar compounds of the word "here" shall mean and
refer to the entire Plan unless the context clearly indicates to the contrary.
SEC. 8.9 CONSTRUED AS A WHOLE. The provisions of the Plan shall be
--------------------
construed as a whole in such manner as to carry out the provisions hereof and
shall not be construed separately without relation to the context.
Date Signed: December ____, 1998 COMPUTER NETWORK TECHNOLOGY CORPORATION
By:______________________________
Its______________________________
13
<PAGE>
[LOGO OF COMPUTER NETWORK TECHNOLOGY APPEARS HERE]
EXHIBIT 10Q
EMPLOYMENT/NON-COMPETE AGREEMENT
THIS AGREEMENT, dated 3/16, 1998 between Computer Network Technology
Corporation, a Minnesota corporation ("CNT"), and
Nick V. Ganio
Employee desires to obtain employment with CNT and CNT desires to employ
Employee subject to the terms and conditions contained in this Agreement.
1. EMPLOYMENT. CNT hereby employs Employee and Employee accepts employment on
the terms and conditions contained in this Agreement. Specific details
surrounding the employment and compensation of Employee may be found in Exhibit
A. In the course of Employee's employment, Employee will perform such duties as
CNT assigns to him or her from time to time. Employee will serve CNT to the
best of Employee's ability and devote Employee's full time, attention, and
efforts to the business and affairs of CNT. Employee confirms that he or she is
not bound by any commitment inconsistent with Employee's obligations in this
Agreement. Employee acknowledges that Employee's employment by CNT is "at
will," which means that either CNT or Employee may terminate Employee's
employment at any time for any or no reason. Employee acknowledges that, except
for the President, no employee of CNT possesses the authority to change
Employee's "at will" status or promise employment for any particular duration.
Employee further acknowledges that he/she received a copy of CNT's Employee
Handbook and agrees to provide CNT with a signed copy of the "Acknowledgment
Form" found therein.
2. PROTECTION OF CONFIDENTIAL INFORMATION. For so long as Employee remains
employed by CNT and at all times thereafter, Employee will not disclose or
provide Confidential Information (as defined in Section 5) to any person except
such persons, whether CNT employees or otherwise, whom Employee knows have been
authorized by CNT to receive such information. Upon the termination of
Employee's employment with CNT, Employee will return all Confidential
Information, copies, and extracts thereof in Employee's possession.
3. DEFINITION OF CONFIDENTIAL INFORMATION. (a) "Confidential Information"
includes Trade Secrets, Business Plans, Personnel Information, and Customer
Information of CNT and its customers and other third parties with which it has
established contractual relations, where:
(i) "Trade Secrets" means information that: (A) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use and (B) is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy. The existence of a
Trade Secret will not be negated merely because a person has acquired a Trade
Secret without express or specific notice that it is a Trade Secret if, under
all the circumstances, such person knows or has reason to know that the party
who owns the information or has disclosed it intends or expects the secrecy of
the type of information comprising the Trade Secret to be maintained. Trade
secrets of CNT may include, but are not limited to, Business Plans, Personnel
Information, Customer Information and Financial Information;
<PAGE>
(ii) "Business Plans" means, without limitation, any and all information
pertaining to proposed products, proposed technologies, current or
proposed marketing plans, current or proposed product tests, current
or proposed product or service pricing, and financial projections;
(iii) "Personnel Information" means information about the names,
addresses, duties, compensation, or other personal characteristics
of employees of CNT, its customers, or others with which it has
established contractual relations; and
(iv) "Customer Information" means the contractual terms and conditions,
including prices, that CNT has established with any of its
customers.
4. PATENTS, INVENTIONS, AND RELATED MATTERS. (a) Employee will promptly
disclose in writing to CNT complete information concerning every invention or
discovery, whether patentable or not, conceived or developed by Employee, either
alone or with others, during Employee's employment by CNT or within six months
thereafter, relating directly to the business, products, or services of CNT
("Developments"). Employee acknowledges that, except as provided in Section
4(b), all Developments are the property of CNT and assigns to CNT all of
Employee's interest in all Developments.
(b) The provisions of Section 4(a) will not apply to any Development meeting
the following conditions: (i) such Development was developed entirely on
Employee's own time; (ii) such Development was made without the use of any CNT
equipment, supplies, or Trade Secrets (as defined in Section 5); (iii) such
Development does not relate (A) directly to the business of CNT or (B) to CNT's
actual or demonstratably anticipated research or development; and (iv) such
Development does not result from any work performed by Employee for CNT.
(c) Upon request and without further compensation, but at no expense to
Employee, and whether during the term of Employee's employment with CNT or
thereafter, Employee will do all reasonable acts that CNT determines are
necessary or appropriate to obtain, sustain, reissue, extend, and enforce
patents on any and all of such Developments assigned to CNT, to perfect, affirm,
and record CNT's complete ownership and title to such Developments, and to
cooperate in all proceedings and matters relating to such Developments.
(d) Employee will keep complete and accurate notes, data, and records of all
Developments assigned to CNT in the manner and form requested by CNT. Such
notes, data, and records will be the property of CNT, and, upon its request,
Employee will promptly surrender them to it.
(e) Employee has listed on Exhibit B attached to this Agreement all inventions
and ideas to which Employee claims an interest as a result of events occurring
before the commencement of Employee's employment or promotion by CNT.
5. ENFORCEMENT. Employee acknowledges that the imposition of damages would be
inadequate upon a breach or threatened breach of this Agreement by Employee.
Consequently, in the event of a breach or threatened breach and in addition to
any other remedies that may be available to CNT, CNT will be entitled to obtain
injunctive relief to enforce the provisions of this Agreement.
6. TERMINATION.
(a) Automatic Termination. This Agreement shall terminate automatically:
----------------------
(i) by mutual written agreement of the parties;
(ii) upon the death of the Employee; or
(iii) in the event the Employee becomes disabled and is unable
to perform his duties hereunder for a period of 90
consecutive days or more.
(b) Termination by the Company for Cause. The Company may terminate the
---------------------------------
Employee's employment for Cause at any time without notice and without
further obligation of any kind to the Employee. "Cause" shall mean:
<PAGE>
(i) any fraud, misappropriation, theft or embezzlement by the
Employee;
(ii) any conviction of or nolo contendere plea to a felony or
gross misdemeanor by the Employee;
(iii) Intentional or malicious misconduct or other willful or
wanton misconduct by the Employee in the performance of
his duties;
(iv) willful and material misconduct, including willful and
material failure to perform the Employee's duties, or
illegal or dishonest acts;
(v) any material breach by the Employee of the Employee's
obligations under this Agreement;
(vi) Any public conduct of the Employee that has or can
reasonably be expected to have a demonstrably detrimental
effect on the Company; or
(vii) the dissolution, liquidation or bankruptcy of the Company.
With respect to any of the matters set forth in subparagraphs 7(b)(iii),
7(b)(iv), or 7(b)(v), the Company shall give the Employee written
notification of the alleged deficiency, and the Employee shall be given a
reasonable opportunity to correct the deficiency for a period of at least
ten (10) days, unless the deficiency shall be of the kind that cannot
reasonably be corrected.
(c) Termination by the Company other than for Cause.
-----------------------------------------------
(i) Notwithstanding the provisions of paragraph 7(b), the
Company may terminate the Employee's employment for any
reason, whether or not such reason constitutes Cause,
without notice and without further obligation of any kind
to the Employee, employee will be eligible for severance
in paragraph 7.
(ii) In the event the Company determines that the position of
employee's title of VP Sales Worldwide must be
headquartered at the Corporate location and Employee
elects not to move to Minnesota, employee will be eligible
to receive severance under the terms in paragraph 8.
7. SEVERANCE BENEFITS. Upon termination of the Employee's employment by the
Company, other than for cause, as defined in Paragraph 6, the Employee shall be
entitled to receive the Employee's base salary, calculated and paid as though
the Employee had remained in the employment of the Company, for a period of six
months (with the opportunity for an additional six months if Employee has not
found employment), provided Employee executes a comprehensive release of claims
acceptable to the Company. Such severance is subject to a reduction by any
amounts earned by the Employee for employment or consulting work during the
severance period. The Employee agrees to notify the Company of any such
employment or consulting work.
8. AGREEMENT NOT TO COMPETE. Employee agrees that during employee's employment
with the company and for a period of two years following termination for any
reason, Employee will not engage directly or indirectly (as an owner, employee,
consultant, or otherwise), or assist others in engaging (as an owner, employee,
consultant or otherwise) in the design, development, manufacture, distribution,
or marketing of any product or service that directly competes with any product
or service that has been designed, developed, manufactured, sold, leased,
distributed or marketed by CNT during the term of Employee's employment by CNT
or the time of termination of employment.
<PAGE>
9. CUSTOMER SOLICITATION - BASIC. The Employee recognizes and acknowledges
that during employment the Employee will have access to, learn, be provided with
and, in some cases, will prepare and create certain confidential and proprietary
business information, including, but not limited to, client and customer
information and customer lists, all of which are of substantial value to CNT in
its business. The Employee agrees that in addition to any other limitation, for
a period of 12 months after the termination of employment hereunder, the
Employee will not, with respect to the "Business", on his or her behalf or on
behalf of any other person, firm, or corporation, (a) call on any of CNT's
customers, or any of its affiliates or subsidiaries for the purpose of
soliciting and/or providing to any of these customers any customer information
relating to the "Business", (b) in any way, directly or indirectly, for himself
or herself, or on behalf of any other person, firm, or corporation, solicit,
divert, or take away any customer of CNT, its affiliates, or its subsidiaries.
The Business refers to the design, development, manufacture, distribution and
sale of product or services sold by CNT.
10. CUSTOMER SOLICITATION - COMPREHENSIVE. For a period of 12 months after
termination of employment for any reason, with or without cause, the Employee
shall not directly or indirectly contact any then-current CNT customer for the
purpose of selling or servicing this customer with any product or service that
directly competes with products or services that were designed, developed,
manufactured, sold, leased, distributed or marketed by CNT during the term of
Employee's employment with CNT or the time of termination of employment.
The Employee's right to compete has been limited in Sections 9, 9 and 10 in this
agreement only to the extent necessary to protect the Employer from unfair
competition. However, reasonable people may differ in making this determination.
If this restrictive covenant's scope or enforceability is disputed, a court or
other trier of fact may modify and enforce the covenant to the extent necessary
to be reasonable under the circumstances. The Employee further acknowledges that
if employment with CNT terminates for any reason, the Employee can earn a
livelihood without violating the foregoing restrictions and that the Employee's
ability to earn a livelihood without violating these restrictions is a material
condition to employment.
11. EMPLOYEE SOLICITATION - BASIC. The Employee agrees that for 12 months
after termination of employment, the Employee will not, on behalf of himself or
herself or on behalf of any other person, firm, or corporation, solicit any of
the employees of CNT or any of its affiliates or subsidiaries nor will the
Employee in any way, directly, or indirectly, for himself or herself, or on
behalf of any other person, firm or corporation, solicit, divert, or take away
any employees of CNT, its affiliates or its subsidiaries.
12. MISCELLANEOUS.
(A) ASSIGNMENT. This Agreement is personal to Employee and may not be assigned
by him or her. This Agreement is binding on the successors of each party,
including successors by operation of law. CNT may not assign this Agreement.
(B) SEVERABILITY. If, but only to the extent that, any provision of this
Agreement is declared or found to be unenforceable, then both parties will be
relieved of all obligations arising under such provision to the extent
necessary. If possible, another provision that is enforceable and achieves
substantially the same objective will be substituted. If the remainder of this
Agreement is not affected by such declaration or finding and is capable of
substantial performance, then the remainder will be enforced to the extent
permitted by law.
(C) AMENDMENT. No amendment, waiver, or discharge under this Agreement will be
valid unless in writing and signed by the party against which such amendment,
waiver, or discharge is sought to be enforced. Failure to enforce any provision
of this Agreement will not constitute a waiver of any further enforcement of
that provision or any other provision of this Agreement.
(D) ENTIRE AGREEMENT. This Agreement contains the entire agreement between the
parties with respect to its subject matter and there are no oral or written
representations, understandings, or agreements relating to this Agreement that
are not fully expressed herein.
<PAGE>
(E) GOVERNING LAW AND WAIVER OF RIGHT TO TRIAL BY JURY. This Agreement will be
governed by the laws of the State of Minnesota. Employee submit to the personal
jurisdiction of the federal and state courts located in Minnesota in connection
with all actions, matters, and disputes in any way related hereto.
(F) EFFECT OF AGREEMENT. BY EXECUTING THIS AGREEMENT, EMPLOYEE REPRESENTS THAT
HE OR SHE HAS THOROUGHLY REVIEWED ITS TERMS, HAS, IF HE OR SHE SO DESIRED,
CONSULTED WITH AN ATTORNEY, AND THAT HE OR SHE ACKNOWLEDGES THAT THE TERMS AND
CONDITIONS OF THIS AGREEMENT ARE REASONABLE UNDER THE CIRCUMSTANCES.
IN WITNESS WHEREOF, this Agreement has been signed and delivered by Employee and
a duly authorized officer or representative of CNT as of the date above written.
COMPUTER NETWORK TECHNOLOGY
CORPORATION
Employee: /s/ Nick Ganio By: /s/ Kristine Ochu
------------------------ -------------------------------------
Title: Vice President Human Resources
----------------------------------
<PAGE>
EXHIBIT A
TO
EMPLOYMENT/NON-COMPETE AGREEMENT
The following outlines the specific details of Employee's employment at CNT,
specifically as they relate to issue of Job Title, Compensation, Benefits and
Stock Options.
1. JOB EMPLOYMENT. Employee will be employed as Vice President of Direct Sales
Worldwide and will become an officer of CNT. As of January 1, 1999, Employee
will be responsible for Worldwide Sales and Distribution (Direct, Channel and
Channel Marketing). Employee will perform duties as are consistent with the
employee's position and as they are assigned to him from time to time.
2. COMPENSATION. Employee will have base compensation at an annualized rate of
$175,000. This will be paid on a semi-monthly basis on the 15th and last day of
each month.
Employee will also be eligible for incentive compensation for the first twelve
months of $175,000. This will be based on a commission plan designed and agreed
to by the CEO and President and the Employee. CNT will provide $95,000 of the
commission incentive through a non-recoverable draw of $7,917.00 payable monthly
for the first twelve months of employment. Total guaranteed compensation for
the Employee's first twelve months of active employment is $270,000.
Employee will be eligible for a $50,000 signing bonus which will be paid on the
first payroll processing date after the date of hire.
Employee will also be eligible to participate in CNT's Executive Deferred
Compensation Plan. The plan provides for a matching contribution by CNT of $.20
to the dollar up to a maximum annual CNT match of $10,000 per year per terms of
the plan.
3. BENEFITS. CNT offers group medical, dental, group life and accidental death
and dismemberment insurance, and disability insurance. CNT also offers a 401(k)
Salary Savings Plan, an Employee Stock Purchase Plan, company paid holidays,
personal time off starting at the five year employment level which equates to 20
days per year, and other benefits. Employee's eligibility for the benefits
listed above is subject to the terms of each plan.
4. STOCK OPTIONS. Employee will be awarded a stock option to purchase 250,000
shares of CNT Common Stock in accordance with the terms of the stock option
plan. The price per share would be the closing sale price for the trading day
immediately preceding the date of approval by the Board of Directors. This
option would vest in increments of 25% over four years with the first 25%
vesting one year from the date of grant and 25% each anniversary thereafter.
Upon the effective date of a "Change of Control", the number of unvested options
shall become immediately vested and exercisable per terms of the plan.
"Change of Control" means: (A) an acquisition (other than directly from CNT)
by an individual, entity, or a group (excluding CNT or an employee benefit plan
of CNT or a corporation controlled by CNT's shareholders) of 50% or more of
CNT's Common Stock or voting securities; or (B) merger, consolidation, or sale
of all or substantially all of CNT's assets (collectively, a "Business
Combination") other than a Business Combination in which all or substantially
all of the stockholders of CNT receive 50% or more of the stock of the company
resulting from the Business Combination and at least a majority of the members
of the board of directors of the resulting corporation were members of the Board
of CNT immediately prior to the Business Combination.
5. EMPLOYMENT/NON-COMPETE AGREEMENT. Employee needs to sign the Employment/Non-
Compete Agreement.
<PAGE>
EXHIBIT B
TO
EMPLOYMENT/NON-COMPETE AGREEMENT
Employee claims that the following inventions or ideas were conceived,
developed, or purchased by Employee before the commencement of Employee's
employment by CNT (attach a separate sheet if necessary):
X Employee does not claim any interest in any invention or idea as of the
date hereof.
Do not disclose information you consider confidential. Use this space to
describe briefly the product or process to which you claim an interest as well
as such supporting documents as you believe would be helpful to identify the
invention or idea, such as patent applications and notes indicating the relevant
dates.
Date: 3/16, 1998 /s/ Nick Ganio
----------------------------
Employee
<PAGE>
EXHIBIT 13
COMPUTER NETWORK TECHNOLOGY CORPORATION
1998 ANNUAL REPORT
Real Solutions. Real Time.
CORPORATE PROFILE
Computer Network Technology Corporation (CNT(R)) is a leading provider of hard-
ware, software, and services for storage area networking and enterprise
application integration solutions. Organizations world wide choose CNT to build
and run their business-critical networks and enterprise applications.
CNT operates at the nexus of the enterprise, across open systems and the
mainframe. We connect the old with new, and local with distant, without
sacrificing performance, security, or integrity. Our customers maintain their
leading edge through greater connectivity and integrated real-time access to
information.
CNT's products and services are sold world wide to end users, system
integrators, original equipment manufacturers and value-added resellers through
a direct sales force and a network of authorized distributors. A public
corporation since 1985, CNT is listed on the Nasdaq National Market System under
the symbol CMNT.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders 2
Real Opportunities. Real Growth. 4
CNT At-a-Glance 6
Enterprise Application Integration 8
Storage Area Networks 10
Financial Review 12
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Independent Auditors' Report
Report of Management
Quarterly Financial Data
Investor Information
Glossary of Terms 41
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
(in thousands, except per share data)
1998 1997
<S> <C> <C>
FOR THE YEAR ENDED DECEMBER 31
Total Revenue $133,535 $97,841
Net income before special charges 5,656* 619*
Net income per share before special charges .25* .03*
Net income (loss) 4,729 (2,314)
Net income (loss) per share .21 (.10)
AT YEAR END
Total assets $ 94,027 $85,487
Shareholders' equity 60,558 55,607
Working capital 35,587 30,380
</TABLE>
* Excludes a special charge in 1998 of $927,000 or $.04 per share after tax,
associated with the acquisition of IntelliFrame Corporation in December 1998;
excludes special charges in 1997 of $4.9 million, or $.13 per share after tax,
associated with the acquisition of the Internet Solutions Division from Apertus
Technologies Inc. in October 1997, and subsequent integration charges.
<PAGE>
Real Growth. Real Profits.
More than ever, we are working and living in a networked, data-rich world. To
stay competitive, organizations must constantly safeguard information and
increase productivity by reliably eliminating the constraints of access and
distance. CNT's solutions are positioned to help organizations meet these
dynamic challenges. The Company's expanding array of market-driven products and
services were well-received in 1998 and are poised to generate increased
shareholder value.
<TABLE>
<CAPTION>
Total Revenues
for the year ended December 31 (in thousands)
<S> <C>
1995 $ 78,837
1996 $ 97,109
1997 $ 97,841
1998 $133,535
</TABLE>
<TABLE>
<CAPTION>
Operating Income (Loss)
for the year ended December 31 (in thousands)
<S> <C>
1995 $7,427*
1996 $2,672*
1997 $ (359)*
1998 $8,139*
</TABLE>
<TABLE>
<CAPTION>
Net Income Per Share
for the year ended December 31
<S> <C>
1995 $.24*
1996 $.13*
1997 $.03*
1998 $.25*
</TABLE>
* Excludes a special charge in 1998 of $927,000 or $.04 per share after tax,
associated with the acquisition of IntelliFrame Corporation in December 1998;
excludes special charges in 1997 of $4.9 million, or $.13 per share after tax,
associated with the acquisition of the Internet Solutions Division from Apertus
Technologies Inc. in October 1997, and subsequent integration charges; excludes
a special charge in 1996 of $2.7 million, or $.07 per share after tax, for the
write-down of purchased technology; excludes a special charge in 1995 of $2.5
million, or $.07 per share after tax, attributable to a management
reorganization.
<PAGE>
To Our Fellow Shareholders:
With record revenues, CNT clearly turned the corner in 1998. We are now
beginning to capitalize on our strategic refocus and the investments we have
made in technology and infrastructure over the last few years. During 1998,
investors saw a long-awaited improvement in the value and liquidity of their
investment in CNT. The price of CNT's shares gained more than 257 percent from
December 31, 1997 to December 31, 1998 -- exceeding the growth of the Russell
2000 index over the same period. We continue to work at extending this positive
momentum for investors. CNT begins 1999 as a multi-product, market-driven
company with a solutions orientation that is attractive to strategic partners
and customers alike. We believe there are strong prospects for our products and
professional services, which we have strategically aimed at two fast-growing
markets: Storage Area Networking (SAN) and Enterprise Application Integration
(EAI). Revenues increased 36 percent to a record $133.5 million in 1998. Total
product revenue was $95.5 million, up 39 percent from 1997, reflecting strong
demand for our SAN solutions, sales of which were up 379 percent to $32 million,
and the completed integration of our 1997 acquisition of the Internet
Solutions Division of Apertus Technologies Inc. Net income for 1998 was $4.7
million, compared to a net loss in 1997 of $2.3 million. Excluding special
charges, net income was $5.7 million, or $.25 per share -- up more than 800
percent from 1997 net income. Operating margins, excluding special charges,
exceeded our goal for the last two quarters, reaching 10.4 percent in the fourth
quarter. In addition, cash flow from operations more than doubled.
Accomplishments and 1999 Agenda. Going into 1998, we were determined to execute
our strategic plan to launch new products and reposition CNT in growth markets,
increase revenues and return CNT to consistent profitability. Those objectives
still guide our activities in 1999.
Networking Solutions. We expanded our SAN solutions offering by introducing an
open systems version of our popular UltraNet product family. Working with EMC
and Oracle, we helped demonstrate an important new remote disk mirroring
solution for wide area networks during 1998.
In 1999, we plan to introduce products to extend Fibre Channel over a wide area
network, a technology first in the marketplace. We are now well-positioned to
grow in the open systems SAN market via our new products, services, and
partnerships.
Our expanding relationships with EMC, Legato, Brocade, Compaq, IBM, and other
storage partners continue to open up more opportunities for our SAN business. We
are pursuing similar relationships with important telecommunications providers
to improve the price/performance of networking solutions and lower the total
cost of ownership.
Enterprise Integration Solutions. In 1998, CNT completed several important
installations worldwide of the Enterprise/Access and Enterprise/ Connect
products, reaffirming our leadership in real-time legacy access technology. We
tightly integrated the Brixton and Apertus Internet Solutions Division software
businesses into our Enterprise Integration Solutions Division. This combination
gives that division stronger research and development capabilities, accelerated
entry into the EAI market, and significantly improved profitability. The
IntelliFrame acquisition brings us exciting new complementary technology, which
we intend to transform in 1999 into scalable solutions for large e-business and
customer relationship management applications.
We continue to initiate strategic affiliations with partners such as Siebel
Systems, a key developer of enterprise relationship management applications, and
systems integrators Cap Gemini, Deloitte Consulting, and PricewaterhouseCoopers.
As partners who recommend and use our products with their clients -- the end
user -- these consultants' relationships expand our reach.
Operational and Management Improvements. In 1998, CNT leveraged its outstanding
service reputation by creating professional services groups designed to serve
customers' advanced needs and speed their quality implementations of CNT
products. We will continue to expand these professional services offerings in
1999.
CNT now has an internal enterprise resource planning system that is fully
compliant with Year 2000 and euro currency needs. In 1999, we will install
additional Siebel software to further improve customer service and sales
support.
We continued to strengthen our attention to customer satisfaction with the
addition of executive leadership in key management positions through-out the
Company. We are dedicated to establishing continuous improvements in our
processes, product quality, and support.
In late 1999, we will consolidate most of our operations into a new suburban
Minneapolis facility, supporting future growth and better lease costs.
<PAGE>
1999 Outlook. The CNT outlook is promising. We have organized into two divisions
and continued to satisfy existing customers and gain new ones, repositioned our
business in growth markets, improved operating profitability and enhanced
shareholder value. This positions CNT for continued growth and product
leadership. With a focus on excellence in execution, our talented, dedicated
employees will continue to build value for customers and shareholders in 1999.
Sincerely,
Thomas G. Hudson
President and Chief Executive Officer
March 10, 1999
(Photo of Thomas G. Hudson)
<PAGE>
REAL OPPORTUNITIES. REAL GROWTH.
Accelerating Forces Are Creating CNT's Opportunity
CNT has expanded and repositioned its business to effectively address the
opportunities created by accelerating global computing trends.
Increased Use of Open Platforms. Organizations are increasingly moving to "open"
systems which use a shared, non-proprietary platform for communication between
hardware and software -- regardless of who created the hardware or software.
Many newer applications are available on these systems and the revenue
opportunity in open systems storage is escalating. Companies must optimize their
ability to reliably store, organize, and share data between open and mainframe
storage devices, and extend the existing legacy applications into newer
applications.
Managing the Data Pile-Up. The daily proliferation of data, coupled with the
dispersal of data storage and usage, have overwhelmed many organizations'
traditional data management procedures, facilities and telecommunications
capabilities. Enterprises need solutions to help them cope with both volume and
distance.
Increasing Productivity through Intelligent Data Access and Integration.
Increased global competition is forcing many organizations to improve
productivity by re-engineering workflow processes and integrating customer data
residing in disparate applications and databases. Successful solutions allow
enterprises to do a better, faster and deeper job of using their own information
to anticipate and respond to customer needs.
Leveraging Existing Computing Assets. The cost of maintaining and upgrading
information technology infrastructures continues to be a concern. Organizations
are lowering the total cost of their computing investments by integrating
applications from different manufacturers and bridging technology platforms in
older and newer equipment. At the same time, organizations are taking advantage
of new solutions that lower the cost of high-bandwidth, high-speed data
communications, necessitating multi-platform networked data management
solutions. Successful solutions are transparent, scalable, reliable and
accessible on a real-time basis.
Business Trends and Key Issues. The forces that trigger demand for CNT's
products and services are all on the rise:
. mergers and acquisitions, and the resulting reorganizations and IT
consolidations;
. efficiency-driven consolidations of data centers, servers and storage
facilities;
. reduced tolerance for computing downtime;
. round-the-clock dependence on computing systems' availability;
. increased regulatory compliance requirements;
. productivity-driven business process re-engineering and improvement
initiatives;
. growing demand to retain and expand customer bases;
. explosive demand for interaction over the Internet;
. increased outsourcing of corporate data management and storage functions;
and,
. increased outsourcing of application development and support.
CNT's Products and Services
To respond to these trends, CNT has structured its products and services to
focus on newer markets: SAN and EAI.
Our SAN solutions help organizations create networks to link together "islands
of information" that exist in various forms across a business. SAN products and
services can help organizations link data centers, build networks to manage
data across their open systems, or manage data across multiple computing
platforms -- from data centers to network servers. Total cost of ownership is
improved because these new networks can reliably support more than one
application such as real-time backup and recovery, disk mirroring, and data
sharing.
Our EAI solutions help organizations link legacy applications with new business
applications. These solutions increase the value of information by making it
available in real-time and usable by key enterprise applications. Intelligent
access to data integrated from multiple applications is the critical capability
that supports beneficial customer interaction and makes e-business work.
We also continue to have a strong presence in our traditional markets of
Channel Networking and SNA Connectivity. According to a recent IDC analyst
report, CNT is the market leader in channel extension solutions -- the
foundation of our SAN technology. Additionally, the expertise we developed in
SNA connectivity has given us the ability to scalably integrate legacy systems
into other applications, a key component of the EAI market.
<PAGE>
CNT is positioned, along with our strategic partners, to strengthen our ability
to develop properly targeted, industry-compatible equipment, software and
solutions. Through our professional services offerings, we provide expertise in
design, planning and project management, along with the ability to develop
custom solutions for customers.
CNT's Growth Strategy
Our growth strategy is clear, and we are making solid progress toward achieving
it. CNT is positioned to grow by:
. Increasing our leadership share in the installed base for channel extension
and SNA connectivity
. Furthering our leadership in the SAN market by extending SANs over wide area
networks, and targeting opportunities involving remote disk mirroring and campus
solutions
. Securing a leadership position in the EAI market, chiefly by pursuing higher-
margin opportunities in customer relationship management and e-business
applications
. Serving customers directly and through an expanding group of high-profile
strategic partners, including systems integrators, enterprise application
developers, telecommunications providers, value-added resellers, and key storage
vendors
. Pursuing 100 percent customer satisfaction by assuring the highest
reliability of our solutions
. Expanding the reach of higher-margin professional services
. Further improving operating productivity, quality assurance and expense
management
<PAGE>
SAN MARKET
CNT SAN Product Revenue
<TABLE>
<CAPTION>
CNT's sale of products for SAN solutions increased 379 percent in 1998.
(in thousands)
<S> <C>
1997 $ 7,000
1998 $32,000
</TABLE>
Dataquest, an industry analyst group, reports that world wide spending on SAN-
type solutions totaled approximately $250 million in 1998 and is projected to
grow to an estimated $2.4 billion in 2002.
EAI MARKET
CNT EAI Product Revenue
<TABLE>
<CAPTION>
1998 sales of CNT's EAI-related products grew 528 percent.
(in thousands)
<S> <C>
1997 $ 700
1998 $4,400
</TABLE>
The market for EAI applications was estimated by Dataquest to be $250 million in
1998 and expected to grow to approximately $1.4 billion in 2002.
CNT OPERATING MARGINS
<TABLE>
<CAPTION>
1998 CNT Operating Margins
as a percentage of revenues and excluding special charges
<S> <C>
Q1 1.7%
Q2 3.8%
Q3 7.9%
Q4 10.4%
</TABLE>
<PAGE>
CNT AT-A-GLANCE
- ---------------
Networking Solutions
- --------------------
Markets
- -------
Channel Networking
- ------------------
CNT's channel extension technology is the foundation of its SAN solutions.
Applications
- ------------
Data Center Consolidation
Data Center Load Balancing
Remote, High-Speed Digital Printing/Imaging
Storage Area Networks (SAN)
- ---------------------------
A SAN is a high-speed network, that establishes a direct connection between
storage devices and servers, either locally or remotely. Now stored information
can be shared between diverse systems components, including mainframes and open
systems.
Remote Disk Mirroring
Disk mirroring avoids the serious threat to business posed by the loss of data
between data system backups by simultaneously creating up-to-the-minute images
of mission-critical data on multiple backup storage disks. CNT provides the
highest level of performance and reliability for mainframe and open systems,
supporting all key vendor environments such as EMC, IBM, and Hitachi Data
Systems.
Backup and Restore/Remote tape vaulting
CNT's UltraNet solutions streamline an enterprise's backup and restore
capabilities by introducing higher storage system performance and better use of
communications bandwidth. The payoff: less system downtime, operating savings,
greater system availability and flexibility.
Data Sharing/Legacy Connections
CNT's UltraNet and FileSpeed solutions give businesses the tools to access and
move data between and among dissimilar storage and network environments. The
results are reduced costs, increased productivity and improved management for
applications such as data warehousing and data mining.
Products & Services
Products:
Channelink
ChannelSpeed
FileSpeed
Management Software
UltraNet Open Systems Director
UltraNet Storage Director
UltraNet Storage Gateway
UltraNet Storage Multiplexer
UltraNet Wave Multiplexer
Services:
Custom Software Development
Data Migration
Implementation Planning
Network Audits
Network Design
Project Management
Solution Prototyping
9
<PAGE>
Selected Customers:
America Online
Ameritech
Bell Atlantic
Branch Banking & Trust
Chase Manhattan Bank (U.S. and U.K.)
EDS
Firstar National Bank
Fannie Mae
HealthPartners
IBM Global Services
National Westminster Bank (U.K)
NationsBank
Sandia National Laboratories
SE Banken (Sweden)
The Vanguard Group
University of Illinois
WalMart
Strategic Alliances:
Amdahl Corporation
BROCADE Communications Systems, Inc.
Clariion (Data General)
Compaq Computer Corporation
EMC Corporation
Exabyte Corporation
Hitachi Data Systems
IBM Corporation
Legato Systems, Inc.
Sutmyn Storage Corporation
Enterprise Integration Solutions
- --------------------------------
SNA Connectivity
- ----------------
Enabling SNA connectivity for legacy systems gave CNT the expertise to enter
the EAI market.
Applications
- ------------
TCP/IP to SNA Gateway servers
UNIX to SNA Gateway servers
Enterprise Application Integration (EAI)
EAI consists of a set of technologies that enable multiple independent and/or
distributed applications to be integrated into one enterprise system. EAI
software automates this integration.
CRM/ERM (Customer Relationship Management/Enterprise Relationship Management)
A set of applications or software that integrates the areas of a company that
affect its customers: sales, marketing and customer service. CNT's
Enterprise/Access integrates with products from Siebel Systems, Vantive,
Clarify, and other vendors to give agents real-time access to customer
information from legacy applications.
E-business (Electronic business)
10
<PAGE>
The act of doing business over the Internet. Enterprise/Access combines with
NetDynamics and other Web tools to build Internet-based applications that
integrate data from a variety of legacy environments.
Legacy Rejuvenation
Re-engineering the older user interfaces of the legacy system to create easier
access to the legacy application, allowing an employee to make better use of the
information. CNT translates and routes data between the users' front-end and
back-end applications on mainframes and Unix servers.
Products & Services
Products:
Brixton Unix-based Terminal Emulators
Enterprise/Access
Enterprise/Connect
SNA Servers
Services:
Application Design
Application Prototyping
Custom Software Development
Integration Consulting
Project Management
Selected Customers:
American Stores
AT&T
BankBoston
Bank One
Barclays Espana (Spain)
Burlington Northern Santa Fe Railroad
Canadian National Defense (Canada)
Exelon Energy Corporation
Government of Sweden (Sweden)
Group Health
GTE
Meadows Credit Union
Sabre Group
Santander Bank (Columbia, SA)
Whirlpool
Strategic Alliances:
Active Software
Bay Networks
Cap Gemini
Deloitte Consulting
Graham Technology
PricewaterhouseCoopers
Siebel Systems
Sun Microsystems/NetDynamics
11
<PAGE>
ENTERPRISE APPLICATION INTEGRATION
Real Solutions. One of the world's leading manufacturers of home appliances
decided to streamline service to its 2,500 trade partners world wide. This was
done by providing real-time access to back office applications -- customer
billing, shipping and receiving, inventory status, materials handling, and
online ordering. The challenge is that these systems run on legacy mainframe
computers using a variety of software. The manufacturer needed a solution that
would interface with all of these systems, provide a comfortable graphical
interface and integrate the information so that it would be available and useful
to partners connecting to the system over the Internet. CNT provided its
Enterprise/Access product and professional services expertise. Today, when you
purchase a home appliance, the dealer gets on the Internet, sends the order and
gives you a delivery estimate based on the latest inventory information. The
dealer has a happier customer and the manufacturer has happier dealers -- and
lower costs for delivering a higher level of day-to-day support to those
partners.
Companies that serve their channel partners and end users faster have a
competitive advantage. CNT's Enterprise/Access can provide an intelligent filter
that understands data on legacy applications, translates it and puts it in
context for use in new e-business applications. Now those trade partners have
easy access to vital supplier information and can provide better customer
service.
Buying a washer is easy: you browse, you choose, you pay, you wait.
(Photo of couple looking a washing machines.)
The real action is behind the scenes: CNT's Enterprise/Access pulls the data
from the manufacturer's mainframe data center, "translates" it, and makes it
available for the dealer through a custom Web site. Over the secure Web site,
the dealer gets up-to-the-second data on inventory, pricing and delivery times--
and then places the order. The dealer knows he can deliver the product. The
customer feels good -- the dealer knows his stuff.
(Photo of man at computer.)
When will it get there? As the washer is trucked to the warehouse, a quick on-
line check by the dealer updates the delivery schedule for the customer. CNT
makes the real connection from data to information.
(Photo of truck.)
Washing clothes is easy now. A good brand from a good dealer. Now, about that
refrigerator...
(Photo of woman at clothes dryer.)
Real Service. When the Telecommunications Act of 1996 created more choices for
consumers, it created a critical need for high-quality service from competitive
telephone companies. When a global telecommunications company chose to enter a
new local market, it knew its customer service representatives needed an easy-
to-use system with all necessary information available online, simultaneously.
To make it work, the customer service system had to link seamlessly to the
mainframe computers that track telephone usage, billing and account information.
Using call center software from Siebel Systems, the customer defined what
information from its many applications it needed to deliver world-class customer
support. CNT delivered an application integration solution based on its highly
scalable Enterprise/Access software. Today, a caller ordering local phone
service encounters a service rep who is knowledgeable and friendly, a sign-up
process that is quick and painless, and the awareness that he or she can count
on the local phone service.
When customers can change companies at the drop of a hat, world-class service
isn't just necessary, it is crucial to success. The customer service call center
has become a crucial ingredient in retaining and satisfying those customers. CNT
provides the essential link between mainframe applications and Siebel Systems
call center software, delivering the right information -- on request -- to the
customer representative's desktop.
A stroke of the pen established the Telecommunications Act of 1996, opening
local telephone markets to competition. Customer service is key to success.
(Photo of ink pen.)
Setting up local phone service means funneling data from the original local
phone company to new systems. The transfer must be seamless -- or the customers
will notice.
Photo of finger pointing to computer screen.)
CNT and Siebel Systems deliver the solution CNT's Enterprise/Access furnishes
customer data to a Siebel call center screen, leaving the call center
representatives well prepared for any customer query. Enterprise/Access proved
the most flexible solution available for enterprise integration, providing the
scalable infrastructure needed by a phone company that expects instant quality
and rapid growth. From the call
12
<PAGE>
center, the phone company can check accounts, review usage data and suggest new
rate programs. This is the kind of knowledgeable service that customers expect.
Photo of man on telephone.)
The result: new customers -- happy customers.
(Photo of woman on telephone.)
13
<PAGE>
STORAGE AREA NETWORKS
Real Growth. For a financial services company that helps more than 1,000
businesses and 2.4 million people make electronic bill payments and deposits,
automate financial transactions and conduct secure transactions over the
Internet, meeting customers' expectations is crucial to securing their long-term
trust and retaining their business. When acquisitions led this financial
services company to move its headquarters from one state to another, it had to
move its data. The company knew this movement had to be handled quickly, without
disruption to the millions of daily transactions handled on the system. Disk
mirroring creates a mirror image of information at a remote location and is
useful for copying "live" data to another environment. Using CNT's UltraNet
hardware, software, and professional services, EMC Corporation's software
"mirrored" data between two remote systems. For 36 hours, every time a change
was made in one state's system, it was automatically synchronized with the data
in another state. The real value of the CNT disk mirroring solution was apparent
to the company: its customers never noticed.
More and more people are transacting business electronically, employing direct-
deposit or automatic bill payment, even using the Internet to access account
information. So when a financial services company makes changes, it has to not
only guard against lost information, but also provide support for on-line
systems that never shut down. CNT enables remote disk mirroring so changes can
be made to one system while it automatically synchronizes information with
another distant system.
So many statements, so much paper. More and more, people are turning to on-line
finances to make their lives easier.
(Photo of person managing finances.)
With so much change in the financial services market, the key is to keep the
customers' trust. Remote disk mirroring from CNT provides reliable instantaneous
backup, helping ensure the system is always up and running. (Photo of tall
buildings.)
With electronic accounts and the Internet, the customer expects 24 x 7 uptime.
Customers can check accounts, update records and pay bills on-line, any place,
any time. SANs work in the background, so that the customer never needs to hear
about "information infrastructures" and "data migration." They can trust that
the information is there when they need it.
(Photo of woman at computer.)
And for millions each year, personal finance goes seamlessly on-line.
(Photo of computer screen.)
Real Opportunity. A major global retailer operating in high-performance athletic
apparel markets knew it had a gold mine in its data centers: a system full of
sales data from its more than 7,000 stores worldwide. The company's challenge
was to turn its data into real profits. A company that knows its customers'
buying habits can purchase product appropriately and target its products and
promotions for far greater impact. To get the most current and accurate analysis
possible, it was critical to be able to move massive amounts of data quickly
from the mainframe to a specialized sales trend analysis system, housed in an
open systems-based data warehouse. The retailer chose CNT's FileSpeed because it
is ideal for situations that have short time windows and involve cross-platform
data sharing applications. The result: the retailer continues to use the CNT-
enabled sales trend analysis system, unlocking the power of its data to stay
ahead of market trends.
Information is power. If a company knows when, where and how customers buy its
products, it can organize its business around those habits and market trends,
targeting products and promotions by geography or even by store to far
greater impact. CNT's products move information at very high speeds between
storage and the analysis tools, improving data warehousing projects.
Every sale tells a story -- the swipe of a scanner delivers the "who, what,
when, where and how" of athletic footwear sales for this retailer.
(Photo of bar code.)
High-tech marketing today uses sophisticated data mining software to find the
story in mountains of information: sales trends by geography, what's hot and
what's not. And the information can get "cold" in only hours. CNT's FileSpeed
software moves the mountain of data from the mainframe to the data mining system
in real time.
(Photo of man at computer.)
The data analysis helps the company predict which styles will sell the best, and
where, so they can make sure those stores are well stocked.
14
<PAGE>
(Photo of shoe boxes.)
Now, the company gets ahead of trends, connecting consumers with the latest
footwear fashions.
(Photo of person's shoes.)
15
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
years ended december 31 1998 1997 1996 1995 1994
--------- -------- -------- --------- ---------
Revenue $ 133,535 $ 97,841 $ 97,109 $ 78,837 $ 79,542
Income (loss) from operations excluding special charges 8,139 (359) 2,672 7,427 6,253
Income (loss) from operations 7,212 (5,293) (48) 4,927 (3,049)
Income (loss) before income taxes 7,639 (3,893) 2,024 6,535 (1,789)
Net income (loss) 4,729 (2,314) 1,360 4,023 (4,714)
Net income (loss) per share:
Basic $ .21 $ (.10) $ .06 $ .18 $ (.21)
Diluted $ .21 $ (.10) $ .06 $ .17 $ (.21)
SELECTED CONSOLIDATED BALANCE SHEETS DATA
(in thousands, except employee data)
as of december 31 1998 1997 1996 1995 1994
--------- ---------- --------- --------- ----------
Current assets $ 66,240 $ 59,559 $ 66,410 $ 61,525 $ 53,062
Current liabilities 30,653 29,179 18,218 17,243 17,675
--------- ---------- --------- --------- ----------
Working capital $ 35,587 $ 30,380 $ 48,192 $ 44,282 $ 35,387
========= ========== ========= ========= ==========
Total assets $ 94,027 $ 85,487 $ 82,379 $ 79,134 $ 73,149
Long-term obligations $ 2,816 $ 701 $ -- $ -- $ 163
Shareholders' equity $ 60,558 $ 55,607 $ 64,161 $ 60,506 $ 53,979
Number of full-time employees 601 625 493 408 338
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ACQUISITIONS
Effective December 3, 1998, the Company acquired all of the outstanding stock of
IntelliFrame Corporation (IntelliFrame), a start-up software and services
company that develops technology for legacy systems integration with
client/server and Internet technologies. The purchase price of $2,000,000 will
be paid in two installments of $1,000,000 each in January 1999 and 2000. The
Company allocated $927,000 of the purchase price to in-process research and
development, which was charged to expense in 1998, as the underlying research
and development project (Process Dynamics) had not yet reached technological
feasibility. Process Dynamics is a new technology that manages business logic
and process workflow for large e-business and customer relationship management
applications. The Company estimates that it will spend approximately $500,000 in
1999 to complete Process Dynamics.
Effective October 24, 1997, the Company acquired substantially all of the
assets, including in-process research and development, of the Internet Solutions
Division of Apertus Technologies Inc., (ISD) a provider of Internet-to-mainframe
connectivity products and Web access to legacy applications. The purchase price
totaled $16,429,000, including a cash payment of $11,412,000 and assumption of
$5,017,000 of liabilities and related acquisition costs. The amount related to
in-process research and development of $2,750,000 was charged to expense in 1997
as the underlying research and development projects had not yet reached
technological feasibility. Subsequent to the acquisition, the Company recorded a
charge of $2,184,000 for costs incurred to integrate existing businesses,
including accruals for severance, facility closures and infrastructure
integration.
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following table
sets forth certain information derived from the Consolidated Statements of
Operations of the Company. (All amounts are expressed as a percentage of total
revenue except gross profit which is expressed as a percentage of the related
revenue.)
<TABLE>
<CAPTION>
Percentage of Revenue 1998 1997 1996
<S> <C> <C> <C>
REVENUE
Product sales 71.5% 70.3% 76.4%
Service fees 28.5 29.7 23.6
----- ----- -----
Total revenue 100.0 100.0 100.0
GROSS PROFIT
Product sales 67.6 67.3 65.2
Service fees 37.2 33.9 24.7
----- ----- -----
Total gross profit 58.9 57.4 55.6
===== ===== =====
OPERATING EXPENSES
Sales and marketing 32.5 34.5 33.2
Engineering and development 15.6 18.2 14.4
General and administrative 4.7 5.1 5.3
Write-down of purchased technology - - 2.8
Purchased in-process research and development 0.7 2.8 -
Integration charges - 2.2 -
----- ----- -----
Total operating expenses 53.5 62.8 55.7
----- ----- -----
Income (loss) from operations 5.4 (5.4) (0.1)
Other income, net 0.3 1.4 2.2
----- ----- -----
Income (loss) before income taxes 5.7 (4.0) 2.1
Provision (benefit) for income taxes 2.2 (1.6) 0.7
----- ----- -----
Net income (loss) 3.5% (2.4)% 1.4%
===== ===== =====
</TABLE>
REVENUE
The Company's Networking products revenue includes the sale and support of
products 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 Company's Enterprise
Integration products revenue includes the licensing, sale and support of
products that integrate real-time access to legacy systems with client/server
and Internet technologies, including e-business and customer relationship
management applications.
<PAGE>
Revenue from the sale of Networking products increased 34 percent in 1998 to
$74,969,000 when compared to 1997. Storage Area Networking (SAN) applications
for both open systems and mainframes continued to drive new product revenue for
CNT in 1998. Product sales of SAN-related applications increased 379 percent in
1998 to $31,850,000 from $6,645,000 in 1997. Product sales of non-SAN related
applications declined in 1998 to $43,119,000 from $49,482,000 in 1997.
Revenue from the sale of Networking products decreased nine percent in 1997 to
$56,127,000 when compared to 1996. The decrease was primarily attributable to a
$7,556,000 reduction in the sale of the Company's channel connectivity
controller product to IBM and a decrease in Channel Extension and other non-SAN
related product sales. The reduction in Networking products revenue attributable
to these items were somewhat offset by initial sales of SAN-related product
applications, including sales of the Company's new UltraNet Storage Director
products.
Revenue from the sale of Enterprise Integration products increased 62 percent in
1998 to $20,506,000, due to the acquisition of ISD in the fourth quarter of 1997
and an increase in the sale of Enterprise Application Integration (EAI)
products. Revenue from the sale of EAI products increased 528 percent in 1998
due to increasing customer demand for products that integrate legacy
applications with frameworks, packaged applications, or new environments, while
also providing mainframe connectivity. In addition, approximately 60 percent of
the increase in revenue from EAI product sales can be attributed to a single
transaction with a tier one systems integrator.
Revenue from the sale of Enterprise Integration products decreased one percent
in 1997 to $12,660,000 when compared to 1996. Reductions in revenue from the
sale of traditional gateway products and the sale of products to OEM customers
were somewhat offset by initial sales of the Company's EAI products. The October
1997 acquisition of ISD accounted for $2,300,000 of new product revenue in 1997
when compared to 1996.
Service fees from Networking products' customers increased by 17 percent in both
1998 and 1997 to $28,053,000 and $24,068,000, respectively, due to the growing
installed base of customers using the Company's products. In addition, the sale
of professional services to Networking products' customers generated $1,464,000
of new incremental revenue in 1998.
Service fees from Enterprise Integration products' customers increased in 1998
and 1997 by $5,021,000 and $2,714,000, respectively, due to the October 1997
acquisition of ISD.
Revenue generated from the sale of products and services outside the United
States increased by $16,344,000 or 57 percent in 1998 when compared to 1997, and
decreased by $173,000 or one percent in 1997 when compared to 1996. The Company
derived 34 percent, 29 percent and 30 percent of its revenue outside the United
States in 1998, 1997 and 1996, respectively. The increase in revenue generated
outside the United States in 1998 and 1997 is primarily attributable to growing
customer demand for SAN- and EAI- related product applications.
No single customer accounted for more than ten percent of the Company's revenue
in 1998 or 1997. Sales to one customer and its multiple divisions accounted for
18 percent of the Company's revenue in 1996.
Revenue increases in both 1998 and 1997 were attributable to higher volumes.
Price increases for the Company's products and services did not have a
significant impact on revenue in either year.
During 1997, the Company announced its new SAN strategy and UltraNet family of
products which provides for high-speed connectivity between storage devices and
servers from anywhere, any time. The Company believes that the SAN applications
provided by its Channelink and UltraNet products position the Company for growth
in the SAN market. During 1999, the Company intends to continue to add new
functionality to its UltraNet product line, particularly in the areas of open
systems and Fibre Channel, to provide customers with additional applications to
satisfy their growing need for SAN capabilities.
The acquisition of IntelliFrame Corporation in 1998 strengthens the Company's
position in the large and rapidly growing EAI market. IntelliFrame provides new
technology that manages software development and deployment, network
communications, business logic, and process workflow that improves development
and deployment for large e-business and customer relationship management
applications. The Company anticipates that new products based on the
capabilities of IntelliFrame will be available in mid-1999. The Company has also
completed the integration of ISD with its existing Enterprise Integration
business. The integration has increased the Company's presence in the growing
EAI market and has allowed the Company to provide customers with a new and
improved set of products and services. The Company believes that it is well-
positioned to take advantage of available growth opportunities in the EAI
market.
<PAGE>
The Company believes that new products and services in both the SAN and EAI
markets should increase demand for its products in both domestic and
international markets. The Company believes that it can increase revenue in both
of these important growth markets by continuing to acquire and develop new
products and services and by continuing to identify new applications and markets
for its technology.
The Company expects 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 the Company 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 margins from Networking product sales were 63 percent in 1998,
compared to 64 percent in 1997 and 62 percent in 1996. The slight decrease in
gross profit margins from Networking product sales in 1998 when compared to 1997
was due to an increase in UltraNet product sales which have a slightly lower
gross margin during the product introduction period than the Company's
traditional Channelink products. The 1997 decrease in sales of the Company's
lower margin channel connectivity controller to IBM, resulted in a higher gross
profit margin percentage from product sales in 1997 when compared to 1996.
Gross profit margins from Enterprise Integration product sales in 1998 and 1997
were 83 percent, compared to 81 percent in 1996. The increase can be attributed
to higher-margin software sales accounting for a larger percentage of total
Enterprise Integration product revenue.
Actual gross profit margins on product sales in 1999 will depend on a number of
factors, including the mix of products, acceptance of the Company's new
products, particularly in the SAN and EAI markets, the relative amount of
products sold through alternative sales channels and the level of price
competition.
Gross profit margins from Networking product services in 1998, 1997 and 1996
were 37 percent, 36 percent and 30 percent, respectively. The improvement in
gross profit margins from Networking product services in 1998 and 1997 is
attributable to economies of scale resulting from the steadily increasing base
of customers contracting for services and new incremental revenue from
professional services, which offers a higher gross margin than the Company's
traditional service business.
Gross profit margins from Enterprise Integration product services in 1998, 1997
and 1996 were 39 percent, 24 percent and a negative 20 percent, respectively.
The improvement in gross profit margins from Enterprise Integration product
services in both 1998 and 1997 can be attributed to the October 1997 acquisition
of ISD.
OPERATING EXPENSES
Sales and marketing expenses related to the Company's Networking products
increased by $4,067,000 or 15 percent in 1998 due to the additional expense
associated with the 34 percent increase in Networking products revenue. Sales
and marketing expenses increased by $3,034,000 or 13 percent in 1997 as compared
to 1996 due to the marketing expense associated with the launch of the Company's
SAN strategy and UltraNet family of products in 1997, and investments the
Company made in its sales and marketing organization to identify new market
opportunities for the Company's products.
Sales and marketing expenses related to the Company's Enterprise Integration
products increased by $5,708,000 in 1998 due to the October 1997 acquisition of
ISD. Enterprise Integration product-related sales and marketing expenses
declined by $1,509,000 in 1997 compared to 1996 due to the reassignment of
certain sales personnel to the Networking products division.
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 the Company's Networking products increased
in 1998 and 1997 by $1,563,000 or 13 percent and $2,246,000 or 22 percent,
respectively, when compared to the prior year due to continued development of
the Company's UltraNet family of products that provide customers with additional
applications to satisfy their growing need for SAN capabilities. Shipments of
UltraNet products increased to $17,730,000 in 1998 from $5,471,000 in 1997.
Engineering and development expense related to the Company's Enterprise
Integration products in 1998, 1997 and 1996 were $6,966,000, $5,553,000 and
$3,947,000, respectively. The increases in 1998 and 1997 can be attributed to
continued development of new products and the acquisition of ISD in the 1997
fourth quarter. The Company also completed development of the Enterprise/Connect
product acquired as in-process research and development in the October 1997
acquisition of ISD.
The Company anticipates investing approximately 15 percent of total revenue in
engineering and development in 1999, which includes investments in current and
future products. The Company believes a
<PAGE>
sustained high level of investment in engineering and development is essential
to customer satisfaction and future revenue. During 1999, the Company intends to
continue to invest in its UltraNet product line, particularly in the areas of
open systems and Fibre Channel to further enhance its SAN offerings. The Company
also intends to complete development of the Process Dynamics product acquired as
in-process research and development from IntelliFrame in December 1998.
General and administrative expenses increased by $1,308,000 or 26 percent in
1998 as compared to 1997. The increase is primarily attributable to the
additional expense associated with the higher level of revenue and acquisition
of ISD in October 1997. General and administrative expenses decreased by
$193,000 or four percent in 1997 as compared to 1996 due to incremental costs
incurred in 1996 for employee severance, and costs associated with the
management reorganization that occurred at the end of 1995.
Excluding special charges, the Company's operating expenses in 1998, 1997 and
1996 were equal to 53 percent, 58 percent and 53 percent of total revenue,
respectively. The improvement in operating expenses as a percentage of total
revenue in 1998 is attributable to headcount and other cost control initiatives
combined with the increase in total revenue. The deterioration in operating
expenses as a percentage of total revenue in 1997 is attributable to the added
expense associated with the development and launch of the Company's UltraNet
product line and SAN strategy. The Company is focused on improving its overall
level of operating profitability through revenue growth, head count management
and implementation of other cost control initiatives. The Company's goal is to
achieve a 15 percent operating margin.
SPECIAL CHARGES
During 1998, the Company recorded a $927,000 charge for in-process research and
development associated with the acquisition of IntelliFrame. This charge is not
deductible for tax purposes.
During 1997, the Company recorded pre-tax charges of $2,750,000 for in-process
research and development associated with the acquisition of ISD and $2,184,000
for productivity initiatives subsequent to the acquisition to integrate existing
businesses.
During 1996, the Company recorded a $2,720,000 pre-tax charge for the write-down
of purchased technology due to changing market conditions and evolving customer
requirements for SNA, Internet and open systems gateway products.
OTHER
Interest income decreased in 1998 and 1997 by $1,160,000 and $306,000,
respectively, due to lower available balances of cash and marketable securities
resulting from the Company's common stock repurchase program and acquisition of
ISD.
The Company recorded a provision for income taxes in 1998, 1997 and 1996 at an
effective rate of 38 percent, 41 percent and 33 percent, respectively. Excluding
the nondeductible charge in 1998 for purchased in-process research and
development associated with the acquisition of IntelliFrame, the Company's
effective tax rate for 1998 would have been 34 percent. Fluctuations in the
Company's effective income tax rate for 1998 and 1997 are primarily due to the
large special charges recorded each year, the amount of nondeductible foreign
losses and fluctuations in the level of benefit from the Company's foreign sales
corporation. The Company has recorded a net deferred tax asset at December 31,
1998 of $5,655,000. Based on an assessment of the Company's taxable earnings
history and prospective future taxable income, management has determined it to
be more likely than not that its net deferred tax asset will be realized in
future periods. The Company may be required to provide a valuation allowance for
this asset in the future if it does not generate sufficient taxable income as
planned.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through the private and
public sales of equity securities, bank borrowings under lines of credit,
capital and operating equipment leases and cash generated by operations.
Cash, cash equivalents and marketable securities at December 31, 1998, totaled
$12,362,000, an increase of $1,538,000 in 1998. Operations provided $10,923,000
of cash in 1998. The Company's operating profitability improved in 1998 and
accounts receivable days sales outstanding were reduced from 95 days at the end
of 1997 to 77 days at the end of 1998. Inventory levels increased by $6,919,000
in 1998 due to higher sales levels and additional requirements for product betas
and evaluations. Accrued liabilities increased by $2,392,000 in 1998 due to
higher year-end bonuses and commissions resulting from the Company's increased
revenue and profitability in 1998. Proceeds from the exercise of stock options
and shares issued under the employee stock purchase plan contributed $1,645,000
of cash in 1998. Uses of
<PAGE>
cash in 1998 included the purchase of property and equipment, field support
spares and technology assets totaling $9,320,000 and common stock repurchases of
$1,758,000.
Expenditures for capital equipment and field support spares have been, and will
likely continue to be, a significant capital requirement. The Company has leased
a new building, presently under construction, for its principal business
operations with occupancy scheduled for the 1999 fourth quarter. The Company
believes that its current balances of cash, cash equivalents and marketable
securities, when combined with anticipated cash flows from operations, will be
adequate to fund its operating plans and meet its currently anticipated
aggregate capital requirements, at least through 1999.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
YEAR 2000
The Company is aware of the issues relating to the Year 2000 and is currently
assessing the impact that Year 2000 issues will have on its business. The
Company has also initiated corrective action with respect to certain Year 2000
issues uncovered during its assessment. The following information outlines the
current status of the Company's plans regarding Year 2000 issues.
COMPANY STATE OF READINESS
The Company has established a cross-functional team that has been charged with
assessing the Company's Year 2000 readiness and identifying Year 2000-related
issues that could impact the Company's business. The activities include a review
of all Year 2000 issues relating to the Company's internal business systems,
products, and third party suppliers and vendors.
The Company has assessed its internal information systems to determine if they
will meet the needs of the Company into and beyond the year 2000. Based on this
assessment, the Company determined that one of its primary internal business
systems was not Year 2000 compliant. The Company spent approximately $2,300,000
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. The Company's old non-compliant business system was fully
depreciated by the end of 1998. The Company is continuing to test and assess its
internal information and business systems to ensure Year 2000 compliance. The
Company presently believes that its other systems are Year 2000 compliant.
The primary purpose of the Company's products is to carry data between systems.
The Company defines Year 2000 readiness for its products to mean that, as a
result of date transition relating to the Year 2000, its products will not: 1)
fail in their task of transmitting data, or 2) corrupt the data stream that they
carry. To date, based on the Company's activities to assess the Year 2000
readiness of its products, the Company has determined that certain third party
software imbedded in its products is not Year 2000 compliant. The Company is
currently implementing a program that will correct the deficiency by July 1,
1999. A secondary issue relates to the cosmetic appearance of displays and
status reports produced by the Company's products. The Company products utilize
dates for logging alerts, messages, and displays and reporting network traffic.
These functions are ancillary to the products' primary operation of data
transmission, and therefore are excluded from the Company's definition of Year
2000 readiness. The Company is committed to making displays and reports from its
products clear and accurate. The Company tested its products for appearance
anomalies at the same time it tested its products for Year 2000 readiness. The
dates presented in certain versions of the Company's 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 the Company's
products that are scheduled to ship prior to the year 2000.
The Company is also conducting an assessment of its key vendors and suppliers to
ensure that no interruption of material, service or product functionality occurs
due to Year 2000 date transitions. The Company's assessment is ongoing and a
completion date has not been identified. However, the Company does believe that
alternate vendors could be utilized to replace the products and services that
are currently provided by its 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 the Company to address Year 2000
readiness. Based on the assessment activities completed to date, the Company
does not believe that it 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 the Company's products that require
significant extra time and expense to correct. In addition, sales could be
materially impacted in 1999 if customers were to stop procurement of new
equipment for their
<PAGE>
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 the
Company's business.
CONTINGENCY PLANS
The Company believes that it is addressing all known Year 2000 related risks.
While the Company does not believe that it is practical to develop a remediation
plan for the worst case Year 2000 risks noted above, it is attempting to
mitigate further risk by continuing to test and assess its products, and the
products and services of its key suppliers and vendors, for Year 2000 readiness.
The Company continually works to identify suitable alternative sources of supply
for key products and services in order to mitigate the risks relative to the
Year 2000 and other business interruption issues. The Company will address any
additional Year 2000 related risks as they become known.
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, (the "Euro Conversion"). 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. The
Company has a significant number of customers located in European Union
countries participating in the Euro Conversion. The Euro Conversion may have
competitive implications for the Company's pricing and marketing strategies,
which could be material in nature; however, any such impact is not known at this
time. The new business system being used by the Company effective January 1999
is capable of handling the new euro currency. There is no assurance, however,
that all problems related to the Euro Conversion will be foreseen and corrected,
or that no material disruptions of the Company's business will occur.
MARKET RISK
The Company is exposed to certain market risks related to its outstanding long-
term debt obligation of $1,000,000 at December 31, 1998. As discussed in note 7
to the consolidated financial statements, the interest rate on the Company's
long-term debt obligation is 4.33 percent and the obligation matures in January
2000. The Company does not invest in any derivative financial instruments. The
company is exposed to certain market risks related to fluctuations in foreign
exchange rates because some sales transactions, and the assets and liabilities
of its foreign subsidiaries, are denominated in foreign currency.
NEW ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133), effective in 2000,
establishes new standards for recognizing all derivatives as either assets or
liabilities, and measuring those instruments at fair value. At the present time,
the Company does not anticipate that SFAS No. 133 will have a material impact on
its financial position or results of operations.
FORWARD-LOOKING STATEMENTS
Certain statements in this annual report (which are summarized below) and in the
Company's press releases and oral statements made by or with the approval of the
Company's executive officers constitute or will constitute "forward-looking
statements." All forward-looking statements involve risks and uncertainties, and
actual results may differ materially from the Company's expectations. The
following factors are among those that could cause the Company's actual results
to differ materially from those set forth in any such forward-looking
statements:
. The expectation that the Company will add new functionality to its UltraNet
product line, particularly for open systems and Fibre Channel, that the Company
will spend $500,000 to complete Process Dynamics and that a beta version of
Process Dynamics will be available in the third quarter of 1999 may be impacted
by unforeseen technological barriers, the loss of key personnel, unexpected
expense or higher than expected levels of engineering resource and commitment.
. The expectation that the SAN applications provided by the Company's
Channelink and UltraNet products position it for growth in the SAN market, that
the Company is well-positioned to take advantage of growth opportunities in the
EAI market and that the acquisition of IntelliFrame in 1998 strengthens the
Company's position in the large, rapidly growing EAI market may be impacted by
the actual level and timing of market growth, completion of required engineering
activities, unforeseen technological barriers, the loss of key personnel, new
product development and the actions of existing and future competitors,
including the introduction of new products and price reductions to gain or
retain market share.
<PAGE>
. The belief that new products and services in both the SAN and EAI markets
will increase demand for the Company's products in both domestic and
international markets and that the Company can increase revenue in both of these
markets by continuing to acquire and develop new products and services and by
identifying new applications and markets for its technology may be impacted by
the Company's ability to identify and complete the acquisition of beneficial new
technologies, the success of current and future product development programs and
the actions of existing and future competitors.
. The expectation that the Company will invest approximately 15 percent of
total revenue in engineering development in 1999 may be impacted by the need to
enhance or modify products due to changing market requirements, the success of
current and future product development programs, unexpected technological
barriers or expense, the need to meet unanticipated product opportunities, the
overall level of resource available for new investment and the amount of total
revenue in 1999.
. The ability of the Company to achieve its goal of generating a 15 percent
operating margin and whether the Company has sufficient cash resources to fund
its operating plans and capital requirements through at least 1999 may depend
upon the Company's ability to generate revenue as presently expected, unexpected
expenses or changes in market requirements, including the need for additional
funds to react to changes in the marketplace.
. The eventual cost to achieve Year 2000 compliance, including correction of
any Year 2000 product deficiencies may be impacted by unforeseen technological
barriers or unexpected Year 2000 deficiencies, including higher than expected
commitments of management and engineering resources to achieve compliance, or
unanticipated interruptions by third parties which are not Year 2000 compliant,
particularly where an alternative vendor is not available.
. The Year 2000 issue could materially impact sales in 1999 if customers were
to stop procurement of new equipment for their data centers and networks until
after the start of the year 2000.
Other factors that could cause the results of the Company to differ materially
from those contained in any such forward-looking statements include general
economic conditions, cost and availability of components and fluctuations in
exchange rates. In addition, the markets for the Company's products are
characterized by significant competition and the Company's results may be
adversely affected by the actions of existing and future competitors, including
the development of new technologies, the introduction of new products and the
reduction of prices by such competitors to gain or retain market share. The
Company assumes no obligation to publicly release the results of any revision or
updates to these forward-looking statements to reflect future events and
unanticipated occurrences.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
years ended december 31 1998 1997 1996
<S> <C> <C> <C>
REVENUE
Product sales $ 95,475 $68,787 $74,170
Service fees 38,060 29,054 22,939
-------- ------- -------
Total revenue 133,535 97,841 97,109
-------- ------- -------
COST OF REVENUE
Cost of product sales 30,935 22,472 25,843
Cost of service fees 23,893 19,219 17,269
-------- ------- -------
Total cost of revenue 54,828 41,691 43,112
-------- ------- -------
GROSS PROFIT 78,707 56,150 53,997
-------- ------- -------
OPERATING EXPENSES
Sales and marketing 43,492 33,717 32,192
Engineering and development 20,824 17,848 13,996
General and administrative 6,252 4,944 5,137
Write-down of purchased technology - - 2,720
Purchased in-process research and development 927 2,750 -
Integration charges - 2,184 -
-------- ------- -------
Total operating expenses 71,495 61,443 54,045
-------- ------- -------
INCOME (LOSS) FROM OPERATIONS 7,212 (5,293) (48)
-------- ------- -------
OTHER INCOME (EXPENSE)
Interest income 393 1,553 1,859
Interest expense (79) (57) (46)
Other, net 113 (96) 259
-------- ------- -------
Other income, net 427 1,400 2,072
-------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES 7,639 (3,893) 2,024
-------- ------- -------
PROVISION (BENEFIT) FOR INCOME TAXES 2,910 (1,579) 66
-------- ------- -------
NET INCOME (LOSS) $ 4,729 $(2,314) $ 1,30
======== ======= =======
BASIC
Net income (loss) per share $ .21 $ (.10) $ .06
======== ======= =======
Shares 22,095 22,702 23,241
======== ======= =======
DILUTED
Net income (loss) per share $ .21 $ (.10) $ .06
======== ======= =======
Shares 22,572 22,702 23,557
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
as of december 31 1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,786 $ 4,790
Marketable securities 576 6,034
Receivables, net 30,225 32,752
Inventories 19,241 12,322
Deferred tax asset 3,138 2,284
Other current assets 1,274 1,377
-------- -------
Total current assets 66,240 59,559
Property and equipment, net 16,360 14,501
Field support spares, net 3,739 3,589
Deferred tax asset 2,517 3,823
Goodwill and other intangibles, net 4,737 3,530
Other assets 434 485
-------- -------
$ 94,027 $85,487
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,565 $ 7,656
Accrued liabilities 14,527 12,135
Deferred revenue 7,235 9,207
Current installments of obligations under capital lease 326 181
Current installments of long-term debt 1,000 -
-------- -------
Total current liabilities 30,653 29,179
Obligations under capital lease, less current installments 1,816 701
Long-term debt, less current installments 1,000 -
-------- -------
Total liabilities 33,469 29,880
-------- -------
Shareholders' equity:
Preferred stock, authorized 1,000 shares; none issued and outstanding - -
Common stock, $.01 par value; authorized 30,000 shares, issued and
outstanding 22,254 at December 31, 1998 and 22,195 at December 31, 1997 223 222
Additional paid-in capital 54,921 54,439
Unearned compensation (355) (35)
Retained earnings 6,141 1,412
Accumulated other comprehensive income -- foreign currency translation adjustment (372) (431)
-------- -------
Total shareholders' equity 60,558 55,607
-------- -------
$ 94,027 $85,487
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN UNEARNED RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS INCOME TOTAL
------ ------ ---------- ------------ -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 22,929 $230 $58,151 $ -- $2,366 $(240) $60,507
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant to the employee stock
purchase plan and exercise of stock options
and warrants, net of 22 shares redeemed 479 4 1,929 -- -- -- 1,933
Tax benefits from employee stock transactions -- -- 292 -- -- -- 292
Comprehensive income:
Net income -- -- -- -- 1,360 -- 1,360
Translation adjustment, net of tax effect of $0 -- -- -- -- -- 69 69
-------
Total comprehensive income -- -- -- -- -- -- 1,429
------ ---- ------- ----- ------ ----- -------
BALANCE, DECEMBER 31, 1996 23,408 $234 $60,372 $ -- $3,726 $(171) $64,161
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options 192 2 741 (42) -- -- 701
Repurchase of common stock (1,405) (14) (6,674) -- -- -- (6,688)
Compensation expense -- -- -- 7 -- -- 7
Comprehensive loss:
Net loss -- -- -- -- (2,314) -- (2,314)
Translation adjustment, net of tax effect of $0 -- -- -- -- -- (260) (260)
-------
Total comprehensive loss -- -- -- -- -- -- (2,574)
------ ---- ------- ----- ------ ----- -------
BALANCE, DECEMBER 31, 1997 22,195 $222 $54,439 $ (35) $1,412 $(431) $55,607
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options 454 5 2,041 (401) -- -- 1,645
Tax benefits from employee stock transactions -- -- 195 -- -- -- 195
Repurchase of common stock (395) (4) (1,754) -- -- -- (1,758)
Compensation expense -- -- -- 81 -- -- 81
Comprehensive income:
Net income -- -- -- -- 4,729 -- 4,729
Translation adjustment, net of tax effect of $0 -- -- -- -- -- 59 59
-------
Total comprehensive income -- -- -- -- -- -- 4,788
------ ---- ------- ----- ------ ----- -------
BALANCE, DECEMBER 31, 1998 22,254 $223 $54,921 $(355) $6,141 $(372) $60,558
====== ==== ======= ===== ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
years ended December 31 1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 4,729 $ (2,314) $ 1,360
Depreciation and amortization 8,856 7,384 7,960
Tax benefits from employee stock transactions 195 - 292
Compensation expense 81 7 -
Write-down of purchased technology - - 2,720
Purchase of in-process research and development 927 2,750 -
Change in deferred taxes 82 (2,630) (2,303)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Receivables 2,585 (8,337) 356
Inventories (6,919) (1,493) 83
Other current assets 115 (468) 655
Accounts payable (137) 3,008 1,255
Accrued liabilities 2,381 1,871 1,653
Deferred revenue (1,972) 2,025 (1,932)
-------- -------- --------
Cash provided by operating activities 10,923 1,803 12,099
-------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment (6,424) (7,565) (4,922)
Additions to field support spares (2,358) (1,797) (2,220)
Additions to purchased technology (538) (1,550) -
Acquisition of business, net of cash provided 169 (11,412) -
Proceeds from sale of Vision product line - 2,000 -
Purchase of marketable securities (18,054) (12,190) (50,671)
Redemption of marketable securities 23,512 36,374 42,902
Other 51 434 (303)
-------- -------- --------
Cash provided by (used in) investing activities (3,642) 4,294 (15,214)
-------- -------- --------
FINANCING ACTIVITIES
Payments for repurchases of common stock (1,758) (6,688) -
Proceeds from issuance of common stock 1,645 701 1,933
Repayments of obligations under capital leases (181) (107) -
-------- -------- --------
Cash provided by (used in) financing activities (294) (6,094) 1,933
-------- -------- --------
Effects of exchange rate changes 9 (60) 69
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 6,996 (57) (1,113)
Cash and cash equivalents -- beginning of year 4,790 4,847 5,960
-------- -------- --------
Cash and cash equivalents -- end of year $ 11,786 $ 4,790 $ 4,847
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997, and 1996 (tabular amounts in thousands, except per
share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Computer Network Technology Corporation is a leading world wide provider of
high-performance Storage Area Networking (SAN) solutions, Enterprise Application
Integration (EAI) tools, and world-class services.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Computer Network Technology Corporation and its subsidiaries (together, the
Company). All significant intercompany balances and transactions are eliminated
in consolidation.
REVENUE RECOGNITION
Revenue from product sales is generally recognized by the Company upon shipment
or signed customer acceptance depending on the terms of the contract or purchase
order. Revenue from software license agreements with original equipment
manufacturers (OEM) for redistribution to the OEM's customers is recognized when
the OEM reports delivery of the software to their customer. Service fees are
recognized as revenue when earned, which is generally on a straight-line basis
over the contracted service period. Deferred revenue primarily consists of the
unearned portion of service agreements billed in advance to customers.
CASH EQUIVALENTS
The Company considers investments in highly liquid debt securities having an
initial maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
If significant, unrealized gains and losses on available-for-sale securities are
excluded from earnings and are reflected as a separate component of
shareholders' equity. Unrealized gains and losses on trading securities are
included in earnings.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment owned by the Company is carried at cost and depreciated
using the straight-line method over two to eight years. Leasehold improvements
are amortized using the straight-line method over the terms of the respective
leases. Expenditures for repairs and maintenance are charged to expense as
incurred.
FIELD SUPPORT SPARES
Field support spares are carried at cost and depreciated using the straight-line
method over three years.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of purchase price over the fair value of net
assets acquired and is amortized using the straight-line method over periods
ranging from five to 20 years. Purchased technology and other identifiable
intangible assets are carried at cost and amortized using the units of
production or straight-line methods over periods ranging from three to seven
years.
The Company assesses the potential impairment of its goodwill and other
intangible assets based on anticipated cash flows from operations. No impairment
charges were recorded in 1998 or 1997. The Company recorded an impairment charge
in 1996 of $2,720,000 because it determined that certain purchased technology
assets were impaired due to changing market conditions and evolving customer
requirements for SNA, Internet and open systems gateway products.
ALLOWANCE FOR RETURNS AND CREDIT LOSSES
An allowance is made for potential returns and uncollectible accounts based on
current and historical experience. The allowance for returns and credit losses
at December 31, 1998 and 1997 was $1,225,000 and $2,979,000, respectively.
ENGINEERING AND DEVELOPMENT
The Company accounts for engineering and development costs in accordance with
Statement of Financial Accounting Standards No. 86 "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS No. 86). The
Company has expensed all engineering and development costs to date, as costs
which meet the capitalization criteria outlined in SFAS No. 86 have not been
significant.
FOREIGN CURRENCY
The financial statements of the Company's international subsidiaries have been
translated into U.S. dollars in accordance with the provisions of Statement of
Financial Accounting Standards No. 52 "Foreign Currency
<PAGE>
Translation" (SFAS No. 52). Under SFAS No. 52, assets and liabilities are
translated into U.S. dollars at year-end exchange rates, while equity accounts
are translated at historical rates. Income and expenses are translated at the
average exchange rates during the year. The resulting translation adjustments
are recorded as a separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining net
income (loss). The Company recorded a foreign currency transaction gain in 1998
of $110,000. The Company recorded foreign currency transaction losses in 1997
and 1996 of $45,000 and $99,000, respectively.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
STOCK COMPENSATION PLANS
The Company accounts for its stock-based compensation awards in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB No. 25) and provides the footnote disclosures required by
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current year
presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates.
NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed based on the weighted average
number of common shares outstanding, while diluted net income (loss) per share
is computed based on the weighted average number of common shares outstanding
plus potential dilutive shares of common stock. Potential dilutive shares of
common stock include stock options which have been granted to employees and
directors and awards under the employee stock purchase plan.
COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) which
established standards for reporting and presentation of comprehensive income and
its components in a full set of financial statements. Comprehensive income
consists of the Company's net income (loss) and foreign currency translation
adjustment and is presented in the consolidated statements of shareholders'
equity and comprehensive income. SFAS No.130 only requires additional
disclosures in the consolidated financial statements; it does not affect the
Company's financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
SEGMENT INFORMATION
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131) which requires a new basis for determining
reportable business segments based on the management approach. SFAS No. 131 only
requires additional disclosures in the consolidated financial statements, it
does not affect the Company's financial position or results of operations.
Disclosures required under SFAS No. 131 have been provided for all periods
presented.
2. COMPONENTS OF SELECTED BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
INVENTORIES
Components and subassemblies $ 9,490 $ 6,572
Work in process 4,095 1,657
Finished goods 5,656 4,093
------- -------
$19,241 $12,322
======= =======
</TABLE>
<PAGE>
PROPERTY AND EQUIPMENT
<TABLE>
<S> <C> <C>
Machinery and equipment $22,944 $17,882
Office and data processing equipment 16,610 14,221
Furniture and fixtures 1,698 1,432
Leasehold improvements 2,293 2,096
------- -------
43,545 35,631
Less accumulated depreciation and amortization 27,185 21,130
------- -------
$16,360 $14,501
======= =======
FIELD SUPPORT SPARES
Field support spares $14,343 $11,985
Less accumulated depreciation 10,604 8,396
------- -------
$ 3,739 $ 3,589
======= =======
GOODWILL AND OTHER INTANGIBLES
Purchased technology $ 3,478 $ 2,250
Goodwill 1,515 1,085
Identifiable intangibles 867 600
------- -------
5,860 3,935
Less accumulated amortization 1,123 405
------- -------
$ 4,737 $ 3,530
======= =======
ACCRUED LIABILITIES
Compensation $ 7,687 $ 5,955
Income taxes 3,725 1,950
Integration 430 1,769
Other 2,685 2,461
------- -------
$14,527 $12,135
======= =======
</TABLE>
3. MARKETABLE SECURITIES
At December 31, 1998, the Company's marketable securities consist of a mutual
fund investment that seeks to provide a return corresponding to the Standard &
Poors 500 stock price index. The Company intends to use any gain or loss from
this investment to directly offset the investment gain or loss owed to
participants under the Company's executive deferred compensation plan. At
December 31, 1998, the fair value of the investment was $576,000. The investment
has been classified as a trading security in accordance with SFAS No. 115. At
December 31, 1997, the Company's marketable securities consisted of investments
in corporate debt and U.S. government and agency securities of $5,034,000 and
$1,000,000, respectively.
The amount of gross unrealized gains and losses with respect to the Company's
investments in marketable securities at December 31, 1998 and 1997 were not
significant. The Company realized no significant gains or losses from the sale
of marketable securities during the three-year period ended December 31, 1998.
Proceeds from the sale of marketable securities during 1998, 1997, and 1996 were
$8,093,000, $26,252,000 and $23,042,000 respectively.
4. ACQUISITIONS
INTELLIFRAME
Effective December 3, 1998, the Company acquired all of the outstanding stock of
IntelliFrame Corporation (IntelliFrame), a start-up software and services
company which develops technology for legacy systems integration with
client/server and Internet technologies. The purchase price of $2,000,000 will
be paid in two installments of $1,000,000 each in January 1999 and 2000. The
acquisition was accounted for as a purchase and the consolidated financial
statements of the Company include the results of IntelliFrame since December 3,
1998. The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows:
<TABLE>
<S> <C>
Net tangible assets $ 148
Identifiable intangibles and goodwill 1,295
In-process research and development 927
Deferred tax liability (370)
------
Installments payable $2,000
======
</TABLE>
The Company has allocated $927,000 of the IntelliFrame purchase price to
acquired in-process research and development to reflect the value of Process
Dynamics which was approximately 75 percent complete at the time of the
acquisition. Process Dynamics is a new technology that manages business logic
and process
<PAGE>
workflow for improved development and deployment of large e-business
and customer relationship management applications. The allocation to in-process
research and development was based on the present value of the net operating
cash flows to be generated by Process Dynamics during its estimated useful life.
At the time of the acquisition, the remaining cost to complete development of
Process Dynamics was estimated to be approximately $500,000. The Company
presently anticipates that a beta version of Process Dynamics will be available
in the third quarter of 1999.
Certain IntelliFrame employees will be eligible for bonus payments of up to
$12,000,000 in the aggregate through December 31, 2001 if future revenues from
the Company's re-engineering products exceed defined targets. The potential
bonus payments increase to a maximum of $16,000,000 if the Company were to sell
any of its principal re-engineering products during 1999.
ISD
Effective October 24, 1997, the Company acquired substantially all of the assets
(including in-process research and development) and assumed certain liabilities
of the Internet Solutions Division of Apertus Technologies, Inc. (ISD), a
provider of Internet-to-mainframe connectivity products and Web access to legacy
applications. The purchase price totaled $16,429,000 including a cash payment of
$11,412,000 and assumption of $5,017,000 of liabilities and related acquisition
costs. The acquisition was accounted for as a purchase and the consolidated
financial statements of the Company include the results of ISD since October
24, 1997. The purchase price was allocated the fair value of the assets and
liabilities acquired as follows:
<TABLE>
<S> <C>
Current assets $10,488
Property and equipment 1,000
Other assets 672
Identifiable intangibles and goodwill 1,519
In-process research and development 2,750
Current liabilities (5,017)
-------
Cash paid $11,412
=======
</TABLE>
The Company allocated $2,750,000 of the ISD purchase price to acquired in-
process research and development to reflect the value of Enterprise/Connect
which was approximately 80 percent complete at the time of the acquisition.
Enterprise/Connect is a family of products bundled together to provide a
solution for access from a dispersed TCP/IP network to legacy-based systems. The
allocation to in-process research and development was based on the present value
of the net operating cash flows to be generated by Enterprise/Connect during its
estimated useful life. At the time of the acquisition, the remaining cost to
complete development of Enterprise/Connect was estimated to be $800,000. The
Company completed development of Enterprise/Connect in 1998.
PRO FORMA RESULTS
The following table presents the consolidated results of operations of the
Company for 1998 and 1997 on an unaudited pro forma basis as if the acquisitions
of IntelliFrame and ISD took place at the beginning of each year:
<TABLE>
<CAPTION>
unaudited pro forma
1998 1997
<S> <C> <C>
Total revenue $133,575 $117,163
Net income (loss) $ 4,284 $(11,052)
Net income (loss) per share $ .19 $ (.49)
</TABLE>
The unaudited pro forma results of operations are for comparative purposes only
and do not necessarily reflect the results that would have been recorded had the
acquisitions occurred at the beginning of the periods presented or the results
which might occur in the future.
5. INTEGRATION ACTIVITIES
Subsequent to the acquisition of ISD in 1997, the Company decided to consolidate
certain operations and recorded a charge of $2,184,000 for costs incurred to
integrate existing businesses, including accruals for severance, facility
closures and infrastructure integration. At December 31, 1998, the remaining
accrual of $430,000 represents the present value of the difference between the
remaining non-cancelable lease obligation and anticipated rental income
resulting from the proposed sublet of a leased facility assumed in the ISD
acquisition.
<PAGE>
In December 1997, the Company sold the assets and technologies relating to the
Vision line of products acquired from ISD for $2,000,000 in cash, plus
additional payments ranging from $1,500,000 to $2,000,000 through March 2001,
depending upon the Vision product line achieving a defined future revenue
target. The sale did not result in recognition of any gain or loss by the
company. Any additional payments received from the sale of the Vision product
line will be recognized as other income.
6. LEASES
The Company leases all office and manufacturing space and certain equipment
under non-cancelable capital and operating leases. Building leases have terms
ranging from one to 16 years. At December 31, 1998 and 1997, leased capital
assets included in property and equipment were as follows:
<TABLE>
<S> <C> <C>
As of December 31 1998 1997
------ -----
Office and data processing equipment $2,430 $ 989
Less accumulated amortization 481 167
------ -----
$1,949 $ 822
====== =====
</TABLE>
Future minimum operating lease payments, excluding executory costs such as real
estate taxes, insurance and maintenance expense, by year and in the aggregate
are as follows:
<TABLE>
<CAPTION>
Minimum Lease Commitments
Year ending December 31 Capital Operating
------- ---------
<S> <C> <C>
1999 $ 463 $ 3,478
2000 632 3,784
2001 632 3,046
2002 499 2,362
2003 372 2,287
Thereafter - 15,547
------- ---------
Total minimum lease payments 2,598 30,504
Less minimum sublease income - 1,115
------- ---------
Net minimum lease payments 2,598 $29,389
Less amounts representing interest at rates ranging from 5.69% to 9.77% 456 =========
-------
Present value of minimum capital lease payments 2,142
Less current installments 326
------
Obligations under capital lease, less current installments $1,816
======
</TABLE>
Rent expense under non-cancelable operating leases, exclusive of executory
costs, for 1998, 1997, and 1996, was $3,122,000, $2,765,000 and $2,202,000,
respectively.
7. LONG-TERM DEBT
Effective December 3, 1998, The Company acquired all of the outstanding stock of
Intelliframe Corporation for $2,000,000. The first $1,000,000 installment was
paid on January 4, 1999. The second $1,000,000 installment, plus interest at the
rate of 4.33 percent, is due and payable on January 3, 2000.
8. SHAREHOLDERS' EQUITY
COMMON STOCK REPURCHASE
On March 10, 1997, the Company's board of directors authorized the repurchase of
up to 2,000,000 shares of the Company's common stock. As of December 31, 1998,
the Company had repurchased 1,799,900 shares of its common stock for $8,446,000,
pursuant to this authorization.
RIGHTS PLAN
On July 24, 1998, the Company's board of directors adopted a shareholder rights
plan pursuant to which rights were distributed as a dividend at the rate of one
preferred share purchase right for each outstanding share of common stock of the
Company. The rights will expire on July 23, 2008 unless extended, earlier
redeemed or exchanged by the Company.
<PAGE>
STOCK OPTIONS
The Company's 1992 Stock Award Plan (the Award Plan) provides for the grant of
stock options, restricted stock and stock-based awards to officers, other
employees, consultants, and independent contractors as determined by the
compensation committee of the board of directors. A maximum of 6,200,000 shares
of common stock are issuable under the terms of the Award Plan, of which no more
than 500,000 shares may be issued as restricted stock or other stock-based
awards.
All stock options granted under the Award Plan have an exercise price equal to
fair market value on the date of grant, vest and become exerciseable over
individually-defined periods, and expire ten years from the date of grant. As of
December 31, 1998, no restricted stock or stock-based awards had been granted
under the Award Plan. A summary of the status of the Company's outstanding stock
options and related changes for each of the years in the three-year period ended
December 31, 1998, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- -----------------
Weighted- Weighted- Weighted-
Average Average Average
OPTIONS Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 4,321 $5.42 3,368 $ 6.19 2,778 $6.28
Granted 1,269 6.08 1,689 4.85 1,483 5.36
Reissued - - 310 4.94 - -
Exercised (219) 4.66 (20) 3.80 (444) 3.38
Canceled (399) 5.33 (1,026) 6.91 (449) 7.10
------ ------ ------ ------ ------ ------
Outstanding at end of year 4,972 $5.63 4,321 $ 5.42 3,368 $6.19
====== ====== ====== ====== ====== ======
Exercisable at end of year 2,388 $5.71 1,707 $ 5.90 1,368 $6.23
====== ====== ====== ====== ====== ======
Weighted-average fair value of options granted
(Black-Scholes Method) $4.48 $ 2.77 $3.48
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
RANGE OF EXERCISE PRICES Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.50 - $ 4.99 2,245 8.3 $ 4.60 858 $ 4.55
$ 5.00 - $ 7.99 2,310 6.8 $ 5.89 1,395 $ 6.02
$ 8.00 - $13.88 417 8.4 $ 9.76 135 $ 9.85
----- -----
4,972 2,388
===== =====
</TABLE>
RESTRICTED STOCK PLAN
The 1997 Restricted Stock Plan (the Restricted Stock Plan) provides for the
issuance of up to 100,000 shares of common stock to eligible employees. Shares
issued under the Restricted Stock Plan are recorded at fair market value on the
date of grant and generally vest over a four-year period. Vesting for some
grants may be accelerated if certain performance criteria are achieved.
Compensation expense is recognized over the applicable vesting period. During
1998 and 1997, the Company issued 81,600 and 8,000 restricted shares under the
Restricted Stock Plan, respectively, and recognized related compensation expense
in 1998 and 1997 of $81,000 and $7,000, respectively. At December 31, 1998,
there were 10,400 restricted shares available for grant under the terms of the
Restricted Stock Plan.
EMPLOYEE STOCK PURCHASE PLAN
The 1992 Employee Stock Purchase Plan (the Purchase Plan) allows eligible
employees an opportunity to purchase an aggregate of 800,000 shares of the
Company's common stock at a price per share equal to 85 percent of the lesser of
the fair market value of the Company's common stock at the beginning or the end
of each six month purchase period. Under the terms of the Purchase Plan, no
participant may acquire more than 5,000 shares of the Company's common stock or
more than $2,500 in aggregate fair market value of common stock (as defined)
during any six month purchase period. Common shares sold to employees under the
Purchase Plan in 1998, 1997 and 1996 were 153,163, 163,637 and 57,456,
respectively.
The fair value of each purchase right granted in 1998, 1997, and 1996 was $1.57,
$1.66, and $2.06, respectively.
FAIR VALUE ASSUMPTIONS
In determining the compensation cost of stock option grants and shares sold to
employees under the
<PAGE>
employee stock purchase plan, as specified by SFAS No. 123, the fair value of
each award has been estimated on the date of grant using the Black-Scholes
option pricing model. The weighted average assumptions used in these
calculations are summarized below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Risk free interest rate 5.26% 6.42% 6.58%
Expected life -- years 8.41 8.14 8.14
Expected volatility 67.50% 39.30% 39.30%
</TABLE>
STOCK COMPENSATION
The Company has elected to continue to account for its plans in accordance with
APB No. 25. Accordingly, no compensation cost has been recognized in the
Company's financial statements for stock compensation awards. Had compensation
cost for the Company's stock-based compensation plans been recognized consistent
with the fair value method of SFAS No. 123, the Company's net income (loss) and
net income (loss) per basic and diluted share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET INCOME (LOSS)
As reported $4,729 $(2,314) $1,360
Pro forma $2,580 $(3,826) $ (704)
NET INCOME (LOSS) PER SHARE
As reported:
Basic $ .21 $ (.10) $ .06
Diluted $ .21 $ (.10) $ .06
Pro forma:
Basic $ .12 $ (.17) $ (.03)
Diluted $ .11 $ (.17) $ (.03)
</TABLE>
The pro forma disclosures presented above do not reflect the full impact of
stock-based compensation on the Company's reported results under the recognition
provisions of SFAS No. 123 because compensation expense is reflected over the
vesting period of the award and compensation expense for awards granted prior to
January 1, 1995 is not considered.
9. NET INCOME (LOSS) PER SHARE
The components of net income (loss) per basic and diluted share are as follows:
<TABLE>
<CAPTION>
Weighted
Net Income Average Shares Per Share
1998 (loss) Outstanding Amount
---------- -------------- ---------
<S> <C> <C> <C>
Basic $ 4,729 22,095 $ .21
Dilutive effect of employee stock purchase awards
and options - 477 -
---------- -------- -------
Diluted $ 4,729 22,572 $ .21
========== ======== =======
1997
Basic $(2,314) 22,702 $(.10)
Dilutive effect of employee stock purchase awards and
options - - -
---------- -------- -------
Diluted $(2,314) 22,702 $(.10)
========== ======== =======
1996
Basic $ 1,360 23,241 $ .06
Dilutive effect of employee stock purchase awards and
options - 316 -
---------- -------- --------
Diluted $ 1,360 23,557 $ .06
========== ======== =======
</TABLE>
<PAGE>
10. INCOME TAXES
The components of income (loss) before income taxes and income tax expense
(benefit) for each of the years in the three-year period ended December 31, 1998
consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES
U.S. $5,548 $(3,517) $ 2,396
Foreign 2,091 (376) (372)
------ ------- -------
Total $7,639 $(3,893) $ 2,024
====== ======= =======
INCOME TAX PROVISION
Current:
U.S. $2,041 $ (592) $ 1,753
Foreign 681 119 75
State 511 (170) 376
------ ------- -------
Total current 3,233 (643) 2,204
------ ------- -------
Deferred:
U.S. (289) (741) (1,285)
State (34) (195) (255)
------ ------- -------
Total deferred (323) (936) (1,540)
------ ------- -------
Total income tax expense (benefit) $2,910 $(1,579) $ 664
====== ======= =======
</TABLE>
The reconciliation of the statutory federal tax rate and the effective tax rate
for each of the years in the three-year period ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Statutory tax rate 34.0% (34.0)% 34.0%
Increase (decrease) in taxes resulting from:
State taxes, net of federal tax benefit 4.2 (6.2) 4.0
Foreign sales corporation (6.5) (6.7) (13.7)
Reduction in foreign net operating loss carryforwards - - 38.6
In-process research and development 4.1 - -
Change in valuation allowance - 5.5 (31.3)
Other 2.3 .8 1.2
---- ----- ----
Total 38.1% (40.6)% 32.8%
==== ===== ====
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
December 31 1998 1997
<S> <C> <C>
DEFERRED TAX ASSETS
Inventory $1,261 $1,483
Purchased in-process research and development 1,163 1,128
Accrued compensation 1,009 480
Property and equipment 888 878
Reserves for bad debts and sales returns 838 686
Foreign net operating loss carryforwards 410 410
Federal and state tax credits 373 501
Integration activities 176 493
Other 533 458
------ ------
Total gross deferred tax assets 6,651 6,517
Valuation allowance (410) (410)
------ ------
Net deferred tax assets 6,241 6,107
------ ------
DEFERRED TAX LIABILITIES
Purchased technology (364) -
Other (222) -
------ ------
Total gross deferred tax liabilities (586) -
------ ------
Net deferred tax assets $5,655 $6,107
====== ======
</TABLE>
At December 31, 1998 and 1997, the Company's valuation allowance was $410,000
due to the nonrecognition of the tax benefit associated with the loss from
foreign operations. The Company has assessed its taxable earnings history and
prospective future taxable income. Based on this assessment, management has
determined that its other net deferred tax assets will be realized in future
periods. The
<PAGE>
Company may be required to provide a valuation allowance for this asset in the
future if it does not generate sufficient taxable income as planned.
11. SUCCESS SHARING BONUS PLAN
The Company's Success Sharing Bonus Plan (the Plan) provides a formula for
determination of cash bonus payments to eligible employees based on a defined
percentage of a participant's qualifying base compensation multiplied by the CNT
Performance Factor (CPF). The CPF is derived from a matrix formulated by the
board of directors with axes consisting of defined levels of revenue growth and
pre-tax profit.
The success sharing bonus expense for 1998, 1997, and 1996 was $1,673,000,
$43,000, and $582,000, respectively.
12. 401(K) AND DEFERRED COMPENSATION PLANS
The Company has a 401(k) salary savings plan which covers substantially all of
its employees. The Company matches 50 percent of a participant's annual plan
contributions up to an annual maximum per participant of $1,000 which vests over
a four-year period.
The Company has also established an executive deferred compensation plan for
selected key employees which allows participants to defer a substantial portion
of their compensation each year. The Company matches 20 percent of a
participant's annual plan contributions up to an annual maximum per participant
of $10,000. Matching contributions vest over a four-year period from the later
of July 1, 1997 or the participant's date of hire. In addition, the Company
provides participants with an annual earnings credit based on the investment
indexes selected by the participant prior to the start of each plan year.
The Company's expense under the 401(k) and deferred compensation plans for 1998
and 1997 was $570,000 and $380,000, respectively. The Company incurred no
expense under these plans prior to 1997.
13. SEGMENT INFORMATION
The Company has two reportable segments consisting of its Network Solutions and
Enterprise Integration Solutions Divisions. 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 and disaster recovery. The Enterprise Integration
Solutions Division provides products and services that integrate legacy systems
with client/server and Internet technologies, including e-business 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 accounting policies for the two reportable segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates performance based on operating profit or loss before special charges
and income taxes.
<TABLE>
<CAPTION>
1998 1997 1996
REVENUE
<S> <C> <C> <C>
Network Solutions $103,022 $80,195 $82,079
Enterprise Integration Solutions 30,513 17,646 15,030
-------- ------- -------
Total $133,535 $97,841 $97,109
======== ======= =======
OPERATING PROFIT
Network Solutions $ 7,857 $ 458 $ 5,849
Enterprise Integration Solutions 282 (817) (3,177)
Special charges (927) (4,934) (2,720)
-------- ------- -------
Total $ 7,212 $(5,293) $ (48)
======== ======= =======
DEPRECIATION AND AMORTIZATION
Network Solutions $ 7,251 $ 6,200 $ 6,528
Enterprise Integration Solutions 1,605 1,184 1,432
-------- ------- -------
Total $ 8,856 $ 7,384 $ 7,960
======== ======= =======
EXPENDITURES FOR LONG-LIVED ASSETS
Network Solutions $ 8,689 $ 9,893 $ 6,259
Enterprise Integration Solutions 631 1,019 883
-------- ------- -------
Total $ 9,320 $10,912 $ 7,142
======== ======= =======
</TABLE>
<PAGE>
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
SEGMENT REPORTING (continued)
ASSETS
Network Solutions $ 64,336 $60,980 $45,709
Enterprise Integration Solutions 17,329 13,683 1,605
Corporate 12,362 10,824 35,065
-------- ------- -------
Total $ 94,027 $85,487 $82,379
======== ======= =======
REVENUE
United States $ 88,365 $69,015 $68,110
United Kingdom 15,805 7,090 6,127
France 5,479 1,849 3,530
Other 23,886 19,887 19,342
-------- ------- -------
Total $133,535 $97,841 $97,109
======== ======= =======
LONG-LIVED ASSETS
United States $ 23,208 $20,508 $13,167
United Kingdom 1,058 835 874
Other 570 277 225
-------- ------- -------
Total $ 24,836 $21,620 $14,266
======== ======= =======
</TABLE>
No single customer accounted for more than ten percent of the Company's total
revenue in 1998 or 1997. During 1996, sales to one customer accounted for 18
percent of the Company's total revenue.
14. NONCASH FINANCING AND INVESTING ACTIVITIES AND SUPPLEMENTAL CASH FLOW
INFORMATION
Cash payments for interest expense in 1998, 1997, and 1996 were $79,000, $57,000
and $46,000, respectively.
Cash payments for income taxes, net of refunds received, in 1998 and 1997 were
$331,000 and $986,000, respectively. Tax refunds received, net of payments, in
1996 were $304,000.
During 1998 and 1997, the Company entered into capital lease obligations for
equipment valued at $1,441,000 and $989,000, respectively.
15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount for Cash and Cash Equivalents, Marketable Securities and
Long-Term Debt approximates fair value because of the short maturity of those
instruments.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Computer Network Technology Corporation:
We have audited the accompanying consolidated balance sheets of Computer Network
Technology Corporation and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Computer Network
Technology Corporation and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998 in conformity with generally
accepted accounting principles.
(Signature KPMG Peat Marwick LLP)
Minneapolis, Minnesota
January 26, 1999
REPORT OF MANAGEMENT
The accompanying consolidated financial statements, including the notes thereto,
and other financial information presented in the Annual Report were prepared by
management, which is responsible for their integrity and objectivity. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based upon our best estimates
and judgments.
Computer Network Technology Corporation maintains an effective system of
internal accounting control. We believe this system provides reasonable
assurance that transactions are executed in accordance with management
authorization and are appropriately recorded in order to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to adequately safeguard, verify, and maintain accountability of assets. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal control should not exceed the benefits derived.
KPMG Peat Marwick LLP, independent certified public accountants, is retained to
audit the Company's financial statements. Their accompanying report is based on
audits conducted in accordance with generally accepted auditing standards. The
audits include a review of the internal accounting control structure to gain a
basic understanding of the accounting system in order to design an effective and
efficient audit approach and not for the purpose of providing assurance on the
system of internal control.
The Audit Committee of the Board of Directors is composed of three outside
directors and is responsible for recommending the independent accounting firm to
be retained for the coming year, subject to shareholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.
(Signature of Gregory T. Barnum) (Signature of Thomas G. Hudson)
Gregory T. Barnum Thomas G. Hudson
Vice President of Finance, Chief President and Chief Executive Officer
Financial Officer and Secretary
<PAGE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
(in thousands, except per share data)
Year ended December 31 First Quarter Second Quarter Third Quarter Fourth Quarter*
<S> <C> <C> <C> <C>
1998
- ----
Revenue $31,166 $33,466 $33,010 $35,893
Gross profit 18,634 19,517 18,884 21,672
Income from operations 522 1,259 2,610 2,821
Net income 369 870 1,799 1,691
Net income per share:
Basic .02 .04 .08 .08
Diluted .02 .04 .08 .07
1997
- ----
Revenue $21,747 $20,696 $23,810 $31,588
Gross profit 12,667 11,736 13,725 18,022
Income (loss) from operations 171 (1,769) 206 (3,901)
Net income (loss) 377 (858) 373 (2,206)
Net income (loss) per share:
Basic .02 (.04) .02 (.10)
Diluted .02 (.04) .02 (.10)
</TABLE>
* Includes a special charge in 1998 of $927,000 or $.04 per share after tax,
associated with the acquisition of IntelliFrame Corporation in December 1998;
includes special charges in 1997 of $4.9 million, or $.13 per share after tax,
associated with the acquisition of the Internet Solutions Division from Apertus
Technologies, Inc. in October 1997, and subsequent integration charges.
<PAGE>
INVESTOR INFORMATION
PRINCIPAL OUTSIDE COUNSEL
Leonard, Street and Deinard Professional Association
Minneapolis, Minnesota
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Minneapolis, Minnesota
TRANSFER AGENT
Shareholder inquiries relating to shareholder records, stock transfer, change of
ownership or change of address should be directed to the Company's transfer
agent:
Chase Mellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 288-9541
FORM 10-K
A copy of our annual report on Form 10-K, filed with the Securities and Exchange
Commission, will be furnished free of charge to any CNT shareholder upon either
telephone request to (612) 797-6111, e-mail request to
[email protected], or written request to:
Investor Relations
Computer Network Technology Corporation
605 North Highway 169
Minneapolis, Minnesota 55441
INVESTOR INQUIRIES
Shareholders, securities analysts, portfolio managers and others in the
investment community seeking information about CNT should contact Investor
Relations at (612) 797-6111 or by e-mail at investor [email protected].
ANNUAL MEETING
Shareholders, employees, and friends are invited to attend CNT's annual meeting
on Thursday, May 13, 1999, at 10:00 a.m. at the Minneapolis Marriott City
Center, 30 South Seventh Street, Minneapolis, Minnesota.
PRICE RANGE OF THE COMPANY'S COMMON STOCK
The following table sets forth the range of high, low and closing sales prices
and volume for the Company's common stock (Nasdaq: CMNT), as reported on the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
VOLUME
HIGH LOW CLOSING (IN THOUSANDS)
------ ----- ------- --------------
<S> <C> <C> <C> <C>
1998
First Quarter $ 5.00 $3.69 $ 4.66 6,685
Second Quarter 5.88 3.88 4.63 9,067
Third Quarter 6.50 3.50 5.56 10,100
Fourth Quarter 14.25 3.75 12.50 29,177
1997
First Quarter $ 7.00 $4.88 $ 5.38 7,180
Second Quarter 5.75 3.88 4.50 7,543
Third Quarter 6.13 3.38 5.50 11,383
Fourth Quarter 5.63 3.38 3.50 7,682
</TABLE>
As of March 15, 1999, there were 1,000 shareholders of record. The Company
estimates that an additional 6,100 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
DIVIDENDS
The Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.
<PAGE>
BOARD OF DIRECTORS
John A. Rollwagen, Chairman of the Board
. Audit Committee
. Compensation Committee
Thomas G. Hudson
Patrick W. Gross
Erwin A. Kelen
. Audit Committee
. Compensation Committee
Lawrence Perlman
. Audit Committee
. Compensation Committee
OFFICERS
Thomas G. Hudson
President and Chief Executive Officer
Gregory T. Barnum
Vice President of Finance,
Chief Financial Officer and Secretary
Jeffrey A. Bertelsen
Corporate Controller and Treasurer
Robert R. Beyer
Vice President of World Wide Quality and Customer Services
Richard E. Carlson
Vice President of Manufacturing
William C. Collette
Vice President of Engineering and Chief Technology Officer
Peter Dixon
Vice President of World Wide Business Development
Nick V. Ganio
Vice President of World Wide Sales
Martin G. Hahn
Vice President and General Manager
Enterprise Integration Solutions Division
Mark R. Knittel
Vice President of Marketing
Julie C. Quintal
Vice President of Quality and Business Services
Kristine E. Ochu
Vice President of Human Resources
<PAGE>
GLOSSARY
CAMPUS: Buildings or computer sites within a limited geographic area, generally
under 500 yards.
CHANNEL: An input/output interface through which mainframe computers and servers
transmit and receive information.
CHANNEL EXTENSION: Connection of mainframes to other mainframes, storage
devices, or peripheral devices over local area or wide area networks.
CRM/ERM (Customer Relationship Management/ Enterprise Relationship Management):
A broad term for the practices and technologies that put customers at the heart
of business. The focus is on improving the entire customer-supplier interaction
through seamless integration of processes and systems. The technology consists
of a set of applications or software that integrates sales, marketing and
customer service.
DATA COMPRESSION: The process of condensing the data in order to save storage
space and shorten transfer time; the original data is decompressed when read
back into memory.
DATA MIGRATION: Transfer of large volumes of data from one storage device to
another.
DISASTER RECOVERY: A set of rules and procedures that allow a computer site to
be put back in operation after a disaster has occurred. The concept of moving
back-ups off-site constitutes the minimum basic precaution for disaster
recovery. The remote copy is used to recover data when the local storage is
inaccessible after a disaster.
DISK MIRRORING: Also known as data mirroring. A data redundancy technique in
which data is recorded identically on multiple separate disk drives at the same
time. When the primary disk is off line, the alternate takes over, providing
continuous access to data.
EAI (Enterprise Application Integration): A set of technologies that enable
multiple independent and/or distributed applications to be integrated into one
enterprise system. EAI software automates this integration by interfacing with
multiple applications, translating data structures, intelligently routing
messages, and creating vital business processes.
FIBRE CHANNEL: Gigabit-per-second data transfer interface technology that can
merge high-speed input/output and networking functionality in a single
connectivity technology.
GATEWAY: A device connecting two or more networks that may use different
protocols and media. Gateways translate between the different networks and can
connect locally or over wide area networks.
LAN (Local Area Network): A data network that enables communications between
multiple users (PCs, printers, etc.) in a limited geographic area, generally
less than a mile.
LEGACY APPLICATION: An application that has been around for some time; it often
refers to a mainframe, AS/400, or open system application.
MIDDLEWARE: Software that functions as a conversion or translation layer between
distributed and/or disparate applications. It allows newer business applications
to access valuable legacy applications, often via a user-friendly interface.
MULTIPLEXER: A networking device that condenses multiple communication streams
into one stream.
PROTOCOL: A set of rules for communicating between computers. The use of
standard protocols allows products from different vendors to communicate on a
common network.
SAN (Storage Area Network): A high-speed network of storage devices that permits
data movement and management.
WAN (Wide Area Network): A network which enables communications between
multiple users (PCs, printers, etc.) across a large geographic area, generally
outside of a home or office building. WANs typically involve connections with
telephone companies or Internet service providers, making transmission more
complex.
For more computer industry definitions, visit these web sites:
http://www.techweb.com/encyclopedia/http://www.pcwebopaedia.com/
<PAGE>
(CNT LOGO)
COMPANY LOCATIONS
Computer Network Technology
(Headquarters)
605 North Highway 169
Suite 800
Minneapolis, Minnesota 55441 USA
Tel: 612-797-6000
Fax: 612-797-6800
Computer Network Technology
(Manufacturing and Development)
6500 Wedgwood Road
Maple Grove, Minnesota 55311 USA
Tel: 612-550-8000
Fax: 612-550-8800
Computer Network Technology
(Development)
1700 West Park Drive
Westborough, Massachusetts 01581 USA
Tel: 508-870-3500
Fax: 508-870-3550
INTERNATIONAL OFFICES
CNT Pty. Ltd.
Australia
Tel: +61-2-9540-5486
Fax: +61-2-9540-5487
CNT France S.A.
France
Tel: +33-1-4130-1212
Fax: +33-1-4130-1213
CNTware GmbH
Germany
Tel: +49-6074-82770
Fax: +49-6074-827725
CNT China Limited
Hong Kong
Tel: +85-2-2824-2660
Fax: +85-2-2824-9090
CNT Japan K.K.
Japan
Tel: +813-5403-4858
Fax: +813-5403-4646
CNT International Ltd.
(Enterprise Integration Solutions)
United Kingdom
Tel: +44-181-232-2600
Fax: +44-181-232-2601
CNT International Ltd.
(Networking Solutions)
United Kingdom
Tel: +44-1753-792400
Fax: +44-1753-792499
For further information, visit our web site at at http://www.cnt.com.
Copyright (C)1999 Computer Network Technology Corporation (CNT).
<PAGE>
CNT, Channelink, UltraNet and Brixton are registered trademarks, and the CNT
logo and FileSpeed are trademarks of Computer Network Technology Corporation.
All other trademarks identified herein are the property of their respective
owners. CNT is an equal opportunity employer. CNT is ISO 9002 certified.
Printed in the U.S.A.
<PAGE>
Exhibit 21
COMPUTER NETWORK TECHNOLOGY CORPORATION
Subsidiaries of the Registrant
CNT International Ltd.
- ----------------------
. Incorporated under the English Companies Act
. d/b/a CNT International Ltd. and CNTI
CNT France S.A.
- ---------------
. Incorporated under French law
. d/b/a CNT France S.A. and CNTF
Computer Network Technology GmbH
- --------------------------------
. Incorporated under German law
CNTFS Corporation
- -----------------
. Incorporated under Virgin Islands law
CNTware Vernetzungssysteme GmbH
- -------------------------------
. Incorporated under German law
. d/b/a CNTware
Computer Network Technology (Asia Pacific) Pty. Ltd.
- ----------------------------------------------------
. Incorporated under Australian Law
. d/b/a CNT A/P
CNT China Limited
- -----------------
. Incorporated under Hong Kong Law
CNT Japan K.K.
- --------------
. Incorporated under Japanese Law
CNT Acquisition I Corporation
- -----------------------------
. Incorporated under Minnesota Law
Intelliframe Corporation
- ------------------------
. Incorporated under Pennsylvania Law
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Computer Network Technology Corporation:
We consent to incorporation by reference in the Registration Statements (No. 33-
6862, 33-28367, 33-42750, 33-41596, 33-48944, 33-48954, 33-68356, 33-68372, 33-
83262, 33-83264, 333-59951, 333-31851, 333-31853, 333-59947, 333-59948 and 33-
83266) of Computer Network Technology Corporation on Form S-8 of our reports
dated January 26, 1999, relating to the consolidated balance sheets of Computer
Network Technology Corporation and subsidiaries as of December 31, 1998 and 1997
and the related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998, and the related financial statement schedule,
which reports appear, or are incorporated by reference, in the December 31, 1998
annual report on Form 10-K of Computer Network Technology Corporation.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
March 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF COMPUTER NETWORK TECHNOLOGY CORPORATION AS
OF AND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<SECURITIES> 576
<RECEIVABLES> 31,450
<ALLOWANCES> 1,225
<INVENTORY> 19,241
<CURRENT-ASSETS> 66,240
<PP&E> 43,545
<DEPRECIATION> 27,185
<TOTAL-ASSETS> 94,027
<CURRENT-LIABILITIES> 30,653
<BONDS> 2,816
0
0
<COMMON> 223
<OTHER-SE> 60,335
<TOTAL-LIABILITY-AND-EQUITY> 94,027
<SALES> 95,475
<TOTAL-REVENUES> 133,535
<CGS> 30,935
<TOTAL-COSTS> 54,828
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<LOSS-PROVISION> 690
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<INCOME-TAX> 2,910
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<F1>AMOUNT PRESENTED REPRESENTS ENGINEERING AND DEVELOPMENT EXPENSE.
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