<PAGE>
As filed with the Securities and Exchange Commission on July 28, 1999.
Registration No. 333-80841
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
--------------
AMENDMENT NO. 1 TO
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:
Morris M. Sherman, Esq. Bruce Alan Mann, Esq.
Leonard, Street and Deinard Kristian E. Wiggert, Esq.
Professional Association Melissa L. Mong, Esq.
150 South Fifth Street, Suite 2300 Morrison & Foerster LLP
Minneapolis, Minnesota 55402 425 Market Street
San Francisco, California 94105
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. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Titles Of Shares To Be Amount To Be Offering Price Per Aggregate Offering Registration
Registered Registered Note(1) Price(1) Fee
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<S> <C> <C> <C> <C>
% Convertible Subordi-
nated Notes Due 2004... $69,000,000 100% $69,000,000 *
Common Stock, $.01 par
value(2)............... 3,502,538(3) (3) (3) (3)
</TABLE>
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- --------------------------------------------------------------------------------
* The registration fee for the notes is $19,182. On June 15, 1999, the
Registrant paid $24,198 in registration fees in connection with the initial
filing of this Registration Statement on Form S-3.
(1) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(c) under the Securities Act. Includes up to
$9,000,000 principal amount of the notes which the underwriters have the
option to purchase to cover over-allotments, if any.
(2) 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.
(3) The notes are convertible into shares of common stock. The securities
registered hereby include an indeterminate number of common shares issuable
upon conversion of the notes. The registrant estimates in good faith that
the maximum number of shares issuable upon conversion will be 3,502,538,
subject to final determination at pricing and adjustment pursuant to the
terms of the notes. Pursuant to Rule 457(i), no additional registration fee
is payable as no additional consideration will be received upon conversion
of the notes.
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 JULY 28, 1999
PRELIMINARY PROSPECTUS
$60,000,000
Computer Network Technology Corporation
% Convertible Subordinated Notes Due 2004
------------
Computer Network Technology Corporation is offering its % Convertible
Subordinated Notes Due 2004. The notes will mature on August , 2004 unless
previously redeemed. We will pay interest on the notes semi-annually on
February 1 and August 1 of each year, beginning February 1, 2000.
Holders may convert any notes or portions of the notes into shares of our
common stock at a conversion price of $ per share, subject to adjustment.
This is equivalent to shares of common stock per $1,000 principal amount
of notes. Our common stock is quoted on the Nasdaq National Market under the
symbol "CMNT." On July 23, 1999, the last reported sale price of our common
stock was $14.813 per share.
We may redeem the notes, in whole or in part, before August , 2002 at a
redemption price equal to $1,000 per $1,000 principal amount of notes, plus
accrued interest, if any, to the redemption date, if the closing price for our
common stock has exceeded 150% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending on the trading day
prior to the date of the mailing of the notice of redemption. We will make an
additional payment in cash with respect to the notes called for such redemption
of $ per $1,000 principal amount of notes, less the amount of interest
actually paid on such note before the call for redemption.
We may redeem the notes, in whole or in part, at any time on or after August
, 2002, at the declining redemption prices listed in this prospectus plus
accrued interest.
In the event of a "Change of Control," under certain circumstances, holders
may require us to repurchase their notes in whole or in part at a repurchase
price of 100% of the principal amount plus accrued interest.
The notes are unsecured and rank junior to all of our existing and future
senior indebtedness.
See "Risk Factors" beginning on page 8 to read about risks that you should
consider before buying the notes.
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.
------------
<TABLE>
<CAPTION>
Per
Note Total
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<S> <C> <C>
Public offering price.......................................... 100% $
Underwriting discounts and commissions......................... % $
Proceeds, before expenses, to us............................... % $
</TABLE>
------------
The public offering price set forth above does not include accrued interest,
if any. Interest on the notes will accrue from August , 1999 and must be paid
by the purchaser if the notes are purchased after that date.
The underwriters may purchase up to an additional $9,000,000 aggregate
principal amount of notes from us at the public offering price less the
underwriting discount.
The underwriters expect to deliver the notes in book-entry form only through
the facilities of The Depository Trust Company against payment in New York, New
York on August , 1999.
------------
Bear, Stearns & Co. Inc.
SG Cowen
Morgan Keegan & Company, Inc.
The date of this prospectus is , 1999.
<PAGE>
[Caption/Title: CNT's SAN/WAN Networking Solutions
Graphic: Illustrative diagram showing our SAN/WAN networking solutions and the
location of where our network solutions products are utilized in a SAN/WAN
network configuration. Under the caption, the following key applications are
represented textually in bullets: fibre channel switching, remote tape
vaulting, remote disk mirroring, intelligent data management and disk
migration. Below the key applications the following are represented textually
and graphically to show the connection between SANs/WANs and LANs: mainframes,
servers and desktop. Running from the graphical representation of the
mainframe, server and desktop are spokes linking the aforementioned to
graphical representations of our networking solutions products. From our
graphically represented products are spokes linking our products to textual and
graphical representations of disks, and tape libraries.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 8
Special Note Regarding Forward-Looking Statements........................ 18
How We Intend to Use the Proceeds From the Offering...................... 18
Price Range of Common Stock.............................................. 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 35
Management............................................................... 51
Principal Shareholders................................................... 54
Underwriting............................................................. 56
Description of the Notes................................................. 58
Description of Capital Stock............................................. 70
Material U.S. Federal Tax Considerations................................. 73
Legal Matters............................................................ 78
Experts.................................................................. 78
Where You Can Find More Information...................................... 78
Index to Financial Statements............................................ F-1
</TABLE>
-------------------
You should rely only on the information contained or incorporated by
reference 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, you should not rely on it. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale is
not permitted. You should assume that the information appearing in this
prospectus or incorporated by reference is accurate only as of the date on the
front cover of this prospectus. Our business and financial condition 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.
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
<PAGE>
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
are limited;
. the distance, known as connectivity, between storage devices is limited;
. 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.
Recent Developments
On July 13, 1999, we reported the results of our operations for the second
quarter of 1999. Our total revenues for the second quarter of 1999 were $37.9
million, an increase of 13% compared to the same period in 1998. Net income for
the second quarter of 1999 totaled $1.8 million, or $.07 per share on a fully
diluted basis, compared to $870,000, or $.04 per share on a fully diluted
basis, for the same quarter in 1998.
These results did not match our expectations or those of securities analysts,
who had forecast earnings of $.10 to $.11 per share on a fully diluted basis
for the second quarter of 1999. As a result, our stock price declined. Our
results of operations did not reach expectations primarily because of the delay
in several forecasted orders, including a single customer's planned EAI
software purchase in excess of $2.0 million. Had this single purchase been
completed, our revenues and earnings would have been in line with those
forecasted by securities analysts.
2
<PAGE>
We believe our performance in the second quarter of 1999 reflects the fact
that our sales are "lumpy" and subject to quarterly fluctuation and does not
reflect any fundamental problems in our business. In fact, in the second
quarter of 1999 we experienced strong growth in each of our SAN and EAI
business segments.
----------------
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
Securities offered....... $60,000,000 ($69,000,000 if the over-allotment
option is exercised in full) of % Convertible
Subordinated Notes Due 2004.
Offering price........... 100% of the principal amount plus accrued
interest, if any, from August , 1999.
Interest payment dates... February 1 and August 1 of each year, beginning
February 1, 2000.
Maturity................. August , 2004.
Conversion price......... The notes are convertible into shares of our
common stock at $ per share, which is
equivalent to a rate of shares per $1,000
principal amount of notes, subject to
adjustment in certain events.
The notes will be convertible at any time
through the close of business on the business
day immediately preceding the maturity date,
unless previously redeemed or repurchased.
Holders of notes called for redemption or
repurchase may convert the notes up to the
close of business on the business day
immediately preceding the date fixed for
redemption or repurchase.
Provisional redemption... We may redeem the notes (the "Provisional
Redemption"), in whole or in part, at any time
prior to August , 2002, at a redemption price
equal to $1,000 per $1,000 principal amount of
notes to be redeemed plus accrued and unpaid
interest, if any, to the date of redemption
(the "Provisional Redemption Date") if the
closing price of our common stock has exceeded
150% of the conversion price then in effect for
at least 20 trading days within a period of 30
consecutive trading days ending on the trading
day prior to the date of mailing of the notice
of Provisional Redemption (the "Notice Date").
Upon any Provisional Redemption, we will make
an additional payment
3
<PAGE>
in cash (the "Make-Whole Payment") with respect
to the notes called for redemption in an amount
equal to $ per $1,000 principal amount of
notes, less the amount of any interest actually
paid on the note before the call for
redemption. We will be obligated to make the
Make-Whole Payment on all notes called for
Provisional Redemption, including any notes
converted after the Notice Date and before the
Provisional Redemption Date.
Optional redemption...... We may redeem the notes, in whole or in part,
at any time on or after August , 2002, at the
declining redemption prices listed in this
prospectus plus accrued and unpaid interest.
Repurchase at option of
holders upon a Change of
Control................. In the event of a "Change of Control," as
defined in the indenture for the notes, holders
of the notes may require that we repurchase the
notes, in whole or in part, at a redemption
price of 100% of the principal amount of the
notes plus accrued and unpaid interest.
Ranking.................. The notes will be unsecured. The notes will
rank junior in right of payment to all of our
existing and future "Senior Indebtedness," as
that term is defined in the indenture for the
notes. As of June 30, 1999, our outstanding
Senior Indebtedness aggregated approximately
$3.1 million. The notes are effectively
subordinated to all existing and future
liabilities of our subsidiaries, including our
trade and other creditors. At June 30, 1999,
our consolidated liabilities were approximately
$34.1 million. The indenture for the notes will
not limit the amount of additional indebtedness
that we or any of our subsidiaries can create,
incur, assume or guarantee.
Certain covenants........ The indenture for the notes contains covenants
concerning, among other things, our
consolidation or merger or the sale of
substantially all of our assets.
Events of default include:
Events of default........
. Failure to pay the principal of or premium,
if any, on the notes when due, including our
failure to purchase the notes when required
upon a Change of Control, regardless of
whether payment is prohibited by the
subordination provisions of the indenture
for the notes;
. Default for 30 days in payment of any
installment of interest on the notes,
regardless of whether payment is prohibited
by the subordination provisions of the
indenture for the notes;
4
<PAGE>
. Failure to provide notice of a Change of
Control, regardless of whether the notice or
related payment is prohibited by the
subordination provisions of the indenture
for the notes;
. Failure to perform any other covenant in the
indenture for the notes continuing for 90
days after written notice by the trustee for
the notes or the holders of 25% in aggregate
principal amount of notes; or
. Certain events involving our bankruptcy,
insolvency or reorganization.
Global note; book entry The notes will be issued only in fully
system.................. registered form without coupons and in minimum
denominations of $1,000 and integral multiples
of $1,000. The notes will be evidenced by a
global note deposited with the trustee for the
notes, as custodian for The Depository Trust
Company. Beneficial interests in the global
note will be shown on, and transfers of those
interests will be effected only through,
records maintained by The Depository Trust
Company and its participants and indirect
participants.
Listing.................. The notes will not be listed on any securities
exchange or quoted on the Nasdaq National
Market. The underwriters have advised us that
they intend to make a market in the notes. The
underwriters are not obligated, however, to
make a market in the notes, and any such market
making may be discontinued at any time at the
sole discretion of the underwriters without
notice.
Use of proceeds.......... Working capital and general corporate purposes
and for possible strategic acquisitions of
complementary businesses. See "How We Intend to
Use the Proceeds from the Offering."
Nasdaq National Market Symbol
for our common stock.........
CMNT
- --------
Unless otherwise indicated, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option and further assumes the
notes have not been converted. References in this prospectus to "common stock"
include the associated preferred share purchase right.
5
<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 below and in "Selected Financial 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."
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
-------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- -------- --------- ---------
(in thousands, except per share data and
ratio
of earnings to fixed charges)
<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
Ratio of earnings to fixed
charges(/1/)................. 3.59 * 7.82 3.08 13.06
</TABLE>
- --------
(1) For purposes of computing this ratio, earnings available for fixed charges
consist of earnings (loss) before provision for income taxes and fixed
charges. Fixed charges consist of interest expense plus such portion of
rental expense as is representative of the interest factor.
* In the fiscal year ended 1997, our earnings were inadequate to cover fixed
charges by $3.9 million.
6
<PAGE>
The consolidated balance sheet data 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 the notes, 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 $72,775
Working capital.............................................. 39,993 97,818
Total assets................................................. 99,977 159,977
Long term obligations........................................ 1,725 61,725
Total shareholders' equity................................... 65,808 65,808
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing the notes. Investing
in the notes involves a high degree of risk.
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;
. product mix among our SAN, channel networking, EAI and server gateway and
tools products;
. 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.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely, in some future period, that
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.
8
<PAGE>
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 and 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.
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, Hitachi Data Systems and IBM. 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 harmed.
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
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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.
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 preferences 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, combined, 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
harm our financial condition and operating results.
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<PAGE>
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, then 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, then we may have excess inventory,
which would increase our costs. If we underestimate our component requirements,
then 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 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 shareholders 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, enhance our technical
capabilities, or 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.
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The notes will rank below our existing and future Senior Indebtedness and we
may be unable to repay our obligations under the notes
The notes will be unsecured and subordinated in right of payment to all of
our existing and future Senior Indebtedness, and the existing and future
liabilities of our subsidiaries. The notes are subordinate to our Senior
Indebtedness and we will make payments on the notes only after we have
satisfied all of our Senior Indebtedness upon the occurence of any of the
following events:
. our bankruptcy, liquidation or reorganization;
. upon default in the payment of principal or interest on Senior
Indebtedness; or
. in certain other events described in the indenture.
As a result, we may not have sufficient assets remaining to pay amounts on any
or all of the notes.
The notes indenture does not limit our ability to incur other indebtedness
and liabilities. We may have difficulty paying our obligations under the notes
if we incur additional indebtedness or liabilities. As of June 30, 1999, our
outstanding Senior Indebtedness was approximately $3.1 million, and our
consolidated liabilities were approximately $34.1 million. We anticipate that
from time to time we may incur additional indebtedness, including Senior
Indebtedness, which could adversely affect our ability to pay our obligations
under the notes.
We may be unable to repurchase the notes
There is no sinking fund with respect to the notes, and at maturity the
entire outstanding principal amount of the notes will become due and payable by
us. If we experience a change in control, under certain circumstances a holder
of the notes may require that we repurchase all or a portion of its notes. At
maturity or if a Change of Control does occur, we might not have sufficient
funds or be able to arrange for additional financing to pay the repurchase
price for all the notes tendered to us or due at maturity. Future borrowing
arrangements or agreements relating to Senior Indebtedness to which we become a
party may contain restrictions on, or prohibitions against, our repurchase of
the notes. If the maturity date or a Change of Control occurs when we are
prohibited from repurchasing the notes, we could try to obtain the consent of
the lenders under those arrangements to purchase the notes or we could attempt
to refinance the borrowings that contain the restrictions. If we do not obtain
the necessary consents or refinance these borrowings, we will be unable to
repurchase the notes. In that case, our failure to repurchase any tendered
notes or notes due upon maturity would constitute an event of default under the
notes indenture. This could, in turn, cause a default under the terms of our
then existing Senior Indebtedness. As a result, in these circumstances, the
subordination provisions of the notes indenture would, absent a waiver,
prohibit any repurchase of the notes until we pay in full the senior debt.
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.
The loss of key executive or experienced personnel or the inability to hire and
retain 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
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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 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.
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 and other 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;
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. 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;
. difficulties enforcing our legal rights;
. 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 than 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, the euro 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 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
harmed. In 1998, Channelink(R) and UltraNet(R) represented approximately one-
half of our product revenues.
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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 these actions, we may be unable to manufacture and sell the
related products, which would reduce our revenues.
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.
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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.
Management can spend the proceeds of this offering in ways with which our
shareholders and noteholders may not agree
Our management can spend the net proceeds from this offering in ways with
which our shareholders and noteholders 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, 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.
There may be no public market for the notes
The notes will be a new issue of securities with no established trading
market. Although the underwriters for this notes offering have advised us that
they intend to make a market in the notes, they have no obligation to do so and
may discontinue their market making at any time without notice. In addition,
their market making activity will be subject to limits imposed under the
federal securities laws. Accordingly, a market for the notes may not develop
and, if it does develop, it may not be maintained. Various factors could have a
material adverse effect on the trading price of the notes, including the
failure of an active market to develop and fluctuations in prevailing interest
rates. In addition, our operating results and prospects could from time to time
fall below the expectations of public market analysts and investors, which
could adversely affect public perception of our creditworthiness and therefore
the trading price of the notes.
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The market price for our common stock has been volatile and could experience
extreme volatility in the future
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. 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;
. differences between our financial or operating results and those
projected by our 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;
. 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.
We do not plan to pay cash dividends
We have never paid cash dividends 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 that we might enter
into in the future could prevent us from paying dividends.
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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:
. anticipated receipt of orders;
. 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," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "intend," "potential" or
"continue" and similar expressions are generally intended to identify forward-
looking statements. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements 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
After deducting underwriting discounts and commissions, and after deducting
our estimated offering expenses we will receive net proceeds from the sale of
the notes of approximately $57,825,000. If the underwriters exercise their
over-allotment option in full, $69,000,000 aggregate principal amount of the
notes would be sold by us, resulting in aggregate net proceeds of approximately
$66,555,000. 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.
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PRICE RANGE OF COMMON STOCK
Our common stock, the security underlying the notes, is traded on the Nasdaq
National Market under the symbol "CMNT." The notes will not be listed on any
securities exchange or quoted on the Nasdaq National Market. 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............................................ $ 30.63 $ 13.00
Third Quarter (through July 23, 1999)..................... $23.25 $12.88
</TABLE>
On July 23, 1999, the last reported sale price for our common stock was
$14.813 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.
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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 the notes 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
% Convertible Subordinated Notes Due 2004............ -- 60,000
------- --------
Total indebtedness..................................... $ 1,725 $ 61,725
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.......... 228 228
Additional paid-in capital............................. 58,120 58,120
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 65,808
------- --------
Total capitalization................................. $67,533 $127,533
======= ========
</TABLE>
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the introductory notes set forth in "Summary Financial Data"
and 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 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
------- ------- ------- ------- -------- --------- ---------
(in thousands, except per share amounts and ratio of
earnings to fixed charges)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of 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 ex-
penses................. 46,117 41,337 54,045 61,443 71,495 18,112 18,352
Income (loss) from oper-
ations................. (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
Ratio of earnings to
fixed charges.......... * 8.81 3.59 * 7.82 3.08 13.06
</TABLE>
- --------
* For the fiscal years ended 1994 and 1997, our earnings were inadequate to
cover fixed charges by $1.8 million and $3.9 million, respectively.
<TABLE>
<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 $ 72,775
Working capital......... 35,387 44,282 48,192 30,380 35,587 39,993 97,818
Total assets............ 73,149 79,134 82,379 85,487 94,027 99,977 159,977
Long-term obligations... 163 -- -- 701 2,816 1,725 61,725
Total shareholders' eq-
uity................... 53,979 60,506 64,161 55,607 60,558 65,808 65,808
</TABLE>
The foregoing as adjusted information reflects the proceeds from the sale of
the notes offered hereby and presumes deduction of underwriting discounts and
estimated offering expenses.
21
<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's product revenue 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.
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.
22
<PAGE>
Recent Developments
On July 13, 1999, we reported our results of operations for the second
quarter of 1999. Our total revenues for the second quarter of 1999 were $37.9
million, an increase of 13% compared to the same period in 1998. Net income for
the second quarter of 1999 totaled $1.8 million, or $.07 per share on a fully
diluted basis, compared to $870,000, or $.04 per share on a fully diluted
basis, for the same quarter in 1998.
Product revenue from the Networking Solutions Division increased 9% in the
second quarter of 1999 to $21.8 million compared to the second quarter of 1998.
Sales of SAN-related applications increased from $8.2 million to $13.6 million,
or 67%, compared to the second quarter 1998 due to continuing demand for both
open systems and mainframe configurations. Service revenue for the Networking
Solutions Division increased 29% from $6.8 million to $8.7 million in the
second quarter of 1999 compared to the second quarter of 1998, including a 228%
increase in professional services revenue from the 1998 second quarter. Sales
of our channel extension products in the second quarter of 1999 decreased 31%
compared to the strong sales during the second quarter of 1998. While we expect
the sale of channel extension products to decrease in the future, we do not
expect the decline per quarter to be as substantial as it was in the second
quarter of 1999.
Product revenue from the Enterprise Integration Solutions Division increased
11% in the second quarter of 1999 to $4.6 million compared to the second
quarter of 1998. Sales of EAI-related products increased 112% from $718,000 in
the second quarter of 1998 to $1.5 million in the second quarter of 1999. Sales
of EAI-related products increased 38% compared to the first quarter of 1999.
Service revenue for the Enterprise Integration Solutions Division increased 11%
compared to the second quarter of 1998 to $2.8 million, primarily due to
growing demand for professional services. Professional services increased 125%
to $1.1 million in the second quarter of 1999 compared to the second quarter of
1998. Revenue from maintenance contracts decreased 18% compared to the second
quarter of 1998. The decrease is attributable to a reduced installed base of
server gateway and tools products.
On a combined basis, gross margins increased in the second quarter of 1999 to
58.9% compared to a gross margin of 58.3% in the second quarter of 1998. This
increase was primarily due to an increase in high margin professional service
revenue in our Network Solutions Division, offset by reduced server gateway and
tools service revenue in our Enterprise Integration Solutions Division. Our
operating margin improved to 7.3% in the second quarter of 1999 from 3.8% in
the second quarter of 1998. The improvement was due primarily to the higher
levels of revenue and cost control initiatives that we implemented in 1998. In
addition, our available cash position improved by $7.4 million from March 31,
1999 due to profitable operations, the improvement in days sales outstanding
from 86 days to 81 days, improvement in inventory turns and proceeds from the
exercise of employee stock options.
We believe our performance in the second quarter of 1999 reflects the fact
that our sales are "lumpy" and subject to quarterly fluctuation and does not
reflect any fundamental problems in our performance. In fact, in the second
quarter of 1999 we experienced strong growth in each of our SAN and EAI
business segments. Although the timing of our orders is not completely
predictable, we continue to show product leadership in the SAN and EAI markets.
We believe that the strategy we put in place in the last fiscal year to focus
on these key markets has proven correct and remains on track.
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, 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 approximately $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 approximately $2.2 million for costs incurred to integrate our
businesses, including accruals for severance, facility closures and
infrastructure integration.
23
<PAGE>
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 aggregate bonus payments of
up to $12.0 million 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
during 1999. The full bonus payments set forth above are conditioned upon the
employment of these individuals through July 1, 2000.
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.
24
<PAGE>
<TABLE>
<CAPTION>
Network Solutions
Division
--------------------------
Three
Year Ended Months
December Ended
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>
25
<PAGE>
<TABLE>
<CAPTION>
Enterprise Integration
Solutions Division
---------------------------------
Year Ended
December Three Months
31, Ended 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>
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>
26
<PAGE>
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.
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.
27
<PAGE>
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 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.
28
<PAGE>
Gross Profit
Three Months Ended March 31, 1998 and 1999
Gross profit margin from the sale of Network Solutions Division products was
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 margin from Network Solutions Division service revenues was 44%
in the first quarter of 1999, compared to 36% in the first quarter of 1998. The
improvement in the gross profit margin 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 margin from the sale of Enterprise Integration Solutions
Division products was 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 margin from all services, including professional services,
provided by the Enterprise Integration Solutions Division was 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 margin from Network Solutions Division product sales was 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 margin from Network Solutions Division service revenues in 1996,
1997 and 1998 was 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 margin from Enterprise Integration Solutions Division product
sales was 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 margin from Enterprise Integration Solutions Division service
revenues was 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.
29
<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 expense primarily relates to costs associated
with development of new products and enhancements to existing products.
Engineering and development expense related to our Network Solutions Division
increased by $1.0 million, or 32%, in the first quarter of 1999 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 expense related to our Network Solutions Division
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
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 expense 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.
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Engineering and development expense related to our Enterprise Integration
Solutions Division in 1996, 1997 and 1998 was $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
approximately $2.8 million for in-process research and development associated
with the acquisition of the Internet Solutions Division of Apertus and
approximately $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 and
$630,000 will be received and recognized as other income in March 2000 and
March 2001, respectively.
We recorded a provision for income taxes 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,
respectively, 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.
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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 we do 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 flows from operations and the 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.
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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 August 31, 1999. A secondary issue relates to the
cosmetic appearance of displays and status reports produced by our products.
Our products utilize dates for logging alerts, messages, 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.
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 suppliers 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.
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Additional Inventory Purchases
Two of our suppliers may not be year 2000 compliant. As a result, we are
purchasing additional inventory of approximately $500,000 from those suppliers
in advance of the year 2000. We believe this additional inventory allows us to
continue to operate without any disruption or delay caused by those suppliers'
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, the euro and British pounds sterling. We have not invested in
any derivitive financial instruments to manage this risk.
New Accounting Pronouncements
Statement of Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS No. 133), effective for us
on January 1, 2001, establishes new standards for recognizing all derivatives
as either assets or liabilities, and measuring those instruments at fair value.
Currently, we do not anticipate that SFAS No. 133 will have a material impact
on our financial position or results of operations.
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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 that 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 that 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.
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 and are
flexible and highly scalable. Our EAI solutions also speed newer applications
to market.
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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.
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.
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;
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. 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;
. if the server to which the data storage device is connected fails, the
data cannot be accessed; and
. 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.
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.
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 that address the following:
. Distance--Customers require products that 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 mainframe 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.
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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.
[Graphic: Illustrative diagram explaining how the Networking Solutions
Division's products relate to typical storage architecture. The diagram shows
an ellipse. Inside the ellipse are graphics of CNT's UltraNet(R) products,
which are labeled as such, and the graphic illustrates connection to a WAN.
Also inside the ellipse is the text "Storage Area Network." The UltraNet
products are connected to graphics of various network devices outside the
ellipse, labeled "Unix/NT Server," "Disk Storage" and "Tape Storage."]
We provide a high level of performance and reliability for mainframe and open
systems, supporting key vendor environments such as EMC, Hitachi Data Systems
and IBM. 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 that 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.
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. 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 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
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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.
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.
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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 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.
UltraNet Storage Multiplexer: The UltraNet(TM) Storage Multiplexer is a rack-
mountable device that allows up to six open systems servers to share access to
up to 15 SCSI-attached storage devices. It allows the connection distance for
SCSI devices to be doubled. Customers get much greater flexibility in the
sharing, deployment and management of SCSI storage devices from multiple
vendors, and greater access to information by users on different systems
through the use of the device.
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.
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
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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.
. 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 Hitachi Data Systems and IBM.
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.
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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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.
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.
. 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. Our EAI solutions also speed 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.
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. 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.
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 that helps
customers install, evaluate, analyze and maintain our EAI products. The benefit
to us is satisfied customers with whom we are able to
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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.
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 who 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 product 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. In addition,
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 package 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 who 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.
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.
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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 that these relationships 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.
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 that integrates with Siebel's products to give users easy, real-time
access to customer information from back-office legacy applications,
minicomputers and open systems.
Our Professional Services
Network Solutions Division
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 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.
Enterprise Application Integration Solutions Division
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.
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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 five 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
BellSouth ILX Systems
Cap Gemini Intec
Sun Microsystems
GTE Wal-Mart
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 has entered 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
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exposure to currency fluctuations, political and economic instability, the
difficulty of administering business internationally and the need to comply
with a wide variety of United States 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.
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.
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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. 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. 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.
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 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
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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 that 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 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.
50
<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 and Secretary 44
Jeffrey A. Bertelsen.... Corporate Controller, Treasurer and Assistant Secretary 37
Richard E. Carlson...... Vice President of Manufacturing 61
William C. Collette..... Vice President of Engineering and Chief Technology Officer 56
Peter Dixon............. Vice President of Worldwide Business Development 49
Nick V. Ganio........... Vice President of Worldwide Sales 40
Martin G. Hahn.......... Vice President and General Manager-Enterprise Integration Solutions Division 41
Mark R. Knittel......... Vice President of Marketing 45
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.
Gregory T. Barnum was appointed Vice President of Finance, Chief Financial
Officer and 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, Treasurer and
Assistant Secretary 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
51
<PAGE>
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, 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 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.
52
<PAGE>
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 companies. Mr. Rollwagen is a graduate
of The Massachusetts Institute of Technology and Harvard Graduate School of
Business Administration.
53
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of July 23, 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 23,440,093 shares of our
common stock outstanding as of July 23, 1999. The "After Offering" information
set forth below assumes a conversion price of $19.70 and an aggregate of
3,045,685 shares issued upon conversion of the notes. 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 has 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 July 23, 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.
Unless otherwise noted, the address for each entity and person listed below
is 605 North Highway 169, Suite 800, Minneapolis, Minnesota 55441.
<TABLE>
<CAPTION>
Percent of Common Stock
Amount of Outstanding
Shares --------------------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ ----------- -----------
<S> <C> <C> <C>
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401........... 1,286,600 5.49% 4.86%
Erwin A. Kelen..................... 519,577 2.20% 1.95%
Thomas G. Hudson................... 504,143 2.11% 1.87%
John A. Rollwagen.................. 320,000 1.35% 1.20%
Lawrence Perlman................... 224,129 * *
Patrick W. Gross................... 80,012 * *
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 direc-
tors as a group (14 persons)...... 1,761,484 7.12% 6.34%
</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,
54
<PAGE>
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 80,012 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 431,950 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.
Beneficial ownership of all executive officers and directors as a group
includes a total of 1,308,795 shares that may be acquired upon exercise of
options and includes only executive officers and directors as of July 23, 1999.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below have severally agreed to purchase
from us the principal amount of notes listed opposite the underwriter's name
below:
<TABLE>
<CAPTION>
Principal
Amount
Name of Underwriter of Notes
------------------- -----------
<S> <C>
Bear, Stearns & Co. Inc...................................... $
SG Cowen Securities Corporation..............................
Morgan Keegan & Company, Inc. ...............................
-----------
Total.................................................... $60,000,000
===========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the notes are subject to
approval by their counsel of certain legal matters and to other conditions
customary in a firm commitment public offering. The underwriters are required
to purchase and pay for the entire principal amount of the notes offered by
this prospectus, except for the principal amount of notes covered by the over-
allotment option described below, if any are purchased.
The underwriters propose to offer the notes to the public at the offering
price listed on the cover page of this prospectus and to securities dealers,
including the underwriters, at the same price less a concession of not more
than $ per $1,000 principal amount of notes. The underwriters may allow,
and the selected dealers may reallow, a concession not in excess of $ per
$1,000 principal amount of the notes to other brokers and dealers. After the
completion of this offering, the offering price and other selling terms may be
changed by the underwriters. However, no change will alter the amount of
proceeds, as listed on the cover page of this prospectus, to be received by us.
We have granted the underwriters an option, exercisable within 30 days after
the date of this prospectus, to purchase up to an additional $9,000,000
aggregate principal amount of the notes. The underwriters may exercise the
option only to cover over-allotments, if any, made in connection with this
offering. To the extent that the underwriters exercise the option, each
underwriter will become obligated to purchase its pro rata portion of the
additional principal amount of the notes based on the underwriter's percentage
underwriting commitment in the offering, which is indicated in the preceding
table. If purchased, the additional principal amount of the notes will be sold
by the underwriters on the same terms as those on which they are selling the
initial $60,000,000 principal amount of the notes.
We estimate that our share of the total expenses of this notes offering,
excluding the estimated underwriting discounts and commissions, will be
approximately $375,000. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, or
to contribute to payments that the underwriters may be required to make in
connection with these liabilities.
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the notes offered by this
prospectus in any jurisdiction which requires action for that purpose. The
notes offered by this prospectus may not be offered or sold, directly or
indirectly, nor may this prospectus or any other offering material or
advertisements be distributed or published in any jurisdiction, except under
circumstances that will ensure compliance with the applicable rules and
regulations of the jurisdiction. Persons holding this prospectus are advised to
inform themselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus. This prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
offered by this prospectus in any jurisdiction in which an offer or a
solicitation is unlawful.
56
<PAGE>
We and certain of our executive officers and directors have agreed that
during the period beginning from the date of this prospectus and continuing to
and including the date 90 days after the date of the prospectus, they 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 Securities Exchange Act
of 1934 or otherwise dispose of any shares of our common stock (or securities
that are convertible into, exercisable for or exchangeable for common stock),
without the prior written consent of Bear, Stearns & Co. Inc., except under
limited circumstances.
Certain persons participating in this offering may engage in passive market
making transactions in the common stock in accordance with Rule 103 of
Regulation M under the Securities Exchange Act of 1934. Rule 103 permits, upon
the satisfaction of certain conditions, underwriting and selling group members
participating in a distribution that are also registered Nasdaq market makers
in the security being distributed, or a related security, to engage in limited
passive market making transactions during the period when Regulation M would
otherwise prohibit the activity. In general, a passive market maker may not bid
for or purchase a security at a price that exceeds the highest independent bid
for those securities by a person that is not participating in the distribution
and must identify its passive market making bids on the Nasdaq electronic
inter-dealer reporting system. In addition, the net daily purchases made by a
passive market maker generally may not exceed 30% of the market maker's average
daily trading volume in the security for the two full consecutive calendar
months, or any 60 consecutive days ending within 10 days, immediately preceding
the date of filing of the registration statement of which this prospectus is a
part.
In addition, the underwriters may maintain or stabilize the price of the
notes by bidding for or purchasing notes in the open markets, and may impose
penalty bids, under which selling concessions allowed to broker-dealers
participating in this offering are reclaimed if notes previously distributed in
this offering are repurchased in connection with stabilization transactions or
otherwise. The imposition of a penalty bid may also affect the price of the
common stock to the extent that it discourages resales of the notes. The
underwriters can make no representation as to the magnitude, duration or effect
of any stabilization or other transactions.
The notes are a new issue of securities with no established trading market.
We have been advised by the underwriters that they intend to make a market in
the notes but are not obligated to do so and may discontinue market making at
any time without notice. No assurance can be given as to the liquidity of the
trading market for the notes.
57
<PAGE>
DESCRIPTION OF THE NOTES
The notes will be issued under an Indenture dated as of August , 1999 (the
"Indenture") between us and U.S. Bank Trust National Association, as trustee
(the "Trustee"). A copy of the form of Indenture is filed as an exhibit to the
registration statement of which this prospectus is a part. The terms of the
Indenture are also governed by certain provisions contained in the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summaries of certain provisions of the notes and the Indenture do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the notes and the Indenture, including the
definitions therein of certain terms that are not otherwise defined in this
prospectus and those terms made a part of the Indenture by reference to the
Trust Indenture Act as in effect on the date of the Indenture. Wherever
particular provisions or defined terms of the Indenture (or of the form of
notes that is a part thereof) are referred to, such provisions or defined terms
are incorporated herein by reference in their entirety.
General
The notes will be general unsecured subordinated obligations of ours and will
be convertible into our common stock as described below under "Conversion of
Notes." The notes will be limited to $60,000,000 aggregate principal amount
($69,000,000 if the underwriters exercise the over-allotment option in full)
and will mature on August 1, 2004, unless earlier redeemed at our option or
repurchased at the option of a holder upon a Change of Control.
The notes will bear interest from the date of original issue at the annual
rate set forth on the cover page of this prospectus, payable semi-annually on
February 1 and August 1, beginning on February 1, 2000, to holders of record at
the close of business on the preceding January 15 and July 15, respectively.
Interest will be computed on the basis of a 360-day year composed of twelve 30-
day months.
Unless other arrangements are made, interest will be paid by check mailed to
holders entitled thereto. Principal will be payable, and the notes may be
presented for conversion, registration of transfer and exchange, without
service charge, at the corporate trust office of the Trustee or at the option
of the holder of the note, at any other office or agency of the Company
maintained for that purpose pursuant to the Indenture. Payments, transfers,
exchanges and conversions relating to beneficial interests in notes issued in
book-entry form will be subject to the procedures described under "Form,
Denomination, Transfer, Exchange and Book-entry Procedures" and "Exchange of
Book-entry Notes for Certificated Notes."
The Indenture will not contain any financial covenants or any restrictions on
the incurrence of debt by us or any of our subsidiaries.
Conversion of Notes
The holders of notes will be entitled, at any time through the close of
business on the business day immediately preceding the maturity date, subject
to prior redemption or repurchase, to convert any notes or portions thereof (in
denominations of $1,000 in principal amount or multiples thereof) into our
common stock at the conversion price set forth on the cover page of this
prospectus, subject to adjustment as described below; provided that in the case
of notes called for redemption, conversion rights will expire immediately prior
to the close of business on the last business day before the date fixed for
redemption, unless we default in payment of the redemption price. A note (or
portion thereof) in respect of which a holder is exercising its option to
require repurchase upon a Change of Control may be converted only if such
holder withdraws its election to exercise such repurchase option in accordance
with the terms of the Indenture.
Except as described below, no adjustment will be made on conversion of any
notes for interest accrued thereon or for dividends paid on any common stock we
issue. Holders of notes at the close of business on a record date will be
entitled to receive the interest payable on such notes on the corresponding
interest payment
58
<PAGE>
date. However, notes surrendered for conversion after the close of business on
a record date, and before the opening of business on the corresponding interest
payment date must be accompanied by funds equal to the interest payable on such
succeeding interest payment date on the principal amount so converted (unless
such note is subject to redemption on a redemption date between such record
date and the corresponding interest payment date). The interest payment with
respect to a note called for redemption on a date during the period from the
close of business on or after any record date to the close of business on the
business day following the corresponding payment date will be payable on the
corresponding interest payment date to the registered holder at the close of
business on that record date (notwithstanding the conversion of such note
before the corresponding interest payment date) and a holder of notes who
elects to convert need not include funds equal to the interest paid. We are not
required to issue fractional shares of our common stock upon conversion of
notes and, in lieu thereof, we will pay a cash adjustment based upon the
closing price of our common stock on the last business day prior to the date of
conversion.
The conversion price is subject to adjustment (under formulae set forth in
the Indenture) upon the occurrence of certain events, including:
(1) The issuance of our common stock as a dividend or distribution on
our outstanding common stock;
(2) The issuance to all holders of our common stock of certain rights,
options or warrants to purchase our common stock at less than the current
market price;
(3) Certain subdivisions, combinations and reclassifications of our
common stock;
(4) Distributions to all holders of our common stock of our capital
stock (other than our common stock) or evidences of our indebtedness or
assets (including securities, but excluding those dividends, rights,
options, warrants and distributions referred to in clauses (1) and (2)
above, dividends and distributions in connection with our liquidation,
dissolution or winding up and dividends and distributions paid exclusively
in cash);
(5) Distributions consisting exclusively of cash (excluding any cash
portion of distributions referred to in clause (4) above or in connection
with a consolidation, merger or sale of our assets as referred to in clause
(2) of the second paragraph below) to all holders of our common stock in an
aggregate amount that, together with (A) all such other all-cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made and (B) any cash and the fair market value of
other consideration payable in respect of any tender offers by us or any of
our subsidiaries for our common stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 20% of our
market capitalization (being the product of the then current market price
of our common stock times the number of shares of our then outstanding
common stock) on the record date for such distribution; and
(6) The purchase of our common stock pursuant to a tender offer made by
us or any of our subsidiaries that involves an aggregate consideration
that, together with (A) any cash and the fair market value of any other
consideration payable in any other tender offer by us or any of our
subsidiaries for our common stock expiring within the 12 months preceding
such tender offer in respect of which no adjustment has been made and (B)
the aggregate amount of any such all-cash distributions referred to in
clause (5) above to all holders of our common stock within the 12 months
preceding the expiration of such tender offer in respect of which no
adjustments have been made, exceeds 20% of our market capitalization on the
expiration of such tender offer.
Except as stated above, the conversion price will not be adjusted for the
issuance of our common stock or any securities convertible into or exchangeable
for our common stock or carrying the right to purchase any of the foregoing. No
adjustment in the conversion price will be required unless such adjustment
would require a change of at least 1% in the conversion price then in effect;
provided that any adjustment that would otherwise be required to be made shall
be carried forward and taken into account in any subsequent adjustment.
59
<PAGE>
No adjustment will be made pursuant to clause (4) of the preceding paragraph
if we make proper provision for each holder of notes who converts a note to
receive, in addition to our common stock issuable upon such conversion, the
kind and amount of assets (including securities) if such holder had been a
holder of our common stock at the time of the distribution of such assets or
securities. Rights, options or warrants distributed by us to all holders of our
common stock that entitle the holders thereof to purchase shares of our capital
stock and that, until the occurrence of an event (a "Triggering Event"), (1)
are deemed to be transferred with the common stock; (2) are not exercisable;
and (3) are also issued in respect of future issuances of our common stock,
shall not be deemed to be distributed until the occurrence of the Triggering
Event.
In the case of (1) any reclassification or change of our common stock (other
than changes in par value or from par value to no par value or resulting from a
subdivision or a combination) or (2) a consolidation or merger involving us or
a sale or conveyance to another corporation or business entity of our property
and assets as an entirety or substantially as an entirety (determined on a
consolidated basis), in each case as a result of which holders of our common
stock shall be entitled to receive stock, other securities, other property or
assets (including cash) with respect to or in exchange for such common stock,
each note then outstanding will, without the consent of the holder of any note,
become convertible only into the kind and amount of shares of stock, other
securities or other property or assets that they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
sale or conveyance had such notes been converted into our common stock
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance, after giving effect to any adjustment event, assuming that a
holder of notes would not have exercised any rights of election as to the
stock, other securities or other property or assets receivable in connection
therewith and received per share the kind and amount received per share by a
plurality of non-electing shareholders.
If a taxable distribution to holders of common stock (or other transaction)
results in any adjustment of the conversion price, the holders of notes may, in
certain circumstances, be deemed to have received a distribution subject to the
U.S. federal income tax as a dividend. In certain other circumstances, the
absence of such an adjustment may result in a taxable dividend to the holders
of our common stock. See "Material U.S. Federal Tax Considerations--U.S.
Holders--Adjustments in conversion price."
We may, from time to time and to the extent permitted by law, reduce the
conversion price by any amount for any period of at least 20 business days, in
which case we shall give at least 15 days' notice of such decrease, if the
Board of Directors has made a determination that such decrease would be in our
best interests, which determination shall be conclusive. We may, at our option,
make such reductions in the conversion price, in addition to those set forth
above, as we deem advisable to avoid or diminish any income tax to our
shareholders resulting from any dividend or distribution of stock (or rights to
acquire stock) or from any event treated as such for income tax purposes. See
"Material U.S. Federal Tax Considerations."
Subordination
The payment of principal of, premium, if any, and interest on the notes,
including amounts payable on any redemption or repurchase, will, to the extent
set forth in the Indenture, be subordinated in the event of right of payment to
the prior payment in full of all Senior Indebtedness. Upon any distribution to
our creditors in our liquidation or dissolution or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding related to us or
our property, in an assignment for the benefit of creditors or any marshalling
of our assets and liabilities, the holders of Senior Indebtedness then
outstanding will first be entitled to receive payment in full of all amounts
due or to become due thereon before the holders of the notes will be entitled
to receive any payment in respect of the principal of, premium, if any, or
interest on the notes (except that holders of notes may receive securities that
are subordinated at least to the same extent as the notes to Senior
Indebtedness and any securities issued in exchange for Senior Indebtedness).
We also may not make any payment upon or in respect of the notes (except in
such subordinated securities) and may not acquire any notes for cash or
property (except in such subordinated securities) if (1) a default in the
payment of the principal of, premium, if any, or interest on, including a
default under any
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repurchase or redemption obligation with respect to, Senior Indebtedness occurs
and is
continuing beyond any applicable period of grace; or (2) any other default
occurs and is continuing with respect to Designated Senior Indebtedness, as
defined below, that permits holders of the Designated Senior Indebtedness as to
which such default relates to accelerate its maturity and the Trustee receives
a notice of such default (a "Payment Blockage Notice") from a holder of such
Designated Senior Indebtedness or other person permitted to give such notice
under the Indenture. Payments on the notes may and shall be resumed and we may
acquire notes (A) in the case of a payment default, upon the date on which such
default is cured or waived; or (B) in the case of a non-payment default, 179
days after the date on which the applicable Payment Blockage Notice is received
(or sooner, if such default is cured or waived), unless the maturity of any
Senior Indebtedness has been accelerated. No new period of payment blockage may
be commenced within 360 days after the receipt by the Trustee of any prior
Payment Blockage Notice. No non-payment default that existed or was continuing
on the date of delivery of any Payment Blockage Notice to the Trustee shall be
the basis for a subsequent Payment Blockage Notice.
"Designated Senior Indebtedness" means CNT's obligations under particular
Senior Indebtedness in which the instrument creating or evidencing the same or
the assumption or guarantee thereof, or related agreements or documents to
which CNT is a party, expressly provides that such indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture, provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness.
"Senior Indebtedness" with respect to the notes means the principal of,
premium, if any, and interest on, and any fees, costs, expenses and any other
amounts (including indemnity payments) related to the following, whether
outstanding on the date of the Indenture or thereafter incurred or created:
(1) Our indebtedness, matured or unmatured, whether or not contingent,
for money borrowed evidenced by notes or other written obligations;
(2) Any interest rate contract, interest rate swap agreement or other
similar agreement or arrangement designed to protect us or any of our
subsidiaries against fluctuations in interest rates;
(3) Our indebtedness, matured or unmatured, whether or not contingent,
evidenced by notes, debentures, bonds or similar instruments or bankers
acceptances, letters of credit or similar facilities (or reimbursement
agreements in respect thereof);
(4) Our obligations as lessee under capitalized leases and under leases
of property made as part of any sale and leaseback transactions;
(5) Indebtedness of others of any of the kinds described in the
preceding clauses (1) through (5) assumed or guaranteed by us; and
(6) Renewals, extensions, modifications, amendments and refundings of,
and indebtedness and obligations of a successor person issued in exchange
for or in replacement of, indebtedness or obligations of the kinds
described in the preceding clauses (1) through (5), unless the agreement
pursuant to which any such indebtedness described in clauses (1) through
(5) is created, issued, assumed or guaranteed and expressly provides that
such indebtedness is not senior or superior in right of payment to the
notes;
provided, however, that the following shall not constitute Senior Indebtedness:
(A) Any of our indebtedness or obligations in respect of the notes;
(B) Any of our indebtedness to any of our subsidiaries or other
affiliates;
(C) Any of our indebtedness that is subordinated or junior in any
respect to any other indebtedness; and
(D) Any of our indebtedness incurred for the purchase of goods or
materials in the ordinary course of business.
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If the Trustee (or paying agent if other than the Trustee) or any holder
receives any payment of principal of, premium, if any, or interest with respect
to the notes at a time when such payment is prohibited under the Indenture,
such payment shall be held in trust for the benefit of, and shall be paid over
and delivered to, the holders of Senior Indebtedness then outstanding or their
representative as their respective interests may appear. After all Senior
Indebtedness is paid in full and until the notes are paid in full, holders of
the notes shall be subrogated (equally and ratably with all other indebtedness
ranking equally with the notes) to the rights of holders of Senior Indebtedness
to receive distributions applicable to Senior Indebtedness to the extent that
distributions otherwise payable to the holders of the notes have been applied
to the payment of Senior Indebtedness.
At June 30, 1999, our Senior Indebtedness consisted of various capital lease
obligations aggregating approximately $2.1 million and the remaining $1.0
million installment due for our purchase of IntelliFrame.
In addition, the notes will be structurally subordinated to all indebtedness
and other liabilities, including trade accounts payable and lease obligations,
of CNT's subsidiaries, as any right of CNT to receive any assets of its
subsidiaries upon their liquidation or reorganization, and the consequent right
of holders of the notes to participate in those assets, will be effectively
subordinated to the claims of that subsidiary's creditors, including trade
creditors, except to the extent that CNT is itself recognized as a creditor of
that subsidiary, in which case the claims of CNT will still be subordinate to
any security interest in the assets of such subsidiary senior to that held by
CNT.
No provision contained in the Indenture or the notes will affect our
obligation, which is absolute and unconditional, to pay, when due, principal
of, premium, if any, and interest on the notes. The subordination provisions of
the Indenture and the notes will not prevent the occurrence of any Default or
Event of Default under the Indenture or limit the rights of the Trustee or any
other holder, subject to the provisions described herein, to pursue any other
rights or remedies with respect to the notes.
The Indenture does not prohibit or limit the incurrence of any indebtedness
by us or our subsidiaries.
Provisional Redemption by Us
We may redeem the notes, in whole or in part, at any time prior to August ,
2002, at a redemption price equal to $1,000 per $1,000 principal amount of
notes to be redeemed plus accrued and unpaid interest, if any, to the
Redemption Date (the "Provisional Redemption Date") if the closing price of the
common stock shall have exceeded 150% of the conversion price then in effect
for at least 20 trading days within a period of 30 consecutive trading days
ending on the trading day prior to the date of mailing of the notice of
provisional redemption (the "Notice Date," which date shall be no more than 60
nor less than 30 days prior to the Provisional Redemption Date).
Upon any Provisional Redemption, we will make an additional payment in cash
(the "Make-Whole Payment") with respect to the notes called for redemption to
holders on the Notice Date in an amount equal to $ per $1,000 principal
amount of notes, less the amount of any interest actually paid on such note
prior to the Notice Date. We will be obligated to make the Make-Whole Payment
on all notes called for provisional redemption, including any notes converted
after the Notice Date and prior to the Provisional Redemption Date.
Optional Redemption by Us
At any time on or after August , 2002, we have the option to redeem the
notes on at least 30 but not more than 60 days' notice, in whole at any time or
in part from time to time, at the following prices (expressed
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in percentages of the principal amount), together with accrued interest to the
date fixed for redemption if redeemed on or after:
<TABLE>
<CAPTION>
Date Redemption Price
---- ----------------
<S> <C>
August , 2002.......................................... %
August , 2003.......................................... %
</TABLE>
If fewer than all the notes are to be redeemed, the Trustee will select the
notes to be redeemed in principal amounts of $1,000 or integral multiples
thereof by lot or, in its discretion, on a pro rata basis. If any note is to be
redeemed in part only, a new note or notes in principal amount equal to the
unredeemed principal portion thereof will be issued. If a portion of a holder's
notes is selected for partial redemption and such holder converts a portion of
such notes, such converted portion shall be deemed to be taken from the portion
selected for redemption. No sinking fund is provided for the notes.
Repurchase at Option of Holders upon a Change of Control
Upon the occurrence of a Change of Control, each holder of notes shall have
the right to require us to repurchase such holder's notes in whole or in part
in integral multiples of $1,000 at a purchase price in cash in an amount equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest to the date of purchase, pursuant to an offer (the "Change of Control
Offer") made in accordance with the procedures described below and the other
provisions in the Indenture.
A "Change of Control" means an event or series of events in which:
. Any "person" or "group" (as such terms are used in sections 13(d) and
14(d) of the Exchange Act) acquires "beneficial ownership" (as determined
in accordance with Rule 13d-3 under the Exchange Act), directly or
indirectly, of more than 50% of the combined voting power of the then
outstanding securities entitled to vote generally in elections of our
directors (the "Voting Stock") other than acquisitions by CNT, its
subsidiaries or its employee benefit plans; or
. We consolidate with or merge into any other corporation or business
entity (other than any merger which is effected solely to change the
jurisdiction of incorporation of CNT), or convey, transfer or lease all
or substantially all of our assets (determined on a consolidated basis)
to any person, or any other corporation or business entity merges with or
into us, and, in the case of any such transaction, our outstanding common
stock is changed or exchanged as a result, unless our shareholders
immediately before such transaction own, directly or indirectly, more
than 50% of the combined voting power of the outstanding voting
securities of the corporation or business entity resulting from such
transaction in substantially the same proportion as their ownership of
the Voting Stock immediately before such transaction;
provided that a Change in Control shall not be deemed to have occurred if
either:
. The closing price per share of the common stock for any five trading days
within the period of ten consecutive trading days ending immediately
after the announcement of such Change of Control shall equal or exceed
105% of the conversion price of the notes in effect on each such trading
day; or
. At least 90% of the consideration in the Change of Control transaction
consists of shares of common stock traded on a national securities
exchange or quoted on the Nasdaq National Market, and as a result of such
transaction, the notes become convertible solely into such common stock.
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Within 30 days following any Change of Control, unless we have given the
holders notice of our irrevocable intention to redeem all outstanding notes as
described under "Optional redemption by us," we shall send by first-class mail,
postage prepaid, to the Trustee and to each holder of notes, at such holder's
address appearing in the security register, a notice (the "Change of Control
Notice") stating, among other things, that a Change of Control has occurred,
the purchase price, the purchase date, which shall be a business day no earlier
than 30 days nor later than 60 days from the date such notice is mailed, and
certain other procedures that a holder of notes must follow to accept a Change
of Control Offer or to withdraw such acceptance.
We will comply, to the extent applicable, with the requirements of Rule 13e-4
under the Exchange Act and other securities laws or regulations in connection
with the repurchase of the notes as described above.
CNT may, to the extent permitted by applicable law, at any time purchase the
notes in the open market or by tender at any price or by private agreement. Any
note so purchased by CNT may, to the extent permitted by applicable law, be
reissued or resold or may, at CNT's option, be surrendered to the trustee for
cancellation. Any notes surrendered as aforesaid may not be reissued or resold
and will be canceled promptly.
The foregoing provisions would not necessarily afford holders of the notes
protection in the event of a highly leveraged or other transaction involving
CNT that may adversely affect holders.
Our future indebtedness may contain prohibitions of certain events that would
constitute a Change of Control or require us to offer to repurchase such
indebtedness upon a Change of Control. Moreover, the exercise by the holders of
notes of their rights to require us to purchase the notes could cause a default
under such indebtedness, even if the Change of Control itself does not, due to
the financial effect of such purchase on us. Finally, our ability to pay cash
to holders of notes upon a purchase may be limited by our then existing
financial resources. There can be no assurance that sufficient funds will be
available when necessary to make any required purchases. Furthermore, the
Change of Control provisions may in certain circumstances make more difficult
or discourage a takeover of us and the removal of the incumbent management.
Certain Covenants
Merger, consolidation and sale of assets. We shall not consolidate with or
merge with or into, or convey, transfer or lease all or substantially all of
our assets (determined on a consolidated basis), whether in a single
transaction or a series of related transactions, to any person unless:
. Either we are the resulting, surviving or transferee person (the
"Successor Company") or the Successor Company is a corporation, limited
liability company, partnership or trust organized and existing under the
laws of the United States or any State thereof or the District of
Columbia, and the Successor Company (if not us) expressly assumes by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all of our obligations under the Indenture
and the notes, including the conversion rights described above under
"Conversion of Notes;"
. Immediately after giving effect to such transaction, no Event of Default
has happened and is continuing; and
. We deliver to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that such consolidation, merger or transfer and
such supplemental indenture, if any, comply with the Indenture.
Events of Default and Remedies
An Event of Default is defined in the Indenture as being:
. Default in payment of the principal of or premium, if any, on the notes
when due at maturity, upon redemption or otherwise, including our failure
to purchase the notes when required upon a Change of Control (whether or
not such payment shall be prohibited by the subordination provisions of
the Indenture);
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. Default for 30 days in payment of any installment of interest on the
notes (whether or not such payment shall be prohibited by the
subordination provisions of the Indenture);
. Failure to provide a Change of Control Notice, whether or not such notice
or payment pursuant to a Change of Control Offer shall be prohibited by
the subordination provisions of the Indenture;
. Failure to perform any other covenant in the Indenture continuing for 90
days after written notice by the Trustee or the holders of 25% in
aggregate principal amount of the notes; and
.Certain events involving the bankruptcy, insolvency or reorganization of
us.
The Indenture provides that the Trustee may withhold notice to the holders of
notes of any default (except in payment of principal, premium, if any, or
interest with respect to the notes) if the Trustee considers it in the interest
of the holders of notes to do so.
The Indenture provides that if any Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in principal
amount of the notes then outstanding may declare the principal of and premium,
if any, on the notes to be due and payable immediately. At any time after a
declaration of acceleration, but before a judgement or decree based on
acceleration has been obtained, the holders of a majority in aggregate
principal amount of the notes may, under certain circumstances, rescind and
annul such acceleration.
The holders of a majority in principal amount of the notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Trustee, subject to certain
limitations specified in the Indenture. The Indenture provides that, subject to
the duty of the Trustee following an Event of Default to act with the required
standard of care, the Trustee will not be under an obligation to exercise any
of its rights or powers under the Indenture at the request or direction of any
of the holders of the notes, unless the Trustee receives satisfactory indemnity
against any associated loss, liability or expense.
Satisfaction and Discharge; Defeasance
The Indenture will cease to be of further effect as to all outstanding notes
except as to:
.Rights of registration of transfer and exchange and our right of optional
redemption;
. Substitution of apparently mutilated, defaced, destroyed, lost or stolen
notes;
. Rights of holders of notes to receive payments of principal of, premium,
if any, and interest on, the notes;
. Rights of holders of notes to convert to common stock;
. Rights, obligations and immunities of the Trustee under the Indenture;
and
. Rights of the holders of notes as beneficiaries of the Indenture with
respect to the property so deposited with the Trustee payable to all or
any of them;
if:
(A) We will have paid or caused to be paid the principal of, premium,
if any, and interest on the notes as and when the same will have become due
and payable;
(B) All outstanding notes (except lost, stolen or destroyed notes which
have been replaced or paid) have been delivered to the Trustee for
cancellation; or
(C) (i) the notes not previously delivered to the Trustee for
cancellation will have become due and payable or are by their terms to
become due and payable within one year or are to be called for redemption
under arrangements satisfactory to the Trustee upon delivery of notice and
(ii) we will have irrevocably deposited with the Trustee, as trust funds,
cash, in an amount sufficient to pay principal of and interest on the
outstanding notes, to maturity or redemption, as the case may be.
Such trust may only be established if such deposit will not result in a
breach or violation of, or constitute a default under, any agreement or
instrument pursuant to which we are a party or by which the trust is bound, and
we have delivered to the Trustee an Officers' Certificate and an opinion of
counsel, each stating that all conditions related to such defeasance have been
complied with.
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The Indenture will also cease to be in effect (except as described in clauses
(1) through (6) in the immediately preceding paragraph) and the indebtedness on
all outstanding notes will be discharged on the 123rd day after the irrevocable
deposit by us with the Trustee, in trust, specifically pledged as security for,
and dedicated solely to, the benefit of the holders of notes, of cash, U.S.
Government Obligations (as defined in the Indenture) or a combination thereof,
in an amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay the principal of, premium, if any, and
interest on the notes then outstanding in accordance with the terms of the
Indenture and the notes ("legal defeasance"). Such legal defeasance may only be
effected if:
. Such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by
which we are bound;
. We have delivered to the Trustee an opinion of counsel stating that (A)
we have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either
case to the effect that, based thereon, the holders of the notes will not
recognize income, gain or loss for federal income tax purposes as a
result of such deposit, defeasance and discharge by us and will be
subject to federal income tax on the same amount and in the same manner
and at the same times as would have been the case if such deposit,
defeasance and discharge had not occurred;
. We have delivered to the Trustee an opinion of counsel to the effect that
after the 123rd day following the deposit, the trust funds will not
constitute a preferential transfer under Section 547(b) of the United
States Bankrupcy Code; and
. We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel stating that we have complied with all conditions related to
the defeasance.
We may also be released from our obligations under the covenants described
above under "Change of Control" and "Certain Covenants" with respect to the
notes outstanding on the 123rd day after the irrevocable deposit by us with the
Trustee, in trust, specifically pledged as security for, and dedicated solely
to, the benefit of the holders of notes, of cash, U.S. Government Obligations
or a combination thereof, in an amount sufficient in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay the principal
of, premium, if any, and interest on the notes then outstanding in accordance
with the terms of the Indenture and the notes ("covenant defeasance"). Such
covenant defeasance may only be effected if:
. Such deposit will not result in a breach or violation of, or constitute a
default under, any agreement or instrument to which we are a party or by
which we are bound;
. We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel to the effect that the holders of notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and covenant defeasance by us and will be subject to federal
income tax on the same amount, in the same manner and at the same times
as would have been the case if such deposit and covenant defeasance had
not occurred;
. We have delivered to the Trustee an opinion of counsel to the effect that
after the 123rd day following the deposit, the trust funds will not
constitute a preferential transfer under Section 547(b) of the United
States Bankrupcy Code; and
. We have delivered to the Trustee an Officers' Certificate and an opinion
of counsel stating that we have complied with all conditions related to
the covenant defeasance.
Following such covenant defeasance, we will no longer be required to comply
with the obligations described above under "Certain Covenants" and will have no
obligation to repurchase the notes pursuant to the provisions described under
"Change of Control."
Notwithstanding any satisfaction and discharge or defeasance of the
Indenture, our obligations described under "Conversion of Notes" will survive
to the extent provided in the Indenture until the notes cease to be
outstanding.
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Form, Denomination, Transfer, Exchange and Book-Entry Procedures
Notes will be issued only in fully registered form, without interest coupons,
in minimum denominations of $1,000 and integral multiples in excess thereof.
Notes sold in the offering will be issued only against payment therefor in
immediately available funds.
The notes initially will be represented by one or more notes in registered,
global form without interest coupons (each a "global note" and collectively,
the "global notes"). The global notes will be deposited upon issuance with the
Trustee as custodian for The Depository Trust Company ("DTC"), in New York, New
York, and registered in the name of DTC or its nominee, in each case for credit
to an account of a direct or indirect participant in DTC as described below.
Transfer of beneficial interests in the global notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants,
which may change from time to time.
Except as set forth below, the global notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the global notes may not be exchanged for
notes in certificated form except in the limited circumstances described below
under "--Exchange of Book-entry notes for Certificated Notes."
Exchange of Book-Entry Notes for Certificated Notes
A beneficial interest in a global note may not be exchanged for a note in
certificated form unless (1) DTC (A) notifies us that DTC is unwilling or
unable to continue as depositary for the global note or (B) has ceased to be a
clearing agency registered under the Exchange Act and in either case we
thereupon fail to appoint a successor depository within 90 days; (2) we, at our
option, notify the Trustee in writing that we elect to cause the issuance of
our notes in certificated form; or (3) there shall have occurred and be
continuing an Event of
Default or any event that after notice or lapse of time or both would be an
Event of Default with respect to the notes. In all cases, certificated notes
delivered in exchange for any global note or beneficial interests therein will
be registered in the names, and issued in any approved denominations, requested
by or on behalf of DTC, in accordance with its customary procedures.
CERTAIN BOOK-ENTRY PROCEDURES FOR GLOBAL NOTES. THE DESCRIPTION OF THE
OPERATIONS AND PROCEDURES OF DTC THAT FOLLOW ARE PROVIDED SOLELY AS A MATTER OF
CONVENIENCE. THESE OPERATIONS AND PROCEDURES ARE SOLELY WITHIN THE CONTROL OF
DTC AND ARE SUBJECT TO CHANGE BY IT FROM TIME TO TIME. WE TAKE NO
RESPONSIBILITY FOR THESE OPERATIONS AND PROCEDURES AND URGE INVESTORS TO
CONTACT DTC OR ITS PARTICIPANTS DIRECTLY TO DISCUSS THESE MATTERS.
DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
participants ("participants") and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical transfer and delivery of certificates. Participants include securities
brokers and dealers, banks, trust companies and clearing corporations and may
include certain other organizations. Certain of such participants, or their
representatives, together with other entities, own DTC. Indirect access to the
DTC system is available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
DTC has advised us that its current practice, upon the issuance of a global
note, is to credit, on its internal system, the respective principal amount of
the individual beneficial interests represented by such global note to the
accounts with DTC of the participants through which such interests are to be
held. Ownership of beneficial
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interest in the global note will be shown on, and the transfer of that
ownership will be effected only through, records maintained by DTC or its
nominees, with respect to interests of participants, and the records of
participants and indirect participants, with respect to interests of persons
other than participants.
AS LONG AS DTC, OR ITS NOMINEE, IS THE REGISTERED HOLDER OF A GLOBAL NOTE,
DTC OR SUCH NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND
HOLDER OF THE NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE
INDENTURE AND THE NOTES. Except in the limited circumstances described above,
owners of beneficial interest in a global note will not be entitled to have any
portions of such global note registered in their names, will not receive or be
entitled to receive physical delivery of notes in definitive form and will not
be considered the owners or holders of the global notes, or any notes
represented thereby, under the Indenture or the notes. Accordingly, each person
owning a beneficial interest in the global note must rely on the procedures of
DTC and, if such person is not a participant, those of the participant through
which such person owns its interest, in order to exercise any rights of a
holder under the Indenture or such note.
Investors may hold their interests in the global note directly through DTC,
if they are participants in such system, or indirectly through organizations
that are participants in such system. All interests in a global note will be
subject to the procedures and requirements of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons may be limited
to that extent. Because DTC can act only on behalf of its participants, which
in turn act on behalf of indirect participants and certain banks, the ability
of a person having beneficial interests in a global note to pledge such
interests to persons or entities that do not participate in the DTC system, or
otherwise take actions in respect of such interests, may be affected by the
lack of a physical certificate evidencing such interests.
Cash payment of the principal of, interest on, or the redemption or
repurchase of the global note will be made to DTC or its nominee, as the case
may be, as the registered owner of the global note by wire transfer of
immediately available funds on each relevant payment date. Neither we, the
Trustee nor any of our respective agents will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a global note including any delay by DTC
or any participant or indirect participant in identifying the beneficial
ownership interests, and we and the Trustee may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes.
We expect that DTC or its nominee, upon receipt of any cash payment of
principal, interest or the redemption or repurchase price in respect of a
global note representing any notes held by it or its nominee, will immediately
credit participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such global note for
such notes as shown on the records of DTC or its nominee (adjusted as necessary
so that such payments are made with respect of whole notes only), unless DTC
has reason to believe that it will not receive payment on such payment date. We
also expect that payments by participants to owners of beneficial interests in
such global note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in "street name." Such payments will
be the responsibility of such participants.
Redemption notices will be sent to DTC or its nominee. If less than all notes
are being redeemed, DTC's practice is to determine by lot the amount of the
holdings of each participant in such issue to be redeemed.
Neither DTC nor its nominee will consent or vote with respect to the notes.
Under its usual procedures, DTC mails an omnibus proxy to the issuer as soon as
possible after the record date. The omnibus proxy assigns DTC's, or its
nominee's, consenting or voting rights to those participants to whose accounts
the notes are credited on the record date identified in a listing attached to
the omnibus proxy.
Interests in the global notes will trade in DTC's Same-Day Funds Settlement
System, and secondary market trading activity in such interests will therefore
settle in immediately available funds, subject to all cases to the rules and
procedures of DTC and its participants. Transfers between participants in DTC
will be effected in accordance with DTC's procedures, and will be settled in
same-day funds.
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DTC has advised us that it will take any action permitted to be taken by a
holder of notes, including the presentation of notes for exchange as described
below and the conversion of notes, only at the direction of one or more
participants to whose account with DTC interests in the global notes are
credited and only in respect of such portion of the aggregate principal amount
of the notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default, as defined above,
under the notes, DTC reserves the right to exchange the global notes for notes
in certificated form, and to distribute such notes to its participants.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the global note among
participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
Neither we, the Trustee nor any of our respective agents will have any
responsibility for the performance by DTC, its participants or indirect
participants of their respective obligations under the rules and procedures
governing its operations, including maintaining, supervising or reviewing the
records relating to, or payments made on account of, beneficial ownership
interests in global notes.
Modifications and Waivers of the Indenture
The Indenture contains provisions permitting us and the Trustee, with the
consent of the holders of not less than a majority in principal amount of the
notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of notes, and to waive
certain past defaults of CNT, except that without the consent of the holder of
each note so affected no such modification shall:
.Extend the fixed maturity of any note;
.Reduce the rate or extend the time of payment of interest thereon;
.Reduce the principal amount thereof or premium, if any, thereon;
.Reduce any amount payable upon redemption thereof;
.Change our obligation to repurchase any note upon the happening of a
Change of Control;
.Impair or affect the right of a holder to institute suit for the
payment thereof;
.Change the currency in which the notes are payable;
.Modify the subordination provisions of the Indenture in a manner
adverse to the holders of notes; or
.Impair the right to convert the notes into common stock subject to the
terms set forth in the Indenture.
In addition, no modification shall reduce the foregoing percentage of notes
without the consent of the holders of all of the notes then outstanding.
The holders of a majority in aggregate principal amount of the outstanding
notes may waive compliance by CNT with certain restrictive provisions of the
Indenture and may also waive any past defaults under the Indenture, except a
default in the payment of principal, premium, if any, or interest.
Compliance Certificates
The Indenture requires us to file annual officer certificates with the
Trustee stating whether or not to the best knowledge of the officer executing
the certificate we are in compliance with the terms and conditions of the
Indenture. We must also notify the Trustee if we become aware of any default or
Event of Default.
Governing Law
The Indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York.
Concerning the Trustee
U.S. Bank Trust National Association, the Trustee under the Indenture, has
been appointed by us as the paying agent, conversion agent, registrar and
custodian with regard to the notes. The Trustee and/or its affiliates provide,
and may provide in the future, banking and other services to us in the ordinary
course of their respective businesses.
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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.
Common Stock
As of July 23, 1999, there were 23,440,093 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.
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. 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 on August 10, 1998. Each share
of common stock issued subsequent to such date, including the shares of common
stock issuable upon conversion of the notes, 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:
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. 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.
Articles of Incorporation and Bylaws
Our articles of incorporation and bylaws could make completion of an offer to
acquire us 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,
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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., Overpeck Centre, 85 Challenger Road, Ridgefield Park, New Jersey 07660,
telephone number (800) 288-9541.
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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
General
The following is a summary of certain material U.S. federal income and estate
tax considerations relating to the purchase, ownership and disposition of the
notes and of common stock into which the notes may be converted, but does not
purport to be a complete analysis of all the potential tax considerations
relating thereto. This summary is based on the provisions of the Internal
Revenue Code, the applicable U.S. Treasury Regulations promulgated thereunder,
judicial authority and current administrative rulings and practice, all of
which are subject to change, possibly on a retroactive basis. This summary
deals only with holders that will acquire the notes at original issuance or
common stock into which the notes may be converted. This summary does not
purport to deal with all aspects of U.S. federal income taxation that might be
relevant to particular holders in light of their personal investment
circumstances or status, nor does it address tax considerations applicable to
investors that may be subject to special tax rules, such as certain financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or currencies, persons that will hold notes as a position in a
hedging transaction, "straddle" or "conversion transaction" for tax purposes,
persons that have a "functional currency" other than the U.S. dollar, persons
entitled to benefits under applicable income tax treaties or persons not
holding the notes or common stock as capital assets for U.S. federal income tax
purposes. Moreover, the effect of any applicable state, local or foreign tax
laws is not discussed. We have not sought any ruling from the Internal Revenue
Service with respect to the statements made and the conclusions reached in the
following summary, and we cannot assure you that the Internal Revenue Service
will agree with such statements and conclusions.
As used in this section of the prospectus, the term "U.S. holder" means a
beneficial owner of a note or common stock who or that is for U.S. federal
income tax purposes a citizen or resident of the United States, an entity
treated as a domestic corporation or partnership, an estate the income of which
is subject to U.S. federal income taxation regardless of its source, or a trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust and one or more U.S. persons have the
authority to control all of the substantial decisions of the trust. The term
"non-U.S. holder" means a holder of notes or common stock who or that is not a
U.S. holder.
The following discussion is for general information only. Investors
considering the purchase of the notes should consult with their own tax
advisors and financial planners with respect to the application of the U.S.
federal income tax estate tax laws to their particular situations as well as
any tax consequences arising under the laws of any state, local or foreign
taxing jurisdiction or under any applicable tax treaty.
U.S. Holders
Interest. Interest on a note will be taxable to a U.S. holder as ordinary
interest income in accordance with the U.S. holder's method of accounting for
U.S. federal income tax purposes. We do not expect the notes to have any
"original issue discount" for U.S. federal income tax purposes.
Sale, exchange or redemption of a note. A U.S. holder generally will
recognize capital gain or loss on the sale, redemption or other taxable
disposition of a note in an amount equal to the difference, if any, between the
U.S. holder's adjusted tax basis in the note and the amount received therefor
(other than amounts attributable to accrued and unpaid interest on the notes,
which will be treated as interest for U.S. federal income tax purposes).
Subject to the market discount rules discussed under "U.S. Holders--Market
discount" below, gain or loss, if any, recognized on the sale, redemption or
other taxable disposition of a note generally will be long-term capital gain or
loss if the note was held for more than one year as of the date of disposition.
Market discount. If a U.S. holder acquires a note subsequent to its original
issuance and the note's stated redemption price at maturity exceeds the U.S.
holder's initial tax basis in the note by more than a de minimis amount, the
U.S. holder generally will be treated as having acquired the note at a "market
discount" equal to
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such excess. Gain recognized on the disposition of a note that has "accrued
market discount" will be treated as ordinary income, and not capital gain, to
the extent of the accrued market discount. Unless the U.S. holder elects to
accrue market discount on a constant yield basis, the accrued market discount
generally would be the amount calculated by multiplying the market discount by
a fraction, the numerator of which is the number of days the obligation has
been held by the U.S. holder and the denominator of which is the number of days
after the U.S. holder's acquisition of the obligation up to and including its
maturity date. A U.S. holder who acquires a note with market discount can elect
to include accrued market discount currently. If a U.S. holder does not make
this election, it may be required to defer a deduction of interest on
indebtedness incurred to purchase or carry the note until the note is disposed
of in a taxable transaction. If a U.S. holder acquires a note with market
discount and receives common stock upon conversion of the note, the amount of
accrued market discount not previously included in income with respect to the
converted note through the date of conversion will be treated as ordinary
income upon the disposition of the common stock. Prospective investors should
be aware that the market discount rules may discourage others from purchasing
the notes after the issuance.
Conversion of the notes. A U.S. holder generally will not recognize gain or
loss upon conversion of the notes into common stock, except with respect to
cash received from us in lieu of a fractional share of common stock. The U.S.
holder's tax basis in shares of common stock received upon conversion will be
the same as the U.S. holder's adjusted tax basis of the notes converted
(reduced by the portion of such basis allocable to any fractional common stock
interest for which the U.S. holder receives a cash payment from us). The
holding period of the common stock received in the conversion will include the
holding period of the notes that were converted. A U.S. holder will recognize
gain (or loss) upon a conversion to the extent that any cash paid in lieu of a
fractional share of common stock exceeds (or is less than) its tax basis
allocable to such fractional share.
Distributions on common stock. We do not intend to pay dividend distributions
on common stock. If we do make a distribution, it will be treated as a dividend
taxable as ordinary income on the date of receipt, to the extent of our current
or accumulated earnings and profits as determined for U.S. federal income tax
purposes. Distributions in excess of such current or accumulated earnings and
profits will first constitute a non-taxable return of capital to the extent of
a U.S. holder's adjusted tax basis in the common stock and then will be treated
as a capital gain realized on the disposition of the common stock. The portion
of any distribution treated as a non-taxable return of capital will reduce such
U.S. holder's tax basis in such common stock. Subject to numerous limitations,
to the extent distributions made by us are treated as dividends for U.S.
federal income tax purposes, a U.S. holder that is taxed as a domestic
corporation and that meets the applicable holding period and taxable income
requirements could be entitled to a deduction in an amount equal to 70% of such
dividend.
Sale or exchange of common stock. Subject to the discussion under "U.S.
Holders--Market discount" above, a U.S. holder of common stock received on
conversion of a note who sells or otherwise disposes of such stock in a taxable
sale or exchange will recognize capital gain or loss equal to the difference
between the cash and the fair market value of any property received on such
sale or exchange and the U.S. holder's tax basis in such stock. Such gain or
loss will be long term capital gain or loss if the holding period for such
common stock was more than one year. As long as a redemption of common stock is
either not "essentially equivalent to a dividend" or "substantially
disproportionate" for federal income tax purposes, it generally will be treated
as a sale or exchange by the U.S. holder of the redeemed common stock.
Adjustments in conversion price. The conversion price of the notes may change
under certain circumstances. Adjustments that have the effect of increasing the
proportionate interest of holders of the notes in our assets or earnings (for
example, an adjustment following a distribution of property by us to our
shareholders) could in some cases be treated as deemed distributions to U.S.
holders of notes, for U.S. federal income tax purposes. Similarly, a failure to
adjust the conversion price of the notes to reflect a stock dividend or other
event increasing the proportionate interest of the holders of outstanding
common stock can in some circumstances be treated as deemed distributions to
U.S. holders of common stock, for such purposes. Such deemed distributions will
be taxable as a dividend, return of capital or capital gain depending on our
earnings
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and profits for federal income tax purposes. See the discussion above under
"U.S. Holders--Distributions on common stock."
Information reporting and backup withholding. A U.S. holder of a note, or of
common stock issued upon conversion of a note, may be subject to information
reporting and possibly backup withholding. If applicable, backup withholding
would apply at a rate of 31% with respect to dividends or interest on, or the
proceeds of a sale, exchange, redemption, retirement, or other disposition of,
such note or common stock, as the case may be, unless such U.S. holder is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact, or provides a taxpayer identification number, certifies
under penalties of perjury that such taxpayer identification number is correct
and as to no loss of exemption from backup withholding, and otherwise complies
with applicable backup withholding rules. Notwithstanding the foregoing, we
will also impose backup withholding on payments made to a U.S. holder of notes
or common stock if instructed to do so by the Internal Revenue Service. A
failure to provide us with a correct taxpayer identification number can also
subject a U.S. holder to penalties imposed by the Internal Revenue Service.
Any amounts withheld under the backup withholding rules from a payment to
U.S. holder will be allowed as a credit against such holder's U.S. federal
income tax liability, if any, or will otherwise be refundable, provided that
the requisite procedures are followed.
Non-U.S. Holders
Payment of interest. The payment of interest on a note generally will not be
subject to U.S. federal income tax withholding if:
. the interest is not "effectively connected" with the conduct of a trade
or business within the United States by the non-U.S. holder;
. the non-U.S. holder does not actually or constructively own 10% or more
of the total combined voting power of all outstanding classes of our
stock entitled to vote;
. the non-U.S. holder is not a controlled foreign corporation that is
related to us actually or constructively through stock ownership; and
. either (A) the beneficial owner of the note certifies to us or our agent,
under penalties of perjury, that it is not a U.S. holder and provides its
name and address on Internal Revenue Service Form W-8 (or on a suitable
substitute form) or (B) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary
course of its trade or business (a "financial institution") and holds the
note and certifies under penalties of perjury that such a Form W-8 (or
suitable substitute form) has been received from the beneficial owner by
it or by a financial institution between it and the beneficial owner and
furnishes the payer with a copy thereof.
If these requirements cannot be satisfied, interest on the notes generally will
be subject to U.S. federal income tax withholding at a 30% rate.
Conversion of notes. A non-U.S. holder generally will not be subject to U.S.
federal income tax withholding on the conversion of a note into common stock.
To the extent a non-U.S. holder receives cash in lieu of a fractional share of
common stock on conversion, such cash may give rise to gain that would be
subject to the rules discussed below under "Non-U.S. Holders--Sale or exchanges
of notes or common stock."
Adjustment of conversion price. The conversion price of the notes is subject
to adjustment in certain circumstances. Any such adjustment could, in certain
circumstances, give rise to a deemed distribution to non-U.S. holders of the
notes. In such case, the deemed distribution would be subject to the rules
described below under "Non-U.S. Holders--Distributions on common stock."
Distributions on common stock. In general, distributions actually or deemed
paid out of our current and accumulated earnings and profits, as determined for
U.S. federal income tax purposes, to a non-U.S. holder of
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the common stock will be subject to U.S. federal income tax withholding at a
30% rate. Distributions in excess of such current or accumulated earnings and
profits will first constitute a non-taxable return of capital to the extent of
a U.S. holder's adjusted tax basis in the common stock and then will be treated
as a capital gain realized on the disposition of the common stock. The portion
of any distribution treated as a non-taxable return of capital will reduce such
U.S. holder's tax basis in such common stock. See "Non-U.S. Holders--Sale or
exchange of notes or common stock" below for a discussion of the U.S. federal
income tax consequences of capital gain realized on the sale of common stock.
Effectively connected income. Interest on the notes and dividends on the
common stock paid to a non-U.S. holder and "effectively connected" with the
non-U.S. holder's conduct of a trade or business in the United States will not
be subject to U.S. federal income tax withholding at a 30% rate. Rather, such
interest and dividends will be subject to U.S. federal income tax at regular,
graduated rates applicable to U.S. persons. Such interest and dividends paid to
non-U.S. holders that are corporations may also, under certain circumstances,
be subject to an additional 30% "branch profits tax."
Sale or exchange of notes or common stock. A non-U.S. holder generally will
not be subject to U.S. federal income tax withholding on gain realized upon the
sale or exchange of a note or common stock (including the receipt of cash in
lieu of a fractional share of common stock upon a conversion of a note) unless
the non-U.S. holder is
. a nonresident alien individual who is present in the United States for
183 or more days in the taxable year in which the gain is realized and
certain other conditions are present, or
. the non-U.S. holder is subject to tax pursuant to the provisions of the
Internal Revenue Code applicable to expatriates.
Any gain realized by a non-U.S. holder on the disposition of our common stock
generally will be subject to U.S. federal income taxation if we have been,
currently are or become a "United States real property holding corporation" for
U.S. federal income tax purposes and the non-U.S. holder owns more than 5% of
our common stock. We believe that we have not been and we are not a United
States real property holding corporation and do not currently anticipate
becoming a United States real property holding corporation for U.S. federal
income tax purposes.
U.S. estate taxes. A note held by an individual who is a non-U.S. holder at
the time of his or her death will not be includible in the decedent's gross
estate for U.S. estate tax purposes, provided that such holder did not at the
time of death actually or constructively own 10% or more of the combined voting
power of all of our outstanding classes of stock entitled to vote. Common stock
actually or beneficially held (other than through a foreign corporation) by a
non-U.S. holder at the time of his or her death (or previously transferred
subject to certain retained rights or powers) generally will be subject to U.S.
federal estate tax.
Information reporting and backup withholding. We must report annually to the
Internal Revenue Service and to each non-U.S. holder any interest and dividends
paid with respect to a note or common stock, respectively, and that is subject
to U.S. federal income tax withholding or that is exempt from such tax. We also
report to the Internal Revenue Service and to each non-U.S. holder such income
paid which is exempt from federal income tax withholding because it is
"effectively connected" with such non-U.S. holder's U.S. trade or business.
A non-U.S. holder will not be subject to Internal Revenue Service information
reporting and backup withholding at a 31% rate if the payor has received
appropriate certification statements from or on behalf of the non-U.S. holder
and provided that the payor does not have actual knowledge that the non-U.S.
holder is a U.S. person. The payment of the proceeds from the disposition of
the notes or common stock to or through the U.S. office of any U.S. or foreign
broker will be subject to information reporting and possibly backup withholding
unless the owner certifies as to its non-U.S. status under penalties of perjury
or otherwise establishes an exemption, provided that the broker does not have
actual knowledge that the holder is a U.S. person or that the conditions of any
other exemption are not, in fact, satisfied. The payment of the proceeds from
the disposition
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of a note or common stock to or through a non-U.S. office of a non-U.S. broker
that is not a "U.S. related person" will not be subject to Internal Revenue
Service information reporting or backup withholding. For this purpose, a "U.S.
related person" is
. a "controlled foreign corporation" for U.S. federal income tax purposes
or
. a non-U.S. person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker
has been in existence) is derived from the activities that are
"effectively connected" with the conduct of a U.S. trade or business.
In the case of the payment of proceeds from the disposition of notes or
common stock to or through a non-U.S. office of a broker that is a U.S. related
person, U.S. Treasury Regulations require Internal Revenue Service information
reporting on the payment unless the broker has documentary evidence in its
files that the owner is a non-U.S. holder and the broker has no knowledge to
the contrary. Backup withholding will not apply to payments made through
foreign offices of a broker that is a U.S. person or a U.S. related person
(absent actual knowledge that the payee is a U.S. person).
Prospective final regulations. The U.S. Treasury Department has issued final
regulations that modify the non-U.S. holder information reporting and
requirements imposed on non-U.S. holders and certain intermediaries for
establishing the recipient's status as a non-U.S. holder eligible for exemption
from U.S. federal income tax withholding and backup withholding described
above. These final regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. In general, these final
regulations do not significantly alter the substantive withholding and
information reporting requirements, but, rather, unify current certification
procedures and forms and clarify reliance standards. In addition, these final
regulations impose more stringent conditions on the ability of financial
intermediaries acting for a non-U.S. holder to provide certifications on behalf
of the non-U.S. holder, which may include entering into an agreement with the
Internal Revenue Service to audit certain documentation with respect to such
certifications. Prospective non-U.S. holders are urged to consult their own tax
advisors and financial planners to determine the effect of the application of
these final regulations to their particular circumstances.
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LEGAL MATTERS
Certain legal matters in connection with the notes offered by this prospectus
will be passed upon by Leonard, Street and Deinard Professional Association,
Minneapolis, Minnesota, our counsel. Certain legal matters in connection with
this 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 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 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 investor [email protected].
78
<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, 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-6
Notes to Consolidated Financial Statements................................. F-7
</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 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> <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>
See accompanying notes to consolidated financial statements.
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
------- ------- -------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
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>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Computer Network Technology Corporation
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Accumulated Other
-------------- Paid-in Unearned Retained Comprehensive
Shares Amount Capital Compensation Earnings Income Total
------ ------ ---------- ------------ -------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 22,929 $230 $58,151 $ -- $2,366 $(240) $60,507
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant
to the employee stock
purchase plan and
exercise of stock
options and warrants,
net of 22 shares
redeemed............... 479 4 1,929 -- -- -- 1,933
Tax benefits from
employee stock
transactions........... -- -- 292 -- -- -- 292
Comprehensive income:
Net income............. -- -- -- -- 1,360 -- 1,360
Translation adjustment,
net of tax effect of
$0.................... -- -- -- -- -- 69 69
-------
Total comprehensive
income................. -- -- -- -- -- -- 1,429
------ ---- ------- ----- ------ ----- -------
Balance, December 31,
1996................... 23,408 $234 $60,372 $ -- $3,726 $(171) $64,161
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant
to the employee stock
purchase plan,
restricted stock plan
and exercise of stock
options................ 192 2 741 (42) -- -- 701
Repurchase of common
stock.................. (1,405) (14) (6,674) -- -- -- (6,688)
Compensation expense.... -- -- -- 7 -- -- 7
Comprehensive loss:
Net loss............... -- -- -- -- (2,314) -- (2,314)
Translation adjustment,
net of tax effect of
$0.................... -- -- -- -- -- (260) (260)
-------
Total comprehensive
loss................... -- -- -- -- -- -- (2,574)
------ ---- ------- ----- ------ ----- -------
Balance, December 31,
1997................... 22,195 $222 $54,439 $ (35) $1,412 $(431) $55,607
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant
to the employee stock
purchase plan,
restricted stock plan
and exercise of stock
options................ 454 5 2,041 (401) -- -- 1,645
Tax benefits from
employee stock
transactions........... -- -- 195 -- -- -- 195
Repurchase of common
stock.................. (395) (4) (1,754) -- -- -- (1,758)
Compensation expense.... -- -- -- 81 -- -- 81
Comprehensive income:
Net income............. -- -- -- -- 4,729 -- 4,729
Translation adjustment,
net of tax effect of
$0.................... -- -- -- -- -- 59 59
-------
Total comprehensive
income................. -- -- -- -- -- -- 4,788
------ ---- ------- ----- ------ ----- -------
Balance, December 31,
1998................... 22,254 $223 $54,921 $(355) $6,141 $(372) $60,558
------ ---- ------- ----- ------ ----- -------
Shares issued pursuant
to the employee stock
purchase plan,
restricted stock plan
and exercise of stock
options (unaudited).... 528 5 3,199 (462) -- -- 2,742
Compensation expense
(unaudited)............ -- -- -- 69 -- -- 69
Comprehensive income
(unaudited):
Net income.............. -- -- -- -- 2,697 -- 2,697
Translation adjustment,
net of tax effect of
$0..................... -- -- -- -- -- (258) (258)
-------
Total comprehensive
income................. -- -- -- -- -- -- 2,439
------ ---- ------- ----- ------ ----- -------
Balance, March 31, 1999
(unaudited)............ 22,782 $228 $58,120 $(748) $8,838 $(630) $65,808
====== ==== ======= ===== ====== ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<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)
<S> <C> <C> <C> <C> <C>
Operating Activities:
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-6
<PAGE>
Computer Network Technology Corporation
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.
Inventories
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market.
F-7
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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-8
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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-9
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
(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
F-10
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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.
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:
<TABLE>
<S> <C>
Current assets................................................... $10,488
Property and equipment........................................... 1,000
Other assets..................................................... 672
Identifiable intangibles and goodwill............................ 1,519
In-process research and development.............................. 2,750
Current liabilities.............................................. (5,017)
-------
Cash paid........................................................ $11,412
=======
</TABLE>
The Company allocated $2,750,000 of the 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
F-11
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
of IntelliFrame since December 3, 1998. The purchase price was allocated to
the fair value of the assets and liabilities acquired as follows:
<TABLE>
<S> <C> <C>
Net tangible assets........................................... $ 148
Identifiable intangibles and goodwill......................... 1,295
In-process research development............................... 927
Deferred tax liability........................................ (370)
------
Installments payable.......................................... $2,000
======
</TABLE>
The Company has allocated $927,000 of the IntelliFrame purchase price to
acquired in-process research and development to reflect the value of
process dynamics which was approximately 75% 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 aggregate bonus payments of up to $12,000,000 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:
<TABLE>
<CAPTION>
Unaudited Pro Forma
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Total revenue....................................... $ 117,163 $ 133,575
Net income (loss)................................... (11,052) 4,284
Net income (loss) per share......................... $ (.49) $ .19
</TABLE>
The unaudited pro forma results of operations are for comparative purposes
only and do not necessarily reflect the results that would have been
recorded had the acquisitions occurred at the beginning of the periods
presented or the results which might occur in the future.
(5)Integration Activities
Subsequent to the acquisition of 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
F-12
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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 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:
<TABLE>
<CAPTION>
Property and equipment: 1997 1998
----------------------- ---- ------
<S> <C> <C>
Office and data processing equipment......................... $989 $2,430
Less accumulated amortization................................ 167 481
---- ------
$822 $1,949
==== ======
</TABLE>
Future minimum lease payments, excluding executory costs such as real
estate taxes, insurance and maintenance expense, by year and in the
aggregate are as follows:
<TABLE>
<CAPTION>
Minimum
Lease Commitments
-----------------
Year Ending December 31 Capital Operating
----------------------- ------- ---------
<S> <C> <C>
1999.................................................. $ 463 $ 3,478
2000.................................................. 632 3,784
2001.................................................. 632 3,046
2002.................................................. 499 2,362
2003.................................................. 372 2,287
Thereafter............................................ -- 15,547
------ -------
Total minimum lease payments.......................... 2,598 30,504
Less minimum sublease income.......................... -- 1,115
------ -------
Net minimum lease payments............................ 2,598 $29,389
=======
Less amounts representing interest at rates ranging
from 5.69% to 9.77%.................................. 456
------
Present value of minimum capital lease payments....... 2,142
Less current installments............................. 326
------
Obligations under capital lease, less current install-
ments................................................ $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.
F-13
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
(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.
(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-14
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$3.50--$4.99............ 2,245 8.3 $4.60 858 $4.55
$5.00--$7.99............ 2,310 6.8 $5.89 1,395 $6.02
$8.00--$13.88........... 417 8.4 $9.76 135 $9.85
----- -----
4,972 2,388
===== =====
</TABLE>
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
F-15
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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>
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-16
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
(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-17
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
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.
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.
F-18
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
(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.
F-19
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 1998
The accounting policies for the two reportable segments are the same as
those described in the summary of significant accounting policies. The
Company evaluates performance based on operating profit or loss before
special charges and income taxes.
<TABLE>
<CAPTION>
Three months
Year ended December 31, 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
======= ======= ========
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.
F-20
<PAGE>
Computer Network Technology Corporation
Notes to Consolidated Financial Statements--(Continued)
December 31, 1996, 1997 and 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-21
<PAGE>
[Caption/Title: CNT's EAI Solutions: The Real Benefits
Graphic: Illustrative diagram showing the benefits of our EAI solutions. Under
the caption is the following text: "Seeing the data in real time, in context,
based on intelligent decision rules and in the most meaningful format for the
user." Below the above text is the following text: "CNT's EAI software provides
real time access to integrated enterprise information." Below that is a diagram
comprised of a combination of graphical representations and text showing the
flow of information from legacy information systems back to the end user. The
first section of the diagram on the left has a diagram of a person at a
computer terminal with the following text above the diagram: "Information
access via
. Web
. Packaged CRM applications
.New e-commerce applications"
To the right of the computer is a graphical representation of an eyeball which
links to three rectangular boxes containing text. The top rectangle encloses
the words "Graphical User Interfaces", the middle rectangle encloses the words
"Integrated Application Views" and the bottom rectangle states: "Automated
Workflow". To the right of the three rectangles is a vertically running
rectangle enclosing the words "Back Office View Today." From the vertical
rectangle are spokes running left and the following, represented graphically
and textually: Mainframe, UNIX and NT.]
<PAGE>
CNT(R), the Access and Data Delivery Company
Connecting users, processors, storage and applications
together, at any distance and at any speed. . .
<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 our shares of common stock covered by
this registration statement. The following expenses are being paid by us.
<TABLE>
<CAPTION>
<S> <C>
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
========
</TABLE>
Item 15. Indemnification of Directors and Officers.
Unless prohibited in a corporation's articles or bylaws, Minnesota Statutes,
section 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, section 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 our directors for monetary damages arising from any breach of
fiduciary duties as a member of our board of directors (except as expressly
prohibited by Minnesota Statutes, section 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.
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
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.)
4.2 Form of Indenture for the % Convertible Subordinated Notes Due
2004.*
5.1 Opinion of Leonard, Street and Deinard Professional Association
regarding the legality of the % Convertible Subordinated Notes Due
2004 being registered.*
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.)
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.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<C> <S>
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 1999 Non-Qualified Stock Award Plan (Pending Board Approval).**
10R-1 Form of Non-Qualified Stock Option Agreement dated May 13, 1999 for
certain officers.**
10R-2 Form of Non-Qualified Stock Option Agreement dated May 13, 1999 for a
certain officer.**
10S-1 Form of Incentive Stock Option Agreement dated May 13, 1999 for
certain officers.**
10S-2 Form of Incentive Stock Option Agreement dated May 13, 1999 for a
certain officer.**
10T 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.)
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.)
12.1 Statement Regarding Computation of Ratios.**
23.1 Consent of Leonard, Street and Deinard Professional Association
(included in Exhibit 5.1).*
23.2 Consent of KPMG 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.**
25.1 Statement of Eligibility of Trustee.**
</TABLE>
- --------
* To be filed by amendment.
** Filed herewith.
*** Previously filed.
II-3
<PAGE>
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.
(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-4
<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 July 28, 1999.
Computer Network Technology
Corporation
/s/ Thomas G. Hudson
By: _________________________________
Thomas G. HudsonChairman,
President and Chief
Executive Officer
II-5
<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
Chairman of the
/s/ Thomas G. Hudson Board, Chief July 28, 1999
- ------------------------------------- Executive Officer
Thomas G. Hudson and Director
(Principal
Executive Officer)
Vice President of
/s/ Gregory T. Barnum Finance, Chief July 28, 1999
- ------------------------------------- Financial Officer
Gregory T. Barnum and Corporate
Secretary
(Principal
Financial Officer)
Corporate Controller
/s/ Jeffrey A. Bertelsen and Treasurer July 28, 1999
- ------------------------------------- (Principal
Jeffrey A. Bertelsen Accounting Officer)
/s/ * Director
- ------------------------------------- July 28, 1999
John A. Rollwagen
/s/ * Director
- ------------------------------------- July 28, 1999
Patrick W. Gross
/s/ * Director
- ------------------------------------- July 28, 1999
Erwin A. Kelen
/s/ * Director
- ------------------------------------- July 28, 1999
Lawrence Perlman
*By
/s/ Gregory T. Barnum
----------------------------------
attorney-in-fact
II-6
<PAGE>
EXHIBIT 10Q
1999 NON-QUALIFIED STOCK AWARD PLAN
(as adopted July 15, 1999)
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:
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 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
2
<PAGE>
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) "Performance Cycle" means the period of time as specified in an
Agreement over which Performance Units are to be earned.
(r) "Performance Units" means an Award made under Section 7.2 hereof
(s) "Plan" means this 1999 Non-Qualified Stock Award Plan, as amended from
time to time.
(t) "Restricted Stock" means Stock granted under Plan Section 7.3 so long
as such Stock remains subject to one or more restrictions.
(u) "Retirement" of an Employee means termination of employment with the
Company or an Affiliate on or after the date the Employee attains age 55.
(v) "Share" means a share of Stock.
3
<PAGE>
(w) "Stock" means the common stock, $.01 par value per share (as such par
value may be adjusted from time to time), of the Company.
(x) "Subsidiary" means a subsidiary corporation, as that term is defined in
Section 424(f) of the Code, or any successor provision.
(y) "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.
(z) "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.
(aa)"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 330,000 (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.
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, Stock or Performance Units 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 or the Performance Cycle for the Performance Units, as the case
may be. 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. Acceleration of the Performance Cycle of Performance Units
shall be subject to Section 7.2(b) hereof.
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 Performance Units or any other Award. No Award of
Restricted Stock (prior to the expiration of the restrictions), Options or
Performance Units 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 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").
7.2 Performance Units.
5
<PAGE>
(a) Initial Award. An Award of Performance Units shall entitle such
Participant (or a Successor) to future payments of cash, Stock, or a combination
of cash and Stock, as determined by the Committee and provided in the Agreement,
based upon the achievement of performance targets established by the Committee.
Such performance targets may, but need not, include without limitation targets
relating to one or more of corporate, group, unit, Affiliate, or individual
performance. The Agreement may establish that a portion of a full or maximum
amount of an employee's Award will be paid for performance which exceeds the
minimum target but falls below the maximum target applicable to such Award. The
Agreement shall also provide for the timing of such payment. Following the
conclusion or acceleration of each Performance Cycle, the Committee shall
determine the extent to which (i) performance targets have been attained, (ii)
any other terms and conditions with respect to an Award relating to such
Performance Cycle have been satisfied, and (iii) payment is due with respect to
an Award of Performance Units.
(b) Acceleration and Adjustment. The Agreement may permit an acceleration
of the Performance Cycle and an adjustment of performance targets and payments
with respect to some or all of the Performance Units awarded to an employee upon
such terms and conditions as shall be set forth in the Agreement, upon the
occurrence of certain events, which may, but need not include without limitation
an Event, a Fundamental Change, the Participant's death or Retirement or, with
respect to payments in Stock with respect to Performance Units, a
reclassification, stock dividend, stock split, or stock combination as provided
in Section 12 hereof.
7.3 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.
7.4 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.
6
<PAGE>
8. Effective Date of this Plan.
8.1 Effective Date. This Plan shall become effective as of July 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.
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
7.2 or 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, in the Option price as to any outstanding Options and, subject to
Section 7.2(b) hereof, in outstanding Performance Units and payments with
respect to outstanding Performance Units 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,
7
<PAGE>
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, "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.
8
<PAGE>
EXHIBIT 10R-1
COMPUTER NETWORK TECHNOLOGY CORPORATION
1992 STOCK AWARD PLAN
(as amended and restated through May 1999)
Non-Qualified Stock Option Agreement
================================================================================
Name of Employee:
=================================== ============================================
No. of Shares Covered: Date of Grant:
=================================== ============================================
Exercise Price Per Share: $ Expiration Date:
================================================================================
Exercise Schedule (Cumulative):
No. of Shares
Date of As to Which Option
Exercisability* Becomes Exercisable
--------------- -------------------
* See Section 4 below regarding acceleration of Date of Exercisability
================================================================================
This is a NON-QUALIFIED STOCK OPTION AGREEMENT between Computer Network
Technology Corporation, a Minnesota corporation ("CNT"), and the employee of CNT
or an Affiliate of CNT listed above (the "Employee").
WHEREAS, CNT desires to carry out the purposes of its 1992 Stock Award Plan
(as amended and restated through May 1999) (the "Plan") by affording Employee an
opportunity to purchase shares of Common Stock of CNT, par value $.01 per share
(the "Common Shares"), in accordance with the terms set forth in this Agreement.
NOW, THEREFORE, CNT and Employee agree as follows:
1. GRANT OF OPTION. Subject to the terms of the Plan and this Agreement,
CNT hereby grants to Employee the right and option (the "Option") to purchase
the number of Common Shares specified at the beginning of this Agreement. The
Option is not intended to be an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), but
instead is intended to be a non-qualified stock option.
2. PURCHASE PRICE. The purchase price of each of the Common Shares subject
to the Option shall be the Exercise Price Per Share specified at the beginning
of this Agreement, which equals 100% of the Fair Market Value (as defined in the
Plan) per Common Share on the Date of Grant.
1
<PAGE>
3. OPTION EXERCISE PERIOD. (a) Subject to the provisions of Sections 6(a),
6(b), and 7, the Option shall become exercisable as to the number of shares and
on the dates specified in the exercise schedule at the beginning of this
Agreement and in Section 4. The exercise schedule shall be cumulative, which
means that to the extent the Option has not already been exercised and has not
expired, terminated, or been canceled, Employee may at any time and from time to
time purchase all or any portion of the Common Shares then purchasable under the
exercise schedule.
(b) The Option and all rights to purchase shares thereunder shall cease on
the earliest of: (i) The Expiration Date specified at the beginning of this
Agreement (which date is not more than 10 years after the date of this
Agreement); or (ii) The expiration of the period after Employee's termination of
employment within which the Option is exercisable as specified in Section 6(a)
or 6(b), whichever is applicable.
(c) Notwithstanding any other provision of this Agreement, no one may
exercise the Option, in whole or in part, after its Expiration Date.
4. ACCELERATION OF DATE OF EXERCISABILITY. (a) Except as provided in
Section 7 the Option shall not become exercisable before the first anniversary
of the Date of Grant. If the criteria of the following subsections (b) or (c)
are met before the first anniversary of the Date of Grant, exercisability of the
Option shall be deferred until the first anniversary of the Date of Grant.
(b) Subject to the provisions of Section 4(a), the Option shall become
exercisable with respect to 50% of the Common Shares subject to Option on the
day following the date that the average of the Closing Sale Price of a Common
Share for 60 consecutive trading days exceeds 150% of the Exercise Price Per
Share (specifically $ per share) specified at the beginning of this
Agreement. For purposes of this Agreement, the Closing Sale Price of a Common
Share on a trading date shall be the closing sale price of a Common Share on
that date or if no sale of Common Shares shall have occurred on that date, then
the closing sale price of a Common Share on the next preceding day on which a
sale occurred of Common Shares on the National Association of Securities
Dealers, Inc. Automated Quotations National Market System (NMS) or if the shares
are not quoted on the NMS, the price that the Stock Plans Committee of the Board
of Directors of CNT (the "Committee") determines in good faith to be the Fair
Market Value of a Common Share on that date.
(c) Subject to the provisions of Section 4(a), the Option shall become
exercisable with respect to 50% of the Common Shares subject to Option on the
day following the date that the average of the Closing Sale Price of a Common
Share for 60 consecutive trading days exceeds 200% (specifically $ per
share) of the Exercise Price Per Share specified at the beginning of this
Agreement. For purposes of this Agreement, the Closing Sale Price of a Common
Share on a trading date shall be the closing sale price of a Common Share on
that date or if no sale of Common Shares shall have occurred on that date, then
the closing sale price of a Common Share on the next preceding day on which a
sale occurred of Common Shares on the National Association of Securities
Dealers, Inc. Automated Quotations National Market System (NMS) or if the shares
are not quoted on the NMS, the price that the Committee determines in good faith
to be the Fair Market Value of a Common Share on that date.
(d) If not sooner vested pursuant to the foregoing provisions, the Option
shall become exercisable on the Date of Exercisability specified at the
beginning of this Agreement.
2
<PAGE>
5. MANNER OF EXERCISING OPTION. (a) Subject to the terms and conditions of
this Agreement, the Option may be exercised by delivering or mailing written
notice of exercise to CNT at its principal executive office, marked for the
attention of the Human Resources Department. The notice shall state the election
to exercise the Option, the number of Common Shares for which it is being
exercised, and be signed by the person exercising the Option. If the person
exercising the Option is not Employee, he or she shall enclose with the notice
appropriate proof of his or her right to exercise the Option. The date of
exercise of the Option shall be the date that the written notice of exercise
with appropriate payment under the following subsection (b) is actually received
by the Human Resources Department of CNT.
(b) Notice of exercise of the Option shall be accompanied by either: (i)
payment (by certified or cashier's check payable to the order of CNT) of the
purchase price of the Common Shares being purchased; or (ii) if so permitted by
the Committee, certificates for unencumbered Common Shares having an aggregate
Fair Market Value (as defined in the Plan) on the date of exercise equal to the
purchase price of the Common Shares to be purchased; or (iii) if so permitted by
the Committee, a combination of cash and such unencumbered Common Shares. The
purchaser shall endorse all certificates delivered to CNT under the foregoing
subsections (b)(ii) or (iii) in blank and represent and warrant in writing that
he or she is the owner of the shares so delivered free and clear of all liens,
security interests, and other restrictions or encumbrances.
(c) As soon as practicable after receipt of the purchase price provided for
above (and any payment required under Section 12), CNT shall deliver to the
person exercising the Option, in the name of Employee (or his or her estate or
heirs, as the case may be) a certificate or certificates representing the Common
Shares being purchased. CNT shall pay all original issue or transfer taxes, if
any, with respect to the issue of the Common Shares to the person exercising the
Option and all fees and expenses necessarily incurred by CNT in connection with
the exercise of the Option. All Common Shares issued upon exercise of the Option
shall be fully paid and nonassessable. Notwithstanding anything in this
Agreement to the contrary, CNT shall not be required, upon exercise of the
Option or any part thereof, to issue or deliver any Common Shares unless such
issuance has been registered under federal and applicable state securities laws
or an exemption therefrom is available.
6. EXERCISABILITY OF OPTION AFTER TERMINATION OF EMPLOYMENT. (a) During the
lifetime of Employee, the Option may be exercised only while Employee is an
employee of CNT or an Affiliate and only if Employee has been continuously so
employed since the date of this Agreement, except that:
(i) If Employee has been continuously employed by CNT (or an
Affiliate) for at least 12 full calendar months following the date of
this Agreement, Employee may exercise the Option within 90 days after
termination of Employee's employment, but only to the extent that the
Option was exercisable immediately prior to Employee's termination of
employment; and
(ii) If Employee is disabled (within the meaning of Section
22(e)(3) of the Code) while employed, Employee (or his or her legal
representative) may exercise the Option within one year after the
termination of Employee's employment.
(b) In the event of Employee's death while employed by CNT or an Affiliate,
or within 90 days after his or her termination of employment, the person
designated by Employee as his or her beneficiary under this Agreement on a form
prescribed by and filed with the Committee, the legal representative of
Employee's estate, or the person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option within one year after the
death of Employee.
3
<PAGE>
(c) Neither the transfer of Employee between CNT and any Affiliate nor a
leave of absence granted to Employee and approved by the Committee shall be
deemed a termination of employment.
7. ACCELERATION OF OPTION ON DISABILITY OR DEATH. If Section 6(a)(ii) or
6(b) of this Agreement is applicable, the Option, whether or not previously
exercisable, shall become immediately exercisable in full.
8. LIMITATION ON TRANSFER. During the lifetime of Employee, only Employee
or his or her guardian or legal representative may exercise the Option. Employee
may not assign or transfer the Option otherwise than by will, the laws of
descent and distribution, or under Section 17 of the Plan, and the Option shall
not be subject to pledge, attachment, or similar process. Any attempt to assign,
transfer, pledge, or otherwise dispose of the Option contrary to the provisions
of this Agreement, and the levy of any attachment or similar process upon the
Option, shall be null and void.
9. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. Employee shall have none of the
rights of a shareholder of CNT with respect to any share subject to the Option
until the share is actually issued to him or her upon exercise of the Option.
10. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits
received by Employee under this Agreement shall not be deemed a part of
Employee's regular, recurring compensation for purposes of the termination,
indemnity, or severance pay law of any country 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 CNT (or an Affiliate
of CNT) unless expressly so provided by such other plan, contract, or
arrangement, or unless the Committee determines that the Option, or a portion
thereof, should be included to accurately recognize that the Option has been
made in lieu of a portion of competitive cash compensation, if such is the case.
11. CHANGES IN CAPITALIZATION; FUNDAMENTAL CHANGE. (a) The Committee may in
its sole discretion make appropriate adjustments in the number and types of
shares subject to the Option and in the Purchase Price Per Share to give effect
to any adjustments made in the number or types of shares of CNT through a
dissolution or liquidation of CNT, a sale of substantially all of the assets of
CNT, a merger or consolidation of CNT with or into any other corporation
(regardless of whether CNT is the surviving corporation), a statutory share
exchange involving capital stock of CNT (each of the foregoing, a "Fundamental
Change"), a recapitalization, a reclassification, a stock dividend, a stock
split, a stock combination, or other relevant change.
(b) In the event of a proposed Fundamental Change: (i) involving a merger,
consolidation, or statutory share exchange, unless appropriate provision is made
for the protection of the Option 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 CNT or such
surviving corporation, to be issuable upon the exercise of options in lieu of
the Option and Common Shares, or (ii) involving the dissolution or liquidation
of CNT, the Committee shall provide written notice to Employee at least 20 days
prior to the occurrence of the Fundamental Change that the 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 Employee
(or the person then entitled to exercise the Option), within 10 days after the
Fundamental Change, of cash equal to the amount, if any, for each Common Share
covered by the canceled Option, by which the Fair Market Value, as defined in
this Section 11(b), per Common Share
4
<PAGE>
exceeds the exercise price per Common Share of the Option. At the time of the
notice provided for in the preceding sentence, the Option shall immediately
become exercisable in full and Employee (or the person then entitled to exercise
the 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
Common Shares covered by the Option. In the event of a declaration under this
Section 11(b), if the Option shall not have been exercised prior to the
Fundamental Change, it shall be canceled at the time of, or immediately prior
to, the Fundamental Change, as provided in the notice. Notwithstanding the
foregoing, Employee shall not be entitled to the payment provided for in this
Section 11(b) if the Option shall have expired. For purposes of this Section
11(b) only, "Fair Market Value" per Common 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 Common Share by the shareholders of CNT upon
the occurrence of the Fundamental Change, notwithstanding anything to the
contrary in the Plan or this Agreement.
12. TAX WITHHOLDING. CNT or an Affiliate may be obligated to withhold
federal and state income taxes and social security or other taxes upon
Employee's exercise of the Option. If CNT or an Affiliate is required to
withhold such taxes, Employee will promptly pay in cash upon demand to CNT, or
the Affiliate having such obligation; such amounts as shall be necessary to
satisfy such obligation, provided, however, that in lieu of all or any part of
such a cash payment, the Committee may, but shall not be required to, permit
Employee 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 Employee's
full FICA and federal, state, and local income tax with respect to income
arising from the exercise of the Option, through a reduction of the number of
Common Shares delivered upon exercise or through a subsequent return to CNT of
shares delivered upon exercise, in each case valued in the same manner as used
in computing the withholding taxes under the applicable laws. Further, such
elections may be subject to the limitations of the Exchange Act, as specified in
Section 11 of the Plan.
13. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations
made by the Committee with regard to any question arising under this Agreement
or the Plan shall be binding and conclusive upon CNT and Employee. In the event
that there is any inconsistency between the provisions of this Agreement and the
Plan, the provisions of the Plan shall govern.
14. NO RIGHT TO EMPLOYMENT. This Agreement shall not give Employee a right
to continued employment with CNT or any Affiliate, and CNT or any Affiliate
employing Employee may terminate his or her employment and otherwise deal with
Employee without regard to the effect it may have upon him or her under this
Agreement.
15. GENERAL. CNT shall at all times during the term of this Option reserve
and keep available such number of Common Shares as will be sufficient to satisfy
the requirements of this Option Agreement. A copy of the Plan is available to
Employee from CNT upon request. Unless the context otherwise dictates,
capitalized terms that are not defined in this Agreement have the meaning set
forth in the Plan from time to time. This Agreement shall be binding in all
respects on the Employee's heirs, representatives, successors and assigns. This
Agreement is entered into under the laws of the State of Minnesota and shall be
construed and interpreted thereunder.
5
<PAGE>
IN WITNESS WHEREOF, Employee and CNT have executed this Agreement and it is
effective as of the date of the grant of the Option.
-----------------------------------
Employee
COMPUTER NETWORK TECHNOLOGY CORPORATION
By:
--------------------------------
Its
-----------------------------
6
<PAGE>
EXHIBIT 10R-2
COMPUTER NETWORK TECHNOLOGY CORPORATION
1992 STOCK AWARD PLAN
(as amended and restated through May 1999)
Non-Qualified Stock Option Agreement
================================================================================
Name of Employee: Martin Hahn
- ------------------------------------------ -------------------------------------
No. of Shares Covered: 105,429 Date of Grant: May 13, 1999
- ------------------------------------------ -------------------------------------
Exercise Price Per Share: 21.875 Expiration Date: May 12, 2009
- ------------------------------------------ -------------------------------------
Exercise Schedule (Cumulative):
No. of Shares
Date of As to Which Option
Exercisability* Becomes Exercisable
--------------- -------------------
May 13, 2005 105,429
* See Section 4 below regarding acceleration of Date of Exercisability
================================================================================
This is a NON-QUALIFIED STOCK OPTION AGREEMENT between Computer Network
Technology Corporation, a Minnesota corporation ("CNT"), and the employee of CNT
or an Affiliate of CNT listed above (the "Employee").
WHEREAS, CNT desires to carry out the purposes of its 1992 Stock Award
Plan (as amended and restated through May 1999) (the "Plan") by affording
Employee an opportunity to purchase shares of Common Stock of CNT, par value
$.01 per share (the "Common Shares"), in accordance with the terms set forth in
this Agreement.
NOW, THEREFORE, CNT and Employee agree as follows:
1. GRANT OF OPTION. Subject to the terms of the Plan and this
Agreement, CNT hereby grants to Employee the right and option (the "Option") to
purchase the number of Common Shares specified at the beginning of this
Agreement. The Option is not intended to be an "incentive stock option" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), but instead is intended to be a non-qualified stock option.
2. PURCHASE PRICE. The purchase price of each of the Common Shares
subject to the Option shall be the Exercise Price Per Share specified at the
beginning of this Agreement, which equals 100% of the Fair Market Value (as
defined in the Plan) per Common Share on the Date of Grant.
1
<PAGE>
3. OPTION EXERCISE PERIOD. (a) Subject to the provisions of Sections
6(a), 6(b), and 7, the Option shall become exercisable as to the number of
shares and on the dates specified in the exercise schedule at the beginning of
this Agreement and in Section 4. The exercise schedule shall be cumulative,
which means that to the extent the Option has not already been exercised and has
not expired, terminated, or been canceled, Employee may at any time and from
time to time purchase all or any portion of the Common Shares then purchasable
under the exercise schedule.
(b) The Option and all rights to purchase shares thereunder
shall cease on the earliest of: (i) The Expiration Date specified at the
beginning of this Agreement (which date is not more than 10 years after the date
of this Agreement); or (ii) The expiration of the period after Employee's
termination of employment within which the Option is exercisable as specified in
Section 6(a) or 6(b), whichever is applicable.
(c) Notwithstanding any other provision of this Agreement, no
one may exercise the Option, in whole or in part, after its Expiration Date.
4. ACCELERATION OF DATE OF EXERCISABILITY. (a) Except as provided in
Section 7 the Option shall not become exercisable before the first anniversary
of the Date of Grant. If the criteria of the following subsections (b) or (c)
are met before the first anniversary of the Date of Grant, exercisability of the
Option shall be deferred until the first anniversary of the Date of Grant.
(b) Subject to the provisions of Section 4(a), the Option
shall become exercisable with respect to 50% of the Common Shares subject to
Option when the Enterprise Integration Division of CNT achieves revenue and
operating income (weighted 2 to 1 in favor of revenue as shown in the attached
exhibit to this Agreement) of at least $125 million for a fiscal year, as
determined by the Stock Plans Committee of the Board of Directors of CNT (the
"Committee") in its reasonable discretion based on the audited financial
statements of CNT. The date of exercisability for such portion of the Option
shall be the date that the Committee certifies in writing to Employee that the
criteria has been achieved, which certification (if the criteria shall have been
met for a fiscal year) shall be made within sixty days of the date that the
audit of CNT for that fiscal year has been released.
(c) Subject to the provisions of Section 4(a), the Option
shall become exercisable with respect to 100% of the Common Shares subject to
Option when the Enterprise Integration Division of CNT achieves revenue and
operating income (weighted 2 to 1 in favor of revenue as shown in the attached
exhibit to this Agreement) of at least $180 million for a fiscal year, as
determined by the Committee in its reasonable discretion based on the audited
financial statements of CNT. The date of exercisability for such portion of the
Option shall be the date that the Committee certifies in writing to Employee
that the criteria has been achieved, which certification (if the criteria shall
have been met for a fiscal year) shall be made within sixty days of the date
that the audit of CNT for that fiscal year has been released.
(d) If not sooner vested pursuant to the foregoing provisions,
the Option shall become exercisable on the Date of Exercisability specified at
the beginning of this Agreement.
5. MANNER OF EXERCISING OPTION. (a) Subject to the terms and conditions
of this Agreement, the Option may be exercised by delivering or mailing written
notice of exercise to CNT at its principal executive office, marked for the
attention of the Human Resources Department. The notice shall state the election
to exercise the Option, the number of Common Shares for which it is being
exercised, and be signed by the person exercising the Option. If the person
exercising the Option is not Employee, he
2
<PAGE>
or she shall enclose with the notice appropriate proof of his or her right to
exercise the Option. The date of exercise of the Option shall be the date that
the written notice of exercise with appropriate payment under the following
subsection (b) is actually received by the Human Resources Department of CNT.
(b) Notice of exercise of the Option shall be accompanied by
either: (i) payment (by certified or cashier's check payable to the order of
CNT) of the purchase price of the Common Shares being purchased; or (ii) if so
permitted by the Committee, certificates for unencumbered Common Shares having
an aggregate Fair Market Value (as defined in the Plan) on the date of exercise
equal to the purchase price of the Common Shares to be purchased; or (iii) if so
permitted by the Committee, a combination of cash and such unencumbered Common
Shares. The purchaser shall endorse all certificates delivered to CNT under the
foregoing subsections (b)(ii) or (iii) in blank and represent and warrant in
writing that he or she is the owner of the shares so delivered free and clear of
all liens, security interests, and other restrictions or encumbrances.
(c) As soon as practicable after receipt of the purchase price
provided for above (and any payment required under Section 12), CNT shall
deliver to the person exercising the Option, in the name of Employee (or his or
her estate or heirs, as the case may be) a certificate or certificates
representing the Common Shares being purchased. CNT shall pay all original issue
or transfer taxes, if any, with respect to the issue of the Common Shares to the
person exercising the Option and all fees and expenses necessarily incurred by
CNT in connection with the exercise of the Option. All Common Shares issued upon
exercise of the Option shall be fully paid and nonassessable. Notwithstanding
anything in this Agreement to the contrary, CNT shall not be required, upon
exercise of the Option or any part thereof, to issue or deliver any Common
Shares unless such issuance has been registered under federal and applicable
state securities laws or an exemption therefrom is available.
6. EXERCISABILITY OF OPTION AFTER TERMINATION OF EMPLOYMENT. (a) During
the lifetime of Employee, the Option may be exercised only while Employee is an
employee of CNT or an Affiliate and only if Employee has been continuously so
employed since the date of this Agreement, except that:
(i) If Employee has been continuously employed by CNT (or an
Affiliate) for at least 12 full calendar months following the date of
this Agreement, Employee may exercise the Option within 90 days after
termination of Employee's employment, but only to the extent that the
Option was exercisable immediately prior to Employee's termination of
employment; and
(ii) If Employee is disabled (within the meaning of Section
22(e)(3) of the Code) while employed, Employee (or his or her legal
representative) may exercise the Option within one year after the
termination of Employee's employment.
(b) In the event of Employee's death while employed by CNT or
an Affiliate, or within 90 days after his or her termination of employment, the
person designated by Employee as his or her beneficiary under this Agreement on
a form prescribed by and filed with the Committee, the legal representative of
Employee's estate, or the person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option within one year after the
death of Employee.
(c) Neither the transfer of Employee between CNT and any
Affiliate nor a leave of absence granted to Employee and approved by the
Committee shall be deemed a termination of employment.
3
<PAGE>
7. ACCELERATION OF OPTION ON DISABILITY OR DEATH. If Section 6(a)(ii)
or 6(b) of this Agreement is applicable, the Option, whether or not previously
exercisable, shall become immediately exercisable in full.
8. LIMITATION ON TRANSFER. During the lifetime of Employee, only
Employee or his or her guardian or legal representative may exercise the Option.
Employee may not assign or transfer the Option otherwise than by will, the laws
of descent and distribution, or under Section 17 of the Plan, and the Option
shall not be subject to pledge, attachment, or similar process. Any attempt to
assign, transfer, pledge, or otherwise dispose of the Option contrary to the
provisions of this Agreement, and the levy of any attachment or similar process
upon the Option, shall be null and void.
9. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. Employee shall have none of
the rights of a shareholder of CNT with respect to any share subject to the
Option until the share is actually issued to him or her upon exercise of the
Option.
10. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other
benefits received by Employee under this Agreement shall not be deemed a part of
Employee's regular, recurring compensation for purposes of the termination,
indemnity, or severance pay law of any country 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 CNT (or an Affiliate
of CNT) unless expressly so provided by such other plan, contract, or
arrangement, or unless the Committee determines that the Option, or a portion
thereof, should be included to accurately recognize that the Option has been
made in lieu of a portion of competitive cash compensation, if such is the case.
11. CHANGES IN CAPITALIZATION; FUNDAMENTAL CHANGE. (a) The Committee
may in its sole discretion make appropriate adjustments in the number and types
of shares subject to the Option and in the Purchase Price Per Share to give
effect to any adjustments made in the number or types of shares of CNT through a
dissolution or liquidation of CNT, a sale of substantially all of the assets of
CNT, a merger or consolidation of CNT with or into any other corporation
(regardless of whether CNT is the surviving corporation), a statutory share
exchange involving capital stock of CNT (each of the foregoing, a "Fundamental
Change"), a recapitalization, a reclassification, a stock dividend, a stock
split, a stock combination, or other relevant change.
(b) In the event of a proposed Fundamental Change: (i) involving a
merger, consolidation, or statutory share exchange, unless appropriate provision
is made for the protection of the Option 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 CNT or such
surviving corporation, to be issuable upon the exercise of options in lieu of
the Option and Common Shares, or (ii) involving the dissolution or liquidation
of CNT, the Committee shall provide written notice to Employee at least 20 days
prior to the occurrence of the Fundamental Change that the 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 Employee
(or the person then entitled to exercise the Option), within 10 days after the
Fundamental Change, of cash equal to the amount, if any, for each Common Share
covered by the canceled Option, by which the Fair Market Value, as defined in
this Section 11(b), per Common Share exceeds the exercise price per Common Share
of the Option. At the time of the notice provided for in the preceding sentence,
the Option shall immediately become exercisable in full and Employee (or the
person then entitled to exercise the 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 Common Shares covered by the Option. In the event
of a declaration under this Section 11(b), if the Option shall not have been
4
<PAGE>
exercised prior to the Fundamental Change, it shall be canceled at the time of,
or immediately prior to, the Fundamental Change, as provided in the notice.
Notwithstanding the foregoing, Employee shall not be entitled to the payment
provided for in this Section 11(b) if the Option shall have expired. For
purposes of this Section 11(b) only, "Fair Market Value" per Common 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 Common Share by the
shareholders of CNT upon the occurrence of the Fundamental Change,
notwithstanding anything to the contrary in the Plan or this Agreement.
12. TAX WITHHOLDING. CNT or an Affiliate may be obligated to withhold
federal and state income taxes and social security or other taxes upon
Employee's exercise of the Option. If CNT or an Affiliate is required to
withhold such taxes, Employee will promptly pay in cash upon demand to CNT, or
the Affiliate having such obligation; such amounts as shall be necessary to
satisfy such obligation, provided, however, that in lieu of all or any part of
such a cash payment, the Committee may, but shall not be required to, permit
Employee 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 Employee's
full FICA and federal, state, and local income tax with respect to income
arising from the exercise of the Option, through a reduction of the number of
Common Shares delivered upon exercise or through a subsequent return to CNT of
shares delivered upon exercise, in each case valued in the same manner as used
in computing the withholding taxes under the applicable laws. Further, such
elections may be subject to the limitations of the Exchange Act, as specified in
Section 11 of the Plan.
13. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations
made by the Committee with regard to any question arising under this Agreement
or the Plan shall be binding and conclusive upon CNT and Employee. In the event
that there is any inconsistency between the provisions of this Agreement and the
Plan, the provisions of the Plan shall govern.
14. NO RIGHT TO EMPLOYMENT. This Agreement shall not give Employee a
right to continued employment with CNT or any Affiliate, and CNT or any
Affiliate employing Employee may terminate his or her employment and otherwise
deal with Employee without regard to the effect it may have upon him or her
under this Agreement.
15. GENERAL. CNT shall at all times during the term of this Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement. A copy of the Plan is
available to Employee from CNT upon request. Unless the context otherwise
dictates, capitalized terms that are not defined in this Agreement have the
meaning set forth in the Plan from time to time. This Agreement shall be binding
in all respects on the Employee's heirs, representatives, successors and
assigns. This Agreement is entered into under the laws of the State of Minnesota
and shall be construed and interpreted thereunder.
5
<PAGE>
IN WITNESS WHEREOF, Employee and CNT have executed this Agreement and
it is effective as of the date of the grant of the Option.
------------------------------------------
Employee
COMPUTER NETWORK TECHNOLOGY CORPORATION
By:
---------------------------------------
Its:
----------------------------------
6
<PAGE>
EXHIBIT 10S-1
COMPUTER NETWORK TECHNOLOGY CORPORATION
1992 STOCK AWARD PLAN
(as amended and restated through May 1999)
Incentive Stock Option Agreement
================================================================================
Name of Employee:
==================================== ===========================================
No. of Shares Covered: Date of Grant:
==================================== ===========================================
Exercise Price Per Share: $ Expiration Date:
================================================================================
Exercise Schedule (Cumulative):
No. of Shares
Date of As to Which Option
Exercisability* Becomes Exercisable
--------------- -------------------
* See Section 4 below regarding acceleration of Date of Exercisability
================================================================================
This is an INCENTIVE STOCK OPTION AGREEMENT between Computer Network
Technology Corporation, a Minnesota corporation ("CNT"), and the employee of CNT
or an Affiliate of CNT listed above (the "Employee").
WHEREAS, CNT desires to carry out the purposes of its 1992 Stock Award Plan
(as amended and restated through May 1999) (the "Plan") by affording Employee an
opportunity to purchase shares of Common Stock of CNT, par value $.01 per share
(the "Common Shares"), in accordance with the terms set forth in this Agreement.
NOW, THEREFORE, CNT and Employee agree as follows:
1. GRANT OF OPTION. Subject to the terms of the Plan and this Agreement,
CNT hereby grants to Employee the right and option (the "Option") to purchase
the number of Common Shares specified at the beginning of this Agreement. The
Option is intended to be an "incentive stock option" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). See
Section 9 below for a limitation on incentive stock option treatment.
2. PURCHASE PRICE. The purchase price of each of the Common Shares subject
to the Option shall be the Exercise Price Per Share specified at the beginning
of this Agreement, which equals 100% of the Fair Market Value (as defined in the
Plan) per Common Share on the Date of Grant.
1
<PAGE>
3. OPTION EXERCISE PERIOD. (a) Subject to the provisions of Sections 6(a),
6(b), and 7, the Option shall become exercisable as to the number of shares and
on the dates specified in the exercise schedule at the beginning of this
Agreement and in Section 4. The exercise schedule shall be cumulative, which
means that to the extent the Option has not already been exercised and has not
expired, terminated, or been canceled, Employee may at any time and from time to
time purchase all or any portion of the Common Shares then purchasable under the
exercise schedule.
(b) The Option and all rights to purchase shares thereunder shall cease on
the earliest of: (i) The Expiration Date specified at the beginning of this
Agreement (which date is not more than 10 years after the date of this
Agreement); or (ii) The expiration of the period after Employee's termination of
employment within which the Option is exercisable as specified in Section 6(a)
or 6(b), whichever is applicable.
(c) Notwithstanding any other provision of this Agreement, no one may
exercise the Option, in whole or in part, after its Expiration Date.
4. ACCELERATION OF DATE OF EXERCISABILITY. (a) Except as provided in
Section 7 the Option shall not become exercisable before the first anniversary
of the Date of Grant. If the criteria of the following subsections (b) or (c)
are met before the first anniversary of the Date of Grant, exercisability of the
Option shall be deferred until the first anniversary of the Date of Grant.
(b) Subject to the provisions of Section 4(a), the Option shall become
exercisable with respect to 50% of the Common Shares subject to Option on the
day following the date that the average of the Closing Sale Price of a Common
Share for 60 consecutive trading days exceeds 150% of the Exercise Price Per
Share (specifically $ per share) specified at the beginning of this
Agreement. For purposes of this Agreement, the Closing Sale Price of a Common
Share on a trading date shall be the closing sale price of a Common Share on
that date or if no sale of Common Shares shall have occurred on that date, then
the closing sale price of a Common Share on the next preceding day on which a
sale occurred of Common Shares on the National Association of Securities
Dealers, Inc. Automated Quotations National Market System (NMS) or if the shares
are not quoted on the NMS, the price that the Stock Plans Committee of the Board
of Directors of CNT (the "Committee") determines in good faith to be the Fair
Market Value of a Common Share on that date.
(c) Subject to the provisions of Section 4(a), the Option shall become
exercisable with respect to 50% of the Common Shares subject to Option on the
day following the date that the average of the Closing Sale Price of a Common
Share for 60 consecutive trading days exceeds 200% (specifically $ per
share) of the Exercise Price Per Share specified at the beginning of this
Agreement. For purposes of this Agreement, the Closing Sale Price of a Common
Share on a trading date shall be the closing sale price of a Common Share on
that date or if no sale of Common Shares shall have occurred on that date, then
the closing sale price of a Common Share on the next preceding day on which a
sale occurred of Common Shares on the National Association of Securities
Dealers, Inc. Automated Quotations National Market System (NMS) or if the shares
are not quoted on the NMS, the price that the Committee determines in good faith
to be the Fair Market Value of a Common Share on that date.
(d) If not sooner vested pursuant to the foregoing provisions, the Option
shall become exercisable on the Date of Exercisability specified at the
beginning of this Agreement.
2
<PAGE>
5. MANNER OF EXERCISING OPTION. (a) Subject to the terms and conditions of
this Agreement, the Option may be exercised by delivering or mailing written
notice of exercise to CNT at its principal executive office, marked for the
attention of the Human Resources Department. The notice shall state the election
to exercise the Option, the number of Common Shares for which it is being
exercised, and be signed by the person exercising the Option. If the person
exercising the Option is not Employee, he or she shall enclose with the notice
appropriate proof of his or her right to exercise the Option. The date of
exercise of the Option shall be the date that the written notice of exercise
with appropriate payment under the following subsection (b) is actually received
by the Human Resources Department of CNT.
(b) Notice of exercise of the Option shall be accompanied by either: (i)
payment (by certified or cashier's check payable to the order of CNT) of the
purchase price of the Common Shares being purchased; or (ii) if so permitted by
the Committee, certificates for unencumbered Common Shares having an aggregate
Fair Market Value (as defined in the Plan) on the date of exercise equal to the
purchase price of the Common Shares to be purchased; or (iii) if so permitted by
the Committee, a combination of cash and such unencumbered Common Shares. The
purchaser shall endorse all certificates delivered to CNT under the foregoing
subsections (b)(ii) or (iii) in blank and represent and warrant in writing that
he or she is the owner of the shares so delivered free and clear of all liens,
security interests, and other restrictions or encumbrances.
(c) As soon as practicable after receipt of the purchase price provided for
above (and any payment required under Section 14), CNT shall deliver to the
person exercising the Option, in the name of Employee (or his or her estate or
heirs, as the case may be) a certificate or certificates representing the Common
Shares being purchased. CNT shall pay all original issue or transfer taxes, if
any, with respect to the issue of the Common Shares to the person exercising the
Option and all fees and expenses necessarily incurred by CNT in connection with
the exercise of the Option. All Common Shares issued upon exercise of the Option
shall be fully paid and nonassessable. Notwithstanding anything in this
Agreement to the contrary, CNT shall not be required, upon exercise of the
Option or any part thereof, to issue or deliver any Common Shares unless such
issuance has been registered under federal and applicable state securities laws
or an exemption therefrom is available.
6. EXERCISABILITY OF OPTION AFTER TERMINATION OF EMPLOYMENT. (a) During the
lifetime of Employee, the Option may be exercised only while Employee is an
employee of CNT or an Affiliate and only if Employee has been continuously so
employed since the date of this Agreement, except that:
(i) If Employee has been continuously employed by CNT (or an
Affiliate) for at least 12 full calendar months following the date of
this Agreement, Employee may exercise the Option within 90 days after
termination of Employee's employment, but only to the extent that the
Option was exercisable immediately prior to Employee's termination of
employment; and
(ii) If Employee is disabled (within the meaning of Section
22(e)(3) of the Code) while employed, Employee (or his or her legal
representative) may exercise the Option within one year after the
termination of Employee's employment.
(b) In the event of Employee's death while employed by CNT or an Affiliate,
or within 90 days after his or her termination of employment, the person
designated by Employee as his or her beneficiary under this Agreement on a form
prescribed by and filed with the Committee, the legal representative of
Employee's estate, or the person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option within one year after the
death of Employee.
3
<PAGE>
(c) Neither the transfer of Employee between CNT and any Affiliate nor a
leave of absence granted to Employee and approved by the Committee shall be
deemed a termination of employment.
7. ACCELERATION OF OPTION ON DISABILITY OR DEATH. If Section 6(a)(ii) or
6(b) of this Agreement is applicable, the Option, whether or not previously
exercisable, shall become immediately exercisable in full.
8. LIMITATION ON TRANSFER. During the lifetime of Employee, only Employee
or his or her guardian or legal representative may exercise the Option. Employee
may not assign or transfer the Option otherwise than by will, the laws of
descent and distribution, or under Section 17 of the Plan, and the Option shall
not be subject to pledge, attachment, or similar process. Any attempt to assign,
transfer, pledge, or otherwise dispose of the Option contrary to the provisions
of this Agreement, and the levy of any attachment or similar process upon the
Option, shall be null and void.
9. LIMITATION ON INCENTIVE STOCK OPTION TREATMENT. Although the Option is
intended to be an incentive stock option within the meaning of Section 422 of
the Code, the Option must meet the requirements of Section 422 to qualify for
that treatment. One requirement for incentive stock option treatment is that the
number of shares first exercisable in any one year, considering all incentive
stock options of Employee from CNT and its Affiliates, cannot exceed $100,000 in
value. This limitation is applied by taking options into account in the order in
which they were granted. CNT will monitor and apply this limitation at the time
that an Option is exercised. CNT will notify Employee if any of the Options
exercised are non-qualified options rather than incentive stock options because
of this limitation.
10. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. Employee shall have none of the
rights of a shareholder of CNT with respect to any share subject to the Option
until the share is actually issued to him or her upon exercise of the Option.
11. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other benefits
received by Employee under this Agreement shall not be deemed a part of
Employee's regular, recurring compensation for purposes of the termination,
indemnity, or severance pay law of any country 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 CNT (or an Affiliate
of CNT) unless expressly so provided by such other plan, contract, or
arrangement, or unless the Committee determines that the Option, or a portion
thereof, should be included to accurately recognize that the Option has been
made in lieu of a portion of competitive cash compensation, if such is the case.
12. CHANGES IN CAPITALIZATION; FUNDAMENTAL CHANGE. (a) The Committee may in
its sole discretion make appropriate adjustments in the number and types of
shares subject to the Option and in the Purchase Price Per Share to give effect
to any adjustments made in the number or types of shares of CNT through a
dissolution or liquidation of CNT, a sale of substantially all of the assets of
CNT, a merger or consolidation of CNT with or into any other corporation
(regardless of whether CNT is the surviving corporation), a statutory share
exchange involving capital stock of CNT (each of the foregoing, a "Fundamental
Change"), a recapitalization, a reclassification, a stock dividend, a stock
split, a stock combination, or other relevant change.
(b) In the event of a proposed Fundamental Change: (i) involving a merger,
consolidation, or statutory share exchange, unless appropriate provision is made
for the protection of the Option by the
4
<PAGE>
substitution of options and appropriate voting common stock of the corporation
surviving any such merger or consolidation or, if appropriate, the parent
corporation of CNT or such surviving corporation, to be issuable upon the
exercise of options in lieu of the Option and Common Shares, or (ii) involving
the dissolution or liquidation of CNT, the Committee shall provide written
notice to Employee at least 20 days prior to the occurrence of the Fundamental
Change that the 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 Employee (or the person then entitled to exercise the
Option), within 10 days after the Fundamental Change, of cash equal to the
amount, if any, for each Common Share covered by the canceled Option, by which
the Fair Market Value, as defined in this Section 12(b), per Common Share
exceeds the exercise price per Common Share of the Option. At the time of the
notice provided for in the preceding sentence, the Option shall immediately
become exercisable in full and Employee (or the person then entitled to exercise
the 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
Common Shares covered by the Option. In the event of a declaration under this
Section 12(b), if the Option shall not have been exercised prior to the
Fundamental Change, it shall be canceled at the time of, or immediately prior
to, the Fundamental Change, as provided in the notice. Notwithstanding the
foregoing, Employee shall not be entitled to the payment provided for in this
Section 12(b) if the Option shall have expired. For purposes of this Section
12(b) only, "Fair Market Value" per Common 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 Common Share by the shareholders of CNT upon
the occurrence of the Fundamental Change, notwithstanding anything to the
contrary in the Plan or this Agreement.
13. DISQUALIFYING TRANSFERS OF SHARES. Employee acknowledges that if any
stock received upon the exercise of any portion of the Option is sold within two
years from the effective date of the grant of the Option or within one year from
the effective date of exercise of the Option, or if certain other requirements
of the Code are not satisfied, including the limitation discussed in Section 9,
such stock will be deemed under the Code not to have been acquired by Employee
pursuant to an "incentive stock option" and that CNT shall not be liable to the
Employee in the event the Option for any reason is deemed not to be an incentive
stock option within the meaning of the Code.
14. TAX WITHHOLDING. CNT or an Affiliate may be obligated to withhold
federal and state income taxes and social security or other taxes upon
Employee's exercise of the Option. If CNT or an Affiliate is required to
withhold such taxes, Employee will promptly pay in cash upon demand to CNT, or
the Affiliate having such obligation; such amounts as shall be necessary to
satisfy such obligation, provided, however, that in lieu of all or any part of
such a cash payment, the Committee may, but shall not be required to, permit
Employee 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 Employee's
full FICA and federal, state, and local income tax with respect to income
arising from the exercise of the Option, through a reduction of the number of
Common Shares delivered upon exercise or through a subsequent return to CNT of
shares delivered upon exercise, in each case valued in the same manner as used
in computing the withholding taxes under the applicable laws. Further, such
elections may be subject to the limitations of the Exchange Act, as specified in
Section 11 of the Plan.
15. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations
made by the Committee with regard to any question arising under this Agreement
or the Plan shall be binding and conclusive upon CNT and Employee. In the event
that there is any inconsistency between the provisions of this Agreement and the
Plan, the provisions of the Plan shall govern.
16. NO RIGHT TO EMPLOYMENT. This Agreement shall not give Employee a right
to
5
<PAGE>
continued employment with CNT or any Affiliate, and CNT or any Affiliate
employing Employee may terminate his or her employment and otherwise deal with
Employee without regard to the effect it may have upon him or her under this
Agreement.
17. GENERAL. CNT shall at all times during the term of this Option reserve
and keep available such number of Common Shares as will be sufficient to satisfy
the requirements of this Option Agreement. A copy of the Plan is available to
Employee from CNT upon request. Unless the context otherwise dictates,
capitalized terms that are not defined in this Agreement have the meaning set
forth in the Plan from time to time. This Agreement shall be binding in all
respects on the Employee's heirs, representatives, successors and assigns. This
Agreement is entered into under the laws of the State of Minnesota and shall be
construed and interpreted thereunder.
IN WITNESS WHEREOF, Employee and CNT have executed this Agreement and it is
effective as of the date of the grant of the Option.
-----------------------------------
Employee
COMPUTER NETWORK TECHNOLOGY CORPORATION
By:
--------------------------------
Its:
----------------------------
6
<PAGE>
EXHIBIT 10S-2
COMPUTER NETWORK TECHNOLOGY CORPORATION
1992 STOCK AWARD PLAN
(as amended and restated through May 1999)
Incentive Stock Option Agreement
================================================================================
Name of Employee: Martin Hahn
- ------------------------------------------ -------------------------------------
No. of Shares Covered: 4,571 Date of Grant: May 13, 1999
- ------------------------------------------ -------------------------------------
Exercise Price Per Share: $21.875 Expiration Date: May 12, 2009
- ------------------------------------------ -------------------------------------
Exercise Schedule (Cumulative):
No. of Shares
Date of As to Which Option
Exercisability* Becomes Exercisable
--------------- -------------------
May 13, 2005 4,571
* See Section 4 below regarding acceleration of Date of Exercisability
================================================================================
This is an INCENTIVE STOCK OPTION AGREEMENT between Computer Network
Technology Corporation, a Minnesota corporation ("CNT"), and the employee of CNT
or an Affiliate of CNT listed above (the "Employee").
WHEREAS, CNT desires to carry out the purposes of its 1992 Stock Award
Plan (as amended and restated through May 1999) (the "Plan") by affording
Employee an opportunity to purchase shares of Common Stock of CNT, par value
$.01 per share (the "Common Shares"), in accordance with the terms set forth in
this Agreement.
NOW, THEREFORE, CNT and Employee agree as follows:
1. GRANT OF OPTION. Subject to the terms of the Plan and this
Agreement, CNT hereby grants to Employee the right and option (the "Option") to
purchase the number of Common Shares specified at the beginning of this
Agreement. The Option is intended to be an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). See Section 9 below for a limitation on incentive stock option
treatment.
2. PURCHASE PRICE. The purchase price of each of the Common Shares
subject to the Option shall be the Exercise Price Per Share specified at the
beginning of this Agreement, which equals 100% of the Fair Market Value (as
defined in the Plan) per Common Share on the Date of Grant.
1
<PAGE>
3. OPTION EXERCISE PERIOD. (a) Subject to the provisions of Sections
6(a), 6(b), and 7, the Option shall become exercisable as to the number of
shares and on the dates specified in the exercise schedule at the beginning of
this Agreement and in Section 4. The exercise schedule shall be cumulative,
which means that to the extent the Option has not already been exercised and has
not expired, terminated, or been canceled, Employee may at any time and from
time to time purchase all or any portion of the Common Shares then purchasable
under the exercise schedule.
(b) The Option and all rights to purchase shares thereunder
shall cease on the earliest of: (i) The Expiration Date specified at the
beginning of this Agreement (which date is not more than 10 years after the date
of this Agreement); or (ii) The expiration of the period after Employee's
termination of employment within which the Option is exercisable as specified in
Section 6(a) or 6(b), whichever is applicable.
(c) Notwithstanding any other provision of this Agreement, no
one may exercise the Option, in whole or in part, after its Expiration Date.
4. ACCELERATION OF DATE OF EXERCISABILITY. (a) Except as provided in
Section 7 the Option shall not become exercisable before the first anniversary
of the Date of Grant. If the criteria of the following subsections (b) or (c)
are met before the first anniversary of the Date of Grant, exercisability of the
Option shall be deferred until the first anniversary of the Date of Grant.
(b) Subject to the provisions of Section 4(a), the Option
shall become exercisable with respect to 50% of the Common Shares subject to
Option when the Enterprise Integration Division of CNT achieves revenue and
operating income (weighted 2 to 1 in favor of revenue as shown in the attached
exhibit to this Agreement) of at least $125 million for a fiscal year, as
determined by the Stock Plans Committee of the Board of Directors of CNT (the
"Committee") in its reasonable discretion based on the audited financial
statements of CNT. The date of exercisability for such portion of the Option
shall be the date that the Committee certifies in writing to Employee that the
criteria has been achieved, which certification (if the criteria shall have been
met for a fiscal year) shall be made within sixty days of the date that the
audit of CNT for that fiscal year has been released.
(c) Subject to the provisions of Section 4(a), the Option
shall become exercisable with respect to 100% of the Common Shares subject to
Option when the Enterprise Integration Division of CNT achieves revenue and
operating income (weighted 2 to 1 in favor of revenue as shown in the attached
exhibit to this Agreement) of at least $180 million for a fiscal year, as
determined by the Committee in its reasonable discretion based on the audited
financial statements of CNT. The date of exercisability for such portion of the
Option shall be the date that the Committee certifies in writing to Employee
that the criteria has been achieved, which certification (if the criteria shall
have been met for a fiscal year) shall be made within sixty days of the date
that the audit of CNT for that fiscal year has been released.
(d) If not sooner vested pursuant to the foregoing provisions,
the Option shall become exercisable on the Date of Exercisability specified at
the beginning of this Agreement.
5. MANNER OF EXERCISING OPTION. (a) Subject to the terms and conditions
of this Agreement, the Option may be exercised by delivering or mailing written
notice of exercise to CNT at its principal executive office, marked for the
attention of the Human Resources Department. The notice shall state the election
to exercise the Option, the number of Common Shares for which it is being
exercised, and be signed by the person exercising the Option. If the person
exercising the Option is not Employee, he
2
<PAGE>
or she shall enclose with the notice appropriate proof of his or her right to
exercise the Option. The date of exercise of the Option shall be the date that
the written notice of exercise with appropriate payment under the following
subsection (b) is actually received by the Human Resources Department of CNT.
(b) Notice of exercise of the Option shall be accompanied by
either: (i) payment (by certified or cashier's check payable to the order of
CNT) of the purchase price of the Common Shares being purchased; or (ii) if so
permitted by the Committee, certificates for unencumbered Common Shares having
an aggregate Fair Market Value (as defined in the Plan) on the date of exercise
equal to the purchase price of the Common Shares to be purchased; or (iii) if so
permitted by the Committee, a combination of cash and such unencumbered Common
Shares. The purchaser shall endorse all certificates delivered to CNT under the
foregoing subsections (b)(ii) or (iii) in blank and represent and warrant in
writing that he or she is the owner of the shares so delivered free and clear of
all liens, security interests, and other restrictions or encumbrances.
(c) As soon as practicable after receipt of the purchase price
provided for above (and any payment required under Section 14), CNT shall
deliver to the person exercising the Option, in the name of Employee (or his or
her estate or heirs, as the case may be) a certificate or certificates
representing the Common Shares being purchased. CNT shall pay all original issue
or transfer taxes, if any, with respect to the issue of the Common Shares to the
person exercising the Option and all fees and expenses necessarily incurred by
CNT in connection with the exercise of the Option. All Common Shares issued upon
exercise of the Option shall be fully paid and nonassessable. Notwithstanding
anything in this Agreement to the contrary, CNT shall not be required, upon
exercise of the Option or any part thereof, to issue or deliver any Common
Shares unless such issuance has been registered under federal and applicable
state securities laws or an exemption therefrom is available.
6. EXERCISABILITY OF OPTION AFTER TERMINATION OF EMPLOYMENT. (a) During
the lifetime of Employee, the Option may be exercised only while Employee is an
employee of CNT or an Affiliate and only if Employee has been continuously so
employed since the date of this Agreement, except that:
(i) If Employee has been continuously employed by CNT (or an
Affiliate) for at least 12 full calendar months following the date of
this Agreement, Employee may exercise the Option within 90 days after
termination of Employee's employment, but only to the extent that the
Option was exercisable immediately prior to Employee's termination of
employment; and
(ii) If Employee is disabled (within the meaning of Section
22(e)(3) of the Code) while employed, Employee (or his or her legal
representative) may exercise the Option within one year after the
termination of Employee's employment.
(b) In the event of Employee's death while employed by CNT or
an Affiliate, or within 90 days after his or her termination of employment, the
person designated by Employee as his or her beneficiary under this Agreement on
a form prescribed by and filed with the Committee, the legal representative of
Employee's estate, or the person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option within one year after the
death of Employee.
(c) Neither the transfer of Employee between CNT and any
Affiliate nor a leave of absence granted to Employee and approved by the
Committee shall be deemed a termination of employment.
3
<PAGE>
7. ACCELERATION OF OPTION ON DISABILITY OR DEATH. If Section 6(a)(ii)
or 6(b) of this Agreement is applicable, the Option, whether or not previously
exercisable, shall become immediately exercisable in full.
8. LIMITATION ON TRANSFER. During the lifetime of Employee, only
Employee or his or her guardian or legal representative may exercise the Option.
Employee may not assign or transfer the Option otherwise than by will, the laws
of descent and distribution, or under Section 17 of the Plan, and the Option
shall not be subject to pledge, attachment, or similar process. Any attempt to
assign, transfer, pledge, or otherwise dispose of the Option contrary to the
provisions of this Agreement, and the levy of any attachment or similar process
upon the Option, shall be null and void.
9. LIMITATION ON INCENTIVE STOCK OPTION TREATMENT. Although the Option
is intended to be an incentive stock option within the meaning of Section 422 of
the Code, the Option must meet the requirements of Section 422 to qualify for
that treatment. One requirement for incentive stock option treatment is that the
number of shares first exercisable in any one year, considering all incentive
stock options of Employee from CNT and its Affiliates, cannot exceed $100,000 in
value. This limitation is applied by taking options into account in the order in
which they were granted. CNT will monitor and apply this limitation at the time
that an Option is exercised. CNT will notify Employee if any of the Options
exercised are non-qualified options rather than incentive stock options because
of this limitation.
10. NO SHAREHOLDER RIGHTS BEFORE EXERCISE. Employee shall have none of
the rights of a shareholder of CNT with respect to any share subject to the
Option until the share is actually issued to him or her upon exercise of the
Option.
11. OTHER BENEFIT AND COMPENSATION PROGRAMS. Payments and other
benefits received by Employee under this Agreement shall not be deemed a part of
Employee's regular, recurring compensation for purposes of the termination,
indemnity, or severance pay law of any country 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 CNT (or an Affiliate
of CNT) unless expressly so provided by such other plan, contract, or
arrangement, or unless the Committee determines that the Option, or a portion
thereof, should be included to accurately recognize that the Option has been
made in lieu of a portion of competitive cash compensation, if such is the case.
12. CHANGES IN CAPITALIZATION; FUNDAMENTAL CHANGE. (a) The Committee
may in its sole discretion make appropriate adjustments in the number and types
of shares subject to the Option and in the Purchase Price Per Share to give
effect to any adjustments made in the number or types of shares of CNT through a
dissolution or liquidation of CNT, a sale of substantially all of the assets of
CNT, a merger or consolidation of CNT with or into any other corporation
(regardless of whether CNT is the surviving corporation), a statutory share
exchange involving capital stock of CNT (each of the foregoing, a "Fundamental
Change"), a recapitalization, a reclassification, a stock dividend, a stock
split, a stock combination, or other relevant change.
(b) In the event of a proposed Fundamental Change: (i) involving a
merger, consolidation, or statutory share exchange, unless appropriate provision
is made for the protection of the Option 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 CNT or such
surviving corporation, to be issuable upon the exercise of options in lieu of
the Option and Common Shares, or (ii) involving the dissolution or liquidation
of CNT, the Committee shall provide written notice to Employee at least 20 days
prior to the occurrence of the Fundamental Change that the Option, whether or
not then exercisable, shall
4
<PAGE>
be canceled at the time of, or immediately prior to the occurrence of, the
Fundamental Change in exchange for payment to Employee (or the person then
entitled to exercise the Option), within 10 days after the Fundamental Change,
of cash equal to the amount, if any, for each Common Share covered by the
canceled Option, by which the Fair Market Value, as defined in this Section
12(b), per Common Share exceeds the exercise price per Common Share of the
Option. At the time of the notice provided for in the preceding sentence, the
Option shall immediately become exercisable in full and Employee (or the person
then entitled to exercise the 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 Common Shares covered by the Option. In the event of a
declaration under this Section 12(b), if the Option shall not have been
exercised prior to the Fundamental Change, it shall be canceled at the time of,
or immediately prior to, the Fundamental Change, as provided in the notice.
Notwithstanding the foregoing, Employee shall not be entitled to the payment
provided for in this Section 12(b) if the Option shall have expired. For
purposes of this Section 12(b) only, "Fair Market Value" per Common 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 Common Share by the
shareholders of CNT upon the occurrence of the Fundamental Change,
notwithstanding anything to the contrary in the Plan or this Agreement.
13. DISQUALIFYING TRANSFERS OF SHARES. Employee acknowledges that if
any stock received upon the exercise of any portion of the Option is sold within
two years from the effective date of the grant of the Option or within one year
from the effective date of exercise of the Option, or if certain other
requirements of the Code are not satisfied, including the limitation discussed
in Section 9, such stock will be deemed under the Code not to have been acquired
by Employee pursuant to an "incentive stock option" and that CNT shall not be
liable to the Employee in the event the Option for any reason is deemed not to
be an incentive stock option within the meaning of the Code.
14. TAX WITHHOLDING. CNT or an Affiliate may be obligated to withhold
federal and state income taxes and social security or other taxes upon
Employee's exercise of the Option. If CNT or an Affiliate is required to
withhold such taxes, Employee will promptly pay in cash upon demand to CNT, or
the Affiliate having such obligation; such amounts as shall be necessary to
satisfy such obligation, provided, however, that in lieu of all or any part of
such a cash payment, the Committee may, but shall not be required to, permit
Employee 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 Employee's
full FICA and federal, state, and local income tax with respect to income
arising from the exercise of the Option, through a reduction of the number of
Common Shares delivered upon exercise or through a subsequent return to CNT of
shares delivered upon exercise, in each case valued in the same manner as used
in computing the withholding taxes under the applicable laws. Further, such
elections may be subject to the limitations of the Exchange Act, as specified in
Section 11 of the Plan.
15. INTERPRETATION OF THIS AGREEMENT. All decisions and interpretations
made by the Committee with regard to any question arising under this Agreement
or the Plan shall be binding and conclusive upon CNT and Employee. In the event
that there is any inconsistency between the provisions of this Agreement and the
Plan, the provisions of the Plan shall govern.
16. NO RIGHT TO EMPLOYMENT. This Agreement shall not give Employee a
right to continued employment with CNT or any Affiliate, and CNT or any
Affiliate employing Employee may terminate his or her employment and otherwise
deal with Employee without regard to the effect it may have upon him or her
under this Agreement.
5
<PAGE>
17. GENERAL. CNT shall at all times during the term of this Option
reserve and keep available such number of Common Shares as will be sufficient to
satisfy the requirements of this Option Agreement. A copy of the Plan is
available to Employee from CNT upon request. Unless the context otherwise
dictates, capitalized terms that are not defined in this Agreement have the
meaning set forth in the Plan from time to time. This Agreement shall be binding
in all respects on the Employee's heirs, representatives, successors and
assigns. This Agreement is entered into under the laws of the State of Minnesota
and shall be construed and interpreted thereunder.
IN WITNESS WHEREOF, Employee and CNT have executed this Agreement and
it is effective as of the date of the grant of the Option.
---------------------------------------
Employee
COMPUTER NETWORK TECHNOLOGY CORPORATION
By:
------------------------------------
Its:
-------------------------------
6
<PAGE>
Exhibit 12.1
Computer Network Technology
Ratio of Earnings To Fixed Charges
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(1,789) $ 6,534 $ 2,024 $(3,893) $ 7,639 $ 591 $ 4,088
Plus fixed charges:
Interest expense 125 60 46 57 79 39 46
Assumed interest element included in
rent expense (1) 784 777 734 922 1,041 245 293
------- ------- ------- ------- ------- ------- -------
909 837 780 979 1,120 284 339
------- ------- ------- ------- ------- ------- -------
Total (880) 7,371 2,804 (2,914) 8,759 875 4,427
Fixed charges 909 837 780 979 1,120 284 339
------- ------- ------- ------- ------- ------- -------
Ratio of earnings to fixed charges 8.81 3.59 7.82 3.08 13.06
======= ======= ======= ======= =======
Deficiency of earnings available to
cover fixed charges $(1,789) $(3,893)
======= =======
Rent expense $ 2,351 $ 2,332 $ 2,202 $ 2,765 $ 3,122 $ 734 $ 880
Interest portion - 33 1/3% $ 784 $ 777 $ 734 $ 922 $ 1,041 $ 245 $ 293
</TABLE>
In the fiscal years ended December 31, 1994 and 1997, earnings were inadequate
to cover fixed charges by $1.8 million and $3.9 million, respectively.
(1) Total rent expense for the period divided by three. This is the portion of
rental expense which the company believes to be representative of interest.
<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 LLP
Minneapolis, Minnesota
July 26, 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,
including preferred share purchase rights, or convertible subordinated notes,
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 26th day of July, 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,
including preferred share purchase rights, or convertible subordinated notes,
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 26th day of July, 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,
including preferred share purchase rights, or convertible subordinated notes,
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 26th day of July, 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,
including preferred share purchase rights, or convertible subordinated notes,
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 26th day of July, 1999.
/s/ John A. Rollwagen
------------------------------
John A. Rollwagen
24.4-1
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM T-1
Statement of Eligibility Under the
Trust Indenture Act of 1939 of a Corporation
Designated to Act as Trustee
U.S. BANK TRUST NATIONAL ASSOCIATION
(Exact name of Trustee as specified in its charter)
United States 41-0257700
(State of Incorporation) (I.R.S. Employer
Identification No.)
U.S. Bank Trust Center
180 East Fifth Street
St. Paul, Minnesota 55101
(Address of Principal Executive Offices) (Zip Code)
COMPUTER NETWORK TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
Minnesota 41-1356476
(State of Incorporation) (I.R.S. Employer
Identification No.)
605 North Highway 169, Suite 800
Minneapolis, MN 55441
(Address of Principal Executive Offices) (Zip Code)
% Convertible Subordinated Notes due 2004
(Title of the Indenture Securities)
<PAGE>
GENERAL
-------
1. General Information Furnish the following information as to the Trustee.
(a) Name and address of each examining or supervising authority to which
it is subject.
Comptroller of the Currency
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes
2. AFFILIATIONS WITH OBLIGOR AND UNDERWRITERS If the obligor or any
underwriter for the obligor is an affiliate of the Trustee, describe each
such affiliation.
None
See Note following Item 16.
Items 3-15 are not applicable because to the best of the Trustee's
knowledge the obligor is not in default under any Indenture for which the
Trustee acts as Trustee.
16. LIST OF EXHIBITS List below all exhibits filed as a part of this statement
of eligibility and qualification.
1. Copy of Articles of Association.*
2. Copy of Certificate of Authority to Commence Business.*
3. Authorization of the Trustee to exercise corporate trust powers
(included in Exhibits 1 and 2; no separate instrument).*
4. Copy of existing By-Laws.*
5. Copy of each Indenture referred to in Item 4. N/A.
6. The consents of the Trustee required by Section 321(b) of the act.
7. Copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority is incorporated by reference to Registration Number
333-70709.
* Incorporated by reference to Registration Number 22-27000.
<PAGE>
NOTE
The answers to this statement insofar as such answers relate to what
persons have been underwriters for any securities of the obligors within three
years prior to the date of filing this statement, or what persons are owners of
10% or more of the voting securities of the obligors, or affiliates, are based
upon information furnished to the Trustee by the obligors. While the Trustee has
no reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
Trustee, U.S. Bank Trust National Association, an Association organized and
existing under the laws of the United States, has duly caused this statement of
eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, and its seal to be hereunto affixed and attested, all
in the City of Saint Paul and State of Minnesota on the 21st day of July, 1999.
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
----------------------------
Richard H. Prokosch
Assistant Vice President
/s/ Harry H. Hall Jr.
- ---------------------------
Harry H. Hall Jr.
Assistant Secretary
<PAGE>
EXHIBIT 6
EXHIBIT 6
CONSENT
In accordance with Section 321(b) of the Trust Indenture Act of 1939, the
undersigned, U.S. BANK TRUST NATIONAL ASSOCIATION hereby consents that reports
of examination of the undersigned by Federal, State, Territorial or District
authorities may be furnished by such authorities to the Securities and Exchange
Commission upon its request therefor.
Dated: July 21, 1999
U.S. BANK TRUST NATIONAL ASSOCIATION
/s/ Richard H. Prokosch
--------------------------------
Richard H. Prokosch
Assistant Vice President
