<PAGE>
As filed with the Securities and Exchange Commission on June 16, 1999.
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMPUTER NETWORK TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1356476
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
605 North Highway 169, Suite 800
Minneapolis, Minnesota 55441
(612) 797-6000
(Address, including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Thomas G. Hudson, Chairman, President and Chief Executive Officer
COMPUTER NETWORK TECHNOLOGY Corporation
605 North Highway 169, Suite 800
Minneapolis, Minnesota 55441
(612) 797-6000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Morris M. Sherman, Esq. Bruce Alan Mann, Esq.
Leonard, Street and Deinard Professional Association Kristian E. Wiggert, Esq.
150 South Fifth Street, Suite 2300 Melissa L. Mong, Esq.
Minneapolis, Minnesota 55402 Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
</TABLE>
Approximate date of commencement of proposed sale to the public. As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================================
Proposed Maximum Proposed Maximum Amount of
Amount To Be Aggregate Price Per Aggregate Offering Registration
Titles Of Shares To Be Registered Registered(1) Share Price Fee/(2)/
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value/(3)/......... 4,025,000 shares $21.625 $87,040,625 $ 24,198
======================================================================================================================
</TABLE>
(1) Includes 525,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act based on the high and
low sales prices for our common stock as reported by the Nasdaq National
Market on June 14, 1999.
(3) Includes attached preferred stock purchase rights issuable under the
Registrant's Rights Agreement. See "Description of Capital Stock--
Shareholder Rights Plan" in the prospectus that is filed as part of this
Registration Statement.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
The information in this prospectus is not complete and may be changed.
Underwriters may not confirm sales of these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are not soliciting
offers to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT TO COMPLETION, DATED JUNE 16, 1999
PRELIMINARY PROSPECTUS 3,500,000 Shares
[CNT Logo]
Computer Network Technology Corporation
Common Stock
________________
This is a public offering of 3,500,000 shares of common stock of Computer
Network Technology Corporation.
The underwriters have an option to purchase a maximum of 525,000 shares of
common stock from us to cover over-allotments of shares.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CMNT." On June 15, 1999, the last sale price of the common stock was
$21.00 per share.
See "Risk Factors" beginning on page 6 to read about risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved these securities or passed upon the adequacy or accuracy
of this prospectus. Any representation to the contrary is a criminal offense.
________________
Per
Share Total
----- -----
Public offering price............................... $ $
Underwriting discount............................... $ $
Proceeds, before expenses, to us.................... $ $
________________
The underwriters are severally underwriting the shares being offered in this
prospectus. The underwriters expect to deliver the shares against payment in New
York, New York on _______ 1999.
________________
Bear, Stearns & Co. Inc.
SG Cowen
BancBoston Robertson Stephens
Morgan Keegan & Company, Inc.
The date of this prospectus is _________ ___, 1999.
<PAGE>
[Graphic: Illustrative diagram showing where our network solutions products are
utilized in a SAN/WAN network configuration. The center of the diagram contains
the words: "Storage Area Networks," which is bordered and enclosed by an
ellipse. Running out of the ellipse are spokes which lead to various
applications typically found in a SAN/WAN network. For example, the following
applications are represented textually and graphically in the diagram:
mainframes, LANs, desktops, servers, WANs, tape libraries, and disks. There is a
star at each location where a spoke intersects the ellipse. Each star represents
a potential use for our network solutions products. Around the outside of the
elliptical diagram are words describing the functionality of our SAN/WAN
solution.
Caption: CNT: A SAN/WAN Leader]
<PAGE>
TABLE OF CONTENTS
Page Page
---- ----
SUMMARY........................... 1 BUSINESS.......................... 34
RISK FACTORS...................... 6 MANAGEMENT........................ 53
SPECIAL NOTE REGARDING PRINCIPAL SHAREHOLDERS............ 57
FORWARD-LOOKING STATEMENTS....... 17 UNDERWRITING...................... 59
HOW WE INTEND TO USE THE DESCRIPTION OF CAPITAL STOCK...... 60
PROCEEDS FROM THE OFFERING....... 17 LEGAL MATTERS..................... 63
PRICE RANGE OF COMMON STOCK....... 18 EXPERTS........................... 63
DIVIDEND POLICY................... 18 WHERE YOU CAN FIND MORE
CAPITALIZATION.................... 19 INFORMATION...................... 63
SELECTED FINANCIAL DATA........... 20 INDEX TO FINANCIAL STATEMENTS.... F-1
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........ 21
__________________
You should rely only on the information contained in this prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, that the
information appearing in this prospectus is accurate only as of the you should
not rely on it. We are not making an offer to sell these securities date on the
front cover of this prospectus. Our business and financial condition in any
jurisdiction where the offer or sale is not permitted. You should assume may
have changed since that date.
<PAGE>
SUMMARY
The following summary contains basic information about our company. This
summary may not contain all of the information that is important to you. To
understand the offering and our business fully, we strongly encourage you to
read carefully this entire prospectus and the documents we have filed with the
Securities and Exchange Commission. For information on how to obtain the
documents that we have filed with the Securities and Exchange Commission, see
"Where You Can Find More Information."
Computer Network Technology Corporation
Our Business
We design, manufacture, market and support a wide range of computer
hardware and software products for business-critical, or important, storage
networks. We also design, manufacture, market and support products that
integrate existing computer applications. We operate as two separate divisions--
the Network Solutions Division and the Enterprise Integration Solutions
Division. Our Network Solutions Division sells storage area networking, or SAN,
products and our established channel networking products, which enable computers
to transmit data over unlimited distances. Our Enterprise Integration Solutions
Division develops and sells enterprise application integration, or EAI, software
that automates the integration of computer software applications, as well as our
traditional server gateways and tools, which enable multiple desktop computers
and mainframe terminals to communicate with one another. Both divisions offer
professional consulting and support services.
Our Network Solutions Division is a leading provider of hardware and
software products that enable our customers to build and manage SANs. A SAN is a
high-speed network within a business' existing computer network that allows the
business to manage and back-up its expanding storage needs with greater
efficiency and less disruption to its network operations. Customers can create
SANs within both local area networks, or LANs, which are networks confined to
limited geographical areas, and wide area networks, or WANs, which are networks
dispersed over long distances that communicate by third party telephone systems.
Our SAN products enable companies to cost effectively manage their increasing
storage requirements, flexibly add to and reconfigure their existing SANs,
provide faster access to greater amounts of data and protect their data more
efficiently. Our SAN solutions consist primarily of our UltraNet(R),
FileSpeed(TM) and Channelink(R) families of products. We market our SAN products
directly and through strategic partnerships with leading storage industry
companies, including Brocade, Compaq, EMC, Hitachi Data Systems, IBM, Legato,
SCH, StorageTek and Sutmyn.
Our Enterprise Integration Solutions Division develops and markets our EAI
software products. EAI refers to the process of integrating existing networks
and applications, which are frequently based on mainframe platforms, with new
networks and applications, which are usually open systems, so that users can
easily access information on all of a business' disparate computer systems.
Mainframes are computer systems with high processing power that have
traditionally been used by large businesses for storing and processing large
amounts of data. Open systems are newer systems that are easy to scale, or
expand, and use hardware and software standards that are not proprietary to any
vendor. Our EAI products offer automated integration, without line-by-line
coding, that allows easy, real-time access to a business' entire database, no
matter what type of system any given data resides upon. Our solutions are
flexible and scalable in that they can accommodate a virtually unlimited number
of users into an integrated system.
<PAGE>
Our EAI products are targeted primarily for customer relationship
management, or CRM, and electronic-commerce, or e-commerce, applications. CRM
affords our clients' customer service representatives easy, real-time access to
all of the organization's information about a given customer. E-commerce,
applications enhance our clients' ability to sell products and conduct business
over the Internet. We market our EAI products directly and in conjunction with
leading industry partners, including Cap Gemini, Deloitte Consulting,
PricewaterhouseCoopers and Siebel Systems.
Our Market Opportunities
The SAN market is growing rapidly. The volume of enterprise, or business,
data is increasing significantly as businesses move towards open systems that
permit data sharing and copying, use more data-intensive applications and seek
to back-up business-critical data more reliably. Traditional network
configurations are poorly suited to handle increasing volumes of data because:
. they are inherently limited in the speed with which data can be
transmitted;
. the rate at which input and output, or I/O, transactions can be
processed;
. the distance, known as connectivity, between storage devices;
. the hetergeneous mix of different architectures and platforms; and
. the ability to connect additional storage hardware.
A new technology known as fibre channel has partially resolved these
limitations by addressing I/O limitations and limitations on the number of
devices that can be connected. However, fibre channel technology still contains
inherent constraints on distance, connectivity with other technologies and data
transmission speeds, which our products uniquely address. Notwithstanding the
limitations of fibre channel, SANs have emerged as an attractive alternative to
traditional storage architecture by serving as a high-speed storage system for
storage management within an existing network. As a result, global spending on
SAN-related solutions is estimated to grow from approximately $250 million in
1998 to an estimated $2.4 billion in 2002, according to Dataquest.
The EAI market is also growing rapidly as a result of several trends.
First, as businesses install newer open systems, they are seeking to preserve
their considerable investments in older mainframe and open systems, known as
legacy technology, by integrating that technology with their new systems.
Second, productivity and customer service concerns are prompting businesses to
seek ways for their employees and customer service representatives to easily
access all organizational data about a particular subject or customer. Third,
mergers and acquisitions necessitate the integration of separate information
systems to realize anticipated benefits from a merger. Lastly, the Internet is
driving the need for customers to look at their own information contained in
corporate data bank and to enable e-commerce. As a result of these trends,
sales of EAI solutions are estimated to grow from $250 million in 1998 to $1.4
billion in 2002, according to Dataquest.
2
<PAGE>
We are a Minnesota corporation. Our principal executive offices are located
at 605 North Highway 169, Suite 800, Minneapolis, Minnesota 55441, and our
telephone number is (612) 797-6000. Our World Wide Website is
http://www.cnt.com. Information contained in our website is specifically not
incorporated herein by reference or otherwise.
_______________
The CNT logo, CNT(R), UltraNet(R) and Channelink(R) are our registered
trademarks. FileSpeed(TM), Enterprise/Access(TM) and Enterprise/Connect(TM)
are also our trademarks. This prospectus contains other trademarks and trade
names owned by us or other entities.
The Offering
The following information, and, unless otherwise indicated, all per share
information set forth in this prospectus is based on 23,292,877 shares of our
common stock outstanding on June 9, 1999. This number excludes:
. 5,491,928 shares of our common stock issuable upon exercise of
options outstanding on such date, with a weighted exercise price
of $9.20 per share; and
. 408,416 shares of our common stock reserved for additional grants
under our stock option, restricted stock and employee stock
purchase plans.
Common stock offered............................ 3,500,000 shares
Common stock outstanding after this offering.... 26,792,877 shares
Use of proceeds................................. Working capital and
general corporate
purposes. See "How We
Intend to Use the
Proceeds from the
Offering."
Nasdaq National Market Symbol................... CMNT
Unless otherwise indicated, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option. References in this
prospectus to "common stock" include the associated preferred share purchase
right.
3
<PAGE>
Summary Financial Data
The following table summarizes the financial data for our business. You
should read the following information, the balance sheet data below, and all
other financial information in this prospectus in conjunction with the financial
statements and related financial statement notes appearing elsewhere in this
prospectus. The data regarding operating income (loss) and earnings (loss) per
share includes:
. a special charge in 1994 of $9.3 million, or $.40 per share after tax,
for purchased in-process research and development associated with the
acquisition of Brixton Systems, Inc., which was not deductible for
income tax purposes;
. a special charge in 1996 of $2.7 million, or $.07 per share after tax,
for the write-down of purchased technology;
. special charges in the fourth quarter of 1997 of $4.9 million, or $.13
per share after tax, for purchased in-process research and development
associated with the acquisition of the Internet Solutions Division of
Apertus Technologies, Inc. and subsequent integration charges;
. a special charge in the fourth quarter of 1998 of $927,000, or $.04
per share after tax, for purchased in-process research and development
associated with the acquisition of IntelliFrame. The charge associated
with the IntelliFrame acquisition was not deductible for tax purposes;
and
. other income in the first quarter of 1999 of $667,000, or $.02
per share after tax, due to recognition of a payment received in
connection with the sale of our vision product line.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
4
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------- -----------------------
1996 1997 1998 1998 1999
---------- ----------- ---------- ----------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Total revenue $ 97,109 $ 97,841 $ 133,535 $ 31,166 $ 36,913
Gross profit 53,997 56,150 78,707 18,634 21,814
Operating income (loss) (48) (5,293) 7,212 522 3,462
Net income (loss) $ 1,360 $ (2,314) $ 4,729 $ 369 $ 2,697
========== =========== ========== =========== ===========
Earnings (loss) per share:
Basic $ .06 $ (.10) $ .21 $ .02 $ .12
Diluted .06 (.10) .21 .02 .11
========== =========== ========== =========== ===========
Shares:
Basic 23,241 22,702 22,095 22,106 22,481
Diluted 23,557 22,702 22,572 22,243 25,203
</TABLE>
The consolidated balance sheet set forth below indicates a summary of our
consolidated balance sheet at March 31, 1999:
. on an actual basis; and
. as adjusted to reflect the receipt of the estimated net proceeds from
the sale of 3,500,000 shares of common stock, after deducting
underwriting discounts and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 1999
--------------------
As
Actual Adjusted
---------- ---------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents, and marketable
securities $ 14,950 $ 84,216
Working capital 39,993 109,259
Total assets 99,977 169,243
Long term obligations 1,725 1,725
Total shareholders' equity 65,808 135,074
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing shares of our common
stock. Investing in our common stock involves a high degree of risk. If any of
the following risks occur, our business, operating results and financial
condition could be seriously harmed. In addition, the trading price of our
common stock could decline due to the occurrence of any of these risks, and you
may lose all or part of your investment.
We expect our quarterly revenues and operating results to fluctuate for a number
of reasons, which could cause our stock price to fluctuate
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect our quarterly financial performance include the
following:
. fluctuations in demand for our products and services;
. the timing of customer orders, which are often grouped toward the end
of a quarter, particularly large orders from our significant customers
and whether any orders are cancelled;
. our traditionally long sales cycle, which can range from 90 days to 12
months or more;
. our ability to develop, introduce, ship and support new products and
product enhancements;
. the fact that our products are usually only part of an overall
solution that our customers may have problems implementing or
obtaining the required components or services from other vendors;
. the rate of adoption of SANs as an alternative to existing data
storage and management systems;
. the rate of adoption of EAI products and related solutions;
. announcements and new product introductions by our competitors and
deferrals of customer orders in anticipation of new products, services
or product enhancements introduced by us or our competitors;
. decreases over time in the prices at which we can sell our products;
. our ability to obtain sufficient supplies of components, including
limited sourced components, at reasonable prices, or at all;
. communication costs and the availability of communication lines;
. increases in the prices of the components we purchase;
. our ability to attain and maintain production volumes and quality
levels for our products; and
. increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key strategic partners.
6
<PAGE>
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. Likely, in some future period, our
operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price likely will drop.
Our success is dependent upon the development of demand for our SAN and
EAI products
We are dependent upon the success of our SAN and EAI businesses. Potential
customers who have invested substantial resources in their existing data storage
and management systems may be reluctant or slow to adopt a new approach, like
SANs. Moreover, potential EAI customers may decide to adopt entirely new systems
that eliminate the need for an EAI product. Our success in generating net
revenues in these areas will depend on, among other things, our ability to:
. educate potential customers, strategic partners and end users about
the benefits of SAN, EAI and related technologies;
. maintain and enhance our relationships with leading strategic
partners; and
. predict and base our products on standards that ultimately become
industry standards.
In addition, the continued growth of the market for SANs and related
products depends on the continued decrease in price of related services and
components, such as communication charges and switches. Any increase in the
price of these related services and components would likely cause this market to
grow at a reduced rate.
Finally, SANs are often implemented in connection with deployment of new
storage systems and servers. Accordingly, our future success is also
substantially dependent on the market for new storage systems and servers.
We have recently incurred losses and may not be able to maintain profitability
We experienced a loss of $2.3 million in 1997. We cannot be certain that we
will be able to sustain recent growth rates or that we will realize sufficient
revenues to maintain profitability. Also, we are depending on our SAN and EAI
products for a significant portion of future revenues, especially as revenues
from our channel networking and server gateways and tools products continue to
decline. Our SAN and EAI related revenues must increase more rapidly than our
revenues related to our channel networking and server gateways and tools
products decline. We expect to incur significant product development, sales and
marketing and administrative expenses in connection with the introduction of new
SAN or EAI products, and as a result, we will need to generate significant
revenue increases to achieve and maintain profitability. We may not be able to
sustain or increase profitability.
Our SAN and EAI businesses are difficult to predict because of our limited
operating experience in these markets
We have only recently expanded into the SAN and EAI markets. In addition,
we expect that a significant portion of our future revenues will be derived from
these businesses. This limited operating experience, combined with the evolving
nature of the markets in which we sell our SAN and EAI products, reduces our
ability to accurately forecast our quarterly and annual revenue. Further, we
plan our operating expenses based in part on these revenue projections. Because
most of our expenses are fixed in the short-term or incurred in advance of
anticipated revenue, we may not be able to decrease our expenses in a timely
manner to offset any unexpected shortfall in revenue.
7
<PAGE>
If our relationships with strategic partners are unsuccessful or terminated, our
product revenues could decline
We market our products in connection with a few significant storage
vendors, including EMC, IBM and Hitachi Data Systems. In the three months ended
March 31, 1999, sales of our SAN products to customers using EMC's disk
mirroring systems accounted for 31% of our product revenues. As a result, our
success depends substantially on our ability to manage and expand our
relationships with EMC and other storage vendors, to initiate relationships with
new strategic partners that will recommend our products and the success of our
strategic partners' products. In addition, we rely to a significant extent on
the continued recommendation of our products by our strategic partners. To the
extent that our strategic partners do not recommend our products, or to the
extent that they recommend products offered by our competitors, our business
will be adversely affected.
Additionally, we have only a limited number of sales people devoted to the
sale of our EAI products. We have chosen to rely on the efforts of our strategic
partners, including Cap Gemini, Deloitte Consulting, PricewaterhouseCoopers and
Siebel, to assist us in these sales efforts. To the extent these strategic
partners are unable to sell these products, are unable to implement systems
using our products or recommend our competitor's products, our future revenues
could be substantially affected.
We may not be able to manage and expand our relationships with strategic
partners successfully, and they may not market our products successfully.
Moreover, our relationships with strategic partners are not in writing, have no
minimum purchase commitments and can be terminated or changed at any time. Our
failure to manage and expand our relationships with our significant strategic
partners, our failure to develop relationships with new strategic partners, or
the failure of our strategic partners to market our products could substantially
reduce our net revenues and seriously harm our business.
We have limited product offerings and our existing products and new products
must achieve widespread market acceptance
We derive a substantial portion of our net revenues from a limited number
of SAN and EAI products. Specifically, for the three-month period ended March
31, 1999, we derived approximately 46% and 4% of our product revenues from our
SAN and EAI products, respectively. We expect that net revenues from these
products will account for a substantial and growing portion of our total net
revenues for the foreseeable future. Moreover, we expect net revenues from our
channel networking and server gateways and tools products to decline. As a
result, for the foreseeable future, we will continue to be subject to the risk
of a dramatic decrease in net revenues if demand for our newest products,
particularly our SAN products, declines. Therefore, widespread market acceptance
of these products is critical to our future success. These products have been
only recently introduced. Accordingly, the demand for, and market acceptance of,
these products is uncertain.
Factors that may affect the market acceptance of our SAN and EAI products,
some of which are beyond our control, include the following:
. growth of the SAN, EAI and related products markets;
. performance, quality, price and total cost of ownership of our SAN and
EAI products;
. availability, price, quality and performance of competing products and
technologies; and
. successful development of our relationships with new and existing
customers and strategic partners.
8
<PAGE>
Our industries are subject to rapid technological change, and we must keep pace
with the changes to successfully compete
The markets for our products are characterized by rapidly changing
technology, evolving industry standards and the frequent introduction of new
products and enhancements. Our future success depends in large part on our
ability to enhance our existing products and to introduce new products on a
timely basis to meet changes in customer preferences and evolving industry
standards. We cannot be certain that we will be successful in developing,
manufacturing and marketing new products or product enhancements that respond to
such changes in a timely manner and achieve market acceptance. We also cannot be
certain that we will be able to develop the underlying core technologies
necessary to create new products and enhancements.
Additionally, changes in technology and consumer preference could
potentially render our current products uncompetitive or obsolete. If we are
unable, for technological or other reasons, to develop new products or enhance
existing products in a timely manner in response to technological and market
changes, our business, results of operations and financial condition would be
harmed.
We are substantially dependent on the financial services, telecommunications and
information outsourcing industries.
During the three months ended March 31, 1999, approximately 20%, 16% and 5%
of our product revenues were derived from businesses in the financial services,
telecommunications and information outsourcing industries, respectively. In
addition, for the years ended December 31, 1997 and 1998, 37% and 44% of our
product revenues were derived from businesses in these industries. The erosion
of our relationships with our customers in these industries, or the erosion of
demand for SAN and EAI products in these industries generally, would have an
adverse effect on our financial condition and operating results.
We depend on a limited number of suppliers for key components
We depend upon a limited number of suppliers for several key components
used in the manufacture of our products. In the future we may experience
shortages of, or difficulties in acquiring, these components. If we are unable
to buy these components, we will not be able to manufacture our products on a
timely basis.
We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If we
overestimate our component requirements, we may have excess inventory, which
would increase our costs. If we underestimate our component requirements, we may
have inadequate inventory, which could interrupt our manufacturing and delay
delivery of our products to our customers. Either of these occurrences would
negatively impact our business and operating results.
The competition in our markets may lead to reduced sales of our products,
reduced profits or reduced market share
The markets for our products are competitive and are likely to become even
more competitive. Increased competition could result in pricing pressures,
reduced sales, reduced margins, reduced profits, reduced market share or the
failure of our products to achieve or maintain market acceptance. Our products
face competition from multiple sources, including the ability of some of our
customers to design solutions to the problems targeted by our products. Many of
our competitors and potential competitors have longer operating histories,
greater name recognition, access to larger customer bases or substantially
greater
9
<PAGE>
resources than we have. As a result, they may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements. For all of the foregoing reasons, we may not be able to
compete successfully against our current and future competitors.
We may engage in future acquisitions that dilute our stockholders and cause us
to incur debt or assume contingent liabilities
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products and
services, expand the breadth of our markets or enhance our technical
capabilities, or that may otherwise offer growth opportunities. In the event of
any future purchases, we could:
. spend significant amounts of cash;
. issue stock that would dilute our current shareholders' percentage
ownership;
. incur amortization expense related to goodwill and other intangible
assets; or
. incur debt or assume liabilities.
These purchases also involve numerous risks, including:
. problems combining the purchased operations, technologies, personnel
or products;
. unanticipated costs;
. diversion of management's attention from our core business;
. adverse effects on existing business relationships with suppliers,
customers or strategic partners;
. risks associated with entering markets in which we have no or limited
prior experience;
. potential loss of key employees of purchased organizations; and
. the growth rates of any acquired company may be less than those
projected by analysts or anticipated by markets, which could have a
depressive effect on our stock price.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
Undetected software or hardware errors could increase our costs and delay
product introduction
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our products, including new
or enhanced products. In addition, our products are combined with products from
other vendors. As a result, when problems occur, it may be difficult to identify
the source of the problem. These problems may cause us to incur significant
warranty and repair costs, divert the attention of our engineering personnel
from our product development efforts and cause significant customer relations
problems. Moreover, the occurrence of hardware and software errors, whether
caused by our or another vendor's products, could delay or prevent the
development of the markets in which we compete.
10
<PAGE>
The loss of key executive or experienced personnel or the inability to hire
additional personnel with expertise in the SAN and EAI industries, could
negatively impact sales and delay product introduction
We are dependent on Thomas G. Hudson, our Chairman, President and Chief
Executive Officer. In addition, we rely upon the continued contributions of our
key management, engineering and sales and marketing personnel, many of whom
would be difficult to replace quickly. We also believe that our success depends
to a significant extent on the ability of our management to operate effectively,
both individually and as a group. Many members of our management team have only
recently joined us. The loss of any one of our key employees could adversely
affect our sales or delay the development or marketing of existing or future
products.
We believe our future success will depend also in part upon our ability
to attract and retain highly skilled and qualified managerial, engineering,
sales and marketing, and finance and operations personnel. Competition for these
personnel is intense. In the past, we have experienced difficulty in hiring
qualified personnel with expertise in the SAN and EAI industries, and there can
be no assurance that we will be successful in attracting and retaining these
individuals in the future. The inability to attract or retain qualified
personnel in the future or delays in hiring required personnel, particularly
engineers and sales personnel, could delay the development and introduction of
and negatively impact our ability to sell our products. In addition, companies
in our industry whose employees accept positions with competitors frequently
claim that their competitors have engaged in unfair hiring practices. We cannot
assure you that we will not receive such claims in the future as we seek to hire
qualified personnel or that such claims will not result in costly litigation. We
could incur substantial costs in defending ourselves against these claims,
regardless of their merits.
We must continue to improve our operational systems and controls to manage
future growth
We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. We expect that this growth will
place a significant demand on our management and our operational resources. In
order to manage growth effectively, we must implement and improve our
operational systems, procedures and controls and train our employee base.
Accordingly, we cannot assure you that:
. we will be able to effectively manage the expansion of our operations;
. our key employees will be able to work together effectively as a team
to successfully manage our growth;
. we will be able to hire, train and manage our employee base;
. we will be able to properly integrate our acquisitions;
. our systems, procedures or controls will be adequate to support our
operations; and
. our management will be able to achieve the rapid execution necessary
to fully exploit the market opportunity for our products and services.
Our inability to manage growth effectively could harm our business.
11
<PAGE>
We plan to increase our international sales activities, which will subject us to
additional business risks
International markets accounted for approximately 34% of our revenues in
1998. We plan to expand our international sales activities, and therefore our
success will become increasingly dependent on our performance in international
markets. In fiscal 1999 and 2000, we intend to focus on expanding our
international sales activities in The Netherlands, Mexico and Brazil. Our
international sales growth in these countries will be limited if we are unable
to establish relationships with international distributors, establish additional
foreign operations, expand international sales channel management, hire
additional personnel and develop relationships with international service
providers. Even if we are able to successfully expand international operations,
we cannot be certain that we will be able to maintain or increase international
market demand for our products. Our international operations, including our
sales activities in the rest of Europe, China, The Netherlands, Mexico and
Brazil, are subject to a number of risks, including:
. supporting multiple languages;
. recruiting sales and technical support personnel with the skills to
support our products;
. increased complexity and costs of managing international operations;
. protectionist laws and business practices that favor local
competition;
. dependence on local vendors;
. multiple, conflicting and changing governmental laws and regulations;
. longer sales cycles;
. difficulties in collecting accounts receivable, converting foreign
currency to dollars and remitting funds to the United States;
. reduced or limited protections of intellectual property rights; and
. political and economic instability.
None of our products include screen displays or user documentation in any
language other then the English language. Our future prospects in international
markets may require us to develop multiple language versions of our products and
support documentation. The lack of such documentation could cause prospective
customers to select other products. In addition, the development of such
products and documentation could be costly and time consuming.
Because a significant portion of our international revenues are denominated
in foreign currencies, primarily French francs and British pounds sterling, an
increase in the value of the U.S. dollar relative to these currencies could
make our products more expensive and thus less competitive in foreign markets.
We have applied for and received a limited number of patents and we may be
unable to protect our intellectual property, which would negatively affect our
ability to compete
Historically, we have not pursued patents on all our intellectual property.
Traditionally, we have relied, and currently continue to rely, on a combination
of patent, copyright, trademark and trade secret laws and restrictions on
disclosure to protect our intellectual property rights. We also enter into
confidentiality or license agreements with substantially all our employees,
consultants and corporate
12
<PAGE>
partners, and control access to and distribution of our software, documentation
and other proprietary information. We have four patents in process and have
three existing patents. In addition, while we intend to more vigorously pursue
patent protection for our intellectual property in the future, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Monitoring unauthorized use of our products is difficult, and we
cannot be certain that the steps we have taken will prevent unauthorized use of
our technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States or where legal
authorities in foreign countries do not vigorously enforce existing laws.
We have from time to time received, and may in the future receive,
communications from parties asserting patent rights against us that relate to
certain of our products. Although we believe that we possess all required
proprietary rights to the technology involved in our products and that our
products, trademarks and other intellectual property rights do not infringe upon
the proprietary rights of third parties, we cannot assure you that others will
not claim a proprietary interest in all or part of our technology or assert
claims of infringement. All such claims, regardless of their merits, could
expose us to costly litigation and could substantially harm our operating
results.
A significant license expires on December 31, 1999
A key license that we rely on for the sale of Channelink(R) and UltraNet(R)
products that use ESCON expires on December 31, 1999. ESCON is the enterprise
serial connection protocol and interface used on IBM mainframes. If we are
unable to renew this license, we may be prohibited from further use of the
subject technology and our operating results and financial condition would be
adversely affected. In 1998, Channelink(R) and UltraNet(R) represented
approximately one-half of our product revenues.
Others may bring infringement claims against us, which could be time-consuming
and expensive to defend
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. Although we are
not currently involved in any intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. These claims
and any resulting lawsuits could subject us to significant liability for damages
and invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
. stop selling, incorporating or using our products or services that use
the challenged intellectual property;
. obtain a license from the owner of the infringed intellectual property
right allowing us to sell or use the relevant technology, which
license may not be available on reasonable terms, or at all; and
. redesign those products or services that use such technology.
In addition to the related costs of the foregoing actions, if we are
forced to take any of such actions, we may be unable to manufacture and sell our
products, which would reduce our revenues.
13
<PAGE>
Our failure or the failure of our suppliers, strategic partners or customers to
be year 2000 compliant could harm our business
Failure of our products to recognize correctly date information when the
year changes to 2000 could result in significant decreases in market acceptance
of our products, increases in warranty claims and legal liability for defective
software. We have undertaken testing and will continue to test our products to
be sure that they are fully year 2000 compliant. Year 2000 preparations by our
strategic partners, suppliers and customers could also slow down purchases of
our products.
Our internal year 2000 compliance review is focused on reviewing our
internal computer information and security systems for year 2000 compliance and
developing and implementing remedial programs to resolve year 2000 issues in a
timely manner. Additionally, we are contacting our third party suppliers and
requesting their written assurances that their systems are year 2000 compliant.
If our suppliers, vendors, major distributors or partners fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a year 2000
problem occurs, it may be difficult to determine which vendor's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any year 2000 failures
will harm us.
A worst case scenario relative to the year 2000 issue would be the
discovery of additional year 2000 deficiencies in our products that require
significant extra time and expense to correct. A critical year 2000 deficiency
by a key supplier, coupled with a failure to locate a suitable alternative
source of supply, could also have a material impact on our business.
Our customers may delay product purchases until after January 1, 2000, which
would harm our sales
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. In
addition, our sales could be materially impacted in 1999 if customers were to
stop, or significantly reduce, procurement of new equipment for their data
centers and networks until after the start of the year 2000.
Our products must comply with evolving industry standards and government
regulations
The market for our products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. For example, all components of a SAN must
utilize a limited number of defined standards in order to work with existing
computer systems. Our products comprise only a part of the entire storage area
network and we depend on the companies that provide other components of the
storage area network, many of whom are significantly larger than we are, to
support the industry standards as they evolve. Also, our EAI products must
provide compatibility with major hardware and software platform standards in
order to be useful to our customers. The failure of these providers to support
these industry standards could adversely affect the market acceptance of our
products. In addition, in the United States, our products must comply with
various regulations and standards defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, products that we
develop will also be required to comply with standards established by
authorities in various countries. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.
14
<PAGE>
Management can spend the proceeds of this offering in ways with which our
shareholders may not agree
Our management can spend the net proceeds from this offering in ways with
which our shareholders may not agree. We cannot assure you that our investments
and use of the net proceeds of this offering will yield favorable returns or
results.
Provisions in our charter documents, our shareholder rights plan, existing
agreements and Minnesota law could prevent or delay a takeover of our company
and may impact the likelihood of takeover offers that would be attractive to
our shareholders
Provisions of our articles of incorporation, bylaws and shareholder rights
plan and existing agreements may discourage, delay or prevent a merger or
acquisition that a shareholder may consider favorable. These provisions include:
. authorizing the issuance of preferred stock without shareholder
approval;
. termination of contracts and license agreements in the event of a
takeover;
. limiting the persons who may call special meetings of shareholders;
and
. preventing a takeover of us under our shareholder rights plan as a
result of the dilutive effect the issuance of securities under the
plan would have on acquiring parties.
Provisions of Minnesota law also may discourage, delay or prevent someone
from acquiring or merging with us. Further, some of our existing contracts may
give other parties the right to terminate the contract or take other action
that could harm our business as a result of a takeover.
Our stock price may be volatile and you may not be able to resell your shares at
or above the offering price
The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that has often been
unrelated to the performance of any specific public companies. The market price
of our common stock has fluctuated in the past and is likely to fluctuate in the
future. As a result, you may be unable to resell your common stock at or above
the offering price. Any of the following factors, some of which are beyond our
control, could have a significant impact on the market price of our common
stock:
. actual or anticipated fluctuations in our operating results;
. changes in financial estimates by securities analysts;
. changes in market valuations of other technology companies;
. announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
. general conditions in the financial services and telecommunications
industries, and among information outsourcers;
. losses of major customers;
15
<PAGE>
. additions or departures of key personnel;
. sales of common stock in the future; and
. anticipated trends in the economy in general, such as increased
interest rates, and domestic and foreign political events, including
war and civil unrest.
You will suffer dilution in value of your shares
Investors in this offering will incur immediate and substantial
dilution in the net tangible book value per share of common stock.
We do not plan to pay cash dividends on our common stock
We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in our foreseeable future. We intend to
retain future earnings, if any, to finance the growth and expansion of our
business and for general corporate purposes. Loan agreements and other contracts
which we might enter into in the future could prevent us from paying dividends.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and other documents we have filed with the Securities
and Exchange Commission contain forward-looking statements which may include
statements about our:
. business strategy;
. timing of and plans for the introduction or phase-out of products or
services;
. enhancements of existing products or services;
. plans for hiring additional personnel;
. entering into strategic partnerships; and
. other plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
When used in this prospectus, the words "may," "should," "expects,"
"plans," "anticipates," "believes," "estimates," "predicts," "intend,"
"potential" or "continue" and similar expressions are generally intended to
identify forward-looking statements. Because these forward-looking statements
involve risks and uncertainties, actual results could differ materially from
those expressed or implied by these forward-looking statements for a number of
reasons, including those discussed under "Risk Factors" and elsewhere in this
prospectus. We assume no obligation to update any forward-looking statements.
These statements are only predictions. Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We estimate that our net proceeds from the sale of the 3,500,000 shares of
common stock we are offering will be approximately $69.3 million or
$79.7 million if the underwriters exercise their over-allotment option in
full, after deducting underwriting discounts and commissions, and after
deducting our estimated offering expenses. We expect to use the net proceeds of
this offering for working capital and general corporate purposes, including
expenditures for research and development of new products and services,
distribution channel development and other corporate purposes. In addition, we
may use a portion of the net proceeds for the acquisition of businesses,
products and technologies that are complementary to ours. Pending such uses, we
will invest the net proceeds of this offering in investment grade, interest-
bearing securities.
17
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol
"CMNT." The following table sets forth for the indicated periods the range of
high and low per share closing sales prices for our common stock as reported on
the Nasdaq National Market:
<TABLE>
<CAPTION>
Price Range of
Common Stock
----------------------------------------
High Low
---------------- ----------------
<S> <C> <C>
Year Ended December 31, 1997:
First Quarter................................... $7.00 $4.88
Second Quarter.................................. 5.75 3.88
Third Quarter................................... 6.13 3.38
Fourth Quarter.................................. 5.63 3.38
Year Ended December 31, 1998:
First Quarter................................... $5.00 $3.69
Second Quarter.................................. 5.88 3.88
Third Quarter................................... 6.50 3.50
Fourth Quarter.................................. 14.25 3.75
Year Ended December 31, 1999:
First Quarter................................... $17.56 $9.75
Second Quarter (through June 14, 1999).......... 27.75 14.06
</TABLE>
On June 15, 1999, the last reported sale price for our common stock was
$21.00 per share, and there were approximately 1,000 holders of record of our
common stock.
DIVIDEND POLICY
We have not paid any cash dividends since our inception, and we do not
intend to pay any cash dividends in the future.
18
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization as of March
31, 1999:
. on an actual basis; and
. as adjusted to give effect to the receipt of the estimated net
proceeds from the sale of 3,500,000 shares of common stock offered by
us in this offering, after deducting underwriting commissions and
discounts and estimated offering expenses.
See Note 6 to our consolidated financial statements for a description of our
capital lease obligations.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
Actual As Adjusted
--------------- -------------
(in thousands)
<S> <C> <C>
Obligations under capital lease, less current installments............. $ 1,725 $ 1,725
--------------- ---------------
Shareholders' equity...................................................
Undesignated preferred stock; authorized 965 shares; none issued
and outstanding............................................... - -
Series A Junior Participating Preferred Stock; authorized 35
shares; none issued and outstanding........................... - -
Common stock, $.01 par value; authorized 100,000 shares;
22,782 shares issued and outstanding, actual; 26,282 shares
issued and outstanding, as adjusted........................... 228 263
Additional paid-in capital.................................... 58,120 127,351
Unearned compensation............................................. (748) (748)
Retained earnings................................................. 8,838 8,838
Accumulated other comprehensive income - foreign currency
translation adjustment........................................ (630) (630)
--------------- ---------------
Total shareholders' equity.................................... 65,808 135,074
--------------- ---------------
Total capitalization..................................... $ 67,533 $ 136,799
=============== ===============
</TABLE>
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus. The selected consolidated
financial data set forth below as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998, are derived from,
and are qualified in their entirety by reference to, our consolidated financial
statements, which have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, and together with their report thereon, are
included elsewhere in this prospectus. The selected consolidated financial data
set forth below as of December 31, 1994, 1995 and 1996, and for the years ended
December 31, 1994 and 1995, are derived from audited financial statements not
included in this prospectus. The consolidated balance sheet data as of March 31,
1999 and the consolidated statements of operations data for the three months
ended March 31, 1998 and 1999 are derived from unaudited financial statements
included elsewhere in this prospectus and include all adjustments, consisting
only of normal recurring adjustments, which we consider necessary for a fair
presentation of the information set forth therein. Operating results for the
three months ended March 31, 1999 are not necessarily indicative of results that
may be expected for the year ending December 31, 1999 or future results.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
---------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of (in thousands, except per share amounts)
Operations Data
Total revenue .................... $ 79,542 $ 78,837 $ 97,109 $ 97,841 $133,535 $31,166 $ 36,913
Gross profit ..................... 43,068 46,264 53,997 56,150 78,707 18,634 21,814
Total operating expenses ......... 46,117 41,337 54,045 61,443 71,495 18,112 18,352
Income (loss) from operations .... (3,049) 4,927 (48) (5,293) 7,212 522 3,462
Net income (loss) ................ $ (4,714) $ 4,023 $ 1,360 $ (2,314) $ 4,729 $ 369 $ 2,697
========== ========== ========== ========== ========== ========== ==========
Net income (loss) per share:
Basic ....................... $ (.21) $ .18 $ .06 $ (.10) $ .21 $ .02 $ .12
Diluted ..................... (.21) .17 .06 (.10) .21 .02 .11
Shares:
Basic........................ 21,972 22,675 23,241 22,702 22,095 22,106 22,481
Diluted...................... 21,972 23,443 23,557 22,702 22,572 22,243 25,203
<CAPTION>
December 31, March 31, 1999
---------------------------------------------------------- ----------------------
As
1994 1995 1996 1997 1998 Actual Adjusted
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data
Cash, cash equivalents and
marketable securities .......... $ 18,342 $ 28,409 $ 35,065 $10,824 $ 12,362 $ 14,950 $ 84,216
Working capital ................. 35,387 44,282 48,192 30,380 35,587 39,993 109,259
Total assets .................... 73,149 79,134 82,379 85,487 94,027 99,977 169,243
Long-term obligations ........... 163 - - 701 2,816 1,725 1,725
Total shareholders' equity ...... 53,979 60,506 64,161 55,607 60,558 65,808 135,074
</TABLE>
The foregoing as adjusted information reflects the proceeds from the sale
of 3,500,000 shares offered hereby and presumes deduction of underwriting
discounts and estimated offering expenses.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this prospectus. The results described below are not necessarily indicative of
the results to be expected in any future period. Certain statements in the
following discussion are considered forward-looking under the federal securities
laws. These forward-looking statements are subject to various risks and
uncertainties that could cause actual results to differ substantially from
historical results or our predictions. See "Special Note Regarding Forward-
Looking Statements."
Overview
We design, manufacture, market and support a wide range of computer
hardware and software products for business-critical storage networks. We also
design, manufacture, market and support products that integrate existing
computer applications. We operate as two separate divisions--the Network
Solutions Division and the Enterprise Integration Solutions Division. Our
Network Solutions Division sells SAN products and our established channel
networking products, which enable computers to transmit data over unlimited
distances. Our Enterprise Integration Solutions Division develops and sells EAI
software that automates the integration of computer software applications, as
well as our traditional server gateways and tools, which enable multiple desktop
computers and mainframe terminals to communicate with one another. Both
divisions offer professional consulting and support services.
We were incorporated in 1979. Our 1998 revenues increased 36%, to $133.5
million, from $97.8 million in 1997, due in part to our October 1997 acquisition
of the Internet Solutions Division of Apertus. This increase in revenues
continued during the first quarter of 1999 with revenues of $36.9 million, an
increase of 18% over 1998 first quarter revenues of $31.2 million.
Our Network Solutions Division product revenues increased 17% in the first
quarter of 1999 to $20.8 million when compared to the first quarter of 1998.
Revenues from SAN product applications increased 91% in the first quarter of
1999 to $11.8 million from $6.2 million in the first quarter of 1998. Sales of
non-SAN related product applications, principally channel networking products,
declined 22% in the first quarter of 1999 to $9.0 million from $11.6 million in
the first quarter of 1998.
Revenue from Enterprise Integration Solutions Division products increased
9% in the first quarter of 1999 to $4.9 million when compared to the first
quarter of 1998. Revenue from the sale of our EAI products increased 81% in the
first quarter of 1999 to $1.1 million from $611,000 in the first quarter of
1998. Sales of server gateways and tools products decreased 2% in the first
quarter of 1999 to $3.8 million when compared to the first quarter of 1998.
As set forth above, we derive an increasingly significant portion of our
revenues from sales of our SAN and EAI products. As a result of product
maturation, revenues derived from traditional channel networking and server
gateways and tools products have declined, and we expect that revenues from
these products will continue to decline in the future as we continue to focus
more of our resources on our SAN and EAI products.
21
<PAGE>
We primarily sell our SAN products directly to end-user customers in
connection with joint marketing activities with our business partners and
original equipment manufacturers, or OEMs. OEMs combine our products with their
own products and sell the combined products to their customers. For a new
customer, the initial sales and design cycle, from first contact through
shipment, can vary from 90 days to 12 months or more. We expect that this cycle
will continue.
While in recent quarters we have been profitable, a risk exists that we
could experience variable earnings levels, including losses. Historically, a
large percentage of our product shipments have occurred late in each quarter.
Timing of receipt of orders from customers and delays in shipment can have a
disproportionate impact on our revenues and results of operations in any given
quarter.
Acquisitions
On October 24, 1997, we acquired substantially all of the assets, including
in-process research and development, of the Internet Solutions Division of
Apertus Technologies Inc., a provider of EAI and server gateways and tools. The
purchase price of $16.4 million included a cash payment of $11.4 million at
closing and assumption by us of $5.0 million of liabilities and related
acquisition costs. The amount related to in-process research and development of
$2.8 million was charged to expense in 1997 as the underlying research and
development projects had not yet reached technical feasibility. Subsequent to
our acquisition of the Internet Solutions Division of Apertus, we recorded a
charge of $2.2 million for costs incurred to integrate our businesses, including
accruals for severance, facility closures and infrastructure integration.
On December 3, 1998, we acquired all of the outstanding stock of
IntelliFrame Corporation, a start-up software and services company that develops
technology for integrating legacy systems with client/server and for the
Internet. The contract to purchase IntelliFrame's stock requires the $2.0
million purchase price to be paid in two installments of $1.0 million in each of
January 1999 and 2000. We made the January 1999 payment of $1.0 million on
January 4, 1999. We allocated $927,000 of the purchase price to in-process
research and development, which was charged to expense in 1998, because 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-commerce and CRM
applications. We estimate that as of June 1, 1999, we will spend approximately
$400,000 to complete development of process dynamics. Two employees who were
former shareholders of IntelliFrame will be eligible for bonus payments of up to
$12.0 million in the aggregate through December 31, 2001 if future revenues from
our EAI products exceed defined targets. The potential bonus payments increase
to a maximum of $16.0 million if we divest any portion of the EAI product line.
The full bonus payments set forth above are conditioned upon the employment of
these individuals through July 1, 2000.
22
<PAGE>
Results of Operations
The following tables set forth financial data for the periods indicated
as a percentage of total revenue except for gross profit, which is expressed as
a percentage of the related revenue.
<TABLE>
<CAPTION>
Network Solutions Division
-------------------------------------------------------------
Three Months Ended
Year Ended December 31, March 31,
------------------------------- ----------------------------
1997 1998 1998 1999
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
Product sales................................... 70.0% 72.8% 73.6% 71.2%
Service fees.................................... 30.0 27.2 26.4 28.8
------ ------ ------ ------
Total revenue............................... 100.0 100.0 100.0 100.0
------ ------ ------ ------
Gross profit:
Product sales................................... 63.8 63.4 67.8 60.7
Service fees.................................... 35.9 36.7 35.9 44.2
------ ------ ------ ------
Total gross profit.......................... 55.4 56.1 59.4 56.0
------ ------ ------ ------
Operating expenses:
Sales and marketing............................. 34.1 30.5 29.9 27.4
Engineering and development..................... 15.2 13.4 13.4 14.5
General and administrative...................... 5.5 4.6 4.3 4.6
------ ------ ------ ------
Total operating expenses.................... 54.8 48.5 47.6 46.5
------ ------ ------ ------
Income from operations............................... 0.6 7.6 11.8 9.5
------ ------ ------ ------
Other income (expense), net..................... 1.8 0.4 0.3 (0.1)
------ ------ ------ ------
Income before income taxes........................... 2.4 8.0 12.1 9.4
Provision for income taxes...................... 0.9 2.7 4.5 3.2
------ ------ ------ ------
Net income ....................................... 1.5% 5.3% 7.6% 6.2%
====== ====== ====== ======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Enterprise Integration Solutions Division
----------------------------------------------------
Three Months Ended
Year Ended December 31, March 31,
----------------------- -----------------------
1997 1998 1998 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product sales................................... 71.7% 67.2% 64.9% 64.5%
Service fees.................................... 28.3 32.8 35.1 35.5
-------- -------- -------- --------
Total revenue............................... 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Gross profit:
Product sales................................... 83.2 83.0 75.3 91.2
Service fees.................................... 23.8 38.8 35.1 34.6
-------- -------- -------- --------
Total gross profit.......................... 66.4 68.4 61.2 71.1
-------- -------- -------- --------
Operating expenses:
Sales and marketing............................. 36.3 39.7 56.0 35.4
Engineering and development..................... 31.5 22.8 33.6 21.8
General and administrative...................... 3.2 5.0 5.0 5.0
Purchased in process research and
development................................... 15.6 3.0 -- --
Integration charges............................. 12.4 -- -- --
-------- -------- -------- --------
Total operating expenses.................... 99.0 70.5 94.6 62.2
-------- -------- -------- --------
Income (loss) from operations........................ (32.6) (2.1) (33.4) 8.9
Other income (expense), net..................... (0.2) -- (0.2) 8.6
-------- -------- -------- --------
Income (loss) before income taxes.................... (32.8) (2.1) (33.6) 17.5
Provision (benefit) for income taxes............ (13.1) 0.3 (12.6) 5.9
-------- -------- -------- --------
Net income (loss).................................... (19.7)% (2.4)% (21.0)% 11.6%
======== ======== ======== ========
</TABLE>
24
<PAGE>
Quarterly Operating Results
The following table sets forth information concerning our quarterly
operating results for our most recent eight quarters. This information has been
derived from our unaudited consolidated financial statements. In our opinion,
this unaudited information has been prepared on the same basis as the annual
consolidated financial statements and includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for the quarters presented. This information should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this prospectus. The operating results for any quarter are
not necessarily indicative of results for any future period. All information
presented is in thousands except per share data.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30, December 31, March 31,
1997 1997 1997 1998 1998 1998 1998 1999
----------- ------------- ------------ ----------- ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............. $ 20,696 $ 23,810 $ 31,588 $ 31,166 $ 33,466 $ 33,010 $ 35,893 $ 36,913
Gross profit........ 11,736 13,725 18,022 18,634 19,517 18,884 21,672 21,814
Income (loss) from
operations....... (1,769) 206 (3,901) 522 1,259 2,610 2,821 3,462
Net income (loss)... $ (858) $ 373 $ (2,206) $ 369 $ 870 $ 1,799 $ 1,691 $ 2,697
=========== ============= ============ =========== ========== ============ ============ ============
</TABLE>
Revenue
Our Network Solutions Division revenue consists of the sale and support of
products that enable our customers to build and manage SANs and our traditional
channel networking products for applications such as remote storage, remote disk
mirroring, remote tape vaulting and disaster recovery.
Our Enterprise Integration Solutions Division revenue consists of the
licensing, sale and support of EAI products and our traditional server gateways
and tools, which are used for CRM and e-commerce applications.
We generally recognize revenue from product sales upon shipment or signed
customer acceptance depending on the terms of the contract or purchase order.
Revenue from software license agreements with OEMs for redistribution to the
OEM's customers is recognized when the OEM reports delivery of the software to
its 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.
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<PAGE>
Three Months Ended March 31, 1998 and 1999
Revenue from Network Solutions Division products increased 17% in the first
quarter of 1999 to $20.8 million compared to the first quarter of 1998. SAN
applications for both open systems and mainframes continued to drive new product
revenue during the first quarter of 1999. SAN product applications increased 91%
in the first quarter of 1999 to $11.8 million from $6.2 million in the first
quarter of 1998. Sales of product applications not related to our SAN products
declined in the first quarter of 1999 to $9.0 million from $11.6 million in the
first quarter of 1998.
Service revenue from the Network Solutions Division increased by $2.0
million or 32% in the first quarter of 1999 to $8.4 million compared to the
first quarter of 1998, with new professional services revenue accounting for
$1.2 million of the increase. The growing base of customers using our products
accounted for the remaining increase in revenue.
Revenue from Enterprise Integration Solutions Division products increased
9% in the first quarter of 1999 to $4.9 million compared to the first quarter of
1998. Revenue from the sale of EAI products increased 81% in the first quarter
of 1999 to $1.1 million from $611,000 in the first quarter of 1998. The increase
was due to growing customer demand for products that integrate legacy
applications and networks with new networks and applications so that users can
access business-critical information. The acquisition of IntelliFrame did not
have a significant impact on 1999 first quarter revenue. Sales of server
gateways and tools decreased 2% in the first quarter of 1999 to $3.8 million
compared to the first quarter of 1998, primarily due to a reduction in sales
volume to OEMs.
Service revenue from the Enterprise Integration Solutions Division
increased 11% in the first quarter of 1999 to $2.7 million compared to the first
quarter of 1998, primarily due to an increase in professional services revenue.
Revenue generated from the sale of products and services outside the United
States increased by $1.6 million, or 16%, in the first quarter of 1999 compared
to the first quarter of 1998. This increase was primarily due to growing
international customer demand for SAN and EAI related product applications. We
derived 31% of our revenue outside the United States in the first quarter of
1999 compared to 32% in the first quarter of 1998.
During 1997 we announced our new SAN strategy and UltraNet(R) family of
products that provides for high-speed connectivity between storage devices and
servers from anywhere, any time. During 1999 we intend to continue to add new
features to our UltraNet(R) 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.
We expect continued quarter-to-quarter fluctuations in both domestic and
international revenues. The timing of sizable orders, because of their relative
impact on total quarterly sales, contributes to such fluctuations. The level of
product sales reported by us in any given period will continue to be affected by
the receipt and fulfillment of sizable new orders.
Years Ended December 31, 1996, 1997 and 1998
Revenue from Network Solutions Division products decreased 9% in 1997 to
$56.1 million compared to 1996. Fulfillment of an OEM contract with IBM resulted
in $7.6 million of this decrease. The balance is attributable to a decrease in
channel networking and other non-SAN related product sales. The reduction in
networking products revenue attributable to these items was somewhat
26
<PAGE>
offset by initial sales of SAN related product applications, including sales of
UltraNet(R) Storage director products.
Revenue from Network Solutions Division products increased 34% in 1998 to
$75.0 million compared to 1997. SAN applications for both open systems and
mainframes continued to drive new product revenue in 1998. Product sales of SAN-
related applications increased 379% in 1998 to $31.9 million from $6.7 million
in 1997. Product sales of channel networking related applications declined 13%
in 1998 to $43.1 million from $49.5 million in 1997.
Service revenue from the Network Solutions Division increased by 17% in
both 1997 and 1998 to $24.1 million and $28.1 million, respectively, due to the
growing base of customers using our products. In addition, the sale of
professional services to Network Solutions Division customers generated $1.5
million of new incremental service revenue in 1998.
Revenue from Enterprise Integration Solutions Division products decreased
1% in 1997 to $12.7 million compared to 1996. Reductions in revenue from the
sale of traditional server gateways and tools products to OEMs were somewhat
offset by initial sales of our EAI products. The October 1997 acquisition of the
Internet Solutions Division of Apertus accounted for $2.3 million of new product
revenue in 1997.
Revenue from the sale of Enterprise Integration Solutions Division products
increased 62% in 1998 to $20.5 million, due to the acquisition of the Internet
Solutions Division of Apertus in the fourth quarter of 1997 and an increase in
the sale of EAI products. Revenue from the sale of EAI products increased 528%
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% of the
increase in revenue from EAI product sales can be attributed to a single
transaction.
Service revenues from the Enterprise Integration Solutions Division
increased in 1997 and 1998 by $2.7 million and $5.0 million, respectively,
primarily due to the October 1997 acquisition of the Internet Solutions Division
of Apertus.
Revenue generated from the sale of products and services outside the United
States decreased by $173,000 or 1% in 1997 compared to 1996 and increased by
$16.3 million or 57% in 1998 compared to 1997. Specifically, we derived 30%, 29%
and 34% of our total revenue from outside the United States in 1996, 1997 and
1998, respectively. The increase in revenue generated outside the United States
in 1998 is primarily attributable to growing customer demand for SAN and EAI
related product applications.
Sales to IBM and its multiple divisions accounted for 18% of our total
revenue in 1996. No single customer accounted for more than 10% of our revenue
in 1997 or 1998.
Revenue increases in both 1997 and 1998 were attributable to the increased
sales of both SAN and EAI products. Price increases for our products and
services did not have a significant impact on revenue in either year.
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<PAGE>
Gross Profit
Three Months Ended March 31, 1998 and 1999
Gross profit margins from the sale of Network Solutions Division products
were 61% in the first quarter of 1999 compared to 68% in the first quarter of
1998. The decrease in the gross profit margin was primarily due to favorable
purchases of raw materials that were realized in the first quarter of 1998.
Gross profit margins from Network Solutions Division service revenues were
44% in the first quarter of 1999, compared to 36% in the first quarter of 1998.
The improvement in gross profit margins from the Network Solutions Division is
attributable to new revenue from professional services that offer a higher gross
margin than our traditional service business.
Gross profit margins from the sale of Enterprise Integration Solutions
Division products were 91% in the first quarter of 1999 compared to 75% in the
first quarter of 1998. The increase can be attributed to higher margin software
sales accounting for a larger percentage of total Enterprise Integration
Solutions Division product revenue.
Gross profit margins from all services, including professional services,
provided by the Enterprise Integration Solutions Division were 35% in the first
quarter of both 1998 and 1999.
Actual gross profit margins on product sales in 1999 will depend on a
number of factors, including the mix of products, acceptance of our new
products, particularly in the SAN and EAI markets, the relative amount of
products sold through sales channels other than our direct sales force,
primarily OEM sales, and the level of price competition.
Years Ended December 31, 1996, 1997 and 1998
Gross profit margins from Network Solutions Division product sales were 62%
in 1996, compared to 64% in 1997 and 63% in 1998. The 1997 decrease in lower
margin sales to IBM resulted in a higher gross profit margin percentage from
product sales in 1997 compared to 1996. The slight decrease in percentage gross
margin from Network Solutions Division product sales in 1998 compared to 1997
was due to an increase in UltraNet(R) product sales that have a slightly lower
gross margin during the product introduction period than our traditional
Channelink(R) products.
Gross profit margins from Network Solutions Division service revenues in
1996, 1997 and 1998 were 30%, 36% and 37%, respectively. The improvement in
gross profit margins in 1997 and 1998 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 our traditional service business.
Gross profit margins from Enterprise Integration Solutions Division product
sales were 81% in 1996 compared to 83% in 1997 and 1998. The increase can be
attributed to the increased sales of higher-margin software products accounting
for a larger percentage of total Enterprise Integration Solutions Division
product revenue.
Gross profit margins from Enterprise Integration Solutions Division service
revenues were a negative 20% in 1996 and improved to 24% and 39% in 1997 and
1998, respectively. The improvement in gross profit margins from Enterprise
Integration Solutions Division service revenues in both 1997 and 1998 can be
attributed to economies of scale generated by the October 1997 acquisition of
the Internet Solutions Division of Apertus.
28
<PAGE>
Operating Expenses
Three Months Ended March 31, 1998 and 1999
Sales and marketing expense related to our Network Solutions Division
increased by $753,000 or 10% in the first quarter of 1999 compared to the first
quarter of 1998 due to the additional expense associated with the 17% increase
in revenue from the sale of Network Solutions Division products.
Engineering and development expenses primarily relate to costs associated
with development of new products and enhancements to existing products.
Engineering and development expenses related to our Network Solutions Division
increased by $1.0 million, or 32%, compared to the first quarter of 1998. This
increase was primarily due to continued development of our UltraNet(R) family of
products that provide customers with additional applications to satisfy their
growing need for SAN capabilities.
Operating expenses, including sales and marketing and engineering and
development, for our Enterprise Integration Solutions Division decreased by $1.8
million, or 28%, in the first quarter of 1999 compared to the first quarter of
1998 due to the completion of our initiatives in 1998 to reduce head count and
expense associated with this division.
We anticipate investing approximately 15% of total revenue on engineering
and development in 1999, which includes investments in current and future
products. We believe a sustained high level of investment in engineering and
development is essential to customer satisfaction and future revenue. During
1999, we intend to continue to invest in our UltraNet(R) product line,
particularly in the areas of open systems and fibre channel to further enhance
our SAN offerings. We also intend to complete development of the process
dynamics technology acquired as in-process research and development from
IntelliFrame in December 1998.
General and administrative expense increased by $321,000, or 23%, in the
first quarter of 1999 compared to the first quarter of 1998. The increase is
primarily attributable to the additional expense associated with the higher
level of revenue in the first quarter of 1999.
The operating margin as a percentage of total revenue for our Network
Solutions Division in the first quarter of 1999 was equal to 9.5%, compared to
11.8% in the first quarter of 1998. Operating margin for our Enterprise
Integration Solutions Division improved to 8.9% of total revenue in the first
quarter of 1999 compared to a negative 33.4% in the first quarter of 1998.
Years Ended December 31, 1996, 1997 and 1998
Sales and marketing expenses increased by $3.0 million, or 13%, in 1997 as
compared to 1996 due to the marketing expense associated with the launch of our
SAN strategy and UltraNet(R) family of products in 1997 and investments we made
in our sales and marketing organization to identify new market opportunities for
our products. Sales and marketing expense related to our Network Solutions
Division increased by $4.1 million, or 15%, in 1998 as compared to 1997 due to
the additional expense associated with the 34% increase in Network Solutions
Division product revenue.
Engineering and development expense related to our Network Solutions
Division increased in 1997 and 1998 by $2.2 million, or 22%, and $1.6 million,
or 13%, respectively, compared to the prior year due to continued development of
our UltraNet(R) family of products that provide customers with additional
29
<PAGE>
applications to satisfy their growing need for SAN capabilities. Revenues
related to shipments of UltraNet(R) products increased 222% to $17.7 million in
1998 from $5.5 million in 1997.
Sales and marketing expenses related to our Enterprise Integration
Solutions Division declined by $1.5 million in 1997 compared to 1996 due to the
reassignment of certain sales personnel to the Network Solutions Division. Sales
and marketing expense related to our Enterprise Integration Solutions Division
increased by $5.7 million in 1998 due to the October 1997 acquisition of the
Internet Solutions Division of Apertus.
Engineering and development expenses related to our Enterprise Integration
Solutions Division in 1996, 1997 and 1998 were $3.9 million, $5.6 million and
$7.0 million, respectively. The increases in 1997 and 1998 can be attributed to
continued development of new products and the acquisition of the Internet
Solutions Division of Apertus in the fourth quarter of 1997. In 1998, we also
completed development of the Enterprise/Connect(TM) product acquired as in-
process research and development in connection with this acquisition.
General and administrative expense decreased by $193,000, or 4%, in 1997 as
compared to 1996 due to incremental costs incurred in 1996 for employee
severance and costs incurred in 1996 associated with a management reorganization
that occurred at the end of 1995. General and administrative expense increased
by $1.3 million, or 26%, in 1998 as compared to 1997. This increase is primarily
attributable to the additional expense associated with the higher level of
revenue and acquisition of the Internet Solutions Division of Apertus in October
1997.
Excluding special charges, our operating expenses in 1996, 1997 and 1998
were equal to 53%, 58% and 53% of total revenue, respectively. The deterioration
in operating expense as a percentage of total revenue in 1997 compared to 1996
is attributable to the added expense associated with the development and launch
of our UltraNet(R) product line and our SAN strategy. The improvement in
operating expenses as a percentage of total revenue in 1998 compared to 1997 is
attributable to a decrease in personnel and other cost control initiatives
combined with the increase in total revenue.
Special Charges
During 1996, we recorded a $2.7 million pre-tax charge for the write-down
of purchased technology due to changing market conditions and evolving customer
requirements for server gateways and tools.
During the fourth quarter of 1997, we recorded pre-tax charges of $2.8
million for in-process research and development associated with the acquisition
of the Internet Solutions Division of Apertus and $2.2 million for severance,
facility closures and infrastructure integration subsequent to the acquisition,
to integrate the businesses.
During the fourth quarter of 1998, we recorded a $927,000 charge for in-
process research and development associated with the acquisition of
IntelliFrame. This charge was not deductible for tax purposes.
Other
Three Months Ended March 31, 1998 and 1999
Other income increased to $626,000 in the first quarter of 1999 from
$69,000 in the first quarter of 1998 due to recognition of a $667,000 payment
received in connection with the sale of our vision product line. We presently
anticipate, but cannot assure, that two additional payments of $667,000 each
will be received and recognized as other income in March 2000 and March 2001,
respectively.
30
<PAGE>
We recorded a provision for income taxes in the first quarter of 1999 at an
effective income tax rate of 34%, compared to 38% in the first quarter of 1998.
Fluctuations in our effective income tax rate are primarily due to the amount of
non-deductible foreign losses and fluctuations in the level of benefit from our
foreign sales corporation.
Years Ended December 31, 1996, 1997 and 1998
Interest income decreased in 1997 and 1998 by $306,000 and $1.2 million
from the prior year, due to lower available balances of cash and marketable
securities resulting from our common stock repurchase program and acquisition of
the Internet Solutions Division of Apertus.
We recorded a provision for income taxes in 1996, 1997 and 1998 at an
effective rate of 33%, 41% and 38%, respectively. Excluding the nondeductible
charge in 1998 for purchased in-process research and development associated with
the acquisition of IntelliFrame, our effective tax rate for 1998 would have been
34%. Fluctuations in our effective income tax rate for 1997 and 1998 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 our
foreign sales corporation. We recorded a net deferred tax asset at December 31,
1998 of $5.7 million. Based on an assessment of our taxable earnings history and
prospective future taxable income, we have determined it to be more likely than
not that our net deferred tax asset will be realized in future periods. We may
be required to provide a valuation allowance for this asset in the future if it
does not generate sufficient taxable income as planned.
Liquidity and Capital Resources
We have historically financed our operations through the private and public
sale of equity securities, bank borrowings under lines of credit, capital and
operating leases and cash generated by operations.
Cash, cash equivalents and marketable securities as of March 31, 1999
totaled $15.0 million, an increase of $2.6 million since December 31, 1998.
Operations and proceeds from the exercise of stock options provided cash in the
first quarter of 1999 of $3.2 million and $2.7 million, respectively. Uses of
cash in the first quarter of 1999 included the purchase of property and
equipment and spare parts totaling $2.3 million. We also made a $1.0 million
installment payment in the first quarter of 1999 relating to our 1998 purchase
of IntelliFrame.
Cash, cash equivalents and marketable securities as of December 31, 1998
totaled $12.4 million, an increase of $1.5 million in 1998. Operations provided
$10.9 million of cash in 1998. Our 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 $6.9
million in 1998 due to higher sales levels and additional requirements for test
products and evaluations. Accrued liabilities increased by $2.4 million in 1998
due to higher year-end bonuses and commissions resulting from our increased
revenue and profitability in 1998. Proceeds from the exercise of stock options
and shares issued under the employee stock purchase plan contributed $1.6
million of cash in 1998. Uses of cash in 1998 included the purchase of property
and equipment, spare parts and technology assets totaling $9.3 million and
common stock repurchases of $1.8 million.
Expenditures for capital equipment and spare parts have been, and will
likely continue to be, a significant capital requirement. We have leased a new
building, presently under construction, for our principal business operations
with occupancy scheduled for the 1999 fourth quarter. We believe that our
current balances of cash, cash equivalents and marketable securities, when
combined with anticipated cash
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<PAGE>
flows from operations, and net proceeds from this offering will be adequate to
fund our operating plans and meet our currently anticipated aggregate capital
requirements, at least through the next 12 months.
We believe that inflation has not had a material impact on our operations
or liquidity to date.
Year 2000
We are aware of the issues relating to the year 2000 and continue to assess
the impact that year 2000 issues will have on our business. We have also
initiated corrective action with respect to the year 2000 issues uncovered
during our assessment. The following information outlines the current status of
our plans regarding year 2000 issues.
Our State of Readiness
We have established a cross functional team that has been charged with
assessing our year 2000 readiness and identifying year 2000 related issues that
could impact our business. The activities include a review of all year 2000
issues relating to our internal business systems, products and third party
suppliers and vendors.
We have assessed our internal information systems to determine if they will
meet our needs into and beyond the year 2000. Based on this assessment, we
determined that one of our primary internal business systems was not year 2000
compliant. We spent approximately $2.3 million on new hardware, software and
services in 1998 to acquire and implement a new year 2000 compliant business
system that was installed and became operational in January 1999. Our old non-
compliant business system was fully depreciated by the end of 1998. We are
continuing to test and assess our internal information and business systems to
ensure year 2000 compliance.
The primary purpose of our products is to carry data between systems. We
define year 2000 readiness for our products to mean that, as a result of date
transition relating to the year 2000, our products will not fail in their task
of transmitting data or corrupt the data stream that they carry. To date, based
on our activities to assess the year 2000 readiness of our products, we have
determined that certain third party software imbedded in our products is not
year 2000 compliant. We are currently implementing a program that is expected to
correct the deficiency by July 1, 1999. A secondary issue relates to the
cosmetic appearance of displays and status reports produced by our products. Our
products utilize dates for logging alerts, messages, and displays and reporting
network traffic. These functions are ancillary to the products' primary
operation of data transmission, and therefore are excluded from our definition
of year 2000 readiness. We are committed to making displays and reports from our
products clear and accurate. We tested our products for cosmetic appearance at
the same time we tested our products for year 2000 readiness. The dates
presented in certain versions of our software products are shown as two digits
or contain other report anomalies. The appearance related anomalies have been or
will be corrected in subsequent versions of our products that are scheduled to
ship prior to January 1, 2000.
We are also conducting an assessment of our key vendors and suppliers to
ensure that no interruption of material, service or product functionality occurs
due to year 2000 date transitions. Our assessment is ongoing and a completion
date has not been identified. However, we believe that alternate vendors could
be utilized to replace the products and services that are currently provided by
our key suppliers and vendors.
To date, the cost of the new business system and the allocation of employee
resources have been the only costs incurred by us to address year 2000
readiness. Based on the assessment activities completed to date, we do not
believe that we will incur significant extra expense relating to year 2000
issues.
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<PAGE>
Year 2000 Related Risks
A worst case scenario relative to the year 2000 issue would be the
discovery of additional Year 2000 deficiencies in our products that require
significant extra time and expense to correct. In addition, sales could be
materially impacted in 1999 if customers were to stop, or significantly reduce,
procurement of new equipment for their data centers and networks until after the
start of the year 2000. A critical year 2000 deficiency by a key supplier,
coupled with a failure to locate a suitable alternative source of supply, could
also have a material impact on our business. See "Risk Factors -- Our failure
and the failure of our supplies and strategic partners and customers to be year
2000 compliant could harm our business."
Contingency Plans
We believe that we are addressing all known year 2000 related risks. While
we do not believe that developing a remediation plan for the worst case year
2000 risks noted above is practicable, we are attempting to mitigate further
risk by continuing to test and assess our products and the products and services
of our key suppliers and vendors for year 2000 readiness. We continually work to
identify suitable alternative sources of supply for key products and services to
mitigate the risks relative to the year 2000 and other business interruption
issues. We intend to address any additional year 2000 related risks as they
become known.
Additional Inventory Purchases
One of our suppliers may not be year 2000 compliant. As a result, we are
purchasing additional inventory of approximately $500,000 from that supplier in
advance of the year 2000. We believe this additional inventory allows us to
continue to operate without any disruption or delay caused by this supplier's
potential failure to be year 2000 compliant. We anticipate that this additional
inventory will be consumed in the ordinary course of business during 2000.
New European Currency
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing currencies and the
euro, a new European currency, and adopted the euro as their common legal
currency. Either the euro or a participating country's present currency will be
accepted as legal tender from January 1, 1999 to January 1, 2002, from which
date forward only the euro will be accepted. We have a significant number of
customers located in European Union countries participating in this conversion.
The conversion may have competitive implications for our pricing and marketing
strategies, which could be material in nature; however, any such impact is not
known at this time. Our new business system implemented as of January 1999 is
capable of handling the new euro currency. There is no assurance, however, that
all problems related to the conversion will be foreseen and corrected, or that
no material disruptions of our business will occur.
Market Risk
We have no derivitive financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment grade, highly
liquid investments, consisting of money market instruments, bank certificates of
deposit and investments in commercial paper. We anticipate investing our net
proceeds from this offering in similar investment grade, interest-bearing
securities pending their use as described in this prospectus.
We are exposed to certain market risks related to fluctuations in foreign
exchange rates because some sales transactions, and the assets and liabilities
of our foreign subsidiaries, are denominated in foreign currencies, primarily
French francs and British pounds sterling. We have not invested in any
derivitive financial instruments to manage this risk.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for us
on January 1, 2001, establishes new standards for recognizing all
33
<PAGE>
derivatives as either assets or liabilities, and measuring those instruments at
fair value. Currently, we do not anticipate that SFAS No. 133 will have a
material impact on our financial position or results of operations.
BUSINESS
Overview
We design, manufacture, market and support a wide range of computer
hardware and software products for business-critical storage networks. We also
design, manufacture, market and support products that integrate existing
computer applications. We operate as two separate divisions--the Network
Solutions Division and the Enterprise Integration Solutions Division. Our
Network Solutions Division sells storage area networking, or SAN, products and
our established channel networking products, which enable computers to transmit
data over unlimited distances. Our Enterprise Integration Solutions Division
develops and sells enterprise application integration, or EAI, software that
automates the integration of computer software applications, as well as our
traditional server gateways and tools, which enable multiple desktop computers
and mainframe terminals to communicate with one another. Both divisions offer
professional consulting and support services.
Our Network Solutions Division is a leading provider of hardware and
software products that provide solutions for networked storage environments.
Specifically, we provide solutions that enable our customers to build and manage
SANs. Customers can create SANs within both LANs and exclusively through our
proprietary technology within WANs. We believe SANs will proliferate as a result
of fibre channel, a new technology which dramatically improves limitations on
I/O and the connectivity of additional devices to SANs. We believe fibre channel
will enable businesses to efficiently consolidate, cluster and share data from
multiple storage devices on a highly fault-tolerant SAN. Our Network Solutions
Division products provide this interconnectivity between SANs and existing
networks.
Our SAN solutions work in both closed mainframe environments and open
systems environments. Our SAN products enable companies to cost effectively
manage their increasing storage requirements, flexibly add to and reconfigure
their existing SANs, provide faster access to greater amounts of data and
protect their data more efficiently. We believe our SAN products uniquely offer
the following advantages over currently available alternatives:
. The ability to connect various applications and heterogenous
environments using different protocols and standards, including ESCON,
T1, SCSI, bus and tag, fibre channel and TCP/IP. Protocols are a set
of rules for communicating between computers.
. The ability to create SAN/WAN configurations which allow high speed
data transfer over long distances. The SAN/WAN configurations enable
remote disk mirroring, which is the real-time, or immediate, back-up
of data to remotely located disks and remote tape vaulting, which is
the back-up of data to a remote tape drive. WANs include various
telephone transmission speeds, media and protocols.
. The flexibility to easily link additional storage devices into an
existing SAN.
. The ability to connect and link devices in a SAN transparently,
meaning with little or no alteration of other vendors' hardware or
software products.
We market our SAN products directly and through partnerships with leading
storage industry companies, including Brocade, Compaq, EMC, Hitachi Data
Systems, IBM, Legato, SCH, StorageTek and Sutmyn.
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<PAGE>
Our Enterprise Integration Solutions Division develops, markets and
supports software products that enable desktop computer and terminal users
to access legacy data. Our EAI solutions help organizations integrate legacy
access with powerful new business applications that improve customer
productivity and customer satisfaction. We produce software that allows the
integration to be automated without burdensome, line-by-line recoding and
retesting of existing applications. Our EAI solutions preserve our customers'
investment in their computer systems, allow enterprise-wide real-time access to
data, are flexible and highly scalable. This also speeds newer application to
market.
Terminal users often operate with different networking protocols, such as
TCP/IP and SNA, to communicate with one another. TCP/IP is used on open systems
and SNA is typically used by IBM mainframes. Enterprise Integration Solutions
Division's products permit interconnectivity among computers using these
differing protocols.
Typical uses for our products include e-commerce and CRM. We market our EAI
products in conjunction with leading industry partners, including Cap Gemini,
Deloitte Consulting, PricewaterhouseCoopers and Siebel Systems.
We also employ a dedicated professional services and support group that
actively assists customers in the installation, maintenance and management of
our solutions. This group is comprised of approximately 150 professionals and
provides service 24 hours a day, seven days a week, around the globe.
[Graphic: Illustrative diagram explaining how the Networking Solutions
Division's products and Enterprise Integration Solution Division's products fit
in a standard information system architecture. The upper third of the diagram
has a two way arrow to both ends of the page. The text "EISD, representing the
Enterprise Integration Solutions Division", is placed in the middle of the
arrow. The left half of the arrow points toward the text "Enterprise Application
Integration". The right half of the arrow points toward the text "Access and
Presentation--Information Access Application Integration, Graphical User
Interface Reengineer, Customer Relationship and e-commerce".
The bottom third of the diagram includes two ovals. The left oval contains the
text "Local Enterprise SAN". The left oval is connected with the right oval with
the text "NSD, for Networking Solutions Division". The right oval contains the
text "Remote Enterprise SAN".
Adjacent to the left oval is the text "Storage Area Network". Adjacent to the
right oval is the text "Data Logistics for IT Central Operations, Information
movement, Backup/Restore, Information storage management, cluster support, Asset
management control".
Overlaid on top of the arrow and ovals is a grid. The top horizontal access of
the grid shows three desktop computers, the middle axis of a grid is a
representation of an OS/390, UNIX and NT computer systems. The bottom third of
the grid shows a representation of a mirrored disk drive, tape, tape library and
disks.
Caption--CNT Solutions at a Glance]
Network Solutions Division
SAN Industry Background
Growth in Enterprise Data
- -------------------------
In recent years, the volume of data generated, processed and distributed in
enterprise environments has grown significantly. This growth has been fueled by,
among other things:
. the proliferation of open systems;
. a distribution, or decentralization, of data storage;
. increased use of data intensive enterprise applications;
. rapid increase of Internet usage, including e-commerce;
. on-line transaction processing;
. digital video and multimedia, or graphical, applications; and
. sophisticated database gathering and retrieval techniques, known as
data warehousing and data mining.
The overall decrease in the cost of storage has also contributed to this trend.
In addition, continuous and seamless back-up of business-critical data is
becoming vital as companies have learned to capture and mine increasing amounts
of data. This increase of, and reliance upon, business-critical data has
increased the demand for storage capacity. International Data Corporation
estimates that disk storage accessed by users grew from approximately 10,000
terabytes, or ten thousand trillion characters, in 1994 to approximately 116,000
terabytes in 1998. This figure is estimated to reach approximately 1,400,000
terabytes in 2002, which reflects a compound growth rate of 86% per year. These
increasing volumes of data are challenging businesses to implement systems that
allow users to share, access and protect the information across the enterprise.
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<PAGE>
Limitations of Traditional Storage Solutions
- --------------------------------------------
The rapid escalation of the size and amount of data stored has presented
organizations with significant data management challenges and increased storage
related costs. As the volume of data stored and the numbers of users that
require access to the data continue to increase, storage systems and servers are
burdened by an increased number of input/output, or I/O, transactions they must
perform. Traditionally companies have stored data using storage connection
architecture based upon ethernet, small computer system interface, or SCSI,
enterprise serial connection, or ESCON, or bus and tag standards. Ethernet,
SCSI, ESCON and bus and tag are storage connection standards and protocols that
govern connections to computer devices and the transfer of data among computers
and peripherals, which are devices such as storage units and printers. However,
this storage architecture has inherent speed, distance, capacity and performance
constraints. For example, depending on the interface used:
. bandwidth, or the data transmission rate, is generally fixed at 15,
40 or 80 megabytes per second;
. distance between devices is limited to 12 to 150 meters;
. connectivity is limited to 15 storage devices;
. the lack of data management capability in SCSI devices places the
burden for management tasks on servers, degrading network performance;
and
. if the server to which the data storage device is connected fails, the
data cannot be accessed; and o LAN performance can be significantly
degraded while the LAN is being used for storage back-up applications.
The constraints have significantly increased the complexity and cost of
maintaining storage systems based on traditional architecture.
Benefits of Fibre Channel
- -------------------------
In response to the speed, distance, capacity and performance limitations of
traditional storage architectures, the fibre channel interface was developed in
the mid-1990s as an open standard technology specifically for high performance,
data intensive environments. Fibre channel products offer over one gigabit per
second of bandwidth and enable the inter-connectivity of millions of storage
devices and servers. In addition, fibre channel offers the following benefits:
. distances up to 10 kilometers;
. technology that serves as a single interface for both networking and
I/O applications;
. technology that supports a variety of traditional I/O and LAN
protocols and interfaces, including SCSI and Internet Protocol, or IP,
over high speed infrastructures; and
. the ability to support simultaneous two-way communications,
effectively doubling the bandwidth.
36
<PAGE>
The introduction of fibre channel means traditional storage architecture
can be replaced by fibre channel SANs over a period of time. SANs utilize the
principles of centralized network management found in LANs to create a
distributed storage environment, meaning multiple storage devices can be
connected to multiple servers. As a result, users experience the connectivity
and access benefits of networking architectures for their storage needs.
[Illustrative diagram of the SAN topology. This diagram is comprised of three
clouds, each of which is a hub with spokes running to various applications,
i.e., UNIX servers, disk arrays, a tape library and an optical drive. The clouds
represent the interconnect products that facilitate operation of the particular
applications. One of the three clouds represents a SAN network, while the
remaining two are LAN networks. The UNIX servers connect with the two LAN
clouds, each of which has spokes which connect with two sets of desktops.
Caption: Example of SAN Topology]
However, the adoption of SANs and fibre channel do not provide complete
solutions to customers managing large amounts of data in a distributed
environment, where operating computers and storage devices are at different
locations, often at great distances from one another. Specifically, solutions
are required which address the following:
. Distance--Customers require products which support transfers over
unlimited distances. SCSI only supports a maximum connection distance
of 12 meters, and fibre channel only supports a maximum connection
distance of 10 kilometers. Transmission across third party phone lines
is not supported by either SCSI or fibre channel.
. Connectivity--Customers want their legacy and open systems to
communicate with one another and share data. Legacy systems have
interface channels using the ESCON, T1 or bus and tag protocols, and
open systems use SCSI or LAN standards known as TCP/IP, or
Transmission Control Protocol/Internet Protocol. Fibre channel
switches cannot communicate with non-fibre channel switches, requiring
further connectivity solutions.
. Seamless storage solutions--Distance and connectivity issues prevent
remote fault-tolerant and disaster-proof storage solutions and
interconnectivity of LANs to WANs. As a result, users are required to
manually handle and transport their storage back-up tapes to off-site
locations, resulting in additional expenses and inefficient data
recovery.
Dataquest, an industry analyst group, reports that worldwide spending on
SAN related solutions totaled approximately $250 million in 1998 and is expected
to grow to an estimated $2.4 billion in 2002. We believe that vendors who
provide solutions to overcome distance and connectivity limitations of fibre
channel/LAN/WAN structures can expect to participate in this large and rapidly
growing market.
Our Networking Solution
We are a leading provider of SAN solutions and help organizations create
storage networks that link local and remote data centers and manage data across
dissimilar computing platforms for storage applications, data transfer and data
sharing. We provide a bridge that allows SANs to be used in a WAN. Customers are
able to implement our solutions without widespread changes to hardware or
software products provided by other vendors.
37
<PAGE>
[Illustrative diagram showing the interplay between wide area SANs, campus or
local SANs. At the top of the diagram, but below the caption, is a list of the
key applications for SAN/WAN integration, including: remote tape backup,
remote disk mirroring, centralized storage management and disk migration. The
diagram, from left to right, is divided into three vertical sections comprised
of mainframe, servers and desktop systems. The mainframe is connected
horizontally to the servers via a WAN, and the servers are connected
horizontally to the desktop via a LAN. At the edges of each of the three systems
are disks and tape libraries.
Caption: CNT SAN/WAN Integration]
We provide a high level of performance and reliability for mainframe and
open systems, supporting key vendor environments such as EMC, IBM and Hitachi
Data Systems. Our storage products address the limitations of traditional
storage architecture, fibre channel and SANs in the following ways:
. Distance--Our products enable organizations to create secure storage
area networks without any distance limitations. Our products allow the
transfer of data over unlimited distances, thereby freeing customers
from the 12 meter connection limit imposed by SCSI and the 10
kilometer connection limit imposed by fibre channel.
. Interoperability and Scalability--Our products also leverage leading
technologies, such as fibre channel, and complement our customers'
existing LAN/WAN infrastructures without burdensome hardware and
software changes. Our products operate at the center of a SAN and
establish a direct connection between storage elements and servers to
manage and share data among servers and storage systems. Our products
are protocol independent--they can connect devices which use SCSI,
fibre channel, ESCON, bus and tag, T1 and TCP/IP protocols.
Distributed storage can be consolidated from multiple servers to one
storage device, which in turn can be accessed by a virtually unlimited
number of servers.
. Increased Systems Performance--Our technology supports rapid transfer
of data, reducing I/O bottlenecks and enhancing overall system
performance. For example, our FileSpeed(TM) products increase data
transfer speeds from 1.5 million bits per second, the maximum allowed
by TCP/IP and SNA, up to 169 million bits per second per channel, by
using a parallel data movement technology. Additionally, network
performance is typically degraded during back-up operations as all of
the files must pass through a central server. We move back-up off of
the LAN and onto the SAN, thereby freeing the server and increasing
the performance of the network.
Combining our solutions with fibre channel products results in further
benefits. Fibre channel products have management capabilities designed to
monitor and control storage and networking devices in a SAN environment. As a
result, servers are no longer burdened with storage management tasks, again
increasing performance. The ability to access data is also enhanced, since a
server failure will not prevent access to data.
Our SAN solutions are used for immediate, or real-time, back-up and
recovery, and support a technology known as remote disk mirroring. Disk
mirroring avoids the serious threat to businesses posed by the loss of data
between data system back-ups by simultaneously creating up-to-the-minute images
of business-critical data on multiple back-up storage disks. Our remote disk
mirroring technology permits the back-ups to be transmitted to a geographically
separated location, thereby reducing the risk of natural and
38
<PAGE>
site wide disasters. This technique also permits rapid recovery of data when
needed, as it is not necessary to reload tapes.
We also enhance disaster-proof operations in other ways. Traditional LAN-
based storage management requires manual handling and transportation of storage
to an off-site location. While this ensures a physically-separated copy of
valuable corporate data, it requires additional time and expense for handling
and transportation. In addition, finding the right tape in a timely manner can
be difficult. By bridging the SAN over the WAN, back-ups can be instantly made
to remote locations on disk media, including by disk mirroring, or on tape,
known as electronic tape vaulting. The benefit is secure archiving and timely
retrieval of the correct business-critical data.
We support our SAN products by offering a comprehensive set of professional
services. We help our customers design and install our products and our business
partners' products. Our offerings include implementation planning and turn-key
installation.
Network Solutions Strategy
We intend to build upon our position as a leading provider of networking
storage solutions. Key elements of this strategy are as follows:
Further SAN Leadership
- ----------------------
We intend to further our leadership in the SAN market by continuing to
provide products that extend SANs over WANs. We intend to build market share by
continuing to focus on areas which make SANs more useful, such as connectivity,
and by offering products like our current UltraNet(R), File Speed(TM) and
Channelink(R) products, which provide solutions not offered by fibre channel
alone. To achieve leadership, we intend to capitalize on the remote disk
mirroring and remote tape vaulting capabilities of our products, and our
expertise in transparently and reliably communicating over long distances and
among vendor products using different protocols and standards.
Leverage Technological Leadership
- ---------------------------------
We intend to leverage our technological capabilities by continuing to
broaden our product and service offerings and by extending our SAN solutions
into new markets. We intend to build on knowledge and expertise acquired through
years of experience in the industry, beginning with our Channelink(R) product.
We believe the recent introduction of our fibre channel products will permit us
to offer comprehensive local campus, or single site, solutions, which, when
combined with our other SAN/WAN products, will allow us to provide turn-key SAN
solutions. We believe our further investments in research and development
coupled with historical product development expertise will permit us to continue
to provide customers with technology they need.
Target High Profile Strategic Partners in the SAN Market
- --------------------------------------------------------
We have established relationships with leaders in the SAN market, including
storage vendors, storage management software providers and fibre channel switch
manufacturers. Our strategic partners include companies such as Compaq, EMC,
Hitachi Data Systems, IBM, Legato, SCH, StorageTek and Sutmyn. We intend to
strengthen our relationships with existing strategic partners and develop
relationships with new strategic partners that offer complementary products and
services. We believe that current and future strategic relationships will
facilitate the integration of our products with our strategic partners, thereby
increasing our market share and reducing the length of our sales cycle.
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<PAGE>
Focus on Comprehensive Solutions and Professional Services
- ----------------------------------------------------------
Our professional services help customers evaluate, analyze, install, manage
and grow data centers and storage networks. We believe this value-added
professional service assists customers in installing and managing data centers
and storage networks better than they could on their own. Our product
implementation planning and turn-key installations not only bolster sales of our
products but allow us to generate high margin revenues. In the future, we also
intend to extend our comprehensive solutions by bundling our product and service
offerings with telecommunications services.
Maintain Leadership in Channel Networking
- -----------------------------------------
We are focused on maintaining a leadership position in the channel
networking market. We believe our channel networking product, Channelink(R),
continues to provide superior functionality for communicating over distances not
supported by SCSI, ESCON or bus and tag and our UltraNet(R) products provide
the same functionality for SCSI, ESCON and fibre channel devices. We believe
that our channel networking knowledge provides us with technical knowledge and
visibility to succeed in the SAN market. We are the only vendor of channel
networking products that installed a new platform compatible with our older
platform of products. As a result we have a large customer base with
Channelink(R) products installed. We have provided a road map for this customer
base and intend to leverage this customer base when marketing our high margin
SAN products.
Network Solutions Products
Our SAN products include the UltraNet(R) family of storage products, our
channel networking product known as Channelink(R) and our FileSpeed(TM) file
transfer software product. We believe that information technology managers today
are looking to maximize the value of their investment in servers, storage
devices and WANs, ensure the ability to recover quickly from a large or small
disaster and provide optimal data sharing among multiple locations and types of
systems across their enterprise.
UltraNet(R) Product Family: The UltraNet(R) product family is used for
--------------------------
the following applications:
. Remote Disk Mirroring: The process creates a real-time simultaneous
back-up of data at a distant location. Advantages include helping to
protect the data from natural and man made disasters and rapid
recovery of the data.
. Remote Tape Vaulting: Data is backed up to tape and archived at a
remote location. Advantages include helping to protect the data from
natural and man made disasters and a low cost storage medium.
. Data Sharing/Legacy Connections: Permits devices using different
protocols and standards to communicate and share information.
UltraNet(R) Storage Director: This product is a high performance switching
----------------------------
application that operates at the center of the SAN. It enables SANs to establish
a direct connection between storage elements and servers and share data among
diverse servers and storage systems. The switch provides connectivity among
SCSI, ESCON, fibre channel and WANs. Two sizes are offered--with 6 or 12
expansion slots.
UltraNet(R) Storage Gateway: This product provides much of the same
---------------------------
functionality and performance of the UltraNet(R) Storage Director at a lower
entry price. The product is targeted at small
40
<PAGE>
remote disk mirroring applications. The product is expected to be generally
available in the second half of 1999.
UltraNet(R) Open Systems Director: This product is based on the same
---------------------------------
architecture as the UltraNet(R) Storage Director. It allows large numbers of
SCSI and fibre channel technologies to be shared among open systems
environments using UNIX and Windows NT operating systems.
UltraNet(R) Fibre Channel Switch: This switch is available in 8 and 16
--------------------------------
expansion slot models. The switch enhances our ability to provide open systems
solutions for fibre channel only configurations as well as mixed environments.
Mixed environments can include SCSI-attached server and storage systems that
require access to fibre channel solutions. Brocade manufactures this switch and
we resell it alone or with our SAN system solutions.
FileSpeed(TM): The product consists of data moving software, when
-------------
combined with our hardware, allows high speed data transport between computers.
Current data transfer protocols, such as TCP/IP, used on open systems, and SNA,
used on IBM systems, permit transfer at 1.5 million bits per second.
FileSpeed(TM) boosts transfer up to 169 million bits per second per channel. The
software uses parallel data movement technology with error correction protocols
at both ends of the transfer. IBM resells this product under the name InfoSpeed.
IBM also bundles it with ADSM to boost performance of that proprietary storage
management and back-up software.
Channelink(R): The product is our traditional channel networking
-------------
product and it is certified for use with over 250 different devices. The
product offers connectivity over unlimited distances, free of limitations
imposed by SCSI, ESCON and bus and tag.
The product is used for the following applications:
. SAN Applications: Remote disk mirroring and remote tape vaulting in
older environments using bus and tag and T1 protocols.
. Data Center Consolidation: The consolidation of data centers in
different locations to one location; often useful after mergers or
acquisitions.
. Remote Printing/Imaging: High speed digital printing or imaging at
remote locations.
. Data Center Load Balancing: Operating two or more data centers from
one site. The application is transparent to the systems and servers
that are interconnected as well as to data users, meaning users do
not know that the data is not located centrally.
[Graphic: Illustrative diagram showing pictures of our products. The lower right
hand corner has a picture of the product. The upper right hand corner contains a
drawing of the product labeled "UltraNet Storage Director" with the following
bullet points:
. "minimize complexity of integrating legacy and open storage system"
. "enabling construction of highly scalable SANs"
. "provides turn-key, integrated SAN solutions"
Under the foregoing drawing, cascaded to the left, is a drawing of the product
labeled "UltraNet Storage Gateway", with the following bullet points:
. "Legacy and open systems storage integration"
. "Entry level storage director packaging with high performance and
flexible connectivity"
Below the drawing, cascaded to the left, is a drawing of the product labeled
UltraNet Storage Multiplexer with the following bullet points:
. "Multiple server access to storage device"
. "Open systems storage extension and storage bridge"
Below the drawing, cascaded to the left, is a drawing of the Channelink(R)
networking product with the following bullet point:
. "Channel extension of over 250 S/390 devices"
Caption: CNT's Networking Solutions - SAN Product Family]
Network Solutions Business Partners
Offering customers effective SAN solutions requires integrating diverse
components, including disk and tape storage devices, storage management
software, network management products and fibre channel products. The optimal
package of goods and services allows a customer to reduce storage management
costs by consolidating data centers and centralizing data management. We work
with our business partners to provide customers with those benefits. Key SAN
alliances include those with storage vendors, storage management software
providers and manufacturers of fibre channel products. Our partners include SAN
leaders such as Brocade, Compaq, EMC, Hitachi Data Systems, IBM, Legato, SCH,
StorageTek and Sutmyn. Benefits of our alliances include:
. The working relationship provides us with visibility regarding market
trends and technology requirements and allows us to contact customers
earlier in the sales cycle and ascertain their needs.
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<PAGE>
. Sales of storage systems for disk mirroring provides a ready market
for our remote disk mirroring applications.
. A platform to demonstrate our interoperability with various
platforms and integrate heterogeneous components allowing us to gain
preferred provider status with key vendors.
. The resulting customer base provides us with strong reference
accounts to further increase market penetration.
EMC
- ---
We have established a strong relationship with EMC for remote disk
mirroring applications. This existing relationship was recently enhanced by an
agreement to provide an exclusive package of remote disk mirroring hardware,
software and implementation service. We are offering an exclusive package of our
hardware, software and implementation services to EMC's customers. Together with
EMC, we offer complementary professional services and linked customer support
organizations. We work with EMC to provide our mutual customers with timely,
effective service. We also market our remote disk mirroring applications with
other vendors, including IBM and Hitachi Data Systems.
IBM
- ---
IBM is one of our oldest strategic partners. We provide IBM with our
FileSpeed(TM) product, which it resells under the name InfoSpeed. We coordinate
local market activities with IBM, provide mutual assistance and prepare combined
proposals. We also partner with IBM to provide customers with disaster avoidance
and recovery capability and remote disk mirroring applications. Our UltraNet(R)
Fibre Channel Switch, which is manufactured by Brocade, became generally
available on June 7, 1999. We believe the combination of our UltraNet(R) SAN
solutions and UltraNet(R) family of fibre channel switches offers customers an
attractive architecture for developing SAN solutions. The industry expects
complete interoperability for fibre channel devices and we believe our solutions
are a step in that direction.
Brocade
- -------
Our UltraNet(R) Fibre Channel Switch, which is manufactured by
Brocade, became generally available on June 7, 1999. We believe the combination
of our UltraNet(R) SAN solutions and UltraNet(R) family of fibre channel
switches offers customers an attractive architecture for developing SAN
solutions. The industry expects complete interoperability for fibre channel
devices, and we believe our SAN solutions are a step in that direction.
Other Business Partners
- -----------------------
Our active alliances span other parts of the SAN market as well:
. We jointly market our FileSpeed(TM) and UltraNet(R) Storage Gateway
products with Compaq. We cooperate with Compaq to ensure
integration between products.
. We have certified StorageTek's tape drives with our UltraNet(R)
product and work closely with them to ensure interoperability.
. Legato has certified our UltraNet(R) products with its remote tape
back-up software, and we jointly market our products with them.
. Sutmyn has certified that our SAN technology is certified to
interoperate with its Scimitar Virtual Tape Server.
. We have certified SCH's REELbackup and REELrobot storage management
software to work with our UltraNet(R) Open Systems Director and
UltraNet(R) Fibre Channel Switch.
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<PAGE>
Enterprise Integration Solutions
EAI Industry Background
Need to Leverage Existing Systems
- ---------------------------------
Organizations today have made considerable investments in their
information technology infrastructure. The distributed processing infrastructure
used by large organizations includes mainframes, open systems and Internet
architectures. We believe most organizations wish to leverage their investment
in existing technology by exploiting the advantages of each system.
Historically, we have helped organizations achieve this goal through our server
gateways and tools. Those tools give customers that use UNIX, an operating
system used with open systems and PC desktop users, access to IBM mainframe and
minicomputer environments.
[Graphic: Illustrative diagram showing the ability of our EAI products to
provide users real-time access to business-critical data. The diagram consists
of an illustration of a computer user accessing information on a real-time basis
from various sources, such sources being listed vertically on the right of the
diagram--multiple corporate divisions, insurance, trading, checking and credit
card. Within the diagram, and under the user diagram, is the following text:
"Seeing the data I want in real-time and in context. . . in the most meaningful
user format." Under the vertical listing of the various sources of information
described above is the following text: "Data stored how the application wants it
for performance and legacy applications."
Caption: Trend Driving EAI -- Universal Access]
The goal of achieving application integration is not easy. Manually
integrating multiple applications and then manually maintaining the resulting
applications is prohibitively expensive for Information Technology, or IT,
departments. It is also difficult and expensive to attract and retain skilled
employees familiar with both mainframe and open systems environments, and time
consuming to manually code the necessary programs.
Limitations of Middleware
- -------------------------
Some vendors have offered middleware products as a partial solution to
solve time and expense problems relating to integrating legacy and open systems.
Middleware software provides a connection between disparate applications,
databases and transaction processing systems. Shortcomings of historical
middleware product offerings include limitations on the ability to integrate
with mainframe environments, inadequate system management tools and difficulty
of use, as well as lack of transparency and scalability.
Development of EAI Products
- ---------------------------
Vendors are developing EAI products to address the historical
limitations of middleware. The applications offer decreased maintenance efforts,
a reduced level of skill required to integrate applications and a central point
to control distributed networks. EAI products also offer the value added promise
of being able to put business knowledge and rules into an application network.
As customers become familiar with EAI products, we believe they will not only
use EAI to integrate old applications, but also to develop new ones as well.
Dataquest estimates sales of EAI products will grow from approximately
$250 million in 1998 to approximately $1.4 billion in 2002. Growth in
industry sales is expected to be driven by:
. Value of information--Increasingly businesses view information as a
strategic asset. Users need real-time, or immediate, access to
information to provide quality customer service and to make
business decisions.
. Mergers and acquisitions--The parties to the transaction must
integrate data processing structures to realize the cost benefits
from the merger and the revenue benefits of cross selling to
customers.
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<PAGE>
. Re-engineering--businesses must adapt to changing trends like
e-commerce. EAI products permit rapid development of new systems.
Enterprise Integration Solution
Automated Application Integration
- ---------------------------------
Our EAI solutions help organizations integrate legacy applications with
powerful new business applications that improve customer productivity and
customer satisfaction. We produce software that allows that integration to be
automated, without burdensome, line-by-line recoding and retesting of
existing applications. Our EAI solutions preserve our customers' investment in
their computer systems, allow enterprise-wide real-time access to data, are
flexible and highly scalable. This also speeds newer applications to market. In
addition to integrating existing systems, our EAI solutions are particularly
suited for developing new applications such as:
. CRM Applications-- CRM facilitates integration of information
collected in different areas of a company that affect customer
relations. Call centers are primary CRM applications. Better
service is delivered when customer service representatives have
real-time, integrated access to each customer's information when
they need it. The CRM applications can instantly pull together
customer information from multiple databases, such as accounts
receivable and recent purchases, when a call is received. The
access to legacy data in a format familiar to the user enables the
call center representative to provide a satisfying customer
interaction, helping to attract and retain customers.
. E-Commerce Applications--Customer data integrated from a variety of
legacy environments can enhance a company's ability to interact
with suppliers and partners, sell products, and provide customer
service over the Internet. An example of an application is allowing
customers to order and pay for products directly over the Internet.
Our solutions filter legacy data, translate and format it so that
it can be used with Sun Micosystem's NetDynamics and Lotus' Domino
products and other Internet tools to build effective Internet-based
sales and service applications in less time.
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<PAGE>
Business Process Automation
- ---------------------------
In our December 1998 acquisition of IntelliFrame we purchased important
new technology for our EAI products. The acquired technology, known as process
dynamics, includes new tools that provide business logic, rules and process work
flow management for improved development and deployment of large e-commerce and
CRM applications. With process dynamics, our EAI solution will be able to do
more than just display information to a call center representative--it will be
able to suggest alternative courses of action. For instance, process dynamics
can recommend to a call center representative at a diversified financial
institution, whether a customer should use funds in an account to pay a credit
card bill, or transfer funds to a more favorable interest bearing account. We
anticipate distributing test versions of our EAI product incorporating process
dynamics product during the second half of 1999. We plan to initially market
process dynamics as part of our Enterprise/Access(TM) product and possibly
subsequently as a stand-alone product.
Key Distribution Channels
- -------------------------
Our EAI products are marketed through a direct sales staff and through
our business partner program. An alliance with Siebel provides a comprehensive
solution to established call centers and for sales force applications. Alliances
with Cap Gemini, Deloitte Consulting and PricewaterhouseCoopers firms provide a
platform for the business partner to introduce our EAI products to customers by
trained specialists.
Enterprise Integration Solutions Strategy
We are focused on becoming a leading provider of EAI solutions to
Fortune 1000 companies. Key aspects of our strategy include:
Increasing our Focus on CRM Applications/Expanding Our Customer Base
- --------------------------------------------------------------------
We intend to market our product to Fortune 1000 companies by focusing
on CRM applications. We intend to achieve this by expanding our distribution
channels. We intend to leverage relationships with key CRM product vendors, such
as Siebel and systems integrators that advise on CRM installations, such as Cap
Gemini, Deloitte Consulting and PricewaterhouseCoopers. Our business partner
relationships are important steps in executing this strategy. We also intend to
build relationships with other key business partners in this area to broaden our
distribution channels.
Moving Process Dynamics Into the Marketplace
- --------------------------------------------
We anticipate that test versions of our process dynamics technology
will be ready during the second half of 1999. We believe that this technology
will help grow our customer base because comparable functions are not available
in our competitors' products. We believe this technology will shift the focus of
our EAI products from that of being useful tools for integrating older computer
applications to products that enable the complete development of new
applications.
Continuing to Support our EAI Products with Professional Services
- -----------------------------------------------------------------
We intend to continue to grow our professional services group which
helps customers install, evaluate, analyze and maintain our EAI products. The
benefit to us is satisfied customers with whom we are able to establish broad
relationships and high margin revenues. We also gain an opportunity to observe
our products in the user environment and therefore enhance our product offerings
in the future.
45
<PAGE>
Leverage Server Gateways and Tools Customer Base
- ------------------------------------------------
We will continue to leverage our historical presence with server
gateways and tools products. These products offer us a platform to demonstrate
our systems integration capabilities. Our customers, who typically require
large, multi-user installations, entrust their systems to us, allowing us to
build considerable brand loyalty. We believe the same customers which install
our server gateways and tools often need EAI products as well--and their past
experience with us will be a powerful, positive force when evaluating products
Enterprise Integration Solutions Products
Enterprise/Access(TM): This is our primary EAI product and is a
---------------------
development tool that permits legacy applications to be linked real-time with
new business applications. The product will include process dynamics technology
when our research and development is complete, which is anticipated to be in the
second half of 1999. Real-time access to information stored on legacy computers
enhances business decision making and preserves the investment made in existing
systems. Enterprise/Access(TM) is a scalable solution that can be deployed on
multiple, connected servers to support large networks. Key features of
Enterprise/Access(TM) include:
. no changes to our customers' existing legacy applications software
environment;
. a graphical user interface, which promotes rapid implementation;
. three-tier architecture for mainframe, server and client workstation,
which enhances scalability and transparency; and
. centralized management to administer, monitor and troubleshoot large-
scale deployments.
Enterprise/Connect(TM): This server gateways and tools product uses
----------------------
TCP/IP to connect legacy to open systems. This product is also a powerful and
easy to implement solution for connecting the mainframe to the Internet.
This product improves and simplifies mainframe access for users deployed across
TCP/IP protocols by combining all the components necessary for efficient legacy
data access into one comprehensive package. As a result, networks are more
efficient and user productivity is increased--UNIX and browser-based Internet
systems can now have access to corporate data on legacy systems without changing
the software. This product is a complete suite of applications providing
mainframe connectivity via standard Web browsers, which are the standard
interface on Internet applications. The browsers, based on the new Java
programming language, function as the universal window for access to mainframe
terminal, file transfer and print services.
Enterprise Integration Solutions Business Partners
Our business partner program couples us with vendors of complementary
products and systems integration partners which provide us with valuable
distribution channels. A systems integrator is a consultant who plans, installs
and implements computer systems. Distribution channel partners are very
important to the growth of the EAI product, as the Enterprise Integration
Solutions Division has a limited sales staff.
46
<PAGE>
Cap Gemini
- ----------
Cap Gemini uses our Enterprise/Access(TM) product for developing
corporate intranets and extranets that require access to mainframe systems. An
intranet is an internal corporate network based on Internet technology. An
extranet is similar to an intranet, but may be accessed by authorized persons
outside of the business enterprise, such as customers and suppliers. Cap Gemini
used the Enterprise/Access(TM) product to develop a working prototype for
Telecom Italia allowing browser based access to legacy data in two weeks. The
application is now in production.
Siebel Systems
- --------------
We believe Siebel is the world's leading supplier of CRM software.
Siebel focuses on software for field sales, customer service, telesales,
telemarketing, field service third-party resellers and Internet based e-commerce
and self-service. Siebel references our Enterprise/Access(TM) product which
integrates with Siebel's products, to give users easy, real-time access to
customer information from back-office legacy applications, minicomputers and
open systems.
Deloitte Consulting and PricewaterhouseCoopers
- ----------------------------------------------
We believe Deloitte Consulting's and PricewaterhouseCoopers trained
professionals will provide a knowledgeable base of consultants to recommend and
implement our EAI products. We anticipate this will enhance sales and provide an
additional distribution and implementation channel. Our Enterprise/Access(TM)
software will be used for legacy application integration in Deloitte
Consulting's and PricewaterhouseCoopers CRM practice, which also implements
Siebel solutions.
Our Professional Services
Network Solutions
We group our services into three areas to help customers' choose the
level of assistance they want--implementation solutions, advanced solutions, or
custom solutions.
Implementation Solutions: We help customers implement our CNT
------------------------
networking products. We provide turn-key installation, configuration,
verification, testing and performance evaluation using our networking products.
This helps ensure timely, professional and efficient implementations, while
reducing the demands on data center personnel.
Advanced Solutions: We help customers implement our products and
------------------
complementary products sold by our business partners and others. We leverage our
employees' skills and experience to develop our interoperability solutions lab.
We provide implementation planning for network expansion or migration, including
a comprehensive network audit, project management, test plan development and
execution, on site support and network optimization using our networking
products.
Custom Solutions: We help customers with data management operations,
----------------
including disaster recovery and a system review to provide recommendations on
improvements. We also provide customized network management software
development, including automated recovery, statistical analysis subsystem, or
SAS, reporting, year 2000 compliance testing and SAN integration services.
47
<PAGE>
Enterprise Application Integration Solutions
We have developed a number of professional services programs to help
customers meet their business objectives on time and within budget:
Proof of Concept: We provide prototype applications to help customers gain
----------------
confidence with the selected product in the context of their own system design.
Project Mentoring: We offer ongoing consulting support throughout a
-----------------
project's lifecycle, ensuring that customers have the support they need for a
successful implementation.
System Architecture and Design: We provide large-scale system design,
------------------------------
including transaction definition, process diagrams, and logic flows.
Development and Deployment: We provide complex, business-critical
--------------------------
application development as well as ongoing management of deployed applications.
Adoption: We provide services such as architecture, design and code review
--------
as well as implementation training.
Other Product Support
Both divisions offer standard maintenance contracts. The contracts
generally have a one-year term and provide for advance payment. Customers are
offered a variety of contracts to choose from to suit their particular needs.
For instance, current options allow a customer to choose support seven days a
week, 24 hours per day, or 5 days per week, 11 hours a day. Other options offer
the customer the choice to select air shipment or replacement parts, with the
part being installed by the customer's staff, or on site support with spare
parts and service being provided by a local parts distributor.
Our Customers
Significant customers of our Network Solutions Division during 1998 were:
Affiliated Computer Systems Controlware
BSC Nordic EDS
Centron DPL IBM
Chase Manhattan Bank Kanematsu Electronics
CitiGroup National Westminster Bank
Comdisco Sprint
Significant customers of our Enterprise Integration Solutions Division
during 1998 were:
Aspect Telecommunications IBM
AT&T ICL
Bay Networks Intec
BellSouth ILX Systems
Cap Gemini Sun Microsystems
GTE Wal-Mart
48
<PAGE>
Sales and Marketing
We market the products of both our divisions in the United States through a
direct sales force. We have established representative offices in Canada, the
United Kingdom, France, Germany, Australia, Hong Kong and Japan, and we are also
in the process of establishing representative offices in The Netherlands, Brazil
and Mexico. We also market the products of both divisions in the United States
and throughout the world through original equipment manufacturers, systems
integrators and independent distributors.
Each division maintains its own marketing staff and direct sales force.
While the customer bases of the divisions overlap, the persons who evaluate and
authorize product purchases at customer organizations are usually different. The
Network Solutions Division currently employs approximately 165 persons in its
marketing and sales organization, and the Enterprise Integration Solutions
Division currently employs approximately 43 persons in its marketing and sales
organization.
The limited sales force of the Enterprise Integration Solutions Division
does not currently allow a sales effort to fully exploit the potential of our
EAI products. To address this limitation, the division is attempting to enter
into key business partner relationships with organizations that can identify
potential customers and install the products, including Cap Gemini, Deloitte
Consulting, PricewaterhouseCoopers and Siebel.
We derived approximately $29.0 million, $28.8 million and $45.2 million, or
30%, 29% and 34%, of our revenue from operations outside of the United States
for the years ended December 31, 1996, 1997 and 1998, respectively.
International operations are subject to various risks common to international
business, including exposure to currency fluctuations, political and economic
instability, the difficulty of administering business internationally and the
need to comply with a wide variety of U.S. export and foreign import laws and
regulations. Sales to IBM and its multiple divisions accounted for 18% of our
total revenue in 1996. No single customer accounted for more than 10% of the our
revenue in 1997 or 1998.
We expect continued quarter-to-quarter fluctuations in revenue in both
domestic and international markets. The timing of sizable orders will contribute
to such fluctuations because of their relative impact on total quarterly sales.
The level of product revenue reported in any given period will continue to be
affected by the receipt and fulfillment of sizable new orders in both domestic
and international markets.
Research and Development
The markets in which we operate are characterized by rapidly changing
technology, new standards and changing customer requirements. Our long term
success in these markets depends upon our continuing ability to develop advanced
network hardware and software technologies and EAI products. Each division
maintains its own research and development staff.
To meet the future demands of our customers, we expect to:
. increase the compatibility of our products with the products made by
others;
. emphasize the flexible and modular architecture of our products to
permit the introduction of new and improved products within existing
systems;
. continue to focus on providing sophisticated diagnostic support tools
to help deliver high network availability and, in the event of
failure, rapid return to service; and
. develop new products based on customer feedback and market trends.
49
<PAGE>
Research and development expenses were equal to 14% of our total revenue in
1996, compared to 18% and 16% of total revenue in 1997 and 1998, respectively.
We intend to continue to apply a significant portion of resources to product
enhancements and new product development for the foreseeable future. We cannot
assure you that our research and development activities will be successful.
Manufacturing and Suppliers
In-house manufacturing activities for our products primarily involve
quality assurance testing of subassemblies and final system assembly,
integration and quality assurance testing. We have been ISO 9002 certified since
1993. ISO 9002 is an international standard of quality for the manufacture and
support services of high-electronic communications devices and computer
networking systems.
We manufacture our products based on forecasted orders. Forecasting orders
is difficult as most shipments occur at the end of each quarter. Our customers
generally place orders for immediate delivery, not in advance of need. Customers
may generally cancel or reschedule orders without penalties. Accordingly, we
believe that backlog is generally not meaningful for purposes of predicting our
revenue for any fiscal period.
Some of our products, including fibre channel switches and wave division
multiplexers, which permit multiple images to be transferred over fibre optic
lines for a short distance, are manufactured by OEMs for sale by us. We
manufacture our other products from subassemblies, parts and components, such as
integrated circuits, printed circuit boards, power supplies and metal parts,
each manufactured by others. Some items manufactured by suppliers are made to
our specific design criteria.
We currently hold $1.5 million of inventory for parts that our vendors no
longer manufacture. Products in which those parts are included accounted for
approximately $55.0 million of sales in 1998. We expect that this inventory will
be used in the ordinary course of our business over the next five years.
Relevant parts will have to be redesigned after the inventory is used.
We believe that we currently have adequate supply channels. Components and
subassemblies used in our products and systems are generally available from a
number of different suppliers. However, certain OEM products, such as fibre
channel switches and wave division multiplexers, and key components in our other
products are purchased from a limited number of sources. We do not anticipate
any difficulty in obtaining an adequate supply of purchased OEM products and
required components. An interruption in our existing supplier relationships or
delays by some suppliers, however, could result in production delays and harm
our results of operations.
Competition
Our products are sold in markets where other market participants have
significantly greater revenues and internationally known brand names. Many of
those market participants do not currently sell products similar to ours.
However, such market participants may do so in the future, and new products we
develop may compete with products sold by well-known market participants. IBM
and Cisco Systems currently compete with us in the server gateways and tools
area. Neon Systems and TSI currently compete with our Enterprise/Access(TM)
product. Other competitors in channel networking and SAN include storage system
vendors and others including Ancor, Computerm, Crossroads, Data Switch, Gadzoox,
McData, Network Systems, STK and Vixel.
The markets in which we operate are characterized by rapidly changing
technology and evolving industry standards, resulting in rapid product
obsolescence and frequent product and feature introductions and improvements. We
compete with several companies that have greater engineering and development
resources, marketing resources, financial resources, manufacturing capability,
customer support resources
50
<PAGE>
and name recognition. As a result, our competitors may have greater credibility
with existing and potential customers. They also may be able to adopt more
aggressive pricing policies and devote greater resources to the development,
promotion and sale of their products than we can to ours, which would allow them
to respond more quickly than we can to new or emerging technologies and changes
in customer requirements. These competitive pressures may materially harm our
business.
The competitive environments of markets in which our SAN and EAI products
are sold are not yet fully developed. Accordingly, we are not in a position to
prepare long range plans in response to unknown competitive pressures. As these
markets grow, we anticipate other companies will enter with competing products.
In addition, customers and business partners could possibly develop and
introduce competing products. We anticipate the markets will be highly
competitive.
The declining sales of channel networking and server gateways and tools
products present unique competitive pressures. We anticipate pricing pressures
may increase in these markets. Consolidation of competing vendors of these
products could also have negative consequences.
The principal competitive factors affecting our 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 our
markets.
Intellectual Property Rights
We rely on a combination of trade secret, copyright, patent and trademark
laws, nondisclosure agreements and technical measures to establish and protect
our intellectual property rights. That protection may not preclude competitors
from developing products with features similar to our products.
We currently own three patents and have four patent applications in process
in the United States. Our pending patent applications, however, may not be
issued. We have not applied for patent protection in any foreign countries. Not
all of our unique products are patented. Our issued patents may not adequately
protect our technology from infringement or prevent others from claiming that
our technology infringes that of third parties. Failure to protect our
intellectual property could materially harm our business. We believe that patent
and copyright protection are less significant to our competitive position
because of the rapid pace of technological change in the markets in which our
products are sold and because of the effectiveness and quality of our support
services, the knowledge, experience and ability of our employees and the
frequency of our enhancements.
We are also dependent upon a patent license agreement to manufacture our
Channelink(R) and UltraNet(R) products which use ESCON. This license expires on
December 31, 1999. We believe the license can be renewed on terms that would not
materially harm our operating results. If we are unable to renew this license,
we may be prohibited from further use of the subject technology and our
operating results and financial condition could be materially harmed.
We have from time to time received, and may in the future receive,
communications from third parties asserting that our products infringe on their
patents. We believe that we possess or license all required proprietary rights
to the technology involved in our products and that our products, trademarks and
other intellectual property rights do not infringe upon the proprietary rights
of others. However, there can be no assurance that others will not claim a
proprietary interest in all or a part of the technology we use or assert claims
of infringement. Any such claim, regardless of its merits, could involve us in
costly litigation and materially harm our business.
The existence of a large number of patents in the markets in which our
products are sold, the rapid rate of issuance of new patents and short product
development cycles means it is not economically practical
51
<PAGE>
to determine in advance whether a product infringes patent rights of others. We
believe that, based upon industry practice, any necessary license or rights
under such patents may be obtained on terms that would not materially harm our
consolidated financial position or results of operations. However, there can be
no assurance in this regard.
Employees
As of March 31, 1999, we had 617 full-time employees. On that date, 128
full-time employees provided services to both divisions and are members of our
administrative and manufacturing departments. On that date, the Network
Solutions Division had 371 employees and Enterprise Integration Solutions
Division had 118 employees. We consider our ability to attract and retain
qualified employees and to motivate such employees to be essential to our future
success. Competition for highly skilled personnel is particularly intense in the
computer and data communications industry, and no assurance may be given that we
will continue to attract and retain qualified employees.
Legal Proceedings
We are currently not a party to any legal proceedings that could materially
harm our business.
Facilities and Properties
Our principal administrative, manufacturing, engineering and development
functions are located in leased facilities in the Minneapolis, Minnesota suburbs
of Maple Grove and Plymouth. We have leased a new building, presently under
construction in Plymouth, Minnesota, to consolidate our current facilities in
Plymouth and Maple Grove for our principal administrative, manufacturing,
engineering and development functions. We are scheduled to occupy the new
building beginning in the fourth quarter of 1999. We also lease space in
Westborough, Massachusetts, primarily for the development and support of
software products for Enterprise Integration Solutions Division. We lease space
in Atlanta, Georgia for development of the FileSpeed(TM) product. In addition,
we lease office space in England, France, Germany, Australia, Hong Kong, Japan,
The Netherlands, Brazil and Mexico. We also lease space for sales offices for
our direct sales staff and systems consultants in a number of locations
throughout the United States and Canada. We believe our facilities are adequate
to meet our current needs.
52
<PAGE>
MANAGEMENT
Directors, Executive Officers and Key Employees
Our directors, executive officers and key employees are as follows:
<TABLE>
<CAPTION>
Name Position Served Age
---------------- ----------------------------------------------- ---
<S> <C> <C>
Thomas G. Hudson Chairman, President and Chief Executive Officer 53
Gregory T. Barnum Vice President of Finance, Chief Financial Officer 44
and Corporate Secretary
Jeffrey A. Bertelsen Corporate Controller and Treasurer 37
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 40
Martin G. Hahn Vice President and General Manager-Enterprise 41
Integration Solutions Division
Mark R. Knittel Vice President of Marketing 44
Kristine E. Ochu Vice President of Human Resources 37
Patrick W. Gross Director 55
Erwin A. Kelen Director 64
Lawrence Perlman Director 61
John A. Rollwagen Director 58
</TABLE>
Thomas G. Hudson has served as President and Chief Executive Officer
since June 1996, as a director since August 1996 and Chairman since May 1999.
From 1993 to June 1996, Mr. Hudson served as 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, 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. Mr. Hudson is a graduate of the
University of Notre Dame and New York University. Mr. Hudson attended the
Harvard Advanced Management Program in 1990.
53
<PAGE>
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 time, Mr. Barnum served in various accounting and
financial management capacities for Cray Research, Inc., a manufacturer of
supercomputers. Mr. Barnum 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 our Controller from March 1995 to
December 1996. From 1985 to March 1995, Mr. Bertelsen was employed by KPMG Peat
Marwick, a public accounting firm, most recently as a Senior Audit Manager. Mr.
Bertelsen 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, and most recently
served 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 our 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.
Peter Dixon was appointed Vice President of Worldwide Business
Development in November 1998. Mr. Dixon served as our Vice President of
Worldwide Distribution from March 1998 to November 1998, Vice President of
International Sales 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 our 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 Assistant 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, magna cum laude from Bernard Baruch College.
Martin G. Hahn was appointed Vice President and General Manager of our
Enterprise Integration Solutions Division in October 1997. From June 1995 to
October 1997, Mr. Hahn served as President of the Internet Solutions Division at
Apertus Technologies Inc., prior to its acquisition by us. Mr. Hahn also held a
variety of executive marketing and sales positions at Apertus from July 1987 to
May 1995. Prior to that, Mr. Hahn served as Assistant Vice President of the
Corporate Finance and Development Business
54
<PAGE>
Unit at First Bank Systems. Mr. Hahn is a graduate of the University of
Minnesota and University of Chicago Graduate School of Business.
Mark R. Knittel was appointed Vice President of Marketing in May 1997.
Mr. Knittel served as our 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 our 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. Ms. Ochu attended the University of
Michigan Advanced Human Resources Executive Program in 1996.
Patrick W. Gross has been a director since July 1997. Mr. Gross founded
American Management Systems, Inc. in 1970 where he serves as Chairman of the
Executive Committee and Principal Executive Officer. American Management is a
management consulting and systems integration firm applying information
technology to business and management in both the public and private sectors.
Between July 1968 and May 1970, Mr. Gross served on the staff of the U.S.
Secretary of Defense in the Office of Systems Analysis. Mr. Gross is Chairman of
Baker & Taylor Holdings, Inc., a private company, and serves as a director of
Capital One Financial Corporation and Landmark Systems Corporation. Mr. Gross is
a graduate of Rensselaer Polytechnic Institute, University of Michigan and
Stanford University.
Erwin A. Kelen has been a director since June 1988. Mr. Kelen is
President of Kelen Ventures and a partner of Camir Investments, both private
investment entities. Mr. Kelen is a private investor active in venture capital
investments, investment management and helping small companies grow. From 1984
to 1990, Mr. Kelen was President and Chief Executive Officer of DataMyte
Corporation, a wholly owned subsidiary of Allen Bradley Co. Mr. Kelen is also a
director of Printronix, Inc., Insignia Systems, Inc., and CyberOptics
Corporation. Mr. Kelen is a graduate of the Technical University of Budapest and
the University of Minnesota Graduate School.
Lawrence Perlman has been a director since June 1988. From January 1990
to November 1992, Mr. Perlman was President and Chief Executive Officer of
Ceridian Corporation, formerly Control Data Corporation, and has been Chairman
and Chief Executive Officer since November 1992. Ceridian Corporation is a
leading information services and defense electronics company that serves the
human resources, electronic media, transportation, gaming and government
markets. Mr. Perlman also serves as a director of Ceridian Corporation, Valspar
Corporation and Amdocs Ltd. and as Chairman and a director of Seagate
Technology, Inc. Mr. Perlman is a graduate of Carleton College and Harvard Law
School.
John A. Rollwagen has been a director since June 1993 and served as
Chairman of the Board from December 1995 to May 1999. Mr. Rollwagen is a private
investor and venture partner with St. Paul Venture Capital, a venture capital
firm. From January 1993 to May 1993, Mr. Rollwagen served as U.S. Department of
Commerce Deputy Secretary-Designate. Beginning in 1975, Mr. Rollwagen served in
executive capacities with Cray Research, Inc. Mr. Rollwagen served as Chairman
and Chief Executive Officer of Cray from 1981 to January 1993. Mr. Rollwagen
serves as a director of several private
55
<PAGE>
companies. Mr. Rollwagen is a graduate of The Massachusetts Institute of
Technology and Harvard Graduate School of Business Administration.
56
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of our common
stock as of June 9, 1999 and as adjusted to reflect the sale of the shares of
common stock in this offering by:
. each person or entity known by us to own beneficially more than 5%
of our common stock;
. each of our directors;
. each of our executive officers; and
. all directors and executive officers as a group.
The beneficial ownership is calculated based on 23,292,877 shares of
our common stock outstanding as of June 9, 1999 and 26,792,877 shares
outstanding immediately following the offering. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Unless otherwise indicated, each person or entity named in the table
have sole voting and investment power, or shares voting and investment power
with his or her spouse, with respect to all shares of stock listed as owned by
such person. Shares issuable upon the exercise of options that are currently
exercisable or become exercisable within 60 days of June 9, 1999 are considered
outstanding for the purpose of calculating the percentage of outstanding shares
of our common stock held by the individual or entity, but not for the purpose of
computing percentage ownership of any other person. The information set forth
below excludes any shares purchased in the offering by the respective beneficial
owner.
57
<PAGE>
Unless otherwise noted, the address for each entity and person listed
below is 605 North Highway 169, Suite 800, Minneapolis, Minnesota 55441.
<TABLE>
<CAPTION> Amount of
Shares
Beneficially Percent of Common Stock
Name of Beneficial Owner Owned Outstanding
- ----------------------- ------------ --------------------------
Before After
Offering Offering
----------- -----------
<S> <C> <C> <C>
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401................................ 1,286,600 5.52% 4.80%
Erwin A. Kelen.......................................... 519,577 2.21% 1.92%
Thomas G. Hudson........................................ 495,163 2.09% 1.82%
John A. Rollwagen....................................... 320,000 1.36% 1.18%
Lawrence Perlman........................................ 220,883 * *
Patrick A. Gross........................................ 79,179 * *
Mark R. Knittel......................................... 40,956 * *
Gregory T. Barnum....................................... 22,009 * *
William C. Collette..................................... 19,737 * *
Peter Dixon............................................. 13,311 * *
Kristine E. Ochu........................................ 8,341 * *
Nick V. Ganio........................................... 5,956 * *
Jeffrey A. Bertelsen.................................... 2,375 * *
Richard E. Carlson...................................... 938 * *
Martin G. Hahn.......................................... 0 * *
All executive officers and directors as a group
(14 persons).......................................... 1,748,425 7.11% 6.22%
</TABLE>
- ---------------------
* Represents beneficial ownership of less than 1% of the outstanding common
Stock.
According to a Schedule 13F dated March 31, 1999, Dimensional Fund
Advisors, Inc., a registered investment advisor, is deemed to have beneficial
ownership of 1,286,600 shares of our common stock as of March 31, 1999, all of
which are held in portfolios of DFA Investment Dimensions Group, Inc., a
registered open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA Participation
Group Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional Fund Advisors, Inc. serves as investment manager. Dimensional
Fund Advisors disclaims beneficial ownership of all such shares.
The beneficial ownership for Messrs. Kelen, Rollwagen, Perlman and
Gross include 226,667, 290,000, 193,333 and 79,179 shares of common stock,
respectively, issuable upon exercise of outstanding options.
Mr. Hudson's beneficial ownership includes 877 shares held by
Connecticut General Trust Company as trustee of our 401(k) Plan and 423,617
shares of common stock issuable upon exercise of outstanding options.
Mr. Knittel's beneficial ownership includes 40,000 shares of common
stock issuable upon the exercise of outstanding options.
Mr. Barnum's beneficial ownership includes 18,750 shares of common
stock issuable upon the exercise of outstanding options.
Mr. Collette's beneficial ownership includes 7,157 shares held by
Connecticut General Trust Company as trustee of our 401(k) Plan and 8,500 shares
issuable upon the exercise of outstanding options.
Mr. Dixon's beneficial ownership includes 8,145 shares of common stock
issuable upon the exercise of outstanding options.
Ms. Ochu's beneficial ownership includes 8,125 shares of common stock
issuable upon the exercise of outstanding options.
Mr. Bertelsen's beneficial ownership includes 2,375 shares of common
stock issuable upon the exercise of outstanding options.
Mr. Carlson's beneficial ownership includes 938 shares of common stock
issuable upon the exercise of outstanding options.
Includes 1,299,629 shares that may be acquired upon exercise of
options. Includes only executive officers and directors as of June 9, 1999.
58
<PAGE>
UNDERWRITING
The underwriters of the offering named below, for whom Bear, Stearns &
Co. Inc., SG Cowen Securities Corporation, BancBoston Robertson Stephens Inc.
and Morgan Keegan & Company, Inc. are acting as representatives, have severally
agreed with us, subject to the terms and conditions of the underwriting
agreement, the form of which has been filed as an exhibit to the registration
statement on Form S-3 of which this prospectus is a part, to purchase from us
the aggregate number of shares of our common stock set forth opposite their
respective names below:
<TABLE>
<CAPTION> Number of
Underwriter Shares
----------- ------------
<S> <C>
Bear, Stearns & Co. Inc. ................................................
SG Cowen Securities Corporation .........................................
BancBoston Robertson Stephens Inc. ......................................
Morgan Keegan & Company, Inc. ...........................................
--------------
Total .............................................................. 3,500,000
==============
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, and where
such indemnification is unavailable, to contribute to payments that the
underwriters may be required to make in respect of such liabilities. The nature
of the underwriters' obligations is such that they are committed to purchase and
pay for all of the above shares of common stock if any are purchased.
If the underwriters sell more than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 525,000
shares of our common stock to cover such sales from us. The underwriters may
exercise that option for 30 days. If any shares are purchased pursuant to this
option, the underwriters will severally purchase shares in the same proportion
as set forth in the table above.
We and all of our directors and executive officers have agreed that,
subject to certain exceptions, for a period of 90 days from the date of this
prospectus, without the prior written consent of Bear, Stearns & Co. Inc., which
may be waived, we will not, directly or indirectly, issue, sell, offer or agree
to sell, grant any option for the sale of, pledge, make any short sale,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act or otherwise dispose of any shares of our common stock
(or securities convertible into, exercisable for or exchangeable for our common
stock) of our company.
The following table shows the per share and total underwriting
discounts and commissions to be paid to the underwriters by us. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
------------------ ------------------
<S> <C> <C>
Per share .......................................................
Total ...........................................................
</TABLE>
Shares sold by the underwriters to the public will be offered at the
public offering price set forth on the cover of this prospectus. Any shares sold
by the underwriters to securities dealers may be sold at a discount of up to
$_______ per share from the public offering price. Any such securities dealers
may resell
59
<PAGE>
any shares purchased from the underwriters to certain other brokers or dealers
at a discount of up to $______ per share from the public offering price. If all
the shares are not sold at the offering price, the representative may change the
offering price and the other selling terms.
In connection with the offering, certain persons participating in the
offering may purchase and sell shares of common stock in the open market. These
transactions may include short sales, stabilizing transactions and purchases to
cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
the offering. Stabilizing transactions consist of certain bids or purchases made
for the purpose of preventing or retarding a decline in the market price of the
common stock while the offering is in progress. The underwriters also may impose
a penalty bid. This penalty occurs when a particular underwriter repays to the
underwriters a portion of the underwriting discount received by it because the
representative has repurchased shares sold by or for the account of such
underwriter in stabilizing or covering short transactions.
These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of the common stock. As a result, the price of
the common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
Certain persons participating in this offering may also engage in
passive market making transactions in the common stock on the Nasdaq National
Market. Passive market making consists of displaying bids on the Nasdaq National
Market limited by the prices of independent market makers and affecting
purchases limited by such prices and in response to order flow. Rule 103 of
Regulation M promulgated by the SEC limits the amount of net purchases that each
passive market maker may make and the displayed size of each bid.
Passive market making may stabilize the market price of the common
stock at a level above that which might otherwise prevail in the open market
and, if commenced, may be discontinued at any time.
The representatives of the underwriters have advised us that Bear,
Stearns & Co. Inc., and SG Cowen Securities Corporation each currently acts as a
market maker for our common stock and currently intends to continue to act as a
market maker following this offering. Since the average daily trading volume of
our common stock exceeds $1 million and our public float exceeds $150 million,
the provisions of Regulation M permit such underwriters to continue market
making activities during the period of the offering. However, the underwriters
are not obligated to do so and may discontinue any market making at any time.
We estimate that the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $375,000. We are
responsible for all such expenses.
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock and 1,000,000 shares of preferred
stock. Following is a summary of the material provisions of our common stock,
our preferred stock, our rights plan, the anti-takeover provisions of the
Minnesota Business Corporation Act, our articles of incorporation and our
bylaws.
60
<PAGE>
Common Stock
As of June 9, 1999, there were 23,292,877 shares of common stock
outstanding held of record by approximately 1,000 shareholders of record. No
shares of preferred stock are outstanding.
Subject to preferences that may be applicable to any outstanding
preferred stock, the holders of outstanding shares of common stock are entitled
to the following rights:
. to receive dividends out of assets legally available therefor at
such times and in such amounts as our board of directors from time
to time may determine;
. one vote for each share held on all matters submitted to a vote of
our shareholders; and
. upon our liquidation, dissolution or winding-up, to share ratably
in all assets remaining after payment of liabilities and the
liquidation or redemption of any preferred stock.
Cumulative voting for the election of directors is not authorized by
our articles of incorporation, which means that the holders of a majority of the
outstanding shares of stock with voting rights can elect all of the directors
then standing for election. The common stock is not entitled to preemptive
rights and is not subject to conversion or redemption. Each outstanding share of
common stock is, and all shares of common stock to be outstanding upon
completion of this offering, will be, upon payment therefor, duly authorized,
validly issued, fully paid and nonassessable.
Preferred Stock
Our board of directors is authorized, without action by our
shareholders, to designate and issue preferred stock in one or more series. The
board of directors can designate the rights, preferences and privileges of the
shares of each series and any qualifications, limitations or restrictions
thereon.
The board of directors may authorize the issuance of preferred stock
with voting or conversion rights that could adversely affect the voting power or
other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes could, among other things, have the effect of delaying,
deferring or preventing a change in control. As further discussed in the section
below, the issuance of preferred stock with voting or conversion rights may
adversely affect the voting power of the holders of common stock, including the
loss of voting control to others. We have no current plans to issue any shares
of preferred stock.
Shareholder Rights Plan
Out of the 1,000,000 authorized shares of preferred stock, we have
35,000 shares of series A junior participating preferred stock reserved for
issuance in connection with our shareholder rights plan set forth in our Rights
Agreement, dated July 24, 1998, with ChaseMellon Shareholder Services, L.L.C. as
rights agent.
In July 1998, the board of directors adopted the shareholder rights
plan and declared a dividend distribution of one preferred stock purchase right
for each share of common stock to shareholders of record
61
<PAGE>
on August 10, 1998. Each share of common stock issued subsequent to such date,
including the shares of common stock being offered pursuant to this prospectus,
includes a corresponding preferred stock purchase right. Each preferred stock
purchase right entitles the registered holder to purchase from us 1/1000th of a
share of the series A preferred stock at a price of $50.00 per unit, subject to
adjustment. The rights become exercisable upon the earlier of:
. the close of business on the tenth day following a public
announcement that a person or group of affiliated or associated
persons have acquired beneficial ownership of 20% or more of the
outstanding common shares; or
. the close of business of the tenth day following the commencement
of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the
beneficial ownership by a person or group of 20% or more of the
outstanding common shares.
Upon exercise and payment of the then current purchase price for the
right, the right holder will have the right to receive common stock (or, in some
circumstances, cash, property or other securities of ours) having a value equal
to two times the purchase price. Upon the occurrence of certain other events,
each right holder shall have the right to receive, upon exercise and payment of
the then current purchase price, common stock of the other party to the
transaction having a value equal to two times the purchase price.
We are entitled to redeem the rights in whole, but not in part, at a
price of $0.01 per right, subject to adjustment, payable in cash or shares of
our common stock, at any time prior to the earlier of the expiration of the
rights in July 2008 or ten days following the time that a party has acquired
beneficial ownership of 20% or more of the shares of common stock then
outstanding. Any of the provisions of the Rights Agreement governing the rights
may be supplemented or amended by us in our sole and absolute discretion. Such
supplements or amendments by us may be made without the approval of the rights
holders.
The existence of the shareholder rights plan as well as the ability of
the board of directors to issue preferred stock and the anti-takeover provision
of Minnesota law described below may serve to discourage an acquisition of us or
stock purchases in furtherance of an acquisition.
Business Combinations and Control Share Acquisitions Under the Minnesota
Business Corporation Act
As a public corporation, we are governed by the provisions of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act. These
anti-takeover provisions could operate to deny shareholders the receipt of a
premium on their stock and may also have a depressive effect on the market price
of our stock. Section 302A.671 basically provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the shareholders in a prescribed manner. A
"control share acquisition" is generally defined as an acquisition of beneficial
ownership of shares that would, when added to all other shares beneficially
owned by the acquiring person, entitle the acquiring person to have voting power
of 20% or more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner of 10% or more of a
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
62
<PAGE>
Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws could make our acquisition
offer more difficult. We believe that the benefits of increased protection from
unfriendly or unsolicited proposals to acquire or restructure us outweigh the
disadvantages of discouraging such proposals, including proposals that are
priced above the then current market value of our common stock, because, among
other things, negotiation of such proposals could result in an improvement of
their terms.
Our articles of incorporation authorize, without action by the
shareholders, the board of directors to designate and issue preferred stock in
one or more series. Our board of directors can also issue shares of a class or
series to holders of shares of another class or series to effectuate share
dividends, splits or conversions of our outstanding shares. In addition, our
articles of incorporation grant the board of directors the authority to adopt,
amend or repeal all or any of the bylaws, by a majority of its members present
at a duly called meeting, subject to the power of the shareholders to change or
repeal the bylaws. In addition, our bylaws provide that meetings of our
shareholders may only be called by the board of directors, certain of our
officers and shareholders holding not less than 3% of all outstanding voting
shares.
The provisions of the shareholder rights plan, our articles of
incorporation, our bylaws and Minnesota law are intended to encourage potential
acquirers to negotiate with us and to allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing
shareholder value. Such provisions may also have the effect of discouraging
acquisition proposals or delaying or preventing a change in control, which may
harm our stock price.
Transfer Agent
The transfer agent for our common stock is Chase Mellon Shareholder
Services, L.L.C., Overpecke Centre, 85 Challenger Road, Ridgefield Park, New
Jersey 07660, telephone number (800) 288-9541.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon by Leonard, Street and Deinard Professional Association,
Minneapolis, Minnesota, counsel for CNT. Various legal matters in connection
with the offering will be passed upon for the underwriters by Morrison &
Foerster LLP, San Francisco, California.
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1998 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 included in this prospectus have been included in
reliance on the report of KPMG Peat Marwick LLP, independent certified public
accountants, and upon their authority as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission. Certain information in the
registration statement has been omitted from this prospectus in accordance with
the rules of the SEC. We file annual, quarterly and special reports, proxy
statements and other information with the SEC. You can inspect and copy the
registration statement as well as reports, proxy statements and other
information we have filed with the SEC at the public reference
63
<PAGE>
room maintained by the SEC at 450 Fifth Street, NW, Washington, D.C. 20549. You
can obtain copies from the public reference room of the SEC at 450 Fifth Street,
NW, Washington, D.C. 20549 upon payment of various fees. You can call the SEC at
1-800-732-0330 for further information about the public reference room. We are
also required to file electronic versions of these documents with the SEC, which
may be accessed through the SEC's World Wide Website at http://www.sec.gov. Our
common stock is quoted on the Nasdaq National Market System.
The SEC allows us to "incorporate by reference" certain of our
publicly-filed documents into this prospectus, which means that information
included in these documents is considered part of this prospectus. Information
that we file with the SEC with this prospectus or subsequent to the date of this
prospectus will automatically update and supersede this information. This
prospectus does not include all the information in the registration statement
and documents incorporated by reference. You should refer to the documents and
to the exhibits to the registration statement for a more complete understanding
of the matter involved. We hereby incorporate by reference the documents listed
below and any future filings made with the SEC prior to the termination of the
offering under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
of 1934.
The following documents filed with the SEC are incorporated by
reference in this prospectus:
1. Our Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 0-13994).
2. Our Proxy Statement dated April 1, 1999, filed in connection with
our May 13, 1999 Annual Meeting of Shareholders.
3. Our Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 (File No. 0-13994).
4. Our Current Report on Form 8-K, filed with the SEC on May 25, 1999
(File No. 0-13994).
We will furnish without charge to you, on written or oral request, a
copy of any or all of the documents incorporated by reference. You should direct
any requests for documents to Sue Nelson, Investor Relations, Computer Network
Technology Corporation, 605 North Highway 169, Suite 800, Minneapolis, Minnesota
55441, ph. (612) 696-6111, e-mail [email protected].
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998,
and March 31, 1999 (unaudited)...................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999 (unaudited)....................... F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
years ended December 31, 1996, 1997 and 1998, and the three months
ended March 31, 1998 and 1999 (unaudited)........................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1997 and 1998, and the three months ended March 31, 1998 and 1999 (unaudited)....................... F-7
Notes to Consolidated Financial Statements............................................................... F-9
</TABLE>
F-1
<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, 1997 and 1998, 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, 1997 and 1998, 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.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 26, 1999
F-2
<PAGE>
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, March 31,
----------------------------------------
1997 1998 1999
------------- --------------- -------------
Assets (unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 4,790 $ 11,786 $ 14,190
Marketable securities 6,034 576 760
Receivables, net 32,752 30,225 35,172
Inventories 12,322 19,241 17,142
Deferred tax asset 2,284 3,138 3,138
Other current assets 1,377 1,274 2,035
------------- --------------- -------------
Total current assets 59,559 66,240 72,437
------------- --------------- -------------
Property and equipment, net 14,501 16,360 16,228
Field support spares, net 3,589 3,739 3,885
Deferred tax asset 3,823 2,517 2,517
Goodwill and other intangibles, net 3,530 4,737 4,507
Other assets 485 434 403
------------- --------------- -------------
$ 85,487 $ 94,027 $ 99,977
============= =============== =============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 7,656 $ 7,565 $ 8,031
Accrued liabilities 12,135 14,527 13,825
Deferred revenue 9,207 7,235 9,228
Current installments of obligations under
capital lease 181 326 360
Current installments of long-term debt - 1,000 1,000
------------- --------------- -------------
Total current liabilities 29,179 30,653 32,444
------------- --------------- -------------
Obligations under capital lease, less current
installments 701 1,816 1,725
Long-term debt, less current installments - 1,000 -
------------- --------------- -------------
Total liabilities 29,880 33,469 34,169
------------- --------------- -------------
Shareholders' equity:
Undesignated Preferred stock,
authorized 965 shares; none issued
and outstanding........................ - - -
Series A Junior Participating Preferred
Stock, authorized 35 shares, none issued
and outstanding.......................... - - -
Common stock, $.01 par value; authorized
100,000 shares, issued and outstanding
22,195 at December 31, 1997,
22,254 at December 31, 1998 and 22,782 at
March 31, 1999........................ 222 223 228
Additional paid-in capital 54,439 54,921 58,120
Unearned compensation (35) (355) (748)
Retained earnings 1,412 6,141 8,838
Accumulated other comprehensive income -
foreign currency translation adjustment (431) (372) (630)
------------- --------------- -------------
Total shareholders' equity 55,607 60,558 65,808
------------- --------------- -------------
$ 85,487 $ 94,027 $ 99,977
============= =============== =============
</TABLE>
F-3
<PAGE>
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
December 31 March 31,
------------------------------------- ----------------------------
1996 1997 1998 1998 1999
----------- ---------- --------- ------------ -------------
Revenue: (Unaudited)
<S> <C> <C> <C> <C> <C>
Product sales $ 74,170 $ 68,787 $ 95,475 $ 22,337 $ 25,757
Service fees 22,939 29,054 38,060 8,829 11,156
----------- ---------- --------- ------------ -------------
Total revenue 97,109 97,841 133,535 31,166 36,913
----------- ---------- --------- ------------ -------------
Cost of revenue:
Cost of product sales 25,843 22,472 30,935 6,854 8,612
Cost of service fees 17,269 19,219 23,893 5,678 6,487
----------- ---------- --------- ------------ -------------
Total cost of revenue 43,112 41,691 54,828 12,532 15,099
----------- ---------- --------- ------------ -------------
Gross profit 53,997 56,150 78,707 18,634 21,814
----------- ---------- --------- ------------ -------------
Operating expenses:
Sales and marketing 32,192 33,717 43,492 11,130 10,700
Engineering and development 13,996 17,848 20,824 5,585 5,934
General and administrative 5,137 4,944 6,252 1,397 1,718
Write-down of purchased technology 2,720 - - - -
Purchased in-process research and
development - 2,750 927 - -
Integration charges - 2,184 - - -
----------- ---------- --------- ------------ -------------
Total operating expenses 54,045 61,443 71,495 18,112 18,352
----------- ---------- --------- ------------ -------------
Income (loss) from operations (48) (5,293) 7,212 522 3,462
----------- ---------- --------- ------------ -------------
Other income (expense):
Interest income 1,859 1,553 393 87 101
Interest expense (46) (57) (79) (39) (46)
Other, net 259 (96) 113 21 571
----------- ---------- --------- ------------ -------------
Other income, net 2,072 1,400 427 69 626
----------- ---------- --------- ------------ -------------
Income (loss) before income taxes 2,024 (3,893) 7,639 591 4,088
Provision (benefit) for income taxes 664 (1,579) 2,910 222 1,391
----------- ---------- --------- ------------ -------------
Net income (loss) $ 1,360 $ (2,314) $ 4,729 $ 369 $ 2,697
=========== ========== ========= ============ =============
Basic:
- -----
Net income (loss) per share $ .06 $ (.10) $ .21 $ .02 $ .12
=========== ========== ========= ============ =============
Shares 23,241 22,702 22,095 22,106 22,481
=========== ========== ========= ============ =============
Diluted:
- -------
Net income (loss) per share $ .06 $ (.10) $ .21 $ .02 $ .11
=========== ========== ========= ============ =============
Shares 23,557 22,702 22,572 22,243 25,203
=========== ========== ========= ============ =============
</TABLE>
F-4
<PAGE>
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------
Additional
Paid - in Unearned Retained
Shares Amount Capital Compensation Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 22,929 $ 230 $ 58,151 $ - $ 2,366
- ----------------------------------------------------------------------------------------------------------------------------------
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 - -
Tax benefits from employee stock transactions - - 292 - -
Comprehensive income:
Net income - - - - 1,360
Translation adjustment, net of tax effect
of $0 - - - - -
Total comprehensive income - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 23,408 $ 234 $ 60,372 $ - $3,726
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options 192 2 741 (42) -
Repurchase of common stock (1,405) (14) (6,674) - -
Compensation expense - - - 7 -
Comprehensive loss:
Net loss - - - - (2,314)
Translation adjustment, net of tax effect of $0 - - - - -
Total comprehensive loss - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 22,195 $ 222 $ 54,439 $ (35) $ 1,412
- ----------------------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options 454 5 2,041 (401) -
Tax benefits from employee stock transactions - - 195 - -
Repurchase of common stock (395) (4) (1,754) - -
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income Total
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1995 (240) $ 60,507
- -----------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan and exercise of stock
options and warrants, net of 22 shares redeemed - 1,933
Tax benefits from employee stock transactions - 292
Comprehensive income:
Net income - 1,360
Translation adjustment, net of tax effect
of $0 69 69
--------------
Total comprehensive income - 1,429
- ---------------------------------------------------------------------------------------
Balance, December 31, 1996 (171) $ 64,161
- ---------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options - 701
Repurchase of common stock - (6,688)
Compensation expense - 7
Comprehensive loss:
Net loss - (2,314)
Translation adjustment, net of tax effect of $0 (260) (260)
--------------
Total comprehensive loss (2,574)
- ---------------------------------------------------------------------------------------
Balance, December 31, 1997 (431) $ 55,607
- ---------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options - 1,645
Tax benefits from employee stock transactions - 195
Repurchase of common stock - (1,758)
- ---------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock
------------
Additional
Paid - in Unearned Retained
Shares Amount Capital Compensation Earnings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Compensation expense - - - 81 -
Comprehensive income:
Net income - - - - 4,729
Translation adjustment, net of tax effect of $0 - - - - -
Total comprehensive income - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 22,254 $ 223 $ 54,921 $ (355) $ 6,141
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options (unaudited) 528 5 3,199 (462) -
Compensation expense (unaudited) - - - 69 -
Comprehensive income (unaudited):
Net income - - - - 2,697
Translation adjustment, net of tax effect
of $0 - - - - -
Total comprehensive income - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 (unaudited) 22,782 $ 228 $ 58,120 $ (748) $ 8,838
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income Total
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Compensation expense - 81
Comprehensive income:
Net income - 4,729
Translation adjustment, net of tax effect of $0 59 59
--------------
Total comprehensive income - 4,788
- ---------------------------------------------------------------------------------------
Balance, December 31, 1998 $ (372) $ 60,558
- ---------------------------------------------------------------------------------------
Shares issued pursuant to the employee stock
purchase plan, restricted stock plan and
exercise of stock options (unaudited) - 2,742
Compensation expense (unaudited) - 69
Comprehensive income (unaudited):
Net income - 2,697
Translation adjustment, net of tax effect of $0
(258) (258)
--------------
Total comprehensive income - 2,439
- ---------------------------------------------------------------------------------------
Balance, March 31, 1999 (unaudited) $ (630) $ 65,808
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months
Years Ended December 31, Ended March 31,
------------------------------------------- ------------------------------
1996 1997 1998 1998 1999
---------- ----------- ------------ ------------ ------------
(Unaudited)
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net income (loss) $ 1,360 $ (2,314) $ 4,729 $ 369 $ 2,697
Depreciation and amortization 7,960 7,384 8,856 2,089 2,509
Tax benefits from employee stock
transactions 292 - 195 - -
Compensation expense - 7 81 43 69
Write-down of purchased technology 2,720 - - - -
Purchase of in-process research
and development - 2,750 927 - -
Change in deferred taxes (2,303) (2,630) 82 - -
Changes in operating assets and liabilities:
Receivables 356 (8,337) 2,585 (1,613) (5,151)
Inventories 83 (1,493) (6,919) (983) 2,099
Other current assets 655 (468) 115 (47) (761)
Accounts payable 1,255 3,008 (137) 1,415 466
Accrued liabilities 1,653 1,871 2,381 (3,107) (702)
Deferred revenue (1,932) 2,025 (1,972) 2,361 1,993
---------- ----------- ------------ ------------ ------------
Cash provided by operating
activities 12,099 1,803 10,923 527 3,219
---------- ----------- ------------ ------------ ------------
Investing Activities:
Additions to property and equipment (4,922) (7,565) (6,424) (1,949) (1,719)
Additions to field support spares (2,220) (1,797) (2,358) (663) (574)
Additions to purchased technology - (1,550) (538) (151) -
Acquisition of business, net of
cash provided - (11,412) 169 - -
Proceeds from sale of vision
product line - 2,000 - - -
Purchase of marketable securities (50,671) (12,190) (18,054) - (184)
Redemption of marketable securities 42,902 36,374 23,512 6,034 -
Other (303) 434 51 5 31
---------- ----------- ------------ ------------ ------------
Cash provided by (used in)
investing activities (15,214) 4,294 (3,642) 3,276 (2,446)
---------- ----------- ------------ ------------ ------------
Financing Activities:
Payments for repurchases of common
stock - (6,688) (1,758) (550) -
Repayment of long-term debt - - - - (1,000)
Proceeds from issuance of common
stock 1,933 701 1,645 13 2,742
Repayments of obligations under
capital leases - (107) (181) (63) (57)
---------- ----------- ------------ ------------ ------------
Cash provided by (used in)
financing activities 1,933 (6,094) (294) (600) 1,685
---------- ----------- ------------ ------------ ------------
Effects of exchange rate changes 69 (60) 9 (5) (54)
---------- ----------- ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (1,113) (57) 6,996 3,198 2,404
Cash and cash equivalents -
beginning of period 5,960 4,847 4,790 4,790 11,786
---------- ----------- ------------ ------------ ------------
Cash and cash equivalents - end of
period $ 4,847 $ 4,790 $ 11,786 $ 7,988 $ 14,190
========== =========== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1996, 1997, and 1998
(Information as of and subsequent to March 31, 1999 and for the three months
ended March 31, 1998 and 1999 is unaudited)
(tabular amounts in thousands except per share data)
(1) Summary of Significant Accounting Policies
DESCRIPTION OF BUSINESS
Computer Network Technology Corporation is a leading worldwide 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.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1999 and for the
three months ended March 31, 1998 and 1999 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal, recurring accruals)
considered necessary for a fair presentation have been included. Results for the
interim period are not necessarily indicative of results for an entire year.
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.
F-8
<PAGE>
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 1997 or 1998. 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, 1997 and 1998 was $2,979,000 and $1,225,000, 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 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 foreign currency transaction losses in 1996
and 1997 of $99,000 and $45,000 respectively. The Company recorded a foreign
currency transaction gain in 1998 of $110,000.
F-9
<PAGE>
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.
F-10
<PAGE>
(2) Components of Selected Balance Sheet Accounts
<TABLE>
<CAPTION>
December 31, March 31,
---------------------
1997 1998 1999
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
Inventories:
Components and subassemblies $ 6,572 $ 9,490 $ 5,723
Work in process 1,657 4,095 2,747
Finished goods 4,093 5,656 8,672
--------- --------- ---------
$ 12,322 $ 19,241 $ 17,142
========= ========= =========
Property and equipment:
Machinery and equipment $ 17,882 $ 22,944 $ 22,920
Office and data processing equipment 14,221 16,610 18,367
Furniture and fixtures 1,432 1,698 1,685
Leasehold improvements 2,096 2,293 2,282
--------- --------- ---------
35,631 43,545 45,254
Less accumulated depreciation and amortization 21,130 27,185 29,026
--------- --------- ---------
$ 14,501 $ 16,360 $ 16,228
========= ========= =========
Field support spares:
Field support spares $ 11,985 $ 14,343 $ 15,093
Less accumulated depreciation 8,396 10,604 11,208
--------- --------- ---------
$ 3,589 $ 3,739 $ 3,885
========= ========= =========
Goodwill and other intangibles:
Purchased technology $ 2,250 $ 3,478 $ 3,478
Goodwill 1,085 1,515 1,515
Identifiable intangibles 600 867 867
--------- --------- ---------
3,935 5,860 5,860
Less accumulated amortization 405 1,123 1,353
--------- --------- ---------
$ 3,530 $ 4,737 $ 4,507
========= ========= =========
Accrued liabilities:
Compensation $ 5,955 $ 7,687 $ 7,212
Income taxes 1,950 3,725 4,038
Integration 1,769 430 430
Other 2,461 2,685 2,145
--------- --------- ---------
$ 12,135 $ 14,527 $ 13,825
========= ========= =========
</TABLE>
(3) Marketable Securities
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. 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.
F-11
<PAGE>
The amount of gross unrealized gains and losses with respect to the Company's
investments in marketable securities at December 31, 1997 and 1998 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 1996, 1997, and 1998 were
$23,042,000, $26,252,000 and $8,093,000, respectively.
(4) Acquisitions
APERTUS
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 Incorporated
(Apertus), 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
Apertus since October 24, 1997. The purchase price was to allocated the fair
value of the assets and liabilities acquired as follows:
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
============
The Company allocated $2,750,000 of the Apertus purchase price to acquired in-
process research and development to reflect the value of enterprise connect
which was approximately 80% complete at the time of the acquisition. At the date
of acquisition, the technological feasibility of Enterprise Connect had not been
attained, and the technology had no alternative future use. 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.
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:
Net tangible assets $ 148
Identifiable intangibles and goodwill 1,295
In-process research development 927
F-12
<PAGE>
Deferred tax liability (370)
-------
Installments payable $ 2,000
=======
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% complete at the time of the acquisition. At
the date of acquisition, the technological feasibility of process dynamics had
not been attained, and the technology had no alternative future use. Process
dynamics is a new technology that manages business logic and process workflow
for improved development and deployment of large e-commerce 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 second half
of 1999.
Two employees, who were former shareholders of IntelliFrame, 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 EAI products exceed defined targets.
The potential bonus payments increase to a maximum of $16,000,000 if the Company
were to divest any portion of the EAI product line during 1999. The full bonus
payments set forth above are conditioned upon the employment of these
individuals through July 1, 2000.
PRO FORMA RESULTS
The following table presents the consolidated results of operations of the
Company for 1997 and 1998 on an unaudited pro forma basis as if the acquisitions
of IntelliFrame and Apertus took place at the beginning of each year:
Unaudited Pro Forma
-------------------
1997 1988
---------- ----------
Total revenue $ 117,163 $ 133,575
Net income (loss) (11,052) 4,284
Net income (loss) per share $ (.49) $ .19
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 Apertus 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
Apertus acquisition.
In December 1997, the Company sold the assets and technologies relating to the
vision line of products acquired from Apertus 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 Company did not recognize any gain or loss upon receipt of the
initial $2,000,000 cash payment. During the three months ended March 31, 1999,
the Company recognized other income in the
F-13
<PAGE>
amount of $667,000 upon receipt of its first additional payment from the sale of
the vision product line. Any additional payments received will be recognized as
other income.
(6) Leases
The Company leases all office and manufacturing space and certain equipment
under noncancelable capital and operating leases. Building leases have terms
ranging from one to 16 years. At December 31, 1997 and 1998, leased capital
assets included in property and equipment were as follows:
Property and equipment: 1997 1998
------ -------
Office and data processing equipment $ 989 $ 2,430
Less accumulated amortization 167 481
------ -------
$ 822 $ 1,949
====== =======
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>
Year Ending December 31 Minimum Lease Commitments
- ----------------------- -------------------------
Capital Operation
------- ---------
<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 noncancelable operating leases, exclusive of executory costs,
for 1996, 1997, and 1998, was $2,202,000, $2,765,000 and $3,122,000,
respectively.
(7) Long Term Debt
Effective December 3, 1998, the Company acquired all of the outstanding stock of
IntelliFrame 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%, is due and payable on January 3, 2000.
F-14
<PAGE>
(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 board of directors adopted a shareholders 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.
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 (7,000,000 as of
May 13, 1999), 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>
1996 1997 1998
-------------------------- -------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
------- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,778 $ 6.28 3,368 $ 6.19 4,321 $ 5.42
Granted 1,483 5.36 1,689 4.85 1,269 6.08
Reissued - - 310 4.94 - -
Exercised (444) 3.38 (20) 3.80 (219) 4.66
Canceled (449) 7.10 (1,026) 6.91 (399) 5.33
----- ------ -----
Outstanding at end of year 3,368 $ 6.19 4,321 $ 5.42 4,972 $ 5.63
===== ======= =====
Exercisable at end of year 1,368 $ 6.23 1,707 $ 5.90 2,388 $ 5.71
===== ======= =====
Weighted-average fair value of
options granted during the year
$ 3.48 $ 2.77 $ 4.48
</TABLE>
F-15
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -------------------------------
Weighted-
Range Average Weighted-
of Number Remaining Average Number Weighted-Average
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>
As of June 9, 1999, there were 5,491,928 shares of common stock issuable upon
exercise of outstanding stock options at a weighted average exercise price of
$9.20 per share, of which options for 1,985,819 shares were currently
exercisable.
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
1997 and 1998, the Company issued 8,000 and 81,600 restricted shares under the
Restricted Stock Plan, respectively, and recognized related compensation expense
in 1997 and 1998 of $7,000 and $81,000, 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 (1,100,000 as of May 13, 1999) at a price per share equal
to 85% 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 1996, 1997 and 1998 were 57,456,
163,637 and 153,163, respectively.
The fair value of each purchase right granted in 1996, 1997, and 1998 was $2.06,
$1.66, and $1.57, respectively.
FAIR VALUE ASSUMPTIONS
In determining the compensation cost of stock option grants and shares sold to
employees under the 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>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate 6.58% 6.42% 5.26%
Expected life 8.14 8.14 8.41
Expected volatility 39.30% 39.30% 67.50%
</TABLE>
F-16
<PAGE>
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>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net income (loss) -
As reported $ 1,360 $ (2,314) $ 4,729
Pro forma $ (704) $ (3,826) $ 2,580
Net income (loss) per share -
As reported
Basic $ .06 $ (.10) $ .21
Diluted $ .06 $ (.10) $ .21
Pro forma
Basic $ (.03) $ (.17) $ .12
Diluted $ (.03) $ (.17) $ .11
</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.
F-17
<PAGE>
(9) Net Income (Loss) Per Share
The components of net income (loss) per basic and diluted share are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Net Income Shares Per Share
(Loss) Outstanding Amount
----------- ------------ -----------
<S> <C> <C> <C>
1996:
Basic $ 1,360 23,241 $ .06
Dilutive effect of employee stock purchase
awards and options - 316 -
----------- ------------ -----------
Diluted $ 1,360 23,557 $ .06
=========== ============ ===========
1997:
Basic $(2,314) 22,702 $ (.10)
Dilutive effect of employee stock purchase
awards and options - - -
----------- ------------ -----------
Diluted $(2,314) 22,702 $ (.10)
=========== ============ ===========
1998:
Basic $ 4,729 22,095 $ .21
Dilutive effect of employee stock purchase
awards and options - 477 -
----------- ------------ -----------
Diluted $ 4,729 22,572 $ .21
=========== ============ ===========
</TABLE>
(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>
1996 1997 1998
--------- --------- --------
<S> <C> <C> <C>
Income (loss) before income taxes:
U.S. $ 2,396 $ (3,517) $ 5,548
Foreign (372) (376) 2,091
--------- --------- --------
Total $ 2,024 $ (3,893) $ 7,639
--------- --------- --------
Income tax provision:
Current:
U.S. $ 1,753 $ (592) $ 2,041
Foreign 75 119 681
State 376 (170) 511
--------- --------- --------
Total current 2,204 (643) 3,233
--------- --------- --------
Deferred:
U.S. (1,285) (741) (289)
State (255) (195) (34)
Total deferred --------- --------- --------
(1,540) (936) (323)
--------- --------- --------
Total income tax expense (benefit) $ 664 $ (1,579) $ 2,910
======== ========== =========
</TABLE>
F-18
<PAGE>
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>
1996 1997 1998
----- ------ -----
<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 4.0 (6.2) 4.2
Foreign sales corporation (13.7) (6.7) (6.5)
Reduction in foreign net operating loss
carryforwards 38.6 - -
In-process research and development - - 4.1
Change in valuation allowance (31.3) 5.5 -
Other 1.2 .8 2.3
---- ---- ----
Total 32.8% (40.6)% 38.1%
==== ==== ====
</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, 1997 and 1998 was as follows:
<TABLE>
<CAPTION>
December 31
1997 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory $ 1,483 $ 1,261
Purchased in-process research and development 1,128 1,163
Accrued compensation 480 1,009
Property and equipment 878 888
Reserves for bad debts and sales returns 686 838
Foreign net operating loss carryforwards 410 410
Federal and state tax credits 501 373
Integration activities 493 176
Other 458 533
--------- --------
Total gross deferred tax assets 6,517 6,651
Valuation allowance (410) (410)
--------- --------
Net deferred tax assets 6,107 6,241
Deferred tax liabilities:
Purchased technology - (364)
Other - (222)
--------- --------
Total gross deferred tax liabilities - (586)
--------- --------
Net deferred income tax asset $ 6,107 $ 5,655
========= ========
</TABLE>
At December 31, 1997 and 1998, 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.
F-19
<PAGE>
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.
(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 1996, 1997, and 1998 was $582,000,
$43,000, and $1,673,000, 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% 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% 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 1997
and 1998 was $380,000 and $570,000, 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-commerce and customer
relationship management applications. The Company's two reportable segments are
strategic business units that offer different products and services. They are
managed separately because each business requires different technology and
market strategies.
The 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.
F-20
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
--------------------------------------------- -----------------------------
1996 1997 1998 1998 1999
------------- -------------- ----------- ------------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Network Solutions $ 82,079 $ 80,195 $ 103,022 $ 24,199 $ 29,245
Enterprise Integration
Solutions 15,030 17,646 30,513 6,967 7,668
----------- ----------- ----------- ----------- -----------
Total $ 97,109 $ 97,841 $ 133,535 $ 31,166 $ 36,913
=========== =========== =========== =========== ===========
Operating Profit:
Network Solutions $ 5,849 $ 458 $ 7,857 2,847 $ 2,781
Enterprise Integration
Solutions (3,177) (817) 282 (2,325) 681
Special charges (2,720) (4,934) (927) - $ -
----------- ----------- ----------- ----------- -----------
Total $ (48) $ (5,293) $ 7,212 $ 522 $ 3,462
=========== =========== =========== =========== ===========
Depreciation and
Amortization:
Network Solutions $ 6,528 $ 6,200 $ 7,251
Enterprise Integration
Solutions 1,432 1,184 1,605
----------- ----------- -----------
Total $ 7,960 $ 7,384 $ 8,856
=========== =========== ===========
Expenditures for Long -
Lived Assets:
Network Solutions $ 6,259 $ 9,893 $ 8,689
Enterprise Integration
Solutions 883 1,019 631
----------- ----------- -----------
Total $ 7,142 $ 10,912 $ 9,320
=========== =========== ===========
Assets (end of year):
Network Solutions $ 45,709 $ 60,980 $ 64,336
Enterprise Integration
Solutions 1,605 13,683 17,329
Corporate 35,065 10,824 12,362
----------- ----------- -----------
Total $ 82,379 $ 85,487 $ 94,027
=========== =========== ===========
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Revenue:
United States $ 68,110 69,015 88,365
United Kingdom 6,127 7,090 15,805
France 3,530 1,849 5,479
Other 19,342 19,887 23,886
---------- -------- --------
Total $ 97,109 97,841 133,535
========== ======== ========
Long - Lived Assets
(end of year):
United States $ 13,167 20,508 23,208
United Kingdom 874 835 1,058
Other 225 277 570
---------- -------- --------
Total $ 14,266 21,620 24,836
========== ======== ========
</TABLE>
During 1996, sales to one customer accounted for 18% of the Company's total
revenue. No single customer accounted for more than 10% of the Company's total
revenue in 1997 or 1998.
(14) Noncash Financing and Investing Activities and Supplemental Cash Flow
Information
Cash payments for interest expense in 1996, 1997, and 1998 were $46,000, $57,000
and $79,000, respectively.
Tax refunds received, net of payments, in 1996 were $304,000. Cash payments for
income taxes, net of refunds received in 1997 and 1998 were $986,000 and
$331,000, respectively.
During 1997 and 1998, the Company entered into capital lease obligations for
equipment valued at $989,000 and $1,441,000, respectively.
(15) Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair values of
financial instruments:
Cash And Cash Equivalents, Marketable Securities and Long-Term Debt
The carrying amount approximates fair value because of the short maturity of
those instruments.
F-22
<PAGE>
[Graphic--Illustrative diagram showing the benefits of our EAI product. The
diagram begins with the text "seeing the data in real time, in context, based on
intelligent decision rules, and in the most meaningful format for the user." The
remainder of the document is divided into six vertical sections. The first
vertical section on the left has a diagram of a person at a terminal followed by
the text "The consumers personal view of their financial account e.g. JSmith's
Insurance, Trading, Checking, Credit Card Accounts." The second horizontal
section from the left includes a bar with the caption "Back Office View Today."
The third vertical section includes a vertical bar with the caption "Graphical
User Interface, GUI." The fourth vertical section contains a bar with the
caption "Integrated Applications Views." The fifth vertical column has a bar
with the caption "Process Dynamics Automated Workflow Based on Business Rules."
Below the four bars is the caption "CNT EAI "Filters"." The sixth vertical
column shows a drawing of six disk devices arranged horizontally. The top device
contains the caption "MVS--Insurance", the next device contains the caption
"Unix Trading", the next device contains the caption "NT--Checking" and the last
device contains the caption "Web--Credit Card." Below the horizontal disk device
is the caption "The back office views information systems."
Caption: "CNT--EAI Real Benefits".]
<PAGE>
CNT(R), the Access and Data Delivery Company
Connecting users, processors, storage and applications
together, at any distance and at any speed...
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The table below sets forth the estimated expenses (except the SEC
registration fee and the NASD listing fee, which are actual expenses) in
connection with the offer and sale of the shares of common stock of CNT covered
by this registration statement. The following expenses are being paid by CNT.
SEC registration fee................................... $ 24,198
Legal fees and expenses................................ 200,000
Accounting fees and expenses........................... 50,000
Nasdaq National Market listing fee..................... 17,500
NASD filing fee........................................ 9,204
Printing expenses...................................... 50,000
Blue sky fees and expenses............................. 5,000
Miscellaneous expenses................................. 19,098
----------
Total............................................. $ 375,000
==========
Item 15. Indemnification of Directors and Officers.
Unless prohibited in a corporation's articles or bylaws, Minnesota
Statutes ss. 302A.521 requires indemnification of officers, directors, employees
and agents, under certain circumstances, against judgments, penalties, fines,
settlements and reasonable expenses (including attorney's fees and
disbursements) incurred by such person in connection with a threatened or
pending proceeding with respect to the acts or omissions of such person in his
official capacity. The general effect of Minnesota Statutes ss. 302A.521 is to
reimburse (or pay on behalf of) directors and officers of the Registrant any
personal liability that may be imposed for certain acts performed in their
capacity as directors and officers of the Registrant, except where such persons
have not acted in good faith.
As permitted by the Minnesota Business Corporation Act, the Articles
of Incorporation of Computer Network Technology Corporation eliminate the
liability of the directors of CNT for monetary damages arising from any breach
of fiduciary duties as a member of the CNT board of directors (except as
expressly prohibited by Minnesota Statutes, ss. 302A.251, Subd. 4).
The underwriting agreement, which is filed as Exhibit 1.1 to this
Registration Statement, provides for indemnification by our underwriters and
their officers and directors for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
Item 16. Exhibits.
Exhibit Description
------- -----------
1.1 Underwriting Agreement.*
2.1 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.)
2.2 Asset Purchase Agreement by and between Computer Network
Technology 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.)
4.1 Rights Agreement between Computer Network Technology
Corporation 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.)
5.1 Opinion of Leonard, Street and Deinard Professional
Association.*
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 to 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 to 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 to Form S-2 Registration Statement
No. 33-41985.)
10D Amended 1992 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 99 to Form S-8 Registration Statement
No. 333-59947.)
10E Amended 1992 Stock Award Plan. (Incorporated by reference to
Exhibit 99 to 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 to 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 to Annual Report on Form 10-K
for the year ended December 31, 1993.)
II-2
<PAGE>
Exhibit Description
------- -----------
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 to 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 to Form S-8
Registration Statement No. 33-83266.)
10J March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 to 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 to Form 10Q for the quarterly
period ended September 30, 1998.)
10L Employment Agreement by and between Computer Network
Technology Corporation and Thomas G. Hudson as amended.
(Incorporated by reference to Exhibit 10Z to 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 to Form 10-Q for the quarterly
period ended June 30, 1996.)
10N Description of Success Sharing Bonus Plan (Incorporated by
reference to Exhibit 10Y to Form 10-K for the year ended
December 31, 1997.)
10O Employment Agreement by and between Computer Network
Technology Corporation and Mark Knittel. (Incorporated by
reference to Exhibit 10AA to Form 10-K for the year ended
December 31, 1997.)
10P Executive Deferred Compensation Plan. (Incorporated by
reference to Exhibit 10P to Form 10-K for the year ended
December 31, 1998).
10Q Proposed Form of 1999 Non-Qualified Stock Award Plan
(Pending Board Approval).**
10R Forms of Non-qualified Stock Option Agreement dated May 13,
1999.*
10S Forms of Incentive Stock Option Agreement Dated May 13,
1999.*
10TS Employment Agreement dated December 3, 1998 by and between
Scott Opitz and IntelliFrame Corporation. (Incorporated by
reference to Exhibit 10.3 to Form 8-K dated December 3,
1998.)
10U Employment Agreement dated December 3, 1998 by and between
Alexsandr Elkin and IntelliFrame Corporation. (Incorporated
by reference to Exhibit 10.4 to Form 8-K dated December 3,
1998.)
II-3
<PAGE>
Exhibit Description
------- -----------
10V Employment Agreement dated March 16, 1998 by and between
Nick V. Ganio and Computer Network Technology Corporation.
(Incorporated by reference to Exhibit 10Q to Form 10-K for
the year ended December 31, 1998.)
10W 1997 Restricted Stock Plan. (Incorporated by reference to
Exhibit 99 to Form S-8 Registration Statement No. 333-
59951.)
23.1 Consent of Leonard, Street and Deinard Professional
Association (included in Exhibit 5.1).*
23.2 Consent of KPMG Peat Marwick LLP.**
24.1 Power of Attorney of Patrick W. Gross.**
24.2 Power of Attorney of Erwin A. Kelen.**
24.3 Power of Attorney of Lawrence Perlman.**
24.4 Power of Attorney of John A. Rollwagen.**
__________________
* To be filed by amendment.
** Filed herewith.
Item 17. Undertakings.
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
person of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by a director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as express in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declare effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
(3) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of the Registrant's annual
report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference
in the registration statement shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on June 16, 1999.
COMPUTER NETWORK TECHNOLOGY CORPORATION
By /s/ Thomas G. Hudson
-----------------------
Thomas G. Hudson
Chairman, President and Chief Executive Officer
II-6
<PAGE>
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints Thomas G. Hudson, Gregory T. Barnum and Jeffrey
A. Bertelsen, and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this registration statement and to sign
any registration statement for the same offering covered by the registration
statement that is to be effective upon filing pursuant to Rule 462(b), and to
file the same with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent, and each of them, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Thomas G. Hudson June 16, 1999
- ------------------------
Thomas G. Hudson Chairman, President, Chief
Executive Officer and Director
(Principal Executive Officer)
/s/ Gregory T. Barnum June 16, 1999
- ------------------------
Gregory T. Barnum Vice President of Finance,
Chief Financial Officer and
Corporate Secretary (Principal
Financial Officer)
/s/ Jeffrey A. Bertelsen June 16, 1999
- ------------------------
Jeffrey A. Bertelsen Corporate Controller and Treasurer
(Principal Accounting Officer)
/s/ * June 16, 1999
- ------------------------
John A. Rollwagen Director
/s/ * June 16, 1999
- -----------------------
Patrick W. Gross Director
/s/ * June 16, 1999
- -----------------------
Erwin A. Kelen Director
/s/ * June 16, 1999
- ------------------------
Lawrence Perlman Director
____________
*By Gregory T. Barnum
------------------,
attorney-in-fact
II-7
<PAGE>
EXHIBIT 10Q
PROPOSED FORM OF 1999 NON-QUALIFIED STOCK AWARD PLAN
(as adopted _______, 1999)
(Pending Board approval)
1. Purpose. The purpose of this 1999 Non-Qualified Stock Award Plan (the
"Plan") is to motivate key personnel to produce a superior return to the
shareholders of Computer Network Technology Corporation by offering such
personnel an opportunity to realize Stock appreciation, by facilitating Stock
ownership, and by rewarding them for achieving a high level of corporate
performance. This Plan is also intended to facilitate recruiting and retaining
key personnel of outstanding ability by providing an attractive capital
accumulation opportunity.
2. Definitions.
2.1 The terms defined in this section are used (and capitalized) elsewhere
in this Plan.
(a) "Affiliate" means any corporation that is a "parent corporation" or
"subsidiary corporation" of the Company, as those terms are defined in Section
424(e) and (f) of the Code, or any successor provision.
(b) "Agreement" means a written contract entered into between the Company
or an Affiliate and a Participant containing the terms and conditions of an
Award in such form (not inconsistent with this Plan) as the Committee approves
from time to time, together with all amendments thereto, which amendments may be
unilaterally made by the Company (with the approval of the Committee) unless
such amendments are deemed by the Committee to be materially adverse to the
Participant and are not required as a matter of law.
(c) "Award" means a grant made under this Plan in the form of Options,
Restricted Stock, Stock, or any other Stock-based Award.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(f) "Committee" means two or more Disinterested Persons designated by the
Board to administer this Plan under Section 3 hereof.
(g) "Company" means Computer Network Technology Corporation, a Minnesota
corporation, or any successor to substantially all of its businesses.
(h) "Disinterested Person" means a member of the Board who is considered a
disinterested person within the meaning of Exchange Act Rule l6b-3 or any
successor definition.
(i) "Effective Date" means the date specified in Section 8.1 hereof.
(j) "Employee" means any employee (excluding an officer or director) of the
Company or an Affiliate. "Employee" shall also include other individuals and
entities who are not "employees" of the Company or an Affiliate but who provide
services to the Company or an Affiliate in the capacity of an advisor or
consultant (other than as a director). References herein to "employment" and
similar terms shall include the providing of services in any such capacity.
Employee shall also include any other person not previously employed by the
Company or an Affiliate who is issued an Award as an inducement essential to the
person's entering into an employment contract with the Company (including
employment as an officer), but only if issuance of the Award would not require
shareholder approval of the Plan or the Award under the rules of the National
Association of Securities Dealers, Inc.
(k) "Event" means any of the following:
10Q-1
<PAGE>
(i) The acquisition by an individual, entity, or group (within the
meaning of Section 13(d)(3) or l4(d)(2) of the Exchange Act) of beneficial
ownership (within the meaning of Exchange Act Rule 13d-3) of 40% or more of
either (A) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (B) the combined voting power of the
then outstanding voting securities of the Company entitled to vote
generally in the election of the Board (the "Outstanding Company Voting
Securities"); provided, however, that the following acquisitions shall not
constitute an Event:
(1) any acquisition of voting securities of the Company directly
from the Company,
(2) any acquisition of voting securities of the Company by the
Company or any of its wholly owned Subsidiaries,
(3) any acquisition of voting securities of the Company by any
employee benefit plan (or related trust) sponsored or maintained by
the Company or any of its Subsidiaries, or
(4) any acquisition by any corporation with respect to which,
immediately following such acquisition, more than 60% of,
respectively, the then outstanding shares of common stock of such
corporation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in
the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such acquisition in substantially the
same proportions as was their ownership, immediately prior to such
acquisition, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be;
(ii) Individuals who, as of the Effective Date, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming a
director subsequent to the Effective Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board shall be
considered a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest which was (or, if
threatened, would have been) subject to Exchange Act Rule 14a-l l;
(iii) Approval by the shareholders of the Company of a reorganization,
merger, consolidation, or statutory exchange of Outstanding Company Voting
Securities, unless immediately following such reorganization, merger,
consolidation, or exchange, all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately
prior to such reorganization, merger, consolidation, owned, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such reorganization, merger,
consolidation, or exchange in substantially the same proportions as was
their ownership, immediately prior to such reorganization, merger,
consolidation, or exchange, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be; or
(iv) Approval by the shareholders of the Company of (A) a complete
liquidation or dissolution of the Company or (B) the sale or other
disposition of all or substantially all of the assets of the Company, other
than to a corporation with respect to which, immediately following such
sale or other disposition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the combined
voting power of the then outstanding voting securities of such
10Q-2
<PAGE>
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of
the individuals and entities who were the beneficial owners, respectively,
of the Outstanding Company Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in
substantially the same proportion as was their ownership, immediately prior
to such sale or other disposition, of the Outstanding Company Common Stock
and Outstanding Company Voting Securities, as the case may be.
(v) Notwithstanding the above, an Event shall not be deemed to occur
with respect to an employee if the acquisition of the 40% or greater
interest referred to in subsection (i) is by a group, acting in concert,
that includes that recipient or if at least 40% of the then outstanding
common stock or combined voting power of the then outstanding voting
securities (or voting equity interests) of the surviving corporation or of
any corporation (or other entity) acquiring all or substantially all of the
assets of the Company shall be beneficially owned, directly or indirectly,
immediately after a reorganization, merger, consolidation, statutory share
exchange or disposition of assets referred to in subsections (iii) or (iv)
by a group, acting in concert, that includes that Participant.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(m) "Fair Market Value" as of any date means, unless otherwise expressly
provided in this Plan:
(i) the closing sale price of a Share on the date immediately
preceding that date or, if no sale of Shares shall have occurred on that
date, on the next preceding day on which a sale occurred of Shares on the
National Association of Securities Dealers, Inc. Automated Quotations
National Market System ("NMS"), or
(ii) if the Shares are not quoted on the NMS, what the Committee
determines in good faith to be 100% of the fair market value of a Share on
that date.
Provided, however, if the NMS has closed for the day at the time the event
occurs that triggers a determination of Fair Market Value, whether the grant of
an Award, the exercise of an Option or otherwise, all references in this Section
2.1(m) to the "date immediately preceding that date" shall be deemed to be
references to "that date." The determination of Fair Market Value shall be
subject to adjustment as provided in Section 12 hereof.
(n) "Fundamental Change" means a dissolution or liquidation of the Company,
a sale of substantially all of the assets of the Company, a merger or
consolidation of the Company with or into any other corporation, regardless of
whether the Company is the surviving corporation, or a statutory share exchange
involving capital stock of the Company.
(o) "Non-Qualified Stock Option" means an Option that is not an incentive
stock option granted in accordance with the requirements of Code Section 422 or
any successor to said section..
(p) "Option" means a right to purchase Stock. All Options under the Plan
shall be Non-Qualified Stock Options.
(q) "Plan" means this 1999 Non-Qualified Stock Award Plan, as amended from
time to time.
(r) "Restricted Stock" means Stock granted under Plan Section 7.2 so long
as such Stock remains subject to one or more restrictions.
(s) "Retirement" of an Employee means termination of employment with the
Company or an Affiliate on or after the date the Employee attains age 55.
(t) "Share" means a share of Stock.
10Q-3
<PAGE>
(u) "Stock" means the common stock, $.01 par value per share (as such par
value may be adjusted from time to time), of the Company.
(v) "Subsidiary" means a subsidiary corporation, as that term is defined in
Section 424(f) of the Code, or any successor provision.
(w) "Successor" means the legal representative of the estate of a deceased
Participant or the person or persons who may, by bequest or inheritance, or
under the terms of an Award or of forms submitted by the Participant to the
Committee under Section 16 hereof, acquire the right to exercise an Option or
receive cash or Shares issuable in satisfaction of an Award in the event of an
employee's death.
(x) "Term" means the period during which an Option may be exercised or the
period during which the restrictions or terms and conditions placed on
Restricted Stock are in effect.
(y) "Transferee" means any member of the Participant's immediate family
(i.e., his or her children, step-children, grandchildren and spouse) or one or
more trusts for the benefit of such family members or partnerships in which such
family members are the only partners.
2.2 Number. Except when otherwise indicated by context, any term used in
the singular shall also include the plural.
3. Administration.
3.1 Authority of Committee. The Committee shall administer this Plan. The
Committee may delegate all or any portion of its authority under this Plan to
persons who are not Disinterested Persons solely for purposes of determining and
administering Awards to Employees who are not then subject to the reporting
requirements of Section 16 of the Exchange Act. The Committee shall have
exclusive power to make Awards, to determine when and to whom Awards will be
granted, the form of each Award, the amount of each Award, and any other terms
or conditions of each Award. Each Award shall be subject to an Agreement
authorized by the Committee. The Committee's interpretation of this Plan and of
any Awards made under this Plan shall be final and binding on all persons. The
Committee shall have the power to establish regulations to administer this Plan
and to change such regulations.
3.2 Indemnification. To the full extent permitted by law, (a) no member of
the Board or of the Committee or any person to whom the Committee delegates
authority under this Plan shall be liable for any action or determination taken
or made in good faith with respect to this Plan or any Award made under this
Plan and (b) the members of the Board and of the Committee and each person to
whom the Committee delegates authority under this Plan shall be entitled to
indemnification by the Company with regard to such actions and determinations.
4. Shares Available Under this Plan. The number of Shares available for
distribution under this Plan shall not exceed [2,000,000] (subject to adjustment
as provided in this Section 4 and under Section 12 hereof). Any Shares subject
to the terms and conditions of an Award under this Plan that are not used
because the terms and conditions of the Award are not met may again be used for
an Award under this Plan. In addition, if, in accordance with this Plan, an
employee uses shares of Common Stock of the Company to (i) pay a purchase or
exercise price, including an Option exercise price, or (ii) satisfy tax
withholdings, only the number of shares issued net of the shares tendered in
payment of such purchase or exercise price and tax withholdings shall be deemed
to be issued for purposes of determining the maximum number of Shares available
under the Plan. Further, the maximum number of Shares available for distribution
under this Plan shall be increased to take into account any Awards granted under
Section 17 of this Plan.
5. Eligibility. Awards may be granted under this Plan to Employees, and
such Awards shall have the terms and conditions specified in Sections 6 and 7
hereof and elsewhere in this Plan. The granting of Awards to Employees is solely
at the discretion of the Committee.
10Q-4
<PAGE>
6. General Terms of Awards.
6.1 Amount of Award. Each Agreement with an Employee shall set forth the
number of Shares to which the Option subject to such Agreement applies or the
number of Shares of Restricted Stock or Stock subject to such Agreement, as the
case may be.
6.2 Term. Each Agreement, other than those relating solely to Awards of
Shares without restrictions, shall set forth the Term of the Option or
Restricted Stock. An Agreement may permit an acceleration of the expiration of
the applicable Term upon such terms and conditions as shall be set forth in the
Agreement, which may, but need not, include without limitation acceleration
resulting from the occurrence of an Event or in the event of the Employee's
death or Retirement.
6.3 Agreements. Each Award under this Plan shall be evidenced by an
Agreement setting forth the terms and conditions, as determined by the
Committee, which shall apply to such Award, in addition to the terms and
conditions specified in this Plan.
6.4 Transferability. Except as provided in this Section 6.4, during the
lifetime of an employee to whom an Award is granted, only that Participant (or
that Participant's legal representative) may exercise an Option or receive
payment with respect to any Award. No Award of Restricted Stock (prior to the
expiration of the restrictions), Options or other Award may be sold, assigned,
transferred, exchanged or otherwise encumbered other than pursuant to a domestic
relations order as defined in the Code or Title I of the Employee Retirement
Income Security Act ("ERISA") or the rules thereunder; any attempted transfer in
violation of this Section 6.4 shall be of no effect. Notwithstanding the
immediately preceding sentence, the Committee, in an Agreement or otherwise at
its discretion, may provide (i) that the Award subject to the Agreement shall be
transferable to a Successor in the event of an employee's death, or (ii) that
the Award may be transferable to a Transferee if the Participant receives no
consideration for the transfer. Any Award held by a Transferee shall continue to
be subject to the same terms and conditions that were applicable to such Award
immediately prior to its transfer. By way of example and not limitation, (i) an
Option may be exercised by a Transferee as and to the extent that such Option
has become exercisable and has not terminated in accordance with the provisions
of the Plan and the applicable Agreement and (ii) for purposes of any provision
of this Plan relating to notice to an optionee or to vesting or termination of
an Option upon the death, disability or termination of employment of an
optionee, the references to "optionee" shall mean the original grantee of an
option and not any Transferee.
7. Terms and Conditions of Specific Awards.
7.1 Stock Options. Each Option shall be granted as a Non-Qualified Stock
Option and not as an incentive stock option under Code Section 422 or any other
successor to said section. The purchase price of each Share subject to an Option
shall be determined by the Committee and set forth in the Agreement, but shall
not be less than 100% of the Fair Market Value of a Share as of the date the
Option is granted. The purchase price of the Shares with respect to which an
Option is exercised shall be payable in full at the time of exercise, provided
that to the extent permitted by law, the Agreement may permit some or all
Participants simultaneously to exercise Options and sell the Shares thereby
acquired pursuant to a brokerage or similar relationship and use the proceeds
from such sale as payment of the purchase price of such Shares. The purchase
price may be payable in cash, in Stock having a Fair Market Value as of the date
the Option is exercised equal to the purchase price of the Stock being purchased
pursuant to the Option, or a combination thereof as determined by the Committee
and provided in the Agreement. Each Option shall be exercisable in whole or in
part on the terms provided in the Agreement. In no event shall any Option be
exercisable at any time after its expiration date. When an Option is no longer
exercisable, it shall be deemed to have lapsed or terminated. The number of
Shares for which any Employee may be granted Options in any one calendar year
shall not exceed 750,000. The Committee may provide, in an Agreement or
otherwise, that an employee who exercises an Option and pays the Option price in
whole or in part with Shares then owned by the Participant will be entitled to
receive another Option covering the same number of shares tendered and with a
price of no less than Fair Market Value on the date of grant of such additional
Option ("Reload Option").
10Q-5
<PAGE>
7.2 Restricted Stock Awards
(a) The Committee is authorized to grant, either alone or in conjunction
with other Awards, stock and stock-based Awards. The Committee shall determine
the persons to whom such Awards are made, the timing and amount of such Awards,
and all other terms and conditions. Company Common Stock granted to recipients
may be unrestricted or may contain such restrictions, including provisions
requiring forfeiture and imposing restrictions upon stock transfer, as the
Committee may determine. Unless forfeited, the recipient of restricted Common
Stock will have all other rights of a shareholder, including without limitation,
voting and dividend rights.
(b) An Award of Restricted Stock under the Plan shall consist of Shares
subject to restrictions on transfer and conditions of forfeiture, which
restrictions and conditions shall be included in the applicable Agreement. The
Committee may provide for the lapse or waiver of any such restriction or
condition based on such factors or criteria as the Committee, in its sole
discretion, may determine.
(c) Except as otherwise provided in the applicable Agreement, each Stock
certificate issued with respect to an Award of Restricted Stock shall either be
deposited with the Company or its designee, together with an assignment separate
from the certificate, in blank, signed by the Participant, or bear such legends
with respect to the restricted nature of the Restricted Stock evidenced thereby
as shall be provided for in the applicable Agreement.
(d) The Agreement shall describe the terms and conditions by which the
restrictions and conditions of forfeiture upon awarded Restricted Stock shall
lapse. Upon the lapse of the restrictions and conditions, Shares free of
restrictive legends, if any, relating to such restrictions shall be issued to
the Participant or a Successor or Transferee.
(e) An employee or a Successor or Transferee with a Restricted Stock Award
shall have all the other rights of a shareholder including, but not limited to,
the right to receive dividends and the right to vote the Shares of Restricted
Stock.
7.3 Other Awards. The Committee may from time to time grant Stock and other
Awards under the Plan including without limitations those Awards pursuant to
which Shares are or may in the future be acquired, Awards denominated in Stock
units, securities convertible into Stock and Phantom securities. The Committee,
in its sole discretion, shall determine the terms and conditions of such Awards
provided that such Awards shall not be inconsistent with the terms and purposes
of this Plan. The Committee may, at its sole discretion, direct the Company to
issue Shares subject to restrictive legends and/or stop transfer instructions
that are consistent with the terms and conditions of the Award to which the
Shares relate. Furthermore, the Committee may use stock available under this
Plan as payment for compensation, grants or rights and earned or due under any
other compensation plans or arrangements of the Company.
8. Effective Date of this Plan.
8.1 Effective Date. This Plan shall become effective as of June 15, 1999,
the date of adoption of this Plan by the Board.
8.2 Duration of this Plan. This Plan shall remain in effect until all Stock
subject to it shall be distributed or all Awards have expired or lapsed,
whichever is latest to occur, or this Plan is terminated pursuant to Section 11
hereof. The date and time of approval by the Committee of the granting of an
Award (or such other time as the Committee shall designate) shall be considered
the date and time at which such Award is made or granted, notwithstanding the
date of any Agreement with respect to such Award.
9. Right to Terminate Employment. Nothing in this Plan or in any Agreement
shall confer upon any Employee the right to continue in the employment of the
Company or any Affiliate or affect any right which the Company or any Affiliate
may have to terminate the employment of the Employee with or without cause.
10Q-6
<PAGE>
10. Tax Withholding. The Company may withhold from any cash payment under
this Plan to an employee or other person (including a Successor or a Transferee)
an amount sufficient to cover any required withholding taxes. The Company shall
have the right to require an employee or other person receiving Stock under this
Plan to pay to the Company a cash amount sufficient to cover any required
withholding taxes. In lieu of all or any part of such a cash payment from a
person receiving Stock under this Plan, the Committee may permit the individual
to elect to cover all or any part of the required withholdings, and to cover any
additional withholdings up to the amount needed to cover the individual's full
FICA and federal, state, and local income tax with respect to income arising
from payment of the Award, through a reduction of the number of Shares delivered
to such individual or a subsequent return to the Company of Shares held by the
Employee or other person, in each case valued in the same manner as used in
computing the withholding taxes under the applicable laws.
11. Amendment, Modification and Termination of this Plan.
(a) The Board may at any time and from time to time terminate, suspend or
modify the Plan. Except as limited in (b) below, the Committee may at any time
alter or amend any or all Agreements under the Plan to the extent permitted by
law.
(b) No termination, suspension, or modification of the Plan will materially
and adversely affect any right acquired by any Participant or Successor or
Transferee under an Award granted before the date of termination, suspension, or
modification, unless otherwise agreed to by the Participant in the Agreement or
otherwise, or required as a matter of law; but it will be conclusively presumed
that any adjustment for changes in capitalization provided for in Plan Section
12 does not adversely affect these rights.
12. Adjustment for Changes in Capitalization. Appropriate adjustments in
the aggregate number and type of Shares available for Awards under this Plan and
in the number and type of Shares and amount of cash subject to Awards then
outstanding, and in the Option price as to any outstanding Options may be made
by the Committee in its sole discretion to give effect to adjustments made in
the number or type of Shares of the Company through a Fundamental Change
(subject to Section 13 hereof), recapitalization, reclassification, stock
dividend, stock split, stock combination, or other relevant change, provided
that fractional Shares shall be rounded to the nearest whole share.
13. Fundamental Change. In the event of a proposed Fundamental Change: (a)
involving a merger, consolidation, or statutory share exchange, unless
appropriate provision shall be made for the protection of the outstanding
Options by the substitution of options and appropriate voting common stock of
the corporation surviving any such merger or consolidation or, if appropriate,
the parent corporation of the Company or such surviving corporation, to be
issuable upon the exercise of options in lieu of Options and capital stock of
the Company, or (b) involving the dissolution or liquidation of the Company, the
Committee shall declare, at least 20 days prior to the occurrence of the
Fundamental Change, and provide written notice to each holder of an Option of
the declaration, that each outstanding Option, whether or not then exercisable,
shall be canceled at the time of, or immediately prior to the occurrence of the
Fundamental Change in exchange for payment to each holder of an Option, within
ten days after the Fundamental Change, of cash equal to the amount, if any, for
each Share covered by the canceled Option, by which the Fair Market Value (as
defined in this Section) per Share exceeds the exercise price per Share covered
by such Option. At the time of the declaration provided for in the immediately
preceding sentence, each Option shall immediately become excercisable in full
and each person holding an Option shall have the right, during the period
preceding the time of cancellation of the Option, to exercise the Option as to
all or any part of the Shares covered thereby; provided, however, that if such
Fundamental Change does not become effective, then the declaration pursuant to
this Section 13(b) shall be rescinded, the acceleration of the exercisibility of
the Option pursuant to this Section 13(b) shall be void, and the Option shall be
exercisable in accordance with its terms. In the event of a declaration pursuant
to this Section 13, each outstanding Option that shall not have been exercised
prior to the Fundamental Change shall be canceled at the time of, or immediately
prior to, the Fundamental Change, as provided in the declaration.
Notwithstanding the foregoing, no person holding an Option shall be entitled to
the payment provided for in this Section 13 if such Option shall have expired
pursuant to an Agreement. For purposes of this Section only,
10Q-7
<PAGE>
"Fair Market Value" per Share means the cash plus the fair market value, as
determined in good faith by the Committee, of the non-cash consideration to be
received per Share by the shareholders of the Company upon the occurrence of the
Fundamental Change, notwithstanding anything to the contrary provided in this
Plan.
14. Unfunded Plan. This Plan shall be unfunded and the Company shall not
be required to segregate any assets that may at any time be represented by
Awards under this Plan.
15. Other Benefit and Compensation Programs. Payments and other benefits
received by an employee under an Award shall not be deemed a part of an
employee's regular, recurring compensation for purposes of any termination,
indemnity, or severance pay laws and shall not be included in, nor have any
effect on, the determination of benefits under any other employee benefit plan,
contract, or similar arrangement provided by the Company or an Affiliate, unless
expressly so provided by such other plan, contract, or arrangement or the
Committee determines that an Award or portion of an Award should be included to
reflect competitive compensation practices or to recognize that an Award has
been made in lieu of a portion of competitive cash compensation.
16. Beneficiary Upon Employee's Death. To the extent that the transfer of
an employee's Award at death is permitted under an Agreement, (a) an employee's
Award shall be transferable to the beneficiary, if any, designated on forms
prescribed by and filed with the Committee and (b) upon the death of the
Employee, such beneficiary shall succeed to the rights of the Employee to the
extent permitted by law and this Plan. If no such designation of a beneficiary
has been made, the Participant's legal representative shall succeed to the
Awards, which shall be transferable by will or pursuant to laws of descent and
distribution to the extent permitted under an Agreement.
17. Corporate Mergers, Acquisitions, Etc. The Committee may also grant
Options, Restricted Stock or other Awards under the Plan having terms,
conditions and provisions that vary from those specified in this Plan provided
that any such awards are granted in substitution for, or in connection with the
assumption of, existing options, stock appreciation rights, restricted stock or
other awards granted, awarded or issued by another corporation and assumed or
otherwise agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, separation, reorganization or liquidation to which the Company or a
subsidiary is a party.
18. Deferrals and Settlements. The Committee may require or permit
Employees to elect to defer the issuance of Shares or the settlement of Awards
in cash under such rules and procedures as it may establish under the Plan. It
may also provide that deferred settlements include the payment or crediting of
interest on the deferral amounts.
19. Governing Law. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken pursuant to
this Plan shall be governed by the laws of Minnesota and construed accordingly.
10Q-8
<PAGE>
Exhibit 23.2
Independent Auditors' Consent
-----------------------------
The Board of Directors of
Computer Network Technology Corporation:
We consent to the use of our reports included or incorporated by reference and
to the reference to our firm under the headings "Selected Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 16, 1999
23.2-1
<PAGE>
Exhibit 24.1
POWER OF ATTORNEY
OF COMPUTER NETWORK TECHNOLOGY CORPORATION
OFFICER OR DIRECTOR
KNOW BY ALL PERSONS PRESENT, that I, the undersigned director or officer of
Computer Network Technology Corporation, a Minnesota corporation (the
"Corporation"), which may file from time to time with the Securities and
Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the
Securities Act of 1933, Registration Statements on Form S-3, or other
appropriate Form, or pursuant to Rule 462, for common stock of the Corporation,
together with preferred share purchase rights, hereby constitute and appoint
Thomas G. Hudson, Gregory T. Barnum, and Jeffrey A. Bertelsen, and each of them,
my true and lawful attorneys-in-fact and agents, with full power to act,
together or each without the others, for me and in my name, place and stead, in
any and all capacities, to sign, or cause to be signed electronically, any and
all of said Registration Statements (which Registration Statements may
constitute post-effective amendments to registration statements previously filed
with the SEC) and any and all amendments to the aforementioned Registration
Statements and to file said Registration Statements and amendments thereto so
signed with all exhibits thereto, and any and all other documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue hereof.
This authorization shall remain in effect through December 31, 1999.
IN WITNESS WHEREOF, I, the undersigned, have executed this Power of
Attorney as of this 16th day of June 1999.
/s/ Patrick W. Gross
-------------------------
Patrick W. Gross
24.1-1
<PAGE>
Exhibit 24.2
POWER OF ATTORNEY
OF COMPUTER NETWORK TECHNOLOGY CORPORATION
OFFICER OR DIRECTOR
KNOW BY ALL PERSONS PRESENT, that I, the undersigned director or officer of
Computer Network Technology Corporation, a Minnesota corporation (the
"Corporation"), which may file from time to time with the Securities and
Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the
Securities Act of 1933, Registration Statements on Form S-3, or other
appropriate Form, or pursuant to Rule 462, for common stock of the Corporation,
together with preferred share purchase rights, hereby constitute and appoint
Thomas G. Hudson, Gregory T. Barnum, and Jeffrey A. Bertelsen, and each of them,
my true and lawful attorneys-in-fact and agents, with full power to act,
together or each without the others, for me and in my name, place and stead, in
any and all capacities, to sign, or cause to be signed electronically, any and
all of said Registration Statements (which Registration Statements may
constitute post-effective amendments to registration statements previously filed
with the SEC) and any and all amendments to the aforementioned Registration
Statements and to file said Registration Statements and amendments thereto so
signed with all exhibits thereto, and any and all other documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue hereof.
This authorization shall remain in effect through December 31, 1999.
IN WITNESS WHEREOF, I, the undersigned, have executed this Power of
Attorney as of this 16th day of June 1999.
/s/ Erwin A. Kelen
---------------------------
Erwin A. Kelen
24.2-1
<PAGE>
Exhibit 24.3
POWER OF ATTORNEY
OF COMPUTER NETWORK TECHNOLOGY CORPORATION
OFFICER OR DIRECTOR
KNOW BY ALL PERSONS PRESENT, that I, the undersigned director or officer of
Computer Network Technology Corporation, a Minnesota corporation (the
"Corporation"), which may file from time to time with the Securities and
Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the
Securities Act of 1933, Registration Statements on Form S-3, or other
appropriate Form, or pursuant to Rule 462, for common stock of the Corporation,
together with preferred share purchase rights, hereby constitute and appoint
Thomas G. Hudson, Gregory T. Barnum, and Jeffrey A. Bertelsen, and each of them,
my true and lawful attorneys-in-fact and agents, with full power to act,
together or each without the others, for me and in my name, place and stead, in
any and all capacities, to sign, or cause to be signed electronically, any and
all of said Registration Statements (which Registration Statements may
constitute post-effective amendments to registration statements previously filed
with the SEC) and any and all amendments to the aforementioned Registration
Statements and to file said Registration Statements and amendments thereto so
signed with all exhibits thereto, and any and all other documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue hereof.
This authorization shall remain in effect through December 31, 1999.
IN WITNESS WHEREOF, I, the undersigned, have executed this Power of
Attorney as of this 16th day of June 1999.
/s/ Lawrence Perlman
-------------------------------------
Lawrence Perlman
24.3.1
<PAGE>
Exhibit 24.4
POWER OF ATTORNEY
OF COMPUTER NETWORK TECHNOLOGY CORPORATION
OFFICER OR DIRECTOR
KNOW BY ALL PERSONS PRESENT, that I, the undersigned director or officer of
Computer Network Technology Corporation, a Minnesota corporation (the
"Corporation"), which may file from time to time with the Securities and
Exchange Commission (the "SEC"), Washington, D.C., under the provisions of the
Securities Act of 1933, Registration Statements on Form S-3, or other
appropriate Form, or pursuant to Rule 462, for common stock of the Corporation,
together with preferred share purchase rights, hereby constitute and appoint
Thomas G. Hudson, Gregory T. Barnum, and Jeffrey A. Bertelsen, and each of them,
my true and lawful attorneys-in-fact and agents, with full power to act,
together or each without the others, for me and in my name, place and stead, in
any and all capacities, to sign, or cause to be signed electronically, any and
all of said Registration Statements (which Registration Statements may
constitute post-effective amendments to registration statements previously filed
with the SEC) and any and all amendments to the aforementioned Registration
Statements and to file said Registration Statements and amendments thereto so
signed with all exhibits thereto, and any and all other documents in connection
therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform any and all acts
and things requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as I might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them may lawfully do or cause to be done by virtue hereof.
This authorization shall remain in effect through December 31, 1999.
IN WITNESS WHEREOF, I, the undersigned, have executed this Power of
Attorney as of this 16th day of June 1999.
/s/ John A. Rollwagen
------------------------------
John A. Rollwagen
24.4-1
