20031110Application (Part 1).pdf

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BEFORE THE IDAHO PUBLIC UTILITIES CO
IN THE MATTER OF APPLICATION )COFCOMPUTERNETWORKTECHNOLOGY)UTILliiES COMM SSIGN
CORPORATIONfor a Certificate of Public )
Convenience and Necessity to Provide )CASE NO.
Non-switched Local Exchange and Intrastate )
Inter-exchangeTelecommunications Services )"
Within the State of Idaho )NEW CASE
APPLICATION AND REOUEST FOR AUTHORITY
Application is hereby made to the Idaho Public Utilities Commission for a Certificate of
Public Convenience and Necessity authorizing COMPUTEit NETWORK
TECHNOLOGYCORPORATION ("Applicant"or "CNT")to provide non-switched
local exchange and interstate inter-exchange telecommunications services pursuant to
Idaho Code Sections 61-526 through -528 and IDAPA 31.01.01.111 (Rules 111 &112)
as clarified by Procedural Order No.26665 in case No.GNR-T-96-4.the following
general information and exhibits are furnished in support thereof:
1.)Applicant's legal name,address of it principal offices and telephone number are:
COMPUTER NETWWORKTECHNOLOGYCORPORATION
6000 Nathan Lane
Minneapolis,MN 55442
(763-268-6800)
The Applicant has no office located in the State of Idaho.The Applicant initially
intends to provide resold and facilities-based local exchange service utilizing the UNE-P
platform.Such services will be provided by utilizing the facilities incumbent local
exchange carriers ("LECs"),as well as unbundled network elements.
2.)Applicant is incorporated in the State of Minnesota and is in good standing under
the laws of that state.In addition,the Company is authorized to do business as a foreign
1
corporation in the State of Idaho.Attached,as Exhibit 1 to this Application is a copy of
the Company's Articles of Incorporation.
A copy of Applicant's certificate of authority to transact business in Idaho is
attached hereto as Exhibit 2.
3.)The name and business address of Applicant's registered agent for service in
Idaho is:
National Registered Agents,Inc.
1423 TyrellLane
Boise,ID 83706
4.)The names and addresses of the shareholders with ownershíp exceeding 5%as
reported to the Securities and Exchange Commission:
Leroy C.Kopp,Kopp Investment Advisors,Inc.
Kopp HoldingCompany and Kopp Emerging GrowthFund
7701 France Avenue South,Suite 500
Edina,Minnesota 55435 17.46%
Royce &Associates,LLC
1414 Avenue of the Americas
New York,NY 10019 9.07%
5.)The names and addresses of Applicant's Officers and Directors are:
Thomas Hudson Chairman/President
Erwin Kelen Vice Chairman
Patrick Gross Director
John Rollwagen Director
Gregory Barnum Vice President/Secretary
Each can be reached at Applicant's primary place of business and telephone
number as follows:
COMPUTER NETWORKTECHNOLGYCORPORATION
6000 Nathan Lane
Minneapolis,MN 55442
763-268-6000
2
6.)Please see number 4 for the name and address of 5%or greater ownership of the
companies stock.
7.)The name and addresses of Subsidiaries Owned or Controlled by the Applicant is
attached hereto a as Exhibit 3.
8.)Applicant initiallyproposes to provide non-switched local exchange and interstate
inter-exchangeservices throughresale of UNE-P utilizingthe facilities of existing LECs:
Applicant intends to provide forms of intrastate non-switched local exchange and inter-
exchange telecommunications services including:
Applicant seeks authority to provide facilities-based inter-exchange and non-
switched local exchange services initiallythroughoutthe State where provided by
incumbent LECs,however,Applicant does not Intendto service areas serviced by
any LECs that are eligible for a small or rural carrier exemption pursuant to
Section 251 of the Federal Telecom Act of 1996.
1.Interexchange(dedicated services):
Dedicated point to point and point to multi point private line data services.
2.Local Exchange:
Non-switched local service (e.g.private line)that currentlyexist or will exist in
the future.
9)Copies of Applicants current Annual Report for 2002 and 10K filing with the
Security and Exchange Commission are attached hereto as Exhibit 4.
10.)A map showing where Applicant is proposing to provide service is attached
hereto as Exhibit 5.
3
l1.)A copy of Applicant's illustrativetariff is attached hereto as Exhibit 6.Applicant
will file its proposed tariff establishing its proposed services and charges upon
completion of interconnection and upon receipt of certification by the Commission.
12.)Questions concerning this application and Applicant's tariff should be directed to
Applicant'srepresentative:
Paulette Bannack
Windfall Resources International,LLC
486 Sequoia Trail
Roselle,IL 60172
630-518-5626 (Telephone)
630-351-3009 (Facsimile)
Customer Complaints and Inquiries are to be addressed to:
Gregory Barnum
Computer NetworkTechnology Corporation
6000 Nathan Lane
Minneapolis,MN 55442
800-752-8061 Customer Service
13.)Applicant has not initiated interconnection or resale negotiations.
14.)Applicant has reviewed the laws and regulations of this Commission governing
local exchange telecommunications services in Idaho and will provide service in
accordance with all laws,rules,and regulations to the extent they are not preempted by
the Federal Act.
15.)Applicant will not require advance payments;therefore,no escrow account is
being filed.
4
WHEREFORE,COMPUTERNETWORKTECHNOLOGYCORPORATION,requests that the
Idaho Public Utilities Commission enter an order granting a Certificate of Public Convenience and
Necessity authorizing COMPUTERNETWORKTECHNOLOGYCORORATION,to provideresold and
facilities-based non-switched local exchange and intgestate inter-exchange telecommunications services
pursuant to Idaho Code Sections 61-526 through -528 and IDAPA 31.01.01.111.
Respectfully submitted this Rday of 2003.
COMPUTERNETWORKTECHNOLOGYCORPORATION
By:
Gregory T.Barnum
ChiefFinancial Orm
Vice President of Finnen
and Corporate Secretary
LIST OF EXHIBITS
EXHIBITl ARTICLESOF INCORPORATION
EXHIBIT2 AUTHORITYTO TRANSACTBUSINESS IN IDAHO
EXHBIT3 SUBSIDIARIESOWNED BY APPLICANT
EXHIBIT4 FINACIALINFORMATION
EXHIBIT 5 A MAP OF PROPOSED SERVICE
EXHIBIT6 APPLICANTS ILLUSTRATIVETARIFF
6
EXHIBIT 1
ARTICLESOF INCORPORATION
7
31 1123
472
in NI fa Sham ihest ßrtsents Shaft (omt.Greetimt;
Êhtitas,rirtides di Incorporation,July s;gned a,d deknowledged under oath,
½ave been Wed for re ord in the ouice of the Secrëtary of State,on the 11th
do of &...,,A.D.19 9 for the incorporation of
Treats¾ton Inc,
poder encË in Accordance with the provisions oÍ the Minitesota Brinen Corp ration
Act,Minnesote Statutes,Chester 301
BUL ËÎlÊfÊ$ÛEt,by viriue of the dowers and dettes vested in me
by law.as Secretarv of State of the State of Mirmesota,I do wereby certify
that the sata
Treatn¾tc.,lac,
is e !«selty orsenized Coroerstion e ider the laws of his Stue,
Wiutess my official signature hereunto sub-
scr:bed and the Great Seal of the State of Minnesote
hereurso aÑived this eleventh
Jugr the year of our Lo d
one thous46d eine noodre¿sesten ne
See etary of State
ARTICLLS Of INCORPORATION
OFTREATS-STC.,TNC.-o0o-
The undersigned,being a natural person of
full ago,for the purposo of forming a corporation under .
and pursuant to the provisions of the Minnesota Business
Corporation Act,boîng chapter 301,Minnesota Statutes
Annotated,does hereby adopt the following Articles of
Ir.corporation.
The name of this corporation shall be:
TREATS-ETC.,INC.
ARTIÇþ¾'II.
The purpocas and powers of this corporation
shall be:
(a)General business purposes.
(b)To pèrform all acts and things necessary
to operate a conžectionery.
(c)To acquire,hold,mortgage,pledge or
dispose of the shares,bonds,securities and other
evidences o€indebtedness of any domestic or foreign
corporation.
td)To take,Lease,purchase or otherwise
acquire,and to own,use,holð,soll,convey,exchange,
lease,mortgage,work,improve,develop,divide and
otherwise handle,deal in and dispose of real estate,
real property,and any interest or right therein To
erect,construct,raaintain,improve¿rebuild,enlarge,
alter,manage and control,directly or through owner-
ship of stock in any corporation,any and all kinds of
uildings,houses,stores,offices,shops,warehouses,
factories,mills,machinery and plants,and any and all
other structures and erections which may at any time
he necessary,useful o:advantageous,for the purposes
of the coryoration;and which lawfully may lie donc
under the laws of the State of Minnesota.
(c)To make,enter into,perform and carry
out contracts for constructing,building,altering,improving,repairing,decorating,maintaining,furnisá
ing and fitting up buildings,tenements and structures
of every description,and to advance money to and enter
into agreements of all kinds with builders,contractors,
properby owners and others for said purpose.
(f)To purchase or otherwise acquire,own,
Fortgage,pleòge,sell,assign and transfor,or other-
wise dispose of,to invest,trade,deal in and Jeal
with goods,wares,and merchandise an<i personal proper ,
of every class and description;to acquire and pay for
in cash,stocks or bonds of this corporation,or other-
wise,the good will,rights,assets and property,and
to undertaAo or assume the whole oc any part of the
obligations or liabilities of any person,firm,
association or corporation;to acquire,hold,use,sell,
assign,lease,grant licenses in respect of,mortgage
or otherwise disposo of letters patent of the United
States or any foreign country,patent rights,licenses
and privileges,inventions,improvements and prvcesses,
copyrights,trademarks and trade names,relating to or
useful in connection with any business of tLis corporation.
09)To enter into,make and perform contracts
of every kind and description with any person,firm,
association,corporation,municipality,county,-state,
body politic or government or colony or dependency
thereof,to borrow money for any of the purposes of the
corporation,from time to time,to draW,make,accept,
endorse,execute and issue promissory notes,drafts,
bills of exchange,warrants,houds,debentures and
other negotiable or non-negotiable instruments and
evidences of indebtedness,and to secure the payment
of any thereof and of the interest thereon by mortgage
upon or pledge,convo ance or assignment 3n trust of
the whole or any part of the proporty of LLe corporation,
whether at the time owned or thereafter acquired,and
to sell,pledge,or otherwise dispose of such bonds or
other obligations of the corporation,for its corporate
purposes.
Ch)To purchase,hold,sell and transfer the
shares of its own capital stock.
(i)To have one or more offices,within or
without the State of Minnesota,to carry on all or any
of its operations and business and,without restriction
or limit as to amount,to purchase or otherwise acquire,
hold,own,mortgage,sell,convey o otherwise dispose
of real property of every class and description în any
of the states,districts,territorîes or colonies of the
United $tates,and in any and all foreign countries,
subject to the laws of such state,district,territory,
omiony or country;and,in general,to exercise and to
have such other powers anr3 purposes as may be reason-
ably incidental to or necessary for the reorcise of any
of the powers hereinabove nyecified.
(j;To do each and all of 'he things afore-
said for itself,<n:as agent,nominee,broker,factor,
consignee,associate,joint venturer,oL partner of or
with other persons,firms,partnerships,general or
limited,associations,or corporations;and to ao the
same as fully and to the same extent as natural persons
might or could do,including the formation or entering
into joint ventures or general or limited partnerships
or associations to do any of the things aforesaid and
becoming and aching as a joint venturer,general or.
limited partner,of associate of :ncluber thercia.
75
(k)The objects and purposes specificò in
the foregoing paragraphs shall,except where otherwise
expressed,ho in nowise limited or restricted by reference
to,or inference from the terms of any other clauso in
these Articles of Incorporation,but the objects and
purposes specified in cach of the foregoing clauses of
this Article shall be regarded as independent objects
and purposes and shall be in addition to any other
powers of corporations having general business purposes
under the Minnesota Business Corporation Act.
AgTICLE III.
The location and post office address of its
cogistercó office within che State of Minnesota shall be
1800 Midwest Plaza Building,Minneapolis,Minnesota,
55402.
ARTICh¾IV.
The time for the commencement of this corpora-
tion shall be the date upon which these Articles of
Lacorporation are filed in the office of the Secretary
of State of Minnesota,and its duration shall be perpetual.
ARTICLW V.
(a)The capital stock of this corporation
shall consist of two thousand,five hundred (2,500)
shares of no par value common stock.
(b}No holder of stock of this corporation
shall be entitled to any cumulative voting rights.
(c)The capital stock of this corporation
shall be issued in the manner,at the times,in such
amounts,and for such consiûeration in money or property
or both,as the Board of Directors may,from time to
time,.determine.The Board of Directors shall have
the authority to fix the terms,provisions and conditions
of,and authorize the issuance of options,warrants,or
rights to purchase or subscribe for shares of î ts common
stock,including the price or prices at which shares nay
be purchased or subscribed for.
(d}.Ño holder of stock of this corporation
shall have any preferential,pre-emptive or other rights
af subscription to any shares of any class of stock of
this corporation allotted or sold or to be allotted or
sold and now or hereafter authorized,or to any obliga-
tions or securities convertible into any class of stock
of this corporation,nor any right of subscription to
any part thereof.
ARTICLE VI.
The corporation shall indemnify its oc
directors,employees and agents to the full extent
permitted by the lawa of the State of Minnesota,as now
in effcet or as the same may hereafter be amended.
The amour.t oE stated capital with which this
corporation shall begin business shall be the sum of One
Thousand Dollars ($1,600.00)
CLE VIII.
The name and post office addreas of the incor-
porator forming this corporation is:
Ulrvey F.Kaplan
1800 Nidwest PlažaMinneapolis,Minnesota 55402
ARTICLE IX.
(a)The management of the corPotation shall
be vested in a Board of Directofs whose number shall be
determined in accordanec with the Bylaws of this corpora-
tion.The first Board of Directors of the corporation,
who shall hold office until the next annual meeting of
shareholders and until their successors are elected shall
consist of:
Laurence S,3ipkin
8910 Westmoreland Lanctinneapolis,Minnescha 55426
Lyle Berman
433 Bushaway Road
Wayrata,Minnesota 55391
Joel Waller7445Knoll AvenueMinneapolis,Minnesota 5542 2
(b)The Board of Dikectors shall have the
authority to change or repeal such 3ylaws.
.I:¢WITNESS WilsRECE,the undersigned has hero-
unto set his hand this -et day of July,1979.
In the Presence of.
Harvey ?/Kayla /
State of Minnesota )>ss.
County of Hennepin )
On this ro'day of July,1979,befoto me,notary
public within and for said county,personally appoated Harvey
F.Kaplan,to me known to be the person na ed in and who exe-
euted the foregoing Articles of Incorporation,and he acknow-
ledged that he executed the -año as his free dct and deed and
for the uses and purposes theroin expressed.
Yg sn
STATE OF MIMESOTA
M.i?MENT OF ST ATE
t n..V;y certsty inat the within
.mru :.«s med for re¢ord in ttus
et we I day of Â
A.D.13 ,et Ëo'eMA M.
w:a wy &y tarded in Book
>
'
N Se mary o btam
3L -it 2þ
Ell(T \T BEt L f>O\DR.EU H\t 'l \
AND
GRTIFig ATE Øi RhST iTE)38 ¶µLES r.W (NC RPOKA110N
TRLATS 01107..IM .
he,the undershgied offigers of Trents Et<-..in<¾,u eurporation Mühjeet to the
provisions of i inyt&301 Minnesota Stuttrtes,du hereby eertil y that re.nulations 4<
nereblafter set Íortly were adopted by unnrümous written notharitation persaw 'to
Rection 301.26.Sub.I F,Minnesota Statutes,effective Februnry 22.1982:
RESOLVED that Trents Etr..hin.«deets to W governed by thprovi intre rol
\Nnnesotn Statutes 302A nità necepts all of the dutie<:md ctyynnibißtiew yet forth
therein.Further,that the follatiing resottition(s)ab>dt enminste 90 corporate articles
currently in etteet that are pronioiten by or inconsistent .nut uinamoto statutes an2a
and ennet new corporntè articles that are require¢or túlswe<t under Minosoth Sintaten .
302A.and further
RESOLVED that the following articles of incorporation of Treats Blo.Ute.
shall supereede and take the phice of the existing Articles of inevrporationund be,nud
the same hereby are amendertand rest:tted to read as foHows:
ARTlÇLE I
The name of this corporittion is "Cameortr.In<.*
ARTIGE U
REGISTERED OFFFCE
The legistered office of this :arporaUnn ethin the Shrte of Himte uta is
located at 1304 ¾idwest Phiza.AUnnenpolis,Tiinuesota 55492
At.
.stock,withparvaltw600poAnm
\gtycLBlì
RintNALINCORPORATOR
,Thetwaùdnadiensoftheoriginalincorpotutorofthecorporationis
Unrvey!.Knpinn.lato.iiidwestPlazu.Enneupolis\Unnesotutir:.
ARTICfxEV
DUARDOFUtKECTORS
Thenamesundaddressesofthedirectorspresentlyservingontheßenrdof
Mrtetorsare:
LaurenceS.%ipkin89NTAerturerdundLntie
SLLouisParisMinadota
JoelN.Walter1945GohlenValley,3719ncsoin
LyleA.German.433thishawayRoad
Waymata,Efanesota
ARTICLEVI
UMLLATIVEVOTINGARDPREE¾PTIVERIG:lTS
%nolderofstockofthiscorporationshallbeentitledtoanyetunnistive
votingrightmNoholderofstockorthiscorporationRh11haveanypreemptiverights.
ARTICI,EVil
WRITTENACTIONWithOLTMENTING
AnynetionrequiredorpermittedtobetakenatanymeetingoftÞ-:Bonedof
Directors:naybetakenwithoutameetingbywrittennetlonsignfŠbyarrajorityofUw
ILmrdofDineetorstheninoffice,exceptastuthose'mdterswhichper:,ñreshnichelder
epproatinwhichetmethewrittenactionshallbesimedbyHNraembeeoftheBoardúD
Dírertórstheninoffice.
CLASSES AND SEKlBS OFSlock
10 addition to,and not by way of Umuotion of,the powers granted to the'
Suuro of Mrectors by Ennesota Statutes.Clutpter 302A,the Monrd of Dircetors :nny,
front time.to time.establish by resolution different einsus or serbs of shares nud omy fix
the rights and preferences of Nuid shares in any class or <eriese The Board of Directors
shaH further nave the nothority to issue «hares of a class or serin to holdeN of shares of
another elass or series to effectuate share dividends,spHts or «nyersion of it<
outstanding shntea
IN «lTNESS WHERRf V,we (mve subscribed our umacy this -day of
L Û ,1942.
Laurence Zipkin.President
Lyle fleriaany Secretary
STATEØFJIINNESOTA )
>
COUNTY OF RENNEPIN )
On this day of Ñbr iale ,1982,before me.n Rotary Public,within
and for said Courtlÿ.personaHy appeared Laurencé Zipkin and Lyle flermmt,to ne
personalIÿ known who being each by me duly sworn did say that they are respectively the
president and secretary of the corpotation named in the foregoing instrument und that the
weal affixed to said instruinent is the corporate seal of the corporation und that said
instronent was signed artd serded in behtáf of an on the nuthority of the shareholders of
the corporation und said president and Aceretary neknowledged said instrument to be the
free act and deed of srûd corporation.
th
.
MICHAEL L S'OVT
NGYAp-pry-r ~.i,$3TA
MENNEPtNCOUNTY
sFãiitisiññoñ~,
DLPARTf.1ENT OF STAfg
i nereay cerbiy that IM within
trument MCs ided for entr'$at (t>y
tice on ikday of
O,19 a.at o'cWW t,t,
d was gay recordM *Bock
i torppfallOAS,Ctt
ir,
CERTIFICATEOF AMENDMEN
TO THE
ARTICLES OF INCORPORATION
or
L
'caucon,Isc.
We,the undersigned,Laurence S.Zipkin and Lyle A.
Berman,respectively,the President and Secretary of Cancom,
Inc.,a corporation subject to t½e provisions of Chapter
302A,Minnesota Revised Statutes,do hereby certify that at
a meeting of the shareholders of this corporation,duly held
in accordance with Section 302A.431,Minnesota Revised
Statutes,the following resolutions were duly adopted:
RESQLVED:That Article I of the Articles
of Incorporation of Cancom,
Inc.be,and the same hereby is,amended to read as
follows:
"AST CLE I
The name of this corporation is 'Computer Networku'
Technology Corporation'."
REGOLVED That the President and secre-
FURTHER:tary of this corporation be,
and they each hereby are,
authorized,empowered and directed to make,execute and
acknowledge a Certificate of this corporation embracing
the foregoing resolution of amendment to the Articles
of Incorporation and to cause the Certificate to be
filed for record in the manner required by law.
IN WITNESS WHEREOF,we have subscribed our names this
day of /SU -rA to ,1983.
IN THE PRESENCE OF:
/Laurence S.Presîdent '
Ly.gd A.Serman
Secretary
Page 1 of 2
STATE OF MINNESOTA)
)sa
COUNTY OF RENNEPIN)
BB IT KNOWN,that on the day of /t À l 83,
before me a notary public,per onally appeared Laurence S.
Eigkin and Lyle A.Derman,to me known to be the persons
named and described as the President and Secretary of Cancom,
Inc.and who executed the foregoing Certificate of Amendment
to the Articles of incorporation,and having been first duly
sworn and under oath,did acknowledge and say that they
executed the foregaing Certificate as their free act and
deed and the free act and deed of said corporation for the
uses and purposes therein expressed.
JMETSCHB0EDER SWTH
NOTÀNY ALIOtfG -MlNNEGOTA
ANOKACOUNTY
Pacc 2 of 2
O+/as
CERTIFICATE
OF"CHANGE OF REGISTERED OFFICE
COMPUTER NETWORK
TECFHNOLOGYCORPORATION
We,the undersigned,Ronald A.Whitehouse and Eugene D.
Misukanis,respectively the President and Se:retary of Computer
Network Technology Corporation,a corporation subject to the
provisions of Chapter 302A,Minnesota Revised Statutes,do
hereby certify that pursuant to a writing signed by all of
the directors of said corporation in accordance with Section
302A.239,Subd.1,Minnesota Revised Statutes,the following
resolutions were duly adopted:
"NOW,THEREFORS,That the location and post
88 IT RESOLVED:office address of the regis-
tered office of this corpo-
ration .in the State of Minnesota shall he changed from:
1800 Midwest Plaza,City of Minneapolis,
County of Hennepina State of Minnesota 55402,
to
9440 Science Center Drive,City of New Rope,-A
County of Hennepin,state of Minnesota 55428,
effective immedigtely-
RESOLVBD That the President and See
FURTHER:retary of this corporationshallbe,and they each herehy
are,authorized,empowered and directed to make,execâbe
and acknowledge a certificate embracing the foregoingresolutionchangingtheregisteredofficeofthiscorporation,and to cause sucA certificate to be filed
for record in the manner required by law."
úlN RITNESS WHEREOF,we have subscribed our names this
,/^day of December,1983.
IN THE PRESENCE OF:
onaldyA.Whitë¾ouse,President
one D.Misukania,SecŸeRy
Page 1 of 2
STATE OF MINNESOTA)
)ss
C UNTY OF HENNEPIN)
BE IT KNowN,that on the 19 'day of December,1983,
before me,a notary public,personallyappeared Ronald A.
Whitehouse and Eugene D.Misukanis,to me known to be the
persons named and described as the President and Secretary
of Computer Network Technology Corporation and who executed
the foregoing Certificate of Change of Registered Office,
and having been first duly sworn and under oath,did acknowl-
edge and say that they executed the foregoing Certificate as
their free act and deed and the free act and deed of said
corporation for the uses and pu poses therein expressed.
Notaty Publie
4¾
STATE OF iniiMSDIA
DIPAWriiMT OF STATE
I tu v.t;e r:dy Ret it.witMn
mst-irmont w.is hh:t!tar re:ord in this
A.D.19 ·.at U -9 oMac '1,
and was ey reec-ded er
of Insey .:2,on
Page 2 of 2
1
CERTIFÍCATE
OF
RESTATED ARTICLES OF INCORPORATION
OF
COMPUTER NETWORK TECHNOLOGY CORPORATION
e,the undersigned,the President and secretary,
respectively,of Computer Network Technology corporation,a
corporation subject to the provisions of Chapter 302A,Minneso*a
Statutes,known as the Minnesota Business Corporation Act,do
hereby certify that at a meeting of the shareholders of the
corporation duly held in accordance with Sections 302A.433 and
302A.435,Minnesota Statutes,the following resolution providing
for the amendment and restatement of the Articles of
Incorporation of said corporation was duly adopted,which Amended
and Restated Articles of Incorporation supersede and take the
place of the existing Restated Articles of Incorporation of said
corporation,and all amendments thereto:
NOW,THEREFORE,BE IT RESOEVED:That the Restated
Articles of Incorporation of computer Network Technology
Corporation filed of record with the Secretary of State of
Minnesota on February 26,1982 in Book U-56 at page 123,as
amendeΠby Amendment to Articles of Incorporation filed of
record with the secretary of state of Minnesota on
November 30,1983 in Book U-GO at page 102 and by Amendment
to Articles of Incorporation filed of record with the
Secretary of state of Minnesota on January 13,1984 in Book
D-61 at page 430,shall be,and they hereby are,revoked in
their entirety,and that the articles of incorporation of
this corporation shall be,and they hereby are,amended and
restated to read as follows:
ARTICLE I
The name of this corporation shall he Computer Network /
Technology Corporation.
ARTICLE 11
The registered office of this corporation in the state of
Minnesota shall be at 9440 Science Center Drive,New Rope,
Minnesota 55428.
ARTICLE III
3.01 This corporation shall have the authority to issue an
aggregate of fifteen million (15,000,000)shares of Common Stock,
each with $.01 par value.Such shares shall he designated as
this corporation's "Common Stock."
3.02 This corporation shall have the authority to issue an
aggregate .of one million (1,000,004)shares of Preferred Stock,
which may be issued in one or mote series as determined from time
to time by the Board of Directors.Such shares shall he
designated as the "Preferred Stock,Series ."The shares
of Preferred Stock of any series authorized for issuance by the
Board of Directors shall he senior to the common Stock with
respect to any distribution (as such term is defined in Section
302A.011,subd.10,Minnesota Statutes)if so designated by the
Board of Directors upon issuance of the shares of that series.
The Board of Directors is hereby granted the express authority to
fix by resolution any other designations,powers,preferences,
voting and other rights,qualifications,limitations or
restrictions with respect to any particular series of Preferred
Stock prior to issuance thereof.
3.03 Except as otherwise required by law,and except as may
be otherwise provided pursuant to Section 3.02 hereof,the
holders of the shares of Common stock shall have the sole voting
rights of this corporation.
3,04 There shall he no cumulative voting by the holders of
the Common Stock.
3.05 The shareholders shali take action by the affirmative
vote of the holders of a majority of the voting poWer of the
shares represented and voting at a duly held meetingr.except
where the affirmative vote of a greater number or the affirmative
vote,af a majority of the voting power of all voting shares is
required by statute and except where the holders of a class or
series are entitled by statute to vote as a class or series
whether or not such holders are otherwise entitled to vote.
3.06 The shareholders of this corporation shall have no
preemptive rights to subscribe for or otherwise acquire any new
or additional shares of stock of this corporation of any class
whether now authorized or authorized hereafter,or any options or
warrants to purchase,subscribe for or otherwise acquire any such
new or additional shares of any class or any shares,bonds,
notes,debentures,or other securities convertible into or
carrying options or warrants to purchase,subscribe for or
otherwise acquire any such new or additional shares of any class.
ARTICLE IV
In addition to,and not by way of limitation of,'the powers
granted to the Board of Directors by the Chapter 302A,Minnesota
Statutes,the Board of Directors of this corporation shall have
the following powers ahd.authority:
4.01 To fix by resolution any designation,power,
preferente,right,qualificatione limitation or restriction with
tespect to the issuante of any series of the Preferred Stock of
this corporation authorized by these Articles of Incorporation.
4.02 To issue shares of a class or series to holders of
shares of another class or series to effectuate share dividends,
splits,or conversion of its outsta¤ding shares.
2
4.03 To fix the terms,provisions and conditions of and to
authorize the issuance,sale,pledge or exchange of bonds,
debentures,notes,or other evidences of indebtedness of this
corporation.
4.04 To adopt,amend or repeal 'all or any of the Bylaws of
this corporation by the vote of a majority of its members present
at a duly held meeting,subject to the power of the shareholders
to adopt,amend or repeal such Bylaws,and sub§ect to any
limitation of such power and authority contained in the Bylaws.
4.05 As to any member of the Board,to give advance written
consent or opposition to a resolution stating an action to be
taken-by the Board.If such member is not present at the meeting
at which action is taken upon such resolution,such congent or
opposition does not constitata presence for purposes of
determining the existence of a quorum,but shall be counted as a
vote in favor of or against the resolution and shall be entered
in the minutes or other record of action taken by the Board at
the meeting if the resolution acted upon by the Board at the
meeting is substantially the same or has substantially the same
effect as the resolution to which the member of the Board has
consented or objected.
4.06 To adopt .ani indemnity plan and to purchase and
maintain insurance for officers,directors,employees and agents
against liability asserted against them and .incurred in any such
capacity or arising out of their status as such to the fullest
extent permissì¾1e under the pr visions of Chaþter 302A,
Minnesota Statutes.
ARTICLE V
Section 302A.G71,Minnesota Statutës,shall apply to a
control share acquisition of the capital stock of this
corporation.
IN WITNEss WHEREoF,we have set our signatures on this Â
day of /''f,',1985.
IN PRES CE F:
ichard A.McRae esident
E ne D.Misukanis,secretary
3
e
suoscribed and sworn to before me ce
this i§"*dAY g r),tontr.-,1985.
Nðtary Public
Š'fATE OF MINNESOTA)
)as.
coDNTŸ OF HENNEPIN)
The foregoing instrument was acknowledged before me this as
day of October,1985 by Richard A.McRae and Eugene D.Minukan
known to me to be the president and secretary,respective1Yr of
computer Network Technology Corporation,on their own behalf and
on behalf of said corporation.
---------N if Public
$4,-&none '
au pme-ansota ;
NAmstr COUNW
.STATt GF MWESOTA ¡EPAkiMUlf er 91.ATF '
ben&>y ce:tify inat rn.:w taaMstument'.ras 14ed for recors$ira das I
of¾ice on the day of
A D.191 at ottoer
and we dg reegreed in Bow
of incorporauens.on page
4
O
CERTIFtCATION BY SECRETARY OF
COMPUTER RETWORK TECHNOLOGY CORPORAflON AND CNT,INC.
The undersigned,the Secretary of Computer Network Technology Corporation
and CNT,Inc.,hereby certifies that the attached Merger Agreement By and Between
Computer Network Technology Corporation and CNT,Inc.was unanimously adopted
in writing by the Boards of Directors of the respective corporations and that since
the date of such adoption there has been no resolution by either such Board of
Directors amending,modifying,or rescinding such adoption.
Eugene D.Wisekanis'
SdEretary of Computer Network Technology
Corporation and CNT,Inc.
MERGER AGREEMENT BY AND BETWEEN
COMPUTER NETWORK TECHNOLOGY CORPORATION
ANDCNT,INC.
This Agreement is made this day of n 4 ,,1986 by and between
Computer Network Technology Corporation,a'%tinnesota korporation,and CNT,Inc.,
a Minnesota corporation,which is wholly owned by Computer Network Technology
Corporation.
RECITALS
A.Computer Network Technology Corporation (the "Parertt")was incorporated in
Minnesota in 1979 under the name "Treats Etc.,Inc."in February 1982,the Parent
changed its name to Canconi,inc.and elected to be governed by Minnesota Statutes
Chapter 302A.On November 29,1983,the shareholders of the Parent approved the
acquisition by the corpor *ion of Computer Network Technology Corporation (now
CNT,Inc.)(the "Subsidiary")by exchange of 3,150,000 shares of the common stock
of the Parent for all of the issued and outstanding common stock of the Subsidiary.
Following such acquisition,the name of the Parent was changed to Computer Network
Technology Corporation and the name of the Subsidiary was changed to CNT,Inc.
B.The Subsidiary was incorporated in April 1983 under the name Computer Network
Technology Corporation.In November 1983,in connection with acquisition of the
Subsidiary by the Parent,the name of the Subsidiary was changed to CNT,Inc.
C.The Parent is authorized to issue j ROO,000 shares of Corr.mon Stock,par value
$.01 per share and 1,000,000 shares of preferred stock.
D.The Subsidiary is authorized to issue to,000,000 shares of Common Stock,$.01
par value per share,and 1,000,000 sharesof Preferred Stock.Theraarecurrently
issued and outstanding 3,&37,500 shares of Common Stock,all of which are held of
record by the Parent.
E.The Boards of Directors of the Parent and the Subsidiary,consisting of the same
persons,unanimously deem it to be desirable and in the best interests of such corporations
and their shareholders that the Subsidiary be merged into the Parent in accordance
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with the provisions of Minnesota Statutes Section 302A.621 and that the transaction
qualify as a tax-free reorganization under the internal Revenue Code of 1954,as
amended.
F.The Subsidiary is wholly-owned by the Parent and,accordingly,there are no
shareholders of the Subsidiary,other than the Parent,entitled to receive notice of this
Agreement pursuant to Minnesota Statutes,Section 302A.621,Subd.2.
In consideration of the mutual covenants herein contained,and subject to the
terms and conditions hereinafter set forth,the Parent and the Subsidiary agree as
foUows:
SECTION I
The Parent to be the Surviving Corporation
Upon the date of filing of this Agreement with the Secretary of State of the State
of Minnesota (the "Effective Date"),the Subsidiary shall be merged into the Parent.
The corporate existence of the Subsidiary shau eease and the corporate existence of
the Parent shaH continue under the name of Computer Network Technology Corporation.
On the Effective Date,the separate existence of the Subsidiary shall cease and the
Parent shan succeed to ad of the rights,privneges,immunities,and franchises and
all the property,real,personal,and mixed,of the Subsidiary without the necessity
for any separate transfer.The Parent shaH thereafter be responsible and liable for
an NabiHtes and obligations of the Subsidiary and neither the rights of creditors or any
liens on the property of the Subsidiary shan be impaired by the mergers
SECTION 2
Principal Office
The principal office of the Parent shan remain at 9440 Science Center Drive,New
Hope,Minnesota 55428 following this merger.
SECTION 3
A rticles of locorporation
The Articles of locorporation of the Parent shan not be amended but shan remain
in the form presently filed with the Secretary of State of Minnesota.
SECTION 4
Bylawa
The Bylaws of the Parent shall not be amended but shan remain as set forth in A
the corporate minute book.
e
t
Roger P.Winiams,650 Fifth Avenue,New York,NY 10019
SECTION 5
Names and Addresses of Directors
The persons who constitute the board of directors of the Parent shan continue
to hold office until the first annual meeting of the shareholders of the Parent foi-
fowing Effective Date.The names and addresses of the persons who constitute the
board of directors of the Parent on the date hereof are as follows:
Eugene D.Misukanis,2404 Reidmond Avenue,Little Canada,MN 55117
Lyte A,Berman,433 Bushaway Road,Wayzata,MN 95391
Robert A.Lutoicki,121 Washington Avenue South,Minneapotis,MN 55401
SECTION 6
Capital Stock
The capital stock of the Subsidiary shall be canceited in whole on the Effective g/
Date.The capital stock of the Parent shaH not be affected by this Merger.
IN WITNESS WHERSOP,the undersigned,constituting aH of the members of the
Boards of Directors of the Parent and the Subsidiary,have executed this Agreement
on the date set forth below.
Dated:January 7 ,1986.
Members of the Board of Directors Members of the Board of Directors of Computer
o (t "N Techno C nt")
Ro rt A.iutrii Ro ri Lutnicki '
Lyfe A.Berman Lyle A.erman
Richard A.McRae
ÌÁbn R.Cuffinane
Roger P.Wiffiams
e
STATE OF MINNESOTA )
}ss
COUNTY OF RENNEPIN )
The foregoing instrument was acknowledged before me this/day of 44
1985 by Eugene D.Misukanis.
ROTARY PUBLIC
STATE OF MINNESOTA )
}ss
COUNTŸ OF HENNERIN )
The foregoing instrument was acknowledged before me this /day of C<s
1985 by Robert A.Lutnicki.
N TARY PUBLic
STATE OF MINNESOTA )
}
COUNTY OF RENNEPIN )
The foregoing instrument was acknowledged before me this day of
198;Í by Lyle A.Berman.
NOTARY PUBLIC
/
STATE OF MINNESOTA )
)sa
COUNTY OF HENNEPIN )
The foregoing instrument was acknowledged before me this /day of
1985 by Richard A.McRae.
es seg 18.1990 /ROTARY PUBLIC
STATE OF MONNESOTA )i
)ss
COUNTY OF HERREPIN }
The foregoing instrument was acknowledged before me this day of ,
e
ru
Ile &<.
O
1985 by John R.Cullinane.
«v ;w:.
-e sa Wv YorkNout&6A --.');
Orassa in Kmas cagmy 'NOTARY ÑBLK
Commwon E×p res March 30,19.......
STATE ÒF MlNNESOTA )
)ss
COUNTY OF HENNEPIR )
The foregoing instrument was acknowledged before me this day f ,
1985 by Roger P.Wißiams.
UnoA MAm4gKr
me,sä s NewYork ÑOTARY ÂUBLtC
er roccid in t.
omee the <hy of \
A.O.19 at 2/.*g.cleck
and was duly reewgg ¡ng
of facer¢5,on page
CERTIFICATE OF AMENDMENT
TO
RESTATED ARTICLES OF INCORPORATION
OF
COMPUTER NETWORK TECHNOLOGY CORPORATION
We,the undersigned,the President and secretary,respectively,of
Computer Network Technology Corporation,a corporation subject to the
provisions of Chapter 302A,Minnesota Statutes,known as the Minnesota
Business Corporation Act,do hereby certify that at a meeting of the
shareholders of the corporation duly held on May 19,1997,in accordance -
with the provisions of Sections 302A.431 and 302A.435,Minnesota
Statutes,the following resolution providing for the amendment of the
Restated Articles of incorporation of said corporation was duly adopted:
"RESOLVED:That the Restated Ardeles of incorporation of this
corporation dated October 25,l ess,and filed of record with the
Secretary of State of Minnesota on October 30,1985,as Document
No.3L-1123 shall be amended by the amendment arrd restatement of
Section 4.05 thereof as follows:
4.06 To adopt an indemnity plan and to purchase and
maintain insurance for officers,directors,employees and agents
against liability asserted against them and incurred in any such
capacity or arising out of their status as such to the fullest
pxtent permissible under the provisions of Chapter 302A,
Minnesota Statutes.Except as expressly provided tw Section
302A.251,Subd.4,Minnesota Statutes,a member of the Board è
of Directors of this corporation shall have no personal liability O
to this corporation or to the shareholders for monetary damages
for breach of fiduciary duty as a member of the Board of
Directors."
14 WITNESS WHEREOF,we have set our signatures hereto this 19th
day of May,1987.
IN THE PRESENC OF:
C.McKenzie Lewis NI,Pt;esident
Eugene D.Misukanis,Seci·etary
Page 1 of 2
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STATE OF MINNESOTA )
)ss.
COUNTY OF HERNEPIN )
On this 19th day of May,1987,before me,a notary public,
personañy appeared C.McKenzie Lewis 10 and Eugene D.Misukanis,to
me known to be the persons named and described as the President and
Secretary,respectively,of Computer Network Technology Corporation,
and who executed the foregoing Certificate of Amendment to the Restated
Articles of Incorporation,and having been first duly sworn and under
oath,did acknowledge and say that they executed the foregoing
Certificate as their free act and deed and the free act and deed of said
corporation for the uses and purposes therein expressed.
Notai y Public
M
.WB50tk0EDERSMmt
N0ÌW PUBUC-MIMEBou
40BC0tlNTY
Mr tapirn Mu 20.1992
WWWWWWWM#wwwwwwwwwwa
STAfi OF )MNNESOTA
DEPARTMEÑTOF SIATE
Pace 2 of 2
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L -311G
CERTIFICATEOF AMENDMENT
TO THE
RESTATED ARTICLESOF INCORPORATION
OF
COMPUTERNETWORK TECHNOLOGYCORPORATION
The undersigned,the President of Computer Network Corporation,
a corporation subject to the provisions of the Minnesota ßusiness Corporation
Act,Chapter 302A,Minnesota Statutes,do hereby certify that at an annual
meeting of the shareholders of the corporation duly held on August 30,1988,
in accordance with the Minnesota Statutes Section 302AA31 and 302A.435,
the following resolution providing for the amendment of the Amended Restated
Articles of incorporation of said corporation was duly adopted:
RESOLVED:That the Amended Restated Articles of locorporation
of this corporation shall be amended by the amendment and restatement
of Section 3.01 thereof as follows:
ARTICLE ill
3.01 This corporation shaN have the authority to issue an aggregate
of 22,500,0 0 shares of Common Stock,each with $.01 par value.Such shares
shall be designatedas this corporation's "Gommon Stock."
IN.WITNESS WHEREOF,i have subscribed my name this day of
C.McKenzie Lewis in
President
ATTEST:
Eugene !).Misukanis
Secretary
STATE OF MINNESOTA
DEÞARTMENTOF STAT6
RLED
$EP 191988 Ë
O
O 3,State of Minnesota
'-
Office of the Secretary of State
',
I M1
Notice of Change of
Registered Office -Registered Agent or Both
by
Pursuant to Minnesota Statutes.Section 302A.123,303.10,317.19 317A.123 or 308A 025 the undersigned hereby
cortifies that the Board of Directors of the above named Corporation has resolved to change the corporation's
registered office and/or ogent to:
you do not wesh to designate an agent,you must hst "NONú"m this bo o NÓf USTTHE CORéORATE NAME
Agentes
Name
Adtkess
the a sweet)6655 WEDGWOOD ROAD
€ny
Coun:y
2ip
MN
llENNEPIN 55369
MAPLE GROVE
(W dittetent than address a6>e -ÈÙ BW m acceptable)
MattmgAddress
City
Coumy
ip
MN
The new address may not be a post offîce box.It must be a street address,pursuant to Minnesota Statutes,Section 302A.011.
Subd.3.,303.02.Subd.5.317.92 Subd,13.,317A.01 Subd.2.
This change is effective on the day it is filed with the Secretary of State,unless you
indicate another date,no later than 30 days after filing with the Secretary of State,
in this bor
i certîty that I am authorized to execute this certificate and i further certify that I understand that by signing this certificate i arti
subject to the penaltiet of perjury as set forth in section 609.48 as if I had signed this certificate under oath.
Name of ORx:et or OtherAuthonzedAgent of Cwporahon Signature -1 /
JOHN R.BRINTNALL
'i r 2
LPteaseihnu
'»./'i.
tie or GiŠte
Oat¢¡
CHIEF FINANCIAL OFFICER 3-9-90
Do not write below this fine.For Secretary of State's uso only.
Receipt Nu her
File Data
STATE OF MINNESOTA
DEPARTMENTOF LïAT3
Retum to:Business Services Division
FILED
Office of the Secretary of State
iso state onice suiteing
fΠ0 91990
ut MN 55155
Makechecks ayable to:Secretary of State
Secretary of State
sc-000V46
e
ARTTCLES OF AMENDMENT
OF THE
RESTATED ARTICLES OF INCORPORATION
OF
COMPUTER NETWORK TECHNOLOGY CORPORATIOÑ
L The name of the corpotation is Computer Network Technology Corporation.
2.Subsection 3.01 of Article III,as amended,reads as follows:
This corporation shall have the authority to issue an aggregate of thirty million
(30,000,000)shares of Common Stock of par value of $,61 per share.Such
shares shall be designated as this corpomtion's "Common Stock."
3,The amendment was adopted pursuant to Chapter 302A of the Minnesota Business
CorpontionAct.
IN WITNESS WHEREOF,the undersigned,the Sec utry of Computer Network
Technology Corporation,being dulÿ authorized,has excested this document on May 21,
1992.
Eu Á D.M ukanis,Secretary
STATE OF MINNESOTA
DEPARTMENTOF STATE
FILEDMAYZ21992
o
SECOND RESTATEDARTICLES OF INCORPORATION
OF
COMPUTER NETWORK TECHNOLOGY CORPORATION
1.The name of the corporation is Computer NetworkTechnokigyCorporation.
2.The Second Restated Articles of Incorporationof the corporation are as follows:
ARTICLE I
The name of this corporation shall be Computer NetworkTechnology
Corporation.
ARTTCLE11
The registered office of this corporation in the State of Minnesota shall be .
6500 Wedgwood Road.Maple Grove,Minnesota $5369.
ARTICLE HI
3.01 This corporationshall have the authority to issue an aggregate of thirty
million (30,000,000)shares of Common Stock of par valueof $.01 per share.Such
shares shall be designated as this corporation's"Common Stock."
3.02 This corporation shall have the authority to issue areaggregate of one
million (LOOO,000)shares of Preferred Stoek which may be issued in one or more
series as determinedfrom time to time by the Board of Directors.Such shares shall
be designated as the "PreferredStock,Series ."The shares of Preferred
Stock of any series authoriteti for issuance by the Board of Directors shall be senior
to the Common Stock witir respect to any distribution (as such term is defined in
Section 302A.011,Subd,10,Minnesota Statutes)if so designated by the Board of
Directors upon issuance of the shares of that series.The Board of Directors is hereby
granted the express authority to fix by resolution any o her designations,powers,
preferences,voting and otherrights,quaFfications,lim tations or restrictions with
respect to any particular series of Preferred Stock prior to issuance thereof.
3.03 Except as otherwise required by law,and except as may be otherwise
providedpursuant to Section 3.02 hereof,the holders of the shares of Common Stock -
shan have the sole voting rights of this corporation.
3,04 There shall be no cumulative voting by the holders of the Common
Stock.
ww.«m Page i of 3
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3.05 The shareholders shall take action by the affirmative vote of the holders
of a majority of the voting power of the shares represented and votingat a duly held
meeting,except where the affirmative vote of a greater number or the affirmative
vote of a majority of the voting power of all voting shares is required by statute and
except where the holders of a class or series are entitled by statute to vote as a class
or series whether or not such holders are otherwise entitled to vote.
3.06 The shareholders of this corporationshall have no preemptive rights to
subscribe for or otherwise acquire any new or additional shares of stock of this
corporation of any class whether now authorized or authorized hereafter,or any
options or warrants to purchase,subscribe for or otherwise acquire any such new or
additional shares of any class or any shares,bonds,notes,debentures,or other
securities convertibleinto or carrying options or warrants to purchase,subscribe for
or otherwise acquire any such new or additional shares of any class.
ARTICLE IV
In addition to,and not by way of limitation of,the powers granted to the
Board of Directors by the Chapter 302A,Minnesota Statutes,the Board of Directors
of this corporationshaH have the fonowing powers and authority:
4.01 To fix by resolution any designation,power,preference,right,
qualification,Emitation or restrictíon with respect to the isstiance of any series of the
Preferred Stock of this corporationauthorized by these Articles of incorporation,
4.02 To issue shares of a class or series to holders of shares of another class
or series to effectuate share dividends,spHts,or conversion of is outstanding shares.
4.03 To fix the terms,provisionsand conditions of and to authorize the
issuance,sale,pledge or exchange of bonds,debentures.notes.or other evidences of
indebtedness of this corporation.
4.04 To adopt,amend or repeal all or any of the Bylaws of this corporation
by the vote of a majority of its members present at a duly held meeting,subject to the
power of the shareholders to adopt,amend or repeal such Bytaws,and subject to any
limitation of such powerand authority contained in the Bylaws.
4.05 As to any member of the Board,to give advancy written consent or
opposition to a resolution stating an action to be taken by the Board,If such member
is not present at the meeting at which action is taken upon such resolution,such
consent or opposition does not constitute presence for purposes of determining the
existence of a quorum,but shall be counted as a vote in favor of or against the
resolution and shall be entered in the minutes or other record of action taken by the
Board at the meeting if the resolution acted upon by the Board at the meeting is
.www-m Page 2 of 3
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substantiallythesameorhassubstantiallythesameeffectastheresolutiontowhich
thememberoftheBoardhasconsentedorobjected.
4.06Toadoptanindemnityplanandtopurchaseandmaintaininsurancefor
officers,directors,employeesandagentsagainstliabilityassertedagainstthemand
incurredinanysuchcapacityorarisingoutoftheirstatusassuchtothefunestextent
permissibleundertheprovisionsofChapter302A,MinnesotaStatutes.Exceptas
expresslyprovidedinSection302A.251.Subd.4,MinnesotaStatutes,amemberof
theBoardofDirectorsofthiscorporationshallhavenopersonalliabilitytothis
corporationortotheshareholdersformonetarydamagesforbreachoffiduciaryduty
asamemberoftheBoardofDirectors.
ARTICLEV
Section302A.671,MinnesotaStatutes,shallapplytoacontrolshare
acquisitionofthecapitalstockofthiscorporation.
3.TheSecondRestatedArticlesofIncorporationofthecorporationcorreetlysetforth
withoutchangethecorrespondingprovisionsofthearticlesaspreviontsyamended,except
thatArticleIIthereofcontainsthenewaddressofthecorporation'sregisteredoffice,which
hasbeenapprovedbytheBoardofDirectorsofthecorporation.
4.TheSecondRestatedArticlesofIncorporationwereadoptedpursuanttoChapter
302AoftheMinnesotaBusinessCorporationAct.
INWITNESSWHEREOF,theundersigned,theSecretaryofComputerNetwork
TechnologyCorporation,beingdulyauthorized,hasexecutedthisdocumentonJune19,
1992.
EugediúÙkanis,Secretary
FILEo°Fsvare
r
Page3of3
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CNT TEL [phone] Jul 08 92 16:10 No.016 P.02
Atate of Minnesolo
flies of the Beeresary of State
Notide of Change of
Registored Office -Registered Agent or Botit
by
Co paw FJekwoÆ Rehanlagg (orpomheb
Ptwauant to Mhmonote Stokites,Section 302A.123.300,10,317,f9,317At23 or sosA020tha undetalgnad horoby
cortifies thot the Board of Directors of the above named C6rpo¢ndon has tesolved to change the corporation'a
regiatored offico and/or agent to;
ityendosi twith todeilgasteanagoni,youmußnu"NONVbeinte box.00ÑCitUSTTHtC0AfonATEilAME
Obuspsy notinte P.4 One,jag you famyMet a ruteˢgute WWIMWourdier),
[pSoo Wedqwood Romol
är 1 4 unw &
gy Goe |Hennepa ""wm
mangen ¢dreasoame-e.a eon aaenshown
MuirweAddress
Tre now oddress may not be a poet officoltu,it must De e street addtess,purtunut to Mfnnesoto Statulos.Sectiota SO2Act1.
Subd.3,,303,02,Subd.5,317.02 Subd.13.317A.01 Subd,2.
This chartge is effeedm on the day it is flied with the Secretary of State,uttfess you
kunnese anodat date,rur later than304ays after filno witti úte Secretory of State,
in thie bec ·
t candy that Lom authorized to exocute this cordticare and f lurther conity that i understarrt tuar by signing this cortinuato i om
subinet to thopenettlesof perþsry us set forth in sectiota 600,40 as if I hadsigned this certificato under oath.
temaororacereron.,«Aue.wa.gAg.,a¢cerbunden
N John R.Brinttrall
President of Firtance
Do not write búlwe this ifna.FetS wretary of Stats's usa enly,
Regelot pastreer
Fúa Data RA.A.
SEME OF MINNESOTK
runo rm som DEPAlltiëNI OE SlME
norum to Business Serviese Meien FilE!)
OfBeeof the Secretaryof State
taamateotoceaanding
AUC 1 1991
Manetment paWbte to:SecretartetStats screierg ti itaid
C0 lÄ 3AV OVJ-31VIS JO 38 OL LG2 BIS 1
1992-07-98 52 I PAGE =02
State of Minnesota FS
ffice of the Secretary of State
Notice of Change of
\Registered Office -Registered Agent or Both
Narne of Corporation
C.OMPu'tEA 14EThiotic TECHNOLoßY
Pursuant to Minnesota Statutes.Sectron 302A.123.303.10,317.19,317A.123 or 308A.025 the under signeJ here y
:ernfies that the Board of Directors of the above narned Corporation has resolved to change the corporation s
registered office and/or agent to:
Agam a
II vov co not wash to cesignale an spent.You must us:"NONE"in (fus os.DO NOT Ú$ν(PÒ¾TÈ NAMË
Nam."No ME a
Address ¡You rnar not tar a PO,a but you romy ist a turst route and tum numoerJ
Streel)&OS ÑOATM Ató4kfAY 149,64tTE goo
t.Counev
MtsnEAPotis eggggggg;SSWI
donerentinentouressacm-AÒ.sommacceptamat Do g list e different street accress er locargen.
Acetess
On County Tim
AS (tdEO OÑ CONGatRREttkŸ ÈtLER FØAM N·-$-11.
Ine nfW dÔÔftSS:Tlav Dot be a DOS:ofûce box.It rnest be a street address,pursuant to Minnesota Statutes.5ection 3CIA.CO.
Su:×:3..303.02.Sutxt 5.337.02 Subct 13.,317A.01 Subet 2.
ths change is effee::ve on the day ::ts filed with the Secetary of State.unless you
andicate another date,no later inan 30 days after filing wsm me Secretary of State.
In this tot
1:er:dy :M:t arn authonrad to execute mis ¢citsficate and i further certify that i understand that y signing this ceraficate I am
sobrect to the :coalues of cerjury as set fortn en decaon 609AS as si i had sagnesmis certiheate under oatn,
e or Ort coroormas segnan.re
i ne or On<a .
3ete
Do not write below this fine.For secretary o state use only.
Receta:Number File Data
ung ½e $36.00
Retum to sostness services Division RLED
cmee or me secreea<y or sta SE P 1 9 1994
so state omoe acuding ,
5L Pavt MN 55155 64
Mare :,s
3etary
of state
O
I
SEORETARY OF STATE
Certificateof Aferger
I,Joan Anderson Growe,Secretmy of State of .ilinnesota,cerityylhat:the doewnents
required to effectuate a merger between the entities listed below and designating the surviving
entity have been filed in this office on the date noted on this certgicate,and the qualgication
ofthe non-surviving entity to do business in Minnesota is terminated on the effective date of
this merger.
Merger Filed Pursuant to Afinnesota Statnies.Chapter:302A
State of Formationand Names of Alerging Entities;
MN:CNT/BRIXTON SYSTßAIS,INC.
MN:COMPUTERNETWORK TECIINOLOGYCORPORATION
State of Fonnationand Narne of Surviving Entity:
MN:COMPUTERNETWORK TECIINOLOGY CORPORATION
Effective Date of Aferger:July 21,1995
Name of Surviving Entity After EffectiveDate of Merger:
COMPUTERNETWORKTEC11AULOGY CØRPORATION
77tis certgicate has been issued on:July 21,1995
Secretary of State
ARTICLESOF MEltGER
OF
CNTIBRIXTON SYSTEMS,INC.
INTO
COMPUTER NETWORK TECHNOLOGY CORPORATION
Pursuant to Scotion 302A.621 of the Minnesota Business CorporationAct,the
undersigned officer of ComputerNetworkTechnology Corporation,a Minnesota ¢orporation
(the "SurvivingCorporation"),the owner of 100Fo of the outstanding capital stock of
CNTIBrixton Systems.Inc..a Minnesota corporation (the "Subsidiary Corporation"}.hereby
executes and files these Articles of Merger:
FIRST:The Plan of Merget,in the form of rusolutions duly adopted by the Board of
Directors of SurvivingCorporationat a meeting on July 20.1995 is attached hereto as
Exhibit A.
SECOND:The number of outstanding shares of each class and series of Subsidiary
Corporationand the number of shares of each class and series owned by Surviving Corporation
are as fonows:
Designation Number of Number of Shares Owned
of Class &Sa OutstandineShares hv SurvivingCorporation
Common Stock,
par value5.01 per share 100 100
THIRD:Thereare no shareholders of Subsidiary Corporationother than Surviving
Corporatica:therefore,no mailing of the Plan of Merger is required pursuant to Section
302A.621,subd.3(c),of the Minnesota Business CorporationAct.
FOURTH:The Plan of Mergerhas been duly approved by Surviving Corporationunder
Section 302A.621 of the Minnesota Business CorporationAct
FIFTH:The mergershall be effectiveJuly 21,1995.
Dated:July?0.1995
COMPUTER NETWORK
TECHNOLOGY CORPORATION
wis Shender,Secretary
041115
EXiflBIT A
WHEREAS.the Corporationowns 100%of the issued and outstanding capital stock of
CNTIBrixton Systems.Inc..a Minnesota corpomtion (the "Subsidiary"),consisting of 100
shares of Common Stock,par value of S.01 per share;and
WNEREAS.the Corporationdesires to effect the tuerger of Subsidiary with and into the
Corporalitmpursuant to Section 302A.621 of the Minnesota Ikisiness CorporationAct.
NOW.THEREFORE,BE IT RESOLVED,that Subsidiary be merged with and into the
Corporationpursuant to Section 302A.621 of the Minnesota Business CorporationAct,in
accordance wîth th¢further resolutions set forth below (which resolutitms shat!¢onstitute the
Plan of Merger):
RESOLVEDFURTHER,that at the effectivetime of the merger all of the outstanding shares of
common stock of the Subsidiary shaH be canceled,and no securities of the Corporationor any
other corporation,or any money or other property,shall be issued to the Corporationin
exchange therefor:
RESOLVED FURTHER,that the merger shaH be effectivethe date of filing of articÏcs of
merger with the Secretary of State of the State of Minnesota in the manner required by law;
RESQLVEDFURTHER,that any officer of the Corporationbe and herchy is authorized and
directed to make,sign,and acknowledge,for and on behalfof the Corporation,artiefes of
merger setting forth the foregoingPlan of Merger and such other informationas required by
law,and to cause such artiëles to be fHed for record with the Secretary of State of the State of
Minnesota in the manner required by law;and
RESOLVED FURTHER,that the officers of the Corporation,and ea¢h of them,he and they
hereby are authorized,for and on behalfof the Corporation.to take such other action as such
officers.or any of them,shan deem necessary or appropriate to carry out the purpose of the
foregoingresolutions.
STATE OF MINNESOTA
DEPARTMENTOF STATE
RLED
o
O
STATO GP Œ©ŒSOTA
DDARTMENT OF STATE
I herebv cardfy that i is a
true and iomp era copy of the
rec r
SecreLary of Stato
EXHIBIT 2
CERTIFCATEOF AUTHORITYTO TRANSACTBUSINESS IN IDAHO
8
State ol a o
Office of the Secretary of State
CERTIFICATEOF AUTHORITY
OF
COMPUTERNETWORKTECHNOLOGYCORPORATION
File Number C 150843
I,BEN YSURSA,Secretary of State of the State of Idaho,hereby certify that an
Applicationfor Certificate of Authority,duly executed pursuantto the provisionsof the
Idaho Business Corporation Act,has beeri received in this office and Is found to
conform to law.
ACCORDINGLYand by virtue of the authority vestedin me by law,I issue this
Certificate of Authority to transact businessin this State arKi attach hereto a duplicate
of the applicationfor suck certificatel
Dated:16 September2003
BY -
SECRETARY OF SÍA
EXHIBIT 3
SUBSIDIARIESOWNED BY APPLICANT
9
ComputerNetwork Technology Corporation
Subsidiaries of the Registrant
Articulent Inc.
-Incorporated under the laws of the State of Delaware
ArticulentLLC
-Organized under the laws of the State of Minnesota
Business Impact Technology Solutions Limited
-Incorporated under the English Companies Act
-d/bla CNT BI-TECH
Business Impact Technology Solutions Sweden AB
-Incorporated under the laws of Sweden
-d/b/a BI-TECH Sweden
CNT Intemational Ltd.
-Incorporated under the English Companies Act
-d/bla CNT Intemational Ltd.and CNTI
CNT France S.A.
-Incorporated under French law
-d/bla CNT France S.A.and CNTF
Computer Network Technology GmbH
-Incorporated under German law
CNTFS Corporation
-Incorporated under Barbados law
CNT Deutschland GmbH
-Incorporated under German law
Computer Network Technology (Asia Pacific)Pty.Ltd.
-Incorporated under Australían law
-d/b/a CNT A/P
CNT Japan K.K.
-Incorporated under Japanese law
CNT Acquisition I Corporation (formerly known as RealLegacy.com,Inc.and also formerly known as Propelis
Software,Inc.)
-Incorporated under Minnesota law
Computer Network Technology do Brasil Ltda.
-Incorporated under Brazillian law
CNT Telecom Services,Inc.
-Incorporated under Minnesota law
Basketball Corporation
-Incorporated under Delaware law
EXHIBIT 4
FINANCIAL INFORMATION
Attaebed are the AnnualReport 2002 and Form 10K for the SEC.
10
CNT Annual Report 2002
paasy
To Our Shareholders:
2002 was a challenging year.Business-to-business
spendinghit a 50-year low.Economic uncertainty drove
the financial markets down,and many companies
responded by freezing capital expenditures.Network
industry sales fell 18 percent comparedto 2001:storage
industry revenues fell three percent.
On a positive note,CNT's financial performance,while
not satisfactory,stood in sharp contrast despite the
tough economic climate.Total CNT revenues were up
13 percent over 2001,making 2002 our fifth consecutive
year of top line revenue growth.In fact,CNT finished the
year with the biggest backlog of business and the CNT continued to grow as a total solutions providerwith
largest managed services revenue stream ever.In a broader portfolio of offerings that extend our reach
recognition of our growth,CNT was named to the in our customers'environments.As we provide our cus-
Network World 200 list of top networking companies tomers with more and more solutions that combine
based on overall revenue.business continuity with business efficiency,we strengthen
our relationship as a valued business partner to our cus-
CNT grew StorageArea Networking(SAN)revenue 16 tomers.Revenue from our storage consulting services
percent,while the industry overall experiencedonly a grew every quarter in 2002.Our managed services rev-
nine percent increase in SAN revenue during 2002.enue also grew every quarter,including our largest
Storage services sales grew only four percent industry-managed services contract to date in the fourth quarter.
wide,but CNT realized a 77 percent increase in revenue Partnerships with other industry-leadingcompanies in
from storage services.Where IP sales grew 35 percent in the storage,networking,and services industries
the industry overall,CNT's IP revenue grew 90 percent.enhancedour ability to deliver comprehensivesolutions
to our customers.We reinforced alliances with IBM,EMC,
When you reflect on the economic struggles of this past Hitachi Data Systems,Strohl Systems,and StorageTek to
year,especially for the informationtechnology industry,leveragetheir strengths for our solutions and to increase
CNT's successes become even more impressive.CNT is our share of their solution sales.
extremely proudof this record revenue and of the team
that delivered this growth.You may conclude,as I have,
that CNT is a company in the right space at the right
time with the right strategy.
During 2002 we implemented a cost-efective disaster recovery solution for Ohio Savings Bank,one ofthe nation's 10 largest
mortgage lenders,that requires 99.999 percent uptime,or '5 nines'reliability.
To meet its business requirements,Ohio Savings Bank implemented a CNT mirroring solution.Our UltraNet Edge Storage Router
was used to connect storage networks over IPfor a highly reliable disaster recovery solution.The organization received afully
redundant network,configured for zero data loss.The solution met our customer's needs as well as their budgetary requirements.
And the architecture will support corporate growth and change far into thefuture.
Donald fanosik,network services team lead,Ohio Savings Bank,commented:"In the lending andfinanceindustry,downtime is
not on option.In the event that one center fails,we now have the capability to access the same data in the second center to
maintain 'business as usual'without anyone even knowing that the change took place.It makes my job a lot easier knowing
that my customers'data is safe at all times."
The year was marked by the introduction of new inno-CNT is poised to extend its competitivelead in 2003,even
vative CNT products and services and the growth of thoughthe outlook is uncertain for many businesses.
existing offerings.Some highlights from 2002 include:
Announced the industry's first successful tape pipelin Risk averse customers are turning away from start-up
ing over IP capabilities suppliers and toward established partners with proven
track records and strong balance sheets.GovernmentLaunched Network Management Service (NMS)to guidelines and regulatory requirements are placingremotelymonitorcustomernetworksandproactively
preventdowntime pressure on companies in several industries to begin or
increase spending on business continuity and disasterIntroduced new,proprietary tools including recovery.Reduced workforces,high equipment costs,HealthChecks and Assessments for storage and IP and escalating maintenance costs are drivinga returnnetworkstoconsolidateddatasites.For customers facing any of
Expanded our Business Continuity consulting practice these issues,CNT is the answer.
Grew sales of the UltraNet*Edge Storage Router from
$3.2 M in 2001 to $13.2 M as the próductcontinued to CNT has participated in the networking and storage
gain acceptance industries since their beginnings.With nearly two decades
Acquired BI-Tech,a leading independent storage in operation,we have accumulated experience and
solutions providerin Europe built our portfolio of offerings.As our industries moved into
.the moinstream,the technologies,interconnectivity,andAcquired over 200 new customers and built stronger interoperability on which they are based have becomerelationshipswithourexistingcustomers
more rather than less complex.Now,more than ever,cus-
tomers need CNT's expertise and innovative solutions.WeAswedeliveredbusinessefficiencysolutionstoourcus-
tomers,we increased efficiency within CNT.We integrated are the storage networking experts.
our networking and solutions sales,support,and service On April 7,2003,CNT announced its intention to acquirefunctionstobetterreflectourcompletecapabilities.We inrange Technologies Corporation.This strategic acquisi-made key organizational changesdesignedto stream-
.tion is expected to significantly broaden and strengthenlineoursalesorganizationandourapproachtoservice
...CNT's portfolioof storage networking products,solutionsdeliverythatwillresultinincreasedsalesopportunitiesandservices,e×pand our customer base,and provideandimprovedcustomersatisfaction.We reduced our
us with significant scale and cost reduction opportuni-worldwide workforce by ten percent and increased our ties.While the transaction is subject to regulatoryrevenueperemployeetothehighestlevelever.approval,it is e×pected to close in the second quarter
CNT exited 2002 with a solid and improving balance of 2003,and when complete,will make CNT larger and
one of the world's best providers of complete storagesheetandastrong,new sales management team in
place.We enter 2003 with a company-widecommitment networking products,solutions and services.
to cost-containment,efficiency,and growing profitability.
As we head into our 20th anniversary,we are cautiously
Our goals for 2003 are to:optimistic about the years ahead and steadfast in our
commitment to grow revenues and profits,I would likeContinue to improve customer satisfaction by offering to thank our shareholders and customers for theirsolutionsthatmeettheirtechnologyobjectivesaswell,ongoing support and our management team andastheirbusinessandfinancialrequirementsemployeesfortheirdedicationandcontinuedfocus
Grow profitability by selling the complete CNT port¯on deliveringcustomer value.folio-products,solutions,and services
Expand the suite of UltraNet products Sincerely,

thearnceannednddeveecreentesnerships
Mine the existing customer base for new sales as tech¯Thomas G.HudsonnologiesandsolutionsevolvePresident,Chief Executive Officer and
Add telecom sales to our solutions to help customers Chairman of the Board
manage their total cost of ownership
(This page intentionally left blank)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,D.C.20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
ØF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31,2003
Commission file number:0-13994
COMPUTER NETWORK TECHNOLOGY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1356476
(State or Other Jurisdiction of Incorporation or Organization)(I.R.S.Employer Identification No.)
6000 Nathan Lane North,Plymouth,Minnesota 55442
(Address of Principal Executive Offices)(Zip Code)
[phone]
(Registrant's telephone number,including area code)
Securities registered pursuant to Section 12(b)of the Act:None
Securities registered pursuantto Section 12(g)of the Act:Common Stock $.01 par value
Indicate by check mark whetherthe Registrant (1)has filed all reports requiredto be filed by Section 13 or
15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was requiredto file such reports),and (2)has been subject to such filing requirements for the past
90 days.Yes V No
Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not
contained herein,and will not be contained,to the best of Registrant's knowledge,in definitive proxy or
information statements incorporated by reference in Part IIÏ of this Form 10-K or any amendment to this
Form 10-K.O
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).Yes V No
State the aggregate market value of the voting and non-votingcommon equity held by non-affiliatescomputed
by reference to the price at which the common equity was last sold,or the average bid and asked price of such
common equity,as of the last business day of the registrant's most recently completed second fiscal quarter:
$146,001,470.
As of April 1,2003 Registrant had 26,970,165 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Computer Network TechnologyCorporation'sdefinitiveProxy Statement for the Annual Meeting
of Shareholders to be held on June 25,2003 are incorporatedby reference into Part III of this Form 10-K.
TABLE OF CONTENTS
PART I
Item1.Business.....................1
Overview .....................I
Our Market Opportunities-----------.
........2
Selected Recent Developments.........---.........3
Storage Networking Overview...........
.........4
Our Storage Networking Solutions .....................5
Our Storage Networking Strategy ......................6
Our Storage Networking Products ....................7
Our Storage Networking Services ...................8
Strategic Storage Networking Relationships ....................9
Sales and Marketing.....................9
Customers .-..
.9
Research and Development.....................9
Manufacturing and Suppliers.......................10
Competition......................10
Intellectual Property Rights ......................12
Employees ......................13
Discontinued Operations ......................13
Website Access to Reports ...............................13
Special Note RegardingForward-Looking Statements.......................13
Item2.Properties.......................14
Item 3.Legal Proceedings......................................14
Item 4.Submission of Matters to a Vote of Security Holders ......................14
Item 4A.Executive Officers of the Company ......................14
PART II
Item 5.Market for the Registrant's Common Equity and Related ShareholderMatters .........16
Item 6.Selected Consolidated Financial Data ..........................................17
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations ...19
Item 7A.Quantitative and Qualitative Disclosures about Market Risk ........................31
Item 8.Consolidated Financial Statements and Supplementary Data .........................32
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ...58
PART HI
Item 10.Directors and Executive Officers of the Registrant .....................59
Item 11.Executive Compensation ...........................................59
Item 12.Security Ownership of Certain Beneficial Owners and Management...................59
Item 13.Certain Relationships and Related Transactions ......................59
Item 14.Controls and Procedures ..........:..........59
PART IV
Item 15.Exhibits,Consolidated Financial Statement Schedules,and Reports on Form 8-K .......60
SIGNATURES......................66
CERTIFICATIONS ....................67
PART I
Item 1.Business
BUSINESS
Overview
We are a leading provider of end-to-endstorage solutions,including hardware and software products,
related consulting and integrationservices,and managed services in the growing storage networking
market.We focus primarily on helping our customers design,develop,deploy and manage storage
networks,including storage area networks,or SANs,a high speed networkwithin a business'existing
computer system that allows the business to manage its data storage needs with greater efficiency and less
disruption to its overall network.We design,manufacture,market and support a wide range of solutions for
critical storage networkingapplications such as remote data replication,or the real-time backup of data to
remotely located disks,and remote tape vaulting,or the backup of data to remotely archivedtapes.We
also supply storage systems,Fibre Channel switches,telecommunications capacity and storage application
software.Our revenues were $211.5 million,$187.0 million and $176.1 million for the years ended
January 31,2003,2002 and 2001,respectively.
Our storage networkingsolutions enable businesses to cost-effectivelydesign,implement,monitor and
manage their storage requirements,connect geographicallydispersed storage networks,provide continuous
availability to greater amounts of data and protect increasing amounts of data more efficiently.We market
our storage networkingproducts and services directly to customers through our sales force and worldwide
distributors.We also have strategic marketing and supply relationships with leading storage,telecommuni-
cations and fibre switching companies,including Brocade,EMC,Hewlett-Packard,Hitachi Data Systems,
IBM,McDATA,StorageTek,Dell Computer Corporation and Veritas.
We were the first to develop,and remain a leading provider of,the following storage networking
solutions:
Storage networkingover WANs.Our solutions for storage networkingover wide area networks,or
WANs,enable businesses to manage and protect data across remote locations,in real time if
necessary,through applications such as remote data replication and remote tape vaulting.WANs
are networks dispersed over long distances that communicate by traditional copper or fiber optic
third-party telecommunication lines.
Fibre Channel-based storage networkingover WANs.In October 1999,we introduced our first
Fibre Channel-based storage networkingover WAN product.Fibre Channel is a technology that
dramatically improves the speed of data input and output,or I/O,between existing storage devices
and the ability to connect additional devices to storage networks.We believe our Fibre Channel-
based storage networking over WAN products offer significant growth prospects.These products
uniquely address constraints in distance,connectivity and data transmission speeds inherent in the
Fibre Channel standard.We believe Fibre Channel technology combined with our products and
services will enable businesses to efficiently consolidate,cluster and share data from multiple
storage devices on storage networks.
Storage networks over IP-based networks.In February2000,we introduced the first products to
allow storage networking applications,such as remote data replication,to be deployed over private
networks that are based on Internet protocol,or IP,the standard method for data transmission over
the Internet.In May 2001,we announced the first implementation of data mirroring that combined
Fibre Channel over IP.Our products were the first to extend the Fibre Channel,SCSI and
ESCON standards to IP-based networks.SCSI and ESCON are older,widely used standards for
communicatingbetween computers and IP refers to internet protocol.These products uniquely
enable businesses that use virtual private IP-basednetworks,or VPNs,to build storage networking
over WAN applications.In October 2002,we announced the first remote tape backup/recovery
solution for open systems environments to operate over thousands of miles utilizing IP networks.
1
Followingthese technological firsts,we expanded our solutions offeringswith the acquisition of
Articulent Inc,in April 2001,a storage solutions provider in the Northeast United States,and the
acquisition of Business Impact TechnologySolutions Limited (BI-Tech)in June 2002,a storage solutions
provider in the United Kingdom.Our expanded solutions offerings include consulting,integration,
monitoring,and management services that allow our customers to rapidly design,implement and manage
complex storage environments.As a result,we are able to capture more of our customers'spending dollars
on storage solutions.
Our storage networkingsolutions operate across most business computingenvironments,including
open systems and mainframes.Open systems are server-based systems that are easy to scale,or expand,
and use hardware and software standards not proprietary to any vendor.Mainframes are computer systems
with high processing power that have historically been used by large businesses for storing and processing
large amounts of data.Comparedto available alternatives,we believe our storage networkingproducts offer
greater ability to connect various applications and heterogeneous environmentsusing different interfaces,
protocols and standards,and to connect and link devices in storage networks transparently,meaning with
little or no alteration of other vendors'hardware or software products.
We believe our solutions that enable storage networking applications over IP-based networks will
benefitexisting customers and attract new customers,including mid-sized businesses.These solutions
extend the "bandwidth on demand"advantages,of IP-based networks to storage applications and allow
customers to access telecommunications capacity only as needed through a virtual private network,or
VPN,connection,as opposed to feasing expensive dedicated lines.By deploying storage networks over IP-
based networks,companies can leverage their existing bandwidth,and can rely on their existing IP network
knowledge.We believe that these cost savings,along with the generally expected decreasing costs of
telecommunications capacity,will create high-growth opportunities for us in remote data replication,
remote tape vaulting and other storage networking applications we enable.
Our storage networking products consist primarily of our UltraNet®family of products,that connect
storage devices.We also market our established channel networkingproducts,which enable mainframe
computers to transmit data over unlimited distances and provideour support services.Our storage solutions
sales,which includes the business we acquired from Articulent in April 2001 and BI-Tech in June 2002,
helps our customers design,deploy and manage enterprise storage solutions by supplying products and
expertise for implementing storage applications.The storage solutions sale includes consulting and
integration services for disaster recovery,business continuance,storage infrastructure and network
performance.We also offer integrationservices for data replication,enterprise back-up and restore,SAN
implementationand network performance monitoring.
Our Market Opportunities
We believe several forces will continue to drive the demand for our storage networkingproducts and
services:
The volume of enterprise data is expected to increase significantly due to the proliferation of Web-
based content,digital media,e-mail,supply chain management,customer relations management
and other data-drivenbusiness applications.As a result,the demand for storage capacity continues
to grow.
Actual and expected declines in telecommunications costs and the introduction of cost-effective
technologies such as Fibre Channel switching and fiber optic transmission capabilities will make
remote data replication and remote tape backup applications more financially attractive for our
customers.The decrease in telecommunications costs,coupled with an overallincrease in the cost
of ownership,contributes to a trend of consolidating and connecting storage across many servers
and many locations,which drives demand for our products and services.
2
I
Storage networkingapplications over IP-basednetworks will further expand the type and amount of
data our customers will backup and replicate to remote locations.This will also make these
applications more affordablefor customers with fewer storage requirements.
The increased complexities of storage applications,such as interoperability,storage effectiveness,
and business efficiency issues,results in customers requiring storage integration and implementation
expertise.We believe our services permit customers to effectively solve these issues,driving demandforourproductsandservicesandincreasingourrevenues.
Customers require that their business critical applications have effective disaster recovery solutions.The events of September 11,2001 demonstrate the need for and functionality of our products and
services.Our customers had 40 systems located in lower Manhattan that were significantly
impacted.Because our products were routing data to remote facilities on behalf of customers
located in and around the World Trade Center,we believe all products worked as designed,
resulting in no material loss of data by any customer.
As a result of the foregoing and other factors,International Data Corporation,or IDC,estimates that
the worldwiderevenue for SAN-attached disk storage systems will grow from $5.9 billion in 2002 to
$9.1 billion in 2006,a compound annual growth rate of 12%.Another indication of demand for our storage
networkingsolutions is the growth of the Fibre Channel industry.IDC estimates the revenue for FibreChannelhubs,switches and directors will grow from $1.5 billion in 2002 to $2.4 billion in 2007,which
reflects a compound annual growth rate of 10%.IDC estimates the demand for storage consulting and
support services will grow from $1.6 billion in 2002 to $2.1 billion in 2006,a compound annual growth rateof6%.IDC estimates that North America revenue for storage services will grow from $12.6 billion in 2002
to $17.1 billion in 2006,a compound annual growth rate of 7%.It is notable however,that we are in the
midst of a current economic slowdown affecting most technology sectors and communications in particular.During 2002,IDC estimates worldwide industry sales of disk storage systems declined $4.1 billion from
$17.4 billion in 2001 to $13.3 billion in 2002.We are uncertain of the depth and duration of this
slowdown.However,we believe the need for storage networkingsolutions is significant and will continue to
increase over the long term.For example,Terabytes installed grew 35%in 2002,even though the pricing
declined from 2001 to 2002.
Selected Recent Developments
On April 6,2003,we entered into an agreement where our wholly owned subsidiary will acquire all of
the shares of Inrange Technologies Corporationthat are owned by SPX Corporation.The shares acquiredwillconstituteapproximately91%of the issued and outstanding shares of Inrange for a purchase price of
$2.3132 per share and $173 million in the aggregate.Pursuant to the agreement,immediately following the
acquisition,the subsidiary will be merged into Inrange,and the remainingcapital stock owned by otherInrangeshareholderswillbeconvertedintotherighttoreceive$2.3132 per share in cash,resulting in a
total payment of approximately $190 million for both the stock purchase and the merger.Consummationofthesetransactionsissubjecttosignificantconditions,including filing and expiration of the waitingperiodundertheHart-Scott-Rodino Antitrust ImprovementsAct of 1976,as amended.Although we
believe we have adequate resources there may be certain circumstances resulting from the completion of
this transaction,which could impair our liquidity.In addition,if this transaction is completed,we will be
subject to increased competition and other risks.See "Liquidity and Capital Resources"on page 29,"Competition"on page 10 and risk factors within Exhibit 99.1 for further discussion regarding the Inrange
transaction.
Upon completion of the acquisition,we will be one of the world's largest providersof complete
storage networkingproducts,solutions and services,with 2002 pro forma annual revenues of approximately
$435 million and global leadership positions in Fibre Channel and wide area network switching,and
operations worldwide.The acquisition significantly broadens and strengthens our portfolio of storage andnetworkingproductsandsolutions,expands our customer base,and provides us with significant scale and
cost reduction opportunities.
3
On January 30,2003,we announced a number of actions to streamline our business,enhance
customer service,and improve future profitability.We completed the integration of our networking and
solutions sales,support and service functions.The integration allows us to execute our strategy for
continued growth and enhanced customer service.Over the last several years,our products have been
designed and built to be extremely reliable and easy to service,resulting in improvedefficiencies within our
service organization,and a reduction in the number of employees needed to provide world-class support.
We continue to see excellent acceptance of our Fibre Channel IP product,the UltraNet®Edge.TheUltraNet®Edge provides enterprise wide access to information and helps companies manage their storage
infrastructurefor maximum performanceand efficiency.Because of the Edge product,the need for future
upgrades to our legacy products is reduced.We expect to extend our competitivelead in fiscal 2003 via
the introductionof new products within the UltraNet®family,and several new joint development
arrangements with other leaders in the storage networking industry.These actions allowed us to reduce our
worldwideworkforce by 80 people or about 10%.While difficult,the reduction in workforce was necessary
to improve future efficiency and profitability.
In June 2002,we acquired all of the outstanding stock of BI-Tech,a leading provider of storage
management solutions and services,for $12 million in cash,plus the assumption of approximately
$3.6 million of liabilities and the acquisition of approximately$8.7 million of tangible assets.The
accompanying financial statements include the results of BI-Tech since June 24,2002.The purchase
agreement requires that we pay at our option,in the form of a note payable or in our stock to the former
stockholders,and in cash to the BI-Tech employees,additional consideration based on achievementof
certain earnings for each of the next two years starting July 1,2002.The portion payable to the former
stockholders will be recorded as goodwill.The portion payable to BI-Tech employees will be recordedas
compensation expense.Through January 31,2003,additional consideration of $3.6 million and $744,000
was added to goodwill and compensation expense,respectively,and a corresponding liability was recorded.
In February 2002,we sold $125 million of 3%convertible subordinated notes due February 2007,
raising net proceeds of $121 million.The notes are convertible into our common stock at a price of $19.17
per share.We may redeem the notes upon payment of the outstanding principal balance,accrued interest
and a make whole payment,if the closing price of our common stock exceeds 175%of the conversion
price for at least 20 consecutive trading days,within a period of 30 consecutive trading days,ending on the
tradingday prior to the date we mail the redemptionnotice.The make whole payment represents
additional interest payments that would be made if the notes were not redeemed prior to the due date.On
August 15,2002 a registration statement for the resale of the notes and the 6.5 million shares of common
stock issuable upon conversion of the notes became effective.
Storage Networking Overview
Storage NetworkingIndustry Background
Growth in Enterprise Data
The volume of enterprise data is increasing due to the proliferation of Web-based content,digital
media,e-mail,supply chain management,customer relations management and other data-driven business
applications.
Limitations of Traditional Storage Products
The growth 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 number
of users that require access to the data continue to increase,storage systems and servers are burdenedby
an increased number of input/output,or I/O,transactions they must perform.However,traditional storage
4
architecture has inherent speed,distance,capacity and performanceconstraints.For example,depending on
the standards and protocols used,the following constraints may exist:
bandwidth,or the data transmission rate,is generally fixed at 15,40 or 80 megabytes per second;
distance between devices is limited to 12 to 150 meters;
connectivity is limited to 15 storage devices;
lack of data management capability in SCSI devices places the burden for management tasks on
servers,thereby degrading network performance;
if the server to which the data storage device is connected fails,the data cannot be accessed;and
local area network,or LAN performancecan be significantly degraded while the LAN is being
used for storage backup applications.
Advent of Storage Networking Services
Storage networking is necessary for the effectiveuse of large data-intensiveapplications such as
enterprise resource planning,customer relationship management,and digital media.Our current and
potential customers have a growing need to access and protect the business critical data created by these
types of applications.As a result,we expect increased demand for the purchase and installation of storage
networks,which will drive demand for our products and demand for our consulting,integration,and
managed services for end-to-endstorage solutions.As a result of the installation of these solutions,we
expect there will also be increased demand for support services.
Complexity and interoperabilityissues associated with storage networks,coupled with budgetary
constraints,cause customers to struggle with the effective implementationof storage networking
environments.We believe this will cause many potential customers to look outside their organization for
help.Thoroughknowledge across a wide variety of proprietary technologies and standards,combining
storage expertise and networkingknowledge,is not easily found in the marketplace.We anticipate
companies such as ours,with comprehensive expertise and skill sets in disaster recovery,business
continuity,storage resource management,database,tuning,troubleshooting,switches,networkingand
storage arrays,will be able to fill in the void for these customers with consulting and integration services.
We believe customers may also look to contract out the management of these storage networks as a result
of outsourcing the design and implementationof these solutions.
Our Storage NetworkingSolutions
Our storage networking solutions,consist of products and services that address the limitations of
traditional storage architecture in the following ways:
Storage networks over unlimited distance -Our products and services enable organizations to
create secure storage networks without any distance limitations.This allows the creation of storage
networkingover WAN environments in such critical applications as remote data replication,
enterprise backup and recovery and remote tape vaulting.
Any-to-any connectivity -Our products are protocol independent -they can connect devices that
use Fibre Channel,SCSI,ESCON,and bus and tag protocols.These devices can be connected and
extended over telecommunications links including T1/El,T3/E3 and ATM (OC3,OCl2),packet
over sonet,or WAN protocols like IP,Fibre Channel and fiber optics.We believe our products
connect with substantially all storage vendors.
Infrastructure options -Our products enable the use of IP,ATM,Fibre Channel and fiber optics
for expanded use of a storage network infrastructure.This supports the growing amounts of storage
created by applications like e-mail and increases due to user demands to access applications in a
continuous mode.
5
IP-based networkingsolutions -We enable remote data replication over IP-based networks using
software providedby EMC,IBM,Hitachi and Hewlett-Packard.Our solutions allow our customers
to capitalize on inexpensive "bandwidth on demand"capabilities of IP-based networks and use
existing IP capacity,especially at low traffic times of the day,and rely on existing IP network
knowledge.We anticipate expanding storage networking applicationsupport with products from
other vendors.
Consulting and integrationservices -Our consulting and integration services help customers
evaluate,analyze,design,install and manage storage networks.We strengthened our consulting,
integration and managed services capacity with the acquisition of Articulent in 2001 and BI-Tech in
June 2002.We believe these value-addedservices assist customers in designing,integrating,
implementing,and managing storage networks more effectively than they could on their own.Our
integration services help customers deal with the complexity of implementinga storage network that
is scalable and compatible with customer resources.These services bolster sales of our high margin
UltraNet®products and allow us to capture more of our customers'spending.We offer bundled
telecommunications access with our products and services to provide customers a complete end-to-
end operating solution.
Managed services --We offer outsourced storage management services that complement our current
storage networkingproducts on a 24x7x365 basis.Our network management service helps our
customers monitor their UltraNet®products,third party manufacturedproducts,and third-party
telecommunication lines and allows them to quickly respond to and resolve storage network issues.
Our data migration services help our customers migrate large amounts of data from one data center
or storage facility to another during consolidation or expansion of data centers.This is a turnkey
service including personnel,equipment,software and support.We anticipate adding other
outsourced services to monitor and manage complete end-to-endstorage solutions for our customers
and help drive demand for our storage networking products.
Our storage networkingsolutions are used for immediate,or real-time,backup and recovery,and
support a technology known as remote data replication.Data replication avoids the serious threat to
businesses posed by the loss of data between data system backups by simultaneously creating up-to-the-
minute images of business-critical data on multiple backup storage disks.Tape back-up over long
distances,or tape pipelining,using our UltraNet®Edge Storage Router dramaticallyimproves the
performance of remote tape backup,making it a viable solution for business continuity and disaster
recovery.Our remote data replicationtechnology permits the backups to be transmitted to a separate
geographic location,thereby reducing the risk of natural and site-wide disasters.This technique also
permits rapid recovery of data when needed.
We also enhance continuous business operations.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 valuablecorporate data,it requires additional time and expense for handling
and transportation.By bridging the storage network over the WAN,backups can be instantly made to
remote locations on disk media,including by data replication,or on tape,known as electronic tape
vaulting.This allows for more secure archivingand timely retrieval of the correct business critical data.
Our Storage Networking Strategy
We intend to build upon our position as a leading provider of storage networkingsolutions.Key
elements of this strategy are as follows:
Extend Storage Networking Technology Leadership
We intend to extend our storage networkingtechnology leadership by continuing to broaden our
product and service offerings and by expanding our storage networkingsolutions into new markets.An
example of this strategy is our recent introduction of our IP over Fibre Channel,IP over ATM WANs and
IP tape pipelining.Currently,our IP-based network solutions enable remote data replication,in
6
corijunction with software products from EMC,IBM,Hitachi and Hewlett-Packard and remote tape
vaulting over IP-based networks.Our network management service will enable us to use our expertise to
assist our customers in keeping the data stored in their storage networks performing efficiently and
continuously.We intend to build market share by continuing to focus on areas that make storage networks
more useful and accessible,such as WAN applications,any-to-any connectivity,IP-based network and
network performance solutions.To achieve leadership,we intend to capitalize on the remote data
replication,enterprise backup and recovery,remote tape vaulting and network management capabilities of
our products.
Expand Our Consulting and Integration Services
Our consulting and integration services help customers evaluate,analyze,design,install and manage
storage networks.We strengthened our consulting,integration and managed services capability with the
acquisition of Articulent in April 2001 and BI-Tech in June 2002.We believethese value-addedservices
assist customers in designing,integrating,implementing,and managing storage networks more effectively
than they could on their own.Our integration services eliminate the complexity of implementing a storage
network that is scalable and compatible with customer resources.These services bolster sales of our high
margin UltraNet®products and allow us to capture more of our customers'spending.We offer bundled
telecommunications access with our products and services to providecustomers a complete end-to-end
operating solution.
Grow ManagedServices
We anticipate adding other outsourced services to monitor and manage complete end-to-endstorage
solutions for our customers and help drive demand for our storage networkingproducts.An example of
this is the recent introduction of our network management service that helps our customers monitor their
UltraNet®products,third party manufacturedproducts,and third-party telecommunicationlines and
allows them to quickly respond to and resolve storage network issues.We plan to add management of
additional storage resources to the services for problem resolution on the complete storage network.
Further Strengthen Relationships with Storage Networking Industry Leaders
We have established relationships with leaders in the storage networking market,including storage
vendors,telecommunications providers,storage management software providersand Fibre Channel switch
manufacturers.The parties with whom we have strategic relationships include companies such as Brocade,
EMC,Hewlett-Packard,Hitachi Data Systems,IBM,McDATA,StorageTek,Dell Computer Corporation
and Veritas.We intend to strengthen our existing relationships and develop new relationships that enable
us to offer complementary products and services.We believe our current and future strategic relationships
will facilitate the integration of our products,thereby increasing our market share and reducing the length
of our sales cycle.
Our Storage Networking Products
Our storage networkingproducts include the UltraNet®family of storage products,and our channel
networkingproduct known as Channelink®.
UltraNet®Storage Director is a high performance switching product that operates at the center of the
storage network.It enables storage networks to establish a direct connection between storage elements and
servers and share data among diverse servers and storage systems,and networks that are local and
geographically dispersed.The switch provides connectivity among SCSI,ESCON,bus and tag,Fibre
Channel and WANs.
UltraNet®Edge Storage Router complements the UltraNet®Storage Director by meeting the needs of
a broader market.It provides a new price and performance entry point for our core solutions,which do not
require high port-density and mixed platform support offeredby the UltraNet®Storage Director.The
UltraNet®Edge Storage Router is designed to reduce the total cost of ownership of enterprise-wide
storage networkingsolutions by leveraging the lower-cost bandwidth offeredby IP networks and the
performanceimprovements providedby Fibre Channel.
7
Channelink®offers connectivity over unlimited distances for mainframes.Applications include remote
printing and imaging and data center load balancing,which permits the operation of two or more data
centers from one site.
Third party manufacturedstorage networkingproducts supplied by us that are designed and
manufactured by others,include the following:
storage systems;
Fibre Channel switches;
telecommunications capacity;
fiber optical multiplexers;
software;and
servers.
Our Storage Networking Services
Our storage networkingservices help our clients design,deploy,monitor and manage end-to-end
storage solutions.We believe these solutions allow our customers to better manage risk and reduce the
cost of storage solutions in the enterprise.The acquisitions of Articulent and BI-Tech strengthened our
service offerings,and providedus access to a family of integrated storage services,including consulting,
integration and managed services.
Consulting Services
Our consulting services analyze a company's storage needs,determine a storage networking solution to
meet those needs,and assist in the developmentof a business case to justify the storage networking
solution.With our consulting,we assist our customers in making their existing networks more flexible and
easier to manage.Our consulting expertise is focused on business continuation,disaster recovery,storage
infrastructureand network performanceto assist information technology managers and corporate executives
responsible for planning and funding resources in making sound data management and storage decisions.
Integration Services
Our integration services help companies implement storage networkingsolutions.These services
include project planning,analyzing,designing and documenting a detailed network,installing storage
components,integratingstorage components,and testing the functionality of the implementedstorage
solution.Our storage networking products are at the core of our storage architecture implementations,and
our long-standing relationships with well-known and successful storage equipment and software
manufacturers place us at the forefront of storage management solutions.Our integration services focus on
data replication,enterprise back-up and restore,SAN implementation and network management.
ManagedServices and Telecommunications
Our managed services include a network management service.We monitor our customers'UltraNet®
products,third party manufacturedproducts and telecommunications networks 24x7x365.We believe this
service allows our customers to optimize network performance,decreases the chance of downtime and
reduces recovery time after failures.Our data migration services help our customers migrate large amounts
of data from one data center or storage facility to another during consolidation or expansion of data
centers.We also offer telecommunications services to our customers.
Support Services
We offer standard maintenance contracts for our proprietary storage networking products.The
contracts generally have a one-year term and providefor advance payment.Our products generally include
a one-year limited warranty.Customers purchasing our UltraNet®Director product generally purchase
maintenance contracts to supplement their one-year limited warranty.Customers are offered a variety of
8
contracts to choose from to suit their particular needs.For instance,current options allow a customer to
choose support 7 days a week,24 hours per day,or 5 days per week,11 hours a day.Other options offer
the customer the choice to select air shipment or replacement parts,with the part being installed by the
customer's staff,or on site support with spare parts and service being providedby a local parts distributor.
Strategic Storage Networking Relationships
Offering customers effective storage networking solutions requires integrating diverse components,
including disk and tape storage devices,storage management software,network management products and
Fibre Channel products.Our storage networkingrelationships include those with key storage vendors,
storage management software providersand manufacturersof Fibre Channel and optical networking
products.We market our storage networkingproducts directly and through worldwide distributors.We
have strategic marketing and supplier relationships with leading storage,telecommunications and fibre
switching companies,including Brocade,EMC,Hewlett-Packard,Hitachi Data Systems,IBM,McDATA,
StorageTek,Dell Computer Corporationand Veritas.These relationships allow us to providecomplete
end-to-endstorage solutions for our customers.Approximately 34%of our revenues during fiscal year
ended January 31,2003 were represented by products that we supplied on behalf of the parties with whom
we have strategic relationships.
Sales and Marketing
We market storage networkingproducts and services in the United States through a direct sales force.
We have established representative offices in Canada,the United Kingdom,France,Germany,Australia,
Japan,and the Netherlands.We also market these products and services in the United States and
throughout the world through systems integrators and independent distributors.We use an exclusive
independent consultant to market telecommunications services.
We maintain our own marketing staff and direct sales force.As of January 31,2003,we had
approximately 213 persons in our marketing and sales organization.
Customers
Our customers include:
Financial Services Telecommunications Information Outsourcing Other
American Express AT&T Computer Sciences Corporation Best Buy
Bank of America British Telecommunications Electronic Data Systems Wal-Mart
Barclays Sprint IBM Global Services EchoStar
JP Morgan France Telecom Sungard Boeing
Chase Verizon Lockheed Martin
CitiGroup Mattel
Merrill Lynch Target
Rabobank International Merck
Fannie Mae
Fidelity
AXA
Nasdaq
IBM and its affiliates accounted for 10%of our revenue for fiscal 2002.
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.
9
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 improvedproducts within existing systems;
continue to focus on providing sophisticated diagnostic support tools to help deliverhigh 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 developmentexpenses were 13%of total revenue each year during the three-year period
ended January 31,2003.We intend to continue to apply a significant portion of our resources to product
enhancements and new product developmentfor the foreseeable future.We cannot assure you that our
research and developmentactivities will be successful,
Manufacturing and Suppliers
In-house manufacturingactivities for our products primarily involve quality assurance testing of
subassemblies and final system assembly,integration and quality assurance testing.We became ISO 9002
certifiedin 1993.In fiscal 2002,we achieved certification under the ISO 2000 standard.
We manufactureour 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.At
January 31,2003 we had a backlog of $13.7 million.We believeapproximately $8.7 million of our backlog
will be recognized as revenue during the next 12 months in fiscal 2003.At January 31,2002 backlog was
not meaningful.
We manufacture our UltraNet®and Channelink®products from subassemblies,parts and components,
such as integrated circuits,printed circuit boards,power supplies and metal parts,manufacturedby others.
Some items manufacturedby suppliers are made to our specific design criteria.
At January 31,2003,we held $1.4 million of net inventoryfor parts that our vendors no longer
manufacture.Products in which those parts are included accounted for $68.6 million in revenue during the
year ended January 31,2003.We expect that this inventory will be used in the ordinarycourse of our
business over the next five years.Relevantparts will have to be redesigned after the inventoryis used.
We believe that we currently have adequate supply channels.Components and subassemblies used in
our products and systems are generally availablefrom a number of different suppliers.However,certain
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 such 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.
Competítion
Computer storage is a very large,multi billion dollar,multi-faceted,industry that has spawned the
need for a diverse set of products,services and management solutions to address the needs of the large
enterpnse.
This market has a diverse set of needs,often dictated by the total cost of ownership,that include high
availability,archive,large scale,high volume growth,flexibility,heterogeneous and interoperability
requirements for a spectrum of solutions for the enterprise.Data movementand replication (mirroring)are
two key applications that every customer must use a spectrum of products and services to get the job done.
Customers have varyingdegrees of needs based upon:the peculiar requirements for various vendor and
technology platforms;capacity;performance;access;back up and recovery time for the applicationuser,
for auditors and regulators;and risk and cost management for the entire enterprise.These needs have a
10
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further communications and distance dimension in their requirement to be local (same building)to each
other,on a campus,across the city,across the country or even internationally interconnected.These needs
often need to be satisfied across a diverse set of communications capabilities,including low and high speed
lines from T1 to OC48+,to diverse protocols from point to point,ATM and IP,to free space optics and
wireless,as well as the availability of dark fiber or wave length services.
Finally,customers often use existing technologies (including multi-generationsof products)and
methods that must be compared and integrated for total enterprise storage management.These data
movement solutions would include:manual truck and archive storage,server based software for data
movement and replication,LAN,SAN,MAN and WAN fabric switching products and technologies,wave
division multiplexing,or WDM,products and technologies,and services across an array of providersboth
in house and outsourced to the customer.
CNT believes it has positioned itself to be a leading competitor of storage networkingproducts and
services,particularly in providingcustomers and service providersa wide range of integrated storagenetworkingsolutions,from us and others,that address high performance,guaranteed data reliability,large
scale storage handling that addresses the above requirementsfor the global 2000 customers.Our key assetsincludenotonlyourpatents,engineering technologies and products,but our 7x24 services,our professional
consulting and our 20 years of diverse implementationsexperience in networkingour clients most mission
critical information.
Our products are sold in markets where other market participants have significantly greater revenues
and internationallyknown brand names.Many of those market participants do not currently sell products
identical to ours today,but address customer needs from one vantage point or another,usually evolvingas
they and general customer requirements mature.However,such market participants may do so in thefuture,and new products we develop may compete with products sold by well-known market participants.Our competitors in channel networkingand storage networkinginclude storage system vendors and othersincludingAkara,Inrange,Nishan Systems,SAN Valley,Sanera,Maxxan and SANeastle.In addition,
Cisco has acquired technology (Andiamo and NuSpeed)with functionality similar to our product
offerings.Also,EMC and Network Appliance recently announced a WAN capability for storagenetworkingthatmaycompetewithourproducts.IBM and others continue to push the distance,performanceand price performance capabilities of channels using FICON and GDPS technologies.In
addition,other fiber channel switch and director companies are all stating that they will be providingsimilarlongdistanceIPbasedconnectivityfeatureswithanintegratedcard.Software vendors,Veritas,
Legato and Tivoli/IBM offer data movement and replication capabilities today at lower speeds and/or
shorter distances.New software start ups,such as CommVault and others offer means for storage
management.Our storage solutions services have numerous competitors,including consulting andintegrationservicesofferedbystoragevendors,telephone companies,dense wave division multiplexortechnologyprovidersandserviceproviders.Specialist firms have begun with large amounts of investedcapitaltoassistlargeenterprisesinthechallengeoflargescalestoragemanagementfortheenterprise,including Storage Networks,Inc,Giant Loop and MSI.In addition,nearly every major storage vendor,including EMC,IBM,HP,Sun,Hitachi,provide various capabilities in full service offerings for the
design,implementation and operation of storage infrastructures.
The markets in which we operate are characterized by rapidly changing technology and evolvingindustrystandards,resulting in rapid product obsolescence and frequent product and feature introductions
and improvements.We compete with several companies that have greaterengineering and development
resources,marketing resources,financial resources,manufacturingcapability,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.
11
The competitiveenvironmentsof markets in which our storage networking solutions are sold are
continuing to develop rapidly.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,our customers and business relationships may develop and introduce competing
products.We anticipate the markets will be highly competitive.
The declining sales of channel networking products present unique competitivepressures.We
anticipate pricing pressures may increase in these markets.Consolidation of competing vendors of these
products could also have negative consequences.
The principal competitivefactors affecting our products include total cost of ownership,customer
service,flexibility,price,performance,reliability,ease of use,bundling of features and capabilities and
functionality.In many situations,the potential customer has an installed base of a competitor's products,
which can be difficult to dislodge.IBM,Cisco,Nortel,Lucent Microsoft and others can significantly
influence customers and control technology in our markets.However,we believe our direct sales force,
storage networking expert consultants and support services personnel offer us a substantial advantageover
new competitors,because these newer competitors do not have the knowledge of storage networking design
and support and any-to-any connectivity necessary to sell competing products and services.
On April 6,2003 we entered into an agreement to acquire Inrange for $190 million in cash.We
believe Inrange's flagship product,the FC/9000,is the most scalable SAN based director class Fibre
Channel director switch available for storage area networking.The FC/9000 provides a platform from
which enterprises can build storage networks that can be used in systems where reliability and continuous
availability are critical,with an ability for customers to upgrade and scale to 256 ports without disrupting
existing systems.While the Fibre Channel switching market has yet to develop fully,we believethat the
market for the products manufacturedby us upon closing of the Inrange transaction will be highly
competitive,continually evolving and subject to rapid technology change.Upon consummation of the
transaction,we will compete against Brocade CommunicationsSystems,McData Corporation,Cisco
Systems,Inc.,and Qlogic Corporationwith respect to Fibre Channelswitches.As the market for storage
area network products grows,the products we acquire in the Inrange transaction may face competition
from traditional networkingcompanies and other manufacturers of networking equipment who may enter
the storage area network market with their own switching products as well as several privately funded
start-up companies who have products currently under development.
Intellectual Property Rights
We rely on a combination of trade secret,copyright,patent and trademarklaws,nondisclosure
agreements and technical measures to establish and protect our intellectual property rights.That protection
may not preclude competitors from developingproducts with features similar to our products.
We currently own 3 patents and have 10 patent applications filed or in the process of being filed in
the United States with respect to our continuing operations.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 and technology are patented.Our issued patents may not adequately protect our
technology from infringementor prevent others from claiming that our technology infringes that of third
parties.Failure to protect our intellectual property could materially harm our business.We believe that
patent and copyright protection are less significant to our competitiveposition 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 rely upon a patent license agreement to manufactureour Channelink®and UltraNet®products
that use ESCON.This license expires on December31,2004.
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
12
required proprietaryrights to the technology included in our products and that our products,trademarks
and other intellectual property rights do not infringe upon the proprietaryrights 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 involveus 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 devälopmentcycles means it is not economically
practical to determine in advance whether a product infringespatent 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 January 31,2003,we had 692 full-time employees.We consider our ability to attract and retain
qualified employees and to mofivate 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 we
cannot assure that we will continue to attract and retain qualified employees.
Discontinued Operations
Our discontinued operations,which we have historically referred to as our Enterprise Integration
Solutions Division,developed and sold our enterprise application integration,or EAI,software that
automated the integrationof computer software applications and business workflow processes,as well as
our traditional server gateways and tools,which enable multiple desktop computers and mainframe
terminals to communicate with one another.We changed the name of our Enterprise IntegrationSolutions
Division to Propelis Software,Inc.During fiscal 2001,we sold substantially all of the assets of our
discontinued operations in a series of transactions.These transactions included the sale of our IntelliFrame
subsidiary to webMethods,and the sale of other assets of our Propelis subsidiary to Jacada Ltd.All
outstanding options to purchase stock of Propelis Software,Inc.have been cancelled or have lapsed.The
transactions allow us to focus all of our resources on our storage networkingproducts and services.
Website Access to Reports
The company's website is located at www.cnt.com.The "Financial"link at this website provides,free
of charge,access to the company's Annual Report on Form 10-K,quarterly reports on Form 10-Q,current
reports on Form 8-K,and all related amendments as soon as reasonably practicable after such material is
electronically filed with,or furnished to,the SEC.
Special Note RegardingForward-Looking Statements
This Form 10-K contains "forward-looking statements"within the meaning of the securities laws.
These forward-lookingstatements are subject to a number of risks and uncertainties,many of which are
beyond our control.All statements other than statements of historical facts included or incorporated by
reference in this Form 10-K,including the statements under "Business"and elsewhere in this Form 10-K
regardingour strategy,future operations,financial position,estimated revenues,projected costs,prospects,
plans and objectives of management are forward-lookingstatements.When used herein,the words "will,"
"believe,""anticipate,""plan,""intend,""estimate,""expect,""project"and similar expressions are
intended to identify forward-lookingstatements,although not all forward-looking statements contain these
identifying words.Although we believe that our plans,intentions and expectations reflected in or suggested
by the forward-lookingstatements we make in this Form 10-K are reasonable,we can give no assurance
that these plans,intentions or expectations will be achieved.Actual results may differ materially from
those stated in these forward-lookingstatements due to a variety of factors,including those described in
Exhibit 99.1 to this Form 10-K and from time to time in our filings with the U.S.SEC.All forward-
13
looking statements speak only as of the date of this Form 10-K.We assume no obligation to update or
revise any forward-lookingstatements,whether as a result of new information,future events or otherwise.
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.The cautionary statements qualify all forward-looking statements,whether attributable to us,
or persons acting on our behalf.
Item 1 Properties
Our principal administrative,manufacturing,engineering and developmentfunctions are located in
leased facilities in the Minneapolis,Minnesota suburb of Plymouth.In addition,we lease office space in
England,France,Germany,Japan,and the Netherlands.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.
Item 3.Legal Proceedings
From time-to-time we are a party to various legal actions and receive threats of litigation.At this
time,management does not believe any such litigation or threats will have a material impact on our
financial position.
Item 4.Submission of Matters to a Vote of Security Holders
None.
Item 4A.Executive Officers of the Company
Our executive officers are as follows:
Name Position Served Age
mas G.Hudson .........Chairman of the Board,President and Chief Executive 57
Officer
Gregory T.Barnum .........Chief Financial Officer,Vice President of Finance and 48
CorporateSecretary
JeffreyA.Bertelsen .........CorporateController and Treasurer 40
William C.Collette .........Chief Technology Officer and Vice President of 59
AdvancedTechnology
James A.Fanella ...........ExecutiveVice-President Worldwide Sales and Services 45
Mark R.Knittel ............Group Vice President of Worldwide Product Operations 48
Thomas G.Hudson has served as our President and as our Chief Executive Officer since June 1996,
as a director since August 1996 and as our Chairman of the Board 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 also as General Managerof its F.W.Dodge Division,and as Senior Vice
President,Corporate Development.From 1968 to 1993,Mr.Hudson served in a number of management
positions at IBM Corporation,most recently as Vice President Services Sector Division.Mr.Hudson's
IBM career included varied product development,marketing and strategic responsibilities for IBM's
financial services customers and extensive international and large systems experience.Mr.Hudson is a
graduate of the University of Notre Dame and New York University.Mr.Hudson attended the Harvard
AdvancedManagement Program in 1990.Mr.Hudson also serves on the board of directors of Ciprico,
Inc.,Lawson Software,Inc.,and PLATO Learning,Inc.,all of which are public companies.
Gregory T.Barnum was appointed Vice President of Finance,Chief Financial Officer and Corporate
Secretary in July 1997.From September 1992 to July 1997,Mr.Barnum served as Senior Vice President
of Finance and Administration,Chief Financial Officer and Corporate Secretary at Tricord Systems,Inc.,
a manufacturerof enterprise servers.From May 1988 to September 1992,Mr.Barnum served as the
14
ExecutiveVice President,Finance,Chief Financial Officer,Treasurerand 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 accountingand financial management capacities for Cray
Research,Inc.,a manufacturerof supercomputers.Mr.Barnum is a graduate of the University of
St.Thomas.
Jeffrey A.Bertelsen was appointed Corporate Controller and Treasurerin 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 LLP,a public accounting firm,most recently as a Senior Audit
Manager.Mr.Bertelsen is a graduate of the University of Minnesota.
William C.Collette was appointed Chief TechnologyOfficer in December 1998 and Vice President ofAdvancedTechnologyinOctober1999.Mr.Collette served as our Vice President of EngineeringfromDecember1995toOctober1999,and as our Director of Future Software Developmentand as a SoftwareDevelopmentManagerfromJune1993toDecember1995.From 1990 to 1993,Mr.Collette was
employed by SuperComputerSystems,Inc.as a Senior Software Engineer,where he worked with Steve
Chen to design the networking for the SSI Supercomputer.Mr.Collette holds a bachelors degree in
business management from Metro State University.
James A.Fanella was appointed Executive Vice-President Worldwide Sales and Services in February
2003.From August 2001 to November2002,Mr.Fanella served as Senior Vice President,Yahoo!
Enterprise Solutions (YES).From September 2000 to July 2001,Mr.Fanella served as Vice President,Global Services for Commerce One,a business to business e-commerce company.From November 1999
to September 2000,Mr.Fanella served as Group President and General Managerof AppNet,Inc.,an
e-commerce company acquired by CommerceOne in September 2000.From August 1994 to October
1999,Mr.Fanella held various positions with Unisys Corporation,a large systems integration company,asManagingPrincipal/Partnerfrom September 1998 to October 1999,and Senior Principal/Partner from
August 1994 to September 1998.Mr.Fanella holds a bachelors degree in business from Western IllinoisUniversity.Mr.Fanella also serves on the board of directors of Avatech,Inc.,a public company.
Mark R.Knittel was appointed Group Vice President of Worldwide Product Operations in October
1999.From May 1997 to October 1999,Mr.Knittel served as our Vice President of Marketing,and also
as our Vice President of Architecture and Business Developmentfrom March 1997 to May 1997.From
July 1977 to March 1997,Mr.Knittel was employed with IBM where he held several executive
development positions for both hardware and software networkingproducts,as well as multiple strategy
positions.Most recently,Mr.Knittel held the position of Director of Campus Product Marketing within
the Network HardwareDivision of IBM.Mr.Knittel has a masters degree in philosophy from theUniversityofChicago.
15
PART II
Item 5.Market for the Registrant's Common Equity and Related ShareholderMatters
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol "CMNT."The
following table sets forth for the indicated periods the range of high and low per share sales prices for our
common stock as reported on the Nasdaq National Market:
Price Range ofCommonStock
High Low
Fiscal Year EndedJanuary 31,2001
First Quarter......................$27.00 $11.50
Second Quarter .....................19.88 11.56
Third Quarter.....................35.25 15.25
Fourth Quarter........................40.00 18.69
Fiscal Year Ended January 31,2002
First Quarter.......................$29.88 $8.44
Second Quarter ......................12.59 7.80
ThirdQuarter......................15.73 8.05
Fourth Quarter........................24.90 14.10
Fiscal Year Ended January 31,2003
First Quarter.......................$21.75 $8.80
Second Quarter ......................9.70 5.41
Third Quarter.....................7.99 3.79
Fourth Quarter...................9.88 5.91
As of April 1,2003,there were approximately1,000 shareholders of record.The Company estimates
that approximately an additional 10,500 shareholders own stock held for their accounts at brokeragefirms
and financial institutions.
DIVIDEND POLICY
We have not paid any cash dividendssince our inception,and we do not intend to pay any cash
dividends in the future.
16
Item 6.Selected Consolidated Financial Data
Years Ended January 31,Years Ended December 31,
2003(6)2002 2001 1999(1)1998
(in thousands,except per share data)
Consolidated Statements ofOperationsData:(8)
Revenue:
Product sales ...................$145,355 $129,276 $125,432 $89,248 $74,969
Service fees ....................66,160 57,747 50,674 36,741 28,052
Total revenue ...............211,515 187,023 176,106 125,989 103,021
Cost of revenue ...................127,125 111,257 83,181 56,795 45,616
Cost of revenue -special charges .....195 (5)2,325 (4)-1,414 (2)-
Total cost of revenue ........127,320 113,582 83,181 58,209 45,616
Gross profit .....................84,195 73,441 92,925 67,780 57,405
Operatingexpenses:
Sales and marketing .............57,849 52,156 41,019 34,626 32,255
Engineeringand development .....26,872 23,452 22,572 18,456 14,236
General and administrative .......10,694 9,311 8,697 6,922 6,252
Special charges .................1,666(5)996(4)(287)(3)1,331(2)-
Total operating expenses .....97,081 85,915 72,001 61,335 52,743
Income (loss)from operations ......(12,886)(12,474)20,924 6,445 4,662
Loss on sale and write down of
web Methods stock.............-(10,283)(4)-
Other income,net .................869(5)5,537 3,152 110 427
Income (loss)from continuing
operations before income taxes ......(12,017)(17,220)24,076 6,555 5,089
Provision (benefit)for income taxes 16,527(5)(5,292)7,947 2,229 1,730
Income (loss)from continuing
operations ......................(28,544)(11,928)16,129 4,326 3,359
Income (loss)from discontinued
operations,net of tax ............207 8,222 (4,135)329 1,370
Net income (loss)before cumulativeeffectofachangeinaccounting...(28,337)(3,706)11,994 4,655 4,729Cumulativeeffectofchangeinaccountingprinciple.............(10,068)(6)----
Net income (loss)................$(38,405)$(3,706)$11,994 $4,655 $4,729
Diluted income (loss)per share:
Continuing operations ............$(1.02)$(.40)$.58 $.17 $.15
Discontinued operations ..........$.01 $.28 $(.15)$.01 $.06
Cumulative effect of change inaccountingprinciple......$(.36)$-$-$-$---
Net income (loss)..............$(1.37)$(.12)$.43 $.18 $.21
Diluted shares ...................28,11I 29,892 27,813 25,818 22,572
Other Financial Data(7):
Ratio of earnings to fixed charges .....--12.41x 5.13x 5.55x
17
As of January 31,As of December 31,
2003 2002 2001 1999 1998
Consolidated Balance Sheet Data:
Cash,cash equivalents and marketable
securities ....................$209,484 $118,014 $150,477 $26,895 $12,362
Working capital ....................229,736 160,271 182,625 50,715 35,587
Total assets ...................339,169 269,738 268,623 110,654 87,596
Long-term obligations...................125,000 708 1,952 1,780 1,816
Total shareholders'equity .................151,631 216,643 213,102 78,472 60,558
(1)On January 12,2000,we changed our fiscal year to end on January 31st,rather than December 31st.
(2)Includes special charges in the fourth quarter of fiscal 1999 of $1.4 million for the write-off of non-
SAN-related products and $1.3 million for an abandoned facility.
(3)Includes a reversal of the unused balance of a fiscal 1999 fourth quarter accrual for an abandoned
facility of $287,000.
(4)Includes special charges and other items recognized in the first quarter of fiscal 2001,including a
$2.0 million write-down of inventory,a $325,000 write-off of a product,a $996,000 restructuring
charge and a $10.3 million loss on the sale and write-down of webMethodscommon stock acquired
from the disposition of a portion of our discontinued operations.
(5)Includes special charges in the fourth quarterof fiscal 2002 of $1.7 million for severance and
professional fees related to canceled acquisition activity.It also includes an earn-out payable to the
employees of BI-Tech of $744,000,of which $195,000 was recorded as cost of service,and $549,000
as operating expense.Other income for fiscal 2002 was reduced by a $1.0 million investment write-
down.Income tax expense for fiscal 2002 includes a non-cash charge of $23.6 million for a valuation
allowance related to our United States deferred tax assets.
(6)In connection with the adoption of Statement of Financial Accounting Standards No.142 "Goodwill
and Other Intangible Assets",we recorded a $10.1 million non-cash charge for impairment of
goodwill associated with the acquisition of Articulent in April 2001.
(7)For fiscal years 2002 and 2001,earnings were inadequate to cover fixed charges by $12.0 million and
$17.2 million,respectively.These ratios are calculated by dividing (a)income from continuing
operations before income taxes and fixed charges by (b)fixed charges.Fixed charges include interest
expense plus a portion of rental expense attributableto interest.
(8)See "Management'sDiscussion and Analysis of Financial Condition and Results of Operations"and
"The Consolidated Financial Statements"included herein for a discussion of accounting changes,
business combinations and dispositions of businesses affecting the comparabilityof the information
reflected in the selected financial data.
18
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
The followingsection should be read in conjunction with Item 1:Business;Item 6:SelectedConsolidatedFinancialData;and Item 8:Consolidated Financial Statements and Supplementary Data.
Overview
We are a leading providerof end-to-endstorage solutions,including hardware and software products,related consulting and integration services,and managed services in the growing storage networkingmarket.We focus primarily on helping our customers design,develop,deploy and manage storagenetworks,including storage area networks,or SANs,a high speed network within a business'existingcomputersystemthatallowsthebusinesstomanageitsdatastorageneedswithgreaterefficiencyand lessdisruptiontoitsoverallnetwork.We design,manufacture,market and support a wide range of solutions forcriticalstoragenetworkingapplicationssuchasremotedatareplication,or the real-time backup of data toremotelylocateddisks,and remote tape vaulting,or the backup of data to remotely archived tapes.Wealsosupplystoragesystems,Fibre Channel switches,telecommunications capacity and storage applicationsoftware.
Our storage networking solutions enable businesses to cost-effectivelydesign,implement,monitor andmanagetheirstoragerequirements,connect geographically dispersed storage networks,provide continuousavailabilitytogreateramountsofdataandprotectincreasingamountsofdatamoreefficiently.We marketoutstoragenetworkingproductsandservicesdirectlytocustomersthroughoursalesforceandworldwidedistributors.We also have strategic marketing and supply relationships with leading storage,telecommuni-cations and fibre switching companies,including Brocade,EMC,Hewlett-Packard,Hitachi Data Systems,IBM,McDATA,StorageTek,Dell Computer Corporationand Veritas.
Integration of Networking and Storage Solutions Team
During fiscal 2002,we integrated our networking and storage solutions sales,support and servicefunctionsintoasingleunit.The integration allows us to execute our strategy for continued growth andenhancedcustomerservice,while achievingimproved efficiency and profitability.Our customers will nowhaveasinglepointofcontactfortheirnetworkingandstoragesolutionsrequirements.As a result,it is nolongerpossibletoallocatecostsandprepareseparatemeaningfulstatementsforwhathadbeenournetworkingandstoragesolutionssegments.Our management now reviews and makes decisions utilizingfinancialinformationfortheconsolidatedbusiness.
Over the last several years,our products have been designed and built to be extremely reliable and
easy to service,resulting in improvedefficiencies within our service organization,and a reduction in thenumberofemployeesneededtoprovideworld-class support.We continue to see excellent acceptance ofourFibreChannelIPproduct,the UltraNet®Edge.The UltraNet®Edge provides enterprise-wide accesstoinformationandhelpscompaniesmanagetheirstorageinfrastructureformaximumperformanceandefnciency.Because of the Edge product,the need for future upgrades to our legacy products is reduced.We expect to extend our competitivelead in fiscal 2003 via the introduction of new products within theUltraNet®family,and several new joint developmentarrangements with other leaders in the storagenetworkingindustry.These actions,along with the integration of our Networking and Storage Solutionssales,support and service functions,allowed us to reduce our worldwideworkforce by 80 people or about10%.While difficult,the reduction in workforcewas necessary to improve future efficiency andprofitability.In the fourth quarter of fiscal 2002,we recorded a $1.7 million restructuringcharge forseveranceresultingfromthereductioninworkforceandprofessionalfeesrelatedtocanceledacquisitionactivity.Of this amount $1.3 million was paid prior to January 31,2003,with the balance to be paid priortoApril30,2003.We anticipate the annual operating cost savings related to these reductions will beapproximately$6.4 million,offset by any incremental costs added during fiscal 2003.
19
Acquisition of Inrange Corporation
On April 6,2003,we entered into an agreement where our wholly owned subsidiary will acquire all of
the shares of Inrange Technologies Corporation that are owned by SPX Corporation.The shares acquired
will constitute approximately 91%of the issued and outstanding shares of Inrange for a purchase price of
$2.3132 per share and $173 million in the aggregate.Pursuant to the agreement,immediately following the
acquisition,the subsidiary will be merged into Inrange,and the remaining capital stock owned by other
Inrange shareholders will be converted into the right to receive $2.3132 per share in cash,resulting in a
total payment of approximately $190 million for both the stock purchase and the merger.Consummation
of these transactions is subject to significant conditions,including filing and expiration of the waiting
period under the Hart-Scott-Rodino Antitrust ImprovementsAct of 1976,as amended.
Upon completion of the acquisition,we will be one of the world's largest providers of complete
storage networkingproducts,solutions and services,with 2002 pro forma annual revenues of approximately
$435 million and global leadership positions in Fibre Channel and wide area network switching,and
operations worldwide.T1.ie acquisition would significantly broaden and strengthen our portfolio of storage
and networking products and solutions,expand our customer base,and provide us with significant scale
and cost reduction opportunities.
Acquisition of BI-Tech Solutions,Inc.
In June 2002,we acquired all of the outstanding stock of BI-Tech,a leading providerof storage
management solutions and services,for $12 million in cash,plus the assumption of approximately
$3.6 million of liabilities and the acquisition of approximately $8.7 million of tangible assets.The
accompanying financial statements include the results of BI-Tech since June 24,2002.The purchase
agreement requires that we pay at our option,in the form of a note payable or our stock to the former
stockholders,and in cash to the BI-Tech employees,additional consideration based on achievementof
certain earnings for each of the next two years starting July 1,2002.The portion payable to the former
stockholders will be recorded as goodwill.The portion payable to BI-Tech employees will be recorded as
compensation expense.Through January 31,2003,additional consideration of $3.6 million and $744,000
was recorded as goodwilland compensation expense,respectively,and a corresponding liabilitywas
recorded.
Valuation Allowance for DeferredTax Assets
In the fourth quarter of fiscal 2002,we recorded a non-cash charge of $23.6 million to provide a
valuation allowance for our United States deferredtax assets.As we generate taxable income in future
periods,we do not expect to record significant income tax expense in the United States until it becomes
likely that we will be able to utilize the deferredtax assets,and we reduce the valuationallowance.The
establishment of the valuationallowance does not impair our ability to use the deferred tax assets upon
achievingprofitability.Our federal net operating loss carry-forwardsand credits do not expire for the next
15-20 years.
ConvertibleSubordinatedDebt Offering
In February 2002,we sold $125 million of 3%convertible subordinated notes due February 2007,
raising net proceeds of $121 million.The notes are convertibleinto our common stock at a price of $19.17
per share.We may redeem the notes upon payment of the outstanding principal balance,accrued interest
and a make whole payment if the closing price of our common stock exceeds 175%of the conversion price
for at least 20 consecutive trading days within a period of 30 consecutive trading days ending on the
trading day prior to the date we mail the redemption notice.The make whole payment represents
additional interest payments that would be made if the notes were not redeemed prior to their due date.
On August 15,2002 a registration statement for the resale of the notes and the 6.5 million shares of
common stock issuable upon conversion of the notes became effective.
20
Special Charges in Fiscal Year 2001
Economic conditions in early 2001 caused our customers to reevaluate their capital spending plans,
and to defer previously planned projects for information technology infrastructure.The reduction in
demand for our products and services resulted in the following charges in the first quarter of fiscal 2001:
$2.0 million to write-down slow moving inventory
$325,000 for the write-off of a product;and
$996,000 for restructuring,principally severance.
Sale and Write-down of webMethodsStock
During the first quarterof fiscal 2001,we sold 232,511 shares of webMethodsstock received from the
sale of IntelliFrame for approximately $6.2 million,resulting in a pre-tax loss of approximately
$8.7 million.We also wrote-downthe carrying value of the remaining 41,031 shares of webMethods stock
that we still own,resulting in a pre-tax loss of approximately $1.5 million.
Acquisition of Articulent
On April 3,2001 we acquired all of the outstanding stock of Articulent Inc.,a privately held,leading
provider of storage solutions and services for $12.4 million in cash,plus the assumption of approximately
$24.4 million of liabilities and the acquisition of approximately $19.3 million of tangible assets.
Cumulative Effect of Change in Accounting Principle -Impairment Charge
Effective February 1,2002,we adopted SFAS No.142 "Goodwill and Other Intangible Assets."In
connection with the adoption of SFAS No.142,we engaged a third party appraisal firm to determine the
fair value of one of the reporting units within our former storage solutions segment.This valuation
indicated that the goodwillassociated with our acquisition of Articulent in April of 2001 was impaired,
resulting in a $10.1 million non-cash charge.This non-cash charge was recognized as a cumulativeeffect
of change in accounting principle in our first quarter ended April 30,2002.
Discontinued Operations -Divestiture of Propelis Software,Inc.
Propelis Software,Inc.,formerly known as our Enterprise Integration Solutions Division,developed
and sold our enterprise application integration,or EAI,software that automates the integration of
computer software applications and business workflow processes.In August 2000,we determined to divest
Propelis Software,Inc.and focus on our core storage networkingbusiness.As a result,Propelis Software,
Inc.has been accounted for as discontinued operations in the accompanying financial statements,meaning
that the division's revenues and expenses are not shown and its net income (loss)for all periods are
included under the "Discontinued Operations"caption in our statement of operations.During 2001,we
sold substantially all of the assets of our discontinued operations in a series of transactions.These included
the sale of our IntelliFrame subsidiary to webMethodsand the sale of other assets to Jacada Ltd.All
outstanding options to purchase stock of Propelis Software have been cancelled or have lapsed.
On February 2,2001 we sold all of the outstanding stock of IntelliFrame Corporation,including the
technology underlying our Propelis BPm"product,to webMethods,Inc.for $8.8 million in cash and
273,542 shares of webMethods common stock.The stock received from webMethods,Inc.was valued at
$17.1 million,which reflects a discount from its publicly reported trading price due to the initial
restrictions placed on our ability to freely sell the stock.In connection with this transaction,we paid
$3.0 million to two employees,who were former shareholders of IntelliFrame,to satisfy all obligations to
make further bonus payments under their employment agreements.The sale resulted in an after tax gain
of $12.6 million in the first quarterof fiscal 2001.
In the first quarter of fiscal 2001,we accrued $9.3 million for the estimated future operating losses of
Propelis Software,Inc.through the potential date of divestiture,resulting in an after tax loss of
$6.2 million.
On August 23,2001,we sold substantially all of the remaining assets and liabilities of Propelis
Software,Inc.to Jacada Ltd.for $6.0 million in cash,plus a warrant to purchase 350,000 ordinary shares
21
of Jacada Ltd.stock at a price of $3.26 per share.The transaction resulted in an after tax gain of
$1.8 million in the third quarter of fiscal 2001.
In the third quarter of fiscal 2002,we received $207,000 of royalty income,net of tax,related to the
discontinued operations sold in fiscal 2001.
Change in Fiscal Year End
On January 12,2000,we changed our fiscal year end to January 31st,from December 31st.
References in this Form 10-K to fiscal 2002,2001 and 2000 represent the twelve months ended
January 31,2003,2002 and 2001,respectively.
Critical Accounting Policies
In preparingthe consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America,management must make decisions which impact the reported
amounts and the related disclosures.Such decisions include the selection of the appropriate accounting
principles to be applied and the assumptions on which to base accounting estimates.In reaching such
decisions,management applies judgment based on its understanding and analysis of the relevant
circumstances.Reported results may differ from these estimates if different assumptions or conditions were
to be rnade.Our most critical accounting estimates include valuationof accounts receivable,which impacts
bad debt expense;valuation of inventory,which impacts gross margin;recognition and measurement of
current and deferredincome tax assets and liabilities,which impact our tax provision;and valuation of
long-lived intangibleassets and goodwill,which will impact operating expense.These critical accounting
estimates and other critical accounting policies are discussed further below.
Revenue Recognition
Revenue is recognized upon shipment for product sales with standard configurations and product sales
with other than standard configurations,which have demonstrated performancein accordance with its
customer's specifications prior to shipment providedthat (a)evidence of an arrangement exists,
(b)delivery has occurred,(c)the price to the customer is fixed and determinable,and (d)collectibility is
assured.All other product sales are recognized when customer acceptance is received,or the passage of
the customer acceptance period.We accrue for warranty costs and sales returns at the time of shipment
based on experience.In transactions that include multiple products and/or services,we allocate the sales
value to each of the deliverables,based on their relative fair values.
Service fees are recognized as revenue when earned,which is generally on a straight-line basis over
the contracted service period or as the services are rendered.Deferred revenue primarily consists of the
unearned portion of service agreements billed in advance to customers.
Valuation ofAccounts Receivable
We reviewaccounts receivable to determine which are doubtful of collection.In addition,we also
make estimates of potential future product returns.In making the determinationof the appropriate
allowance for doubtful accounts and product returns,we consider specific accounts,changes in customer
payment terms,historical write-offs and returns changes in customer demand and relationships,
concentrations of credit risk and customer credit worthiness.Changes in the credit worthiness of
customers,general economic conditions and other factors may impact the level of future write-offs and
product returns.
Valuation of Inventory
We review obsolescence to determine that inventoryitems deemed obsolete are appropriatelyreserved.
In making the determinationwe consider our history of inventorywrite-offs,future sales of related
products,and quantity of inventory at the balance sheet date assessed against our past usage rates and
future expected usage rates.Changes in factors such as technology,customers demand,competitor product
introductionsand other matters could affect the level of inventoryobsolescence in the future.
22
Valuation ofDeferredTaxes
Significant management judgment is required in determining the provision for incomes taxes,deferred
tax assets and liabilities and any valuation allowance recorded against net deferredtax assets.We are
required to estimate our income taxes in each jurisdiction where we operate.This process involves
estimating our actual current tax exposure together with assessing temporarydifferences resulting from
differing treatment of items,such as the depreciable life of fixed assets for tax and accounting purposes.
These differences result in deferredtax assets and liabilities,which are included in our consolidated
balance sheet.We then assess the likelihood that our deferredtax assets will be recovered from future
taxable income,and to the extent we believe recovery is unlikely,we must establish a valuationallowance.
To the extent we establish a valuation allowance or increase the valuation allowance in a given period,we
must increase tax expense within our statement of operations.
In the fourth quarter of fiscal 2002,we recognized a non-cash charge of $23.6 million to provide a
valuation allowance for our United States deferredtax assets.Our cumulative valuationallowance recorded
against our deferred tax assets-at January31,2003 was $24.8 million.As we generate taxable income in
future periods,we do not expect to record significant income tax expense in the United States until it
becomes likely that we will be able to utilize the deferredtax assets,and we reduce the valuation
allowance.The establishment of the valuation allowance does not impair our ability to use the deferred tax
assets upon achieving profitability.Our federal net operating loss carry-forwardsand credits do not expire
for the next 15-20 years.
Valuation of Long-Livedand Intangible Assets and Goodwill
We assess the impairment of long-lived and intangible assets and goodwill whenever events or changes
in circumstances indicate that the carrying value may not be recoverable.Factors we consider important
which could triggeran impairment review include significant under performancerelative to expected
operating results,changes in the manner of use of the acquired assets or the strategy of our overall
business,negative industry or economic trends,significant decline in our stock price for a sustained period,
and our market capitalization relative to our net book value.
When we determine that the carrying value of long-lived and intangibles assets and goodwill may not
be recoverable based upon the existence of one or more of the above indicators of impairment,we measure
any impairment based on the projected discounted cash flow method using a discount rate commensurate
with the risk inherent in our current business model.We may also obtain an independent third party
appraisal of the asset to help us identify and quantify any possible impairment.Net long-livedand
intangible assets,and goodwill amounted to $44.4 million at January 31,2003,and no asset impairments
were identified as of that date.
Effective February 1,2002,we adopted SFAS No.142 which eliminates amortization of goodwill,but
instead follows an impairment approach for goodwill valuation.In fiscal 2001,we recorded goodwill
amortization expense of $624,000,which was not required in fiscal 2002.In lieu of amortization,we were
required to perform an initial impairment review of our goodwill in fiscal 2002,and an annual impairment
review thereafter.SFAS No.142 provides a six-month transitional period from the effectivedate of
adoption to performan assessment of whether there is an indication of goodwill impairment.We tested our
reporting units for impairment by comparing fair value to carrying value.Fair value was determined using
a discounted cash flow and cost methodology.We engaged a third-party appraisal firm to determine the
fair value of a reporting unit within our former Storage Solutions segment.This valuationindicated that
the goodwill associated with our acquisition of Articulent in April of 2001 was impaired.The performance
of this business has not met management's original expectations,primarily due to the unexpected global
slow down in capital spending for information technology equipment.Accordingly,a non-cash impairment
charge of $10.1 million from the adoption of SFAS No.142 was recognized as a cumulative effect of
change in accounting principle in our first quarter ended April 30,2002.Impairment adjustments
recognized after adoption,if any,generally are requiredto be recognized as an operating expense.
23
Results of Continuing Operations
The following table sets forth financial data for our continuing operations for the periods indicated as
a percentage of total revenue except for gross profit,which is expressed as a percentage of the related
revenue.
Years Ended January 31,
2003 2002 2001
Revenue:
Product sales.....................68.7%69.1%71.2%
Service fees .....................31.3 30.9 28.8
Total revenue .....................100.0 100.0 100.0
Gross profit:
Product sales......................38.7 41.0 57.8
Service fees .......................42.2 35.4 40.2
Total gross profit ......................39.8 39.3 52.8
Operatingexpenses:
Sales and marketing ....................27.3 27.9 23.3
Engineering and development ..................12.7 12.5 12.8
General and administrative...................5.1 5.0 4.9
Restructuring ...................0.8 0.5 (0.2)
Total operating expenses .....................45.9 45.9 40.9
Income (loss)from continuing operations....................(6.1)%(6.6)%11.9%
Revenue
Years Ended January31,2003 and 2002
Product revenue
Sales of our networkingproducts generated revenue of $94.6 million in fiscal 2002,an increase of
$2.6 million or 3%,from $92.0 million in fiscal 2001.Storage networking related product revenue increased
16%in fiscal 2002 to $80.9 million from $69.8 million in fiscal 2001.Sales of our new UltraNet®Edge
product were up over 300%,or $10 million,in fiscal 2002 to $13.2 million,from $3.2 million in fiscal 2001.
Sales of channel extension product applications decreased 38%in fiscal 2002 to $13.7 million from
$22.2 million in fiscal 2001.Our older channel extension products continue to be a profitable part of our
business and a key application for many of our storage networking customers.We expect that revenue
from our storage networkingproducts will account for a substantial portion of our total networking product
sales for the foreseeable future.Further we do not expect revenue for our channel networkingproducts to
increase significantly and it may decline in the future.
Sales of our third party storage solutions products generated revenues of $50.8 million in fiscal 2002,
an increase of 36%,from $37.2 million in fiscal 2001.Our acquisition of Articulent in April 2001 and
BI-Tech in June 2002 significantly expanded our third party solutions offerings,and accounted for most of
the increase in third party product revenue when comparing fiscal 2002 to earlier years.Our acquisition of
BI-Tech in June 2002 contributed$12.1 million of product revenue in fiscal 2002.
Service revenue
Service revenue from maintenance of our networking products decreased 3%in fiscal 2002 to
$43.3 million from $44.8 million in fiscal 2001.The decrease can be attributed to cancellation of
maintenance related to our Channelink®products and migration of customers to our UltraNet®products.
24
Our storage consulting fee revenues increased 77%in fiscal 2002 to $22.8 million from $12.9 million
in fiscal 2001.The growth in solutions consulting fees revenue in fiscal 2002 was due to increased
customer acceptance of our service offerings.In addition,our sales team has become more experienced
and proficientat selling solutions that include our service offerings.During fiscal 2002,BI-Tech
contributed$3.0 million of storage consulting fee revenue.
Years Ended January31,2002 and 2001
Product revenue
Sales of our networkingproducts generated revenue of $92.0 million in fiscal 2001,a decrease of 24%,
from $121.1 million in fiscal 2000.Storage networkingrelated product revenue decreased 16%in fiscal
2001 to $69.8 million from $83.5 million in fiscal 2000.Approximately $3.2 million of storage networking
product revenue in fiscal 2001 resulted from the sale of our new UltraNet®Edge product,which started to
ship in our third quarter ended October 31,2001.Sales of channel extension product applications
decreased 41%in fiscal 2001 to $22.2 million from $37.7 million in fiscal 2000.
During fiscal 2000,partner relationships with STK and Compaqgenerated significant product revenue.
Sales of the DXE product to STK contributed $9.3 million of product revenue in fiscal 2000,compared to
$1.5 million of product revenue in fiscal 2001.We discontinued the DXE/RDE product line in March
2001,and are transitioningthe customer base to our UltraNet®products.An OEM agreement with
Compaq contributed $5.7 million of product revenue in fiscal 2000.No revenue was generated from this
OEM agreement in fiscal 2001.
Sales of our third party storage solutions products generated revenues of $37.2 million in fiscal 2001,
up significantly from $4.3 million in fiscal 2000.Our acquisition of Articulent in April 2001 significantly
expanded our third party solution offerings and accounted for most of the increase when comparing fiscal
2001 to fiscal 2000.
Service revenue
Service revenue from maintenance of our networkingproducts increased 6%in fiscal 2001 to
$44.8 million from $42.3 million in fiscal 2000.The increase in revenue was due to the growing installed
base of customers using our networkingproducts.
Our storage consulting fee revenues increased 55%in fiscal 2001 to $12.9 million,from $8.3 million in
fiscal 2000.The increase primarily relates to our acquisition of Articulent in April 2001.During fiscal
2001,Articulent contributed$2.9 million of service revenue.
General
Revenue from the sale of products and services outside the United States increased by $13.1 million
or 29%in fiscal 2002 when compared to fiscal 2001,and decreased by 12%or $6.0 million in fiscal 2001
when compared to fiscal 2000.We derived27%,25%and 30%of our revenue outside the United States in
fiscal 2002,2001 and 2000,respectively.The increase in revenue generated outside the United States in
fiscal 2002 is primarily attributable to the BI-Tech acquisition in June of 2002.BI-Tech increased our
international sales in fiscal 2002 by $15.1 million.BI-Tech is based in the United Kingdom,and we expect
that,it will further increase our international sales in future periods.
One customer accounted for 10%of our revenue in fiscal 2002.No single customer accounted for
more than 10%of our revenue in fiscal 2001 or 2000.Price discounting for our networking products had a
small impact on revenue in fiscal 2002 and 2001.
In fiscal 2002,approximately 36%,5%and 14%of our product revenue was derived from businesses in
the financial services,telecommunications and information outsourcing industries,respectively.
We primarily sell our networkingand third party storage solutions products directly to end-user
customers in connection with joint marketing activities with our business partners.For a new customer,the
25
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.
We expect continued quarter-to-quarterfluctuations in revenue in both domestic and international
markets.The timing of sizable orders,because of their relativeimpact on total quarterly sales,may
contribute to such fluctuations.The level of product sales reported by us in any given period will continue
to be affected by the receipt and fulfillment of sizable new orders in both domestic and international
markets.
Gross Profit Margin
Years Ended January 31,2003 and January 31,2002
Product margins
Gross margins from the sale of networking products were 49%in fiscal 2002,compared to 51%in
fiscal 2001.Excluding the $2.0 million write-down of slow moving inventory and the $325,000 write-ofT of
a product in the first quarter of fiscal 2001,gross profit margins from the sale of networkingproducts were
53%in fiscal 2001.The decline in gross margin percentage was due to the continued movement in sales
mix toward our UltraNet®Director products,which carry a lower margin than our older Channelink®
products,and higher levels of sales discounts.We believe that margins for our networkingproducts will
trend upward as volumes increase,particularlý for our new higher margin UltraNet®Edge product.
Gross margins from the sale of third party storage solutions products were 20%in fiscal 2002,
compared to 17%in fiscal 2001.The increase in gross margin percentage was primarily due to a change in
product mix,as certain third party storage solutions products carry higher gross margins.Historically,the
third party storage solutions products offeredby Articulent,BI-Tech and CNT have generated gross
margins in the 15%to 25%range.
Service margins
Gross service margins for our networking maintenance business decreased slightly in fiscal 2002 to
48%from 49%in fiscal 2001.The slight decrease was due to the 3%decline in maintenance revenue,
resulting from the cancellation of maintenance for our older Channelink®products,and migration of
customers to our newer UltraNet®products.Cost of service associated with our networkingmaintenance
business decreased slightly in fiscal 2002 to $22.7 million from $22.9 million in fiscal 2001.
Gross service margins for our storage consulting fees were 32%in fiscal 2002,or 33%,excluding a
$195,000 earn-out payable to the service employees of BI-Tech.The gross service margins for our storage
consulting fees were a negative 12%in fiscal 2001.The improvementin gross service margin percentage in
fiscal 2002 compared to fiscal 2001 was due to higher utilization of our employee consultants.Our storage
consulting fees revenue increased to $22.8 million in fiscal 2002 from $12.9 million in fiscal 2001,an
increase of 77%.Costs associated with our storage consulting fees were $15.5 million or $15.3 million,
excluding the BI-Tech earn-out,up from $14.4 million in fiscal 2001.
Years Ended January31,2002 and January 31,2001
Product margins
Gross margins from the sale of our networkingproducts were 51%in fiscal 2001.Excluding the
$2.0 million write-down of slow movinginventory and the $325,000 write-off of a product in the first
quarter of fiscal 2001,gross profit margins from the sale of networkingproducts were 53%in fiscal 2001
compared to 58%in fiscal 2000.The decline in gross margin percentage was due to the continued
movement in sales mix toward our UltraNet®products which carry a lower margin than our older
Channelink®products,and higher levels of sales discounts.
Gross profit margins from the sale of storage solutions products were 17%in fiscal 2001 compared to
53%in fiscal 2000.The decline in gross margin percentage was primarily due to an increase in the sale of
26
lower margin third party products resulting from the acquisition of Articulent in April 2001.Historically,
the product solutions offeredby Articulent have generated gross margins in the 15%to 25%range.
Service margins
Gross service margins for our networking maintenance business improved to 49%in fiscal 2001 from
46%in fiscal 2000.The improvementwas due to the steadily increasing base of customers contracting for
maintenance services,actions taken in April 2001 to reduce employee costs,including a workforce
reduction and wage freeze,and a change in third party maintenance and logistic suppliers that also
reduced costs in fiscal 2001.
Gross profit margins from storage consulting fees were a negative 12%in fiscal 2001 compared to apositive13%in fiscal 2000.The decline in gross margin percentage and negative gross margin in fiscal
2001 is due to the fixed cost structure of the services business and low levels of service revenue in fiscal
2001.The service costs for the solutions business,mainly people,tend to be fixed in nature.Gross profit
margins for storage consulting fees improveas the volume of storage consulting fees revenue increases.
Operating Expenses
Years Ended January 31,2003 and 2002
Sales and marketing
Sales and marketing expense increased 11%or $5.6 million in fiscal 2002 to $57.8 million from
$52.2 million in fiscal 2001.The June 2002 acquisition of BI-Tech added $1.7 million to sales andmarketingexpenseinfiscal2002.The remainderof the increase in sales and marketing expense was due to
increases in expense for employee wages,fringe benefits,commissions,and travel,partially offset by a
$1.3 million reduction in employee recruitment in fiscal 2002 compared to fiscal 2001.Recruitment costs
were higher in fiscal 2001 due to a 25%increase in our sales force,and an increase in sales management.
Engineeringand development
Engineering and developmentexpense increased 15%or $3.4 million in fiscal 2002 to $26.9 millionfrom$23.5 million in fiscal 2001.The increase in engineering and developmentexpense for fiscal 2002 wasprimarilyduetocontinueddevelopmentofourUltraNet®family of products,particularly the UltraNet®
Edge product,which generated $13.2 million of revenue in fiscal 2002.
General and administrative
General and administrativeexpense increased $1.4 million or 15%in fiscal 2002 to $10.7 million from
$9.3 million in fiscal 2001.The June 2002 acquisition of BI-Tech added $776,000 to general andadministrativeexpenseinfiscal2002.The remainingincrease in expense for fiscal 2002 was due to higher
costs for employee wages,fringe benefits,insurance,professional fees and legal fees associated with
canceled acquisition activity,partially offset by a $624,000 reduction in goodwill amortization expense.Amortization of goodwill ceased efTective February 1,2002 with our adoption of SFAS No.142,"Goodwill and Other Intangible Assets".
Years Ended January 31,2002 and 2001
Sales and marketing
Sales and marketing expense increased $11.1 million or 27%in fiscal 2001 to $52.2 million from
$41.0 million in fiscal 2000.The acquisition of Articulent.in April 2001 added $6.0 million to sales and
marketing expense in fiscal 2001,including wages for approximately 26 new employees,and related costs
such as travel,training and facilities.The remainingincrease in sales and marketing expense was due to aplannedexpansionofoursalesforce.During fiscal 2001,we increased our sales force by over 25%,and
27
added additional sales management,resulting in additional expense for employee wages,fringe benefits and
recruitment.
Engineeringand development
Engineering and development expense increased 4%in fiscal 2001 to $23.5 million from $22.6 million
in fiscal 2000.The increase was primarily due to continued developmentof our UltraNet®family of
products,particularly the UltraNet®Edge product,which generated over $3.0 million of revenue since its
introduction in the third quarter of fiscal 2001.This increase was partially offset by cost reduction actions
taken in April 2001,including a workforce reduction,wage cuts and reductions in discretionary spending.
General and Administrative
General and administrativeexpenses increased $614,000 or 7%in fiscal 2001 to $9.3 million from
$8.7 million in fiscal 2000.The increase in expense is primarily due to the acquisition of Articulent in
April 2001,including $594,000 of additional expense for goodwill amortization.Total goodwill amortization
expense in fiscal 2001 was $624,000,including the goodwill amortization expense associated with the
acquisition of Articulent.
Other
Years Ending January31,2003 and 2002
Interest and other income in fiscal 2002 totaled $5.2 million,including a $1.0 write-down of an equity
investment.Excluding the equity investment write-down,interest and other income totaled $6.2 million in
fiscal 2002,a $400,000 increase from $5.8 million in fiscal 2001.Higher balances of cash and marketable
securities available for investment in fiscal 2002 were partially offset by lower investmentyields.We also
had foreign exchange gains of $63,000 in fiscal 2002,compared to a foreign exchange loss of $106,000 in
fiscal 2001.Interest expense increased $4.0 million in fiscal 2002 to $4.3 million from $285,000 in fiscal
2001.In February 2002,we sold $125 million of 3%convertiblesubordinated notes due February 2007,
raising net proceeds of $121 million.Pending use of our cash and marketable securities for general
corporate purposes or complementary acquisitions,the funds have been invested in investment grade,
interest-bearingsecurities.
Years Ending January 31,2002 and 2001
Other income was an expense of $4.7 million in fiscal 2001.Excluding the $10.3 million loss from the
sale and write-down of webMethods stock,other income increased by $2.4 million to $5.5 million in fiscal
2001 from $3.2 million in fiscal 2000.Interest income increased by $2.4 million in fiscal 2001.Proceeds
from an October 2000 offering of common stock increased the balances of cash and marketable securities
availablefor investment.
Income Taxes
Given our losses in fiscal 2002 and 2001,and our cautious outlook for information technology
spending,we concluded that it was necessary to providea valuation allowance for our United States
deferredtax assets,resulting in a non-cash charge of $23.6 million in our fourth quarter ending
January 31,2003.As we generate taxable income in future periods,we do not expect to record significant
income tax expense in the United States until it becomes likely that we will be able to utilize the deferred
tax assets,and we reduce the valuation allowance.The establishment of the valuationallowance does not
impair our ability to use the deferredtax assets upon achievingprofitability.Our federal net operating loss
carry-forwardsand credits do not expire for the next 15-20 years.
We recorded a provisionfor income taxes at an effectivetax rate of 31%in fiscal 2001,and at an
effective tax rate of 33%in fiscal 2000.The fluctuations in our effective tax rate were primarily due to the
large special charges recorded in fiscal 2001,including the $10.3 million loss on the sale of webMethods
28
stock,the amount of nondeductible foreign losses and fluctuations in the level of benefit from our foreignsalescorporation.We also recorded an $830,000 valuation allowance in fiscal 2001 for certain state andforeigntaxcreditsandlosscarry-forwards.Utilization of these benefits in future periods was determined tobeunlikely.
Liquidity and Capital Resources
We have historically financed our operations through the public and private sale of debt and equitysecurities,bank borrowings under lines of credit,capital and operating equipment leases and cashgeneratedbyoperations.
Cash,cash equivalents and marketable securities at January 31,2003 totaled $209.5 million,anincreaseof$91.5 million since January 31,2002.In February 2002,we sold $125 million of 3%convertiblesubordinatednotesdueFebruary2007,raising net proceeds of $121.6 million.Operations generated$17.5 million of cash in fiscal 2002,including $7.4 million from reduced inventories due to better inventorymanagement,$1.7 million from lower accounts receivable,a $2.1 million increase in accounts payable,and$5.9 million from deferredreveñue,resulting from receipt of cash in advance of revenue recognition.Proceeds from the exercise of stock options,and purchases of stock through our employee stock purchaseplanprovidedcashinfiscal2002of$3.0 million.Uses of cash in fiscal 2002 included $7.7 million for thepurchaseofBI-Tech,$1.5 million for repayment of capital lease obligations,and purchases of property andequipmentandfieldsupportsparestotaling$12.4 million.We also used $32.2 million of cash in fiscal 2002torepurchase4.0 million shares of our common stock.
Expenditures for capital equipment and field support spares have been,and will likely continue to be,a significant capital requirement.On April 6,2003,we entered into an agreement to acquire all of theoutstandingcommonstockofInrangeTechnologiesCorporationfor$190 million in cash.Upon closing ofthetransaction,Inrange will become our wholly owned subsidiary.We anticipate that our available cashafterclosingforthecombinedentitywillbeapproximately$50-$60 million before transaction costs.Webelievethatouravailablecashafterclosing,when combined with our anticipated cash flows from thecombinedoperationsofthetwocompanies,including cash flow improvementsresulting from increasedscaleandcostsynergies,will be adequate to fund our operating plans and meet our current anticipatedaggregatecapitalrequirements,at least through fiscal 2003.
In April 2001,our board of directors authorized the repurchase of up to $50.0 million of our commonstock.As of January 31,2003,we had repurchased 4.1 million shares of our common stock for$33.0 million.The board recently changed the authorization,so that the remainingbalance of the$50.0 million authorized can be used for the repurchase of either debt or common stock.
In fiscal 2002,our board of directors adopted amendments to our 1999 Non-Qualified Stock AwardPlanincreasingthenumberofsharesauthorizedforissuancefrom3,230,000 to 4,730,000.In fiscal 2002,our board and shareholders also approved our 2002 Stock Award Plan providingfor the issuance of1,000,000 shares of our common stock.In February 2003,our board of directors adopted an amendment toour1999Non-Qualified Stock Award Plan increasing the number of shares authorized for issuance by250,000 to 4,980,000,in connection with the hiring of our new Executive Vice President of WorldwideSales&Services.
We believe that inflation has not had a material impact on our operations or liquidity to date.
Our future contractual cash obligations at January 31,2003,including open purchase orders incurredintheordinarycourseofbusiness,are as follows (in millions):
Less Than One to Three Four to Five After FiveCashObligationTotalOneYearYearsYearsYears
Capital leases ...................$.7 $.7 None None NoneOperatingleases.................$22.6 $4.6 $8.2 $4.6 $5.2
Purchase orders .................$13.5 $12.9 $.6 None NoneConvertiblesubordinateddebt,
plus interest ...............$140.0 $3.8 $11.3 $124.9 None
29
On December 3,2002 we entered into a product developmentagreement that requires us to purchase
$10.0 million of product prior to March 15,2005.The commitment expires if the product is not generally
available by March 31,2004.This purchase commitment has been reflected in the above table under the
"Purchase Order"caption.
Our acquisition of BI-Tech requires that we pay to the former stockholders and the BI-Tech
employees additional consideration based on achievement of certain earnings for each of the next two years
starting July 1,2002.The additional consideration of $4.4 million at January 31,2003 is not reflected in
the above table because terms of payment have not yet been elected.Payment may be in the form of a
note payable or stock at our option,or in the case of the employees,cash.
On February 20,2002,we sold $125 million in aggregate principal amount of 3%convertible
subordinated notes due February2007.Holders of the notes may,in whole or part,convert the notes into
shares of our common stock at a conversion price of approximately $19.17 per share (aggregate of
approximately 6.5 million shares)at any time prior to maturity on February 15,2007.We may redeem the i
notes in whole or part at any time if the closing price of our common stock has exceeded 175%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 we mail the redemption notice.We are required to pay interest
on February 15 and August 15 of each year while the notes are outstanding.Debt issuance costs of
$3.2 million are being amortized over a five-year term using the straight-line method,which approximates
the effective interest rate method.The amortization of these debt issuance costs will accelerate upon early
redemption of the notes.The net proceeds remain available for general working capital purposes and ,potential acquisitions.Cash obligations related to this debt include annual interest payments of $3.8 million
for the next five fiscal years starting 2002 and a principal payment of $125 million due February 2007.
Payment of the notes will also accelerate upon certain events of default.In addition,upon certain events
which constitute a change in control of the company,we must make an offer to purchase the notes at
100%of the principal amount plus accrued interest.
Our convertible subordinated debt is subject to a fixed interest rate,and the notes are based on a i
fixed conversion ratio into common stock.Therefore,we are not exposed to changes in interest rates #
related to our long-term debt instruments.On January 31,2003,the reportedtrading price of our
convertiblesubordinated notes due 2007 was 75.50 per $100 in face amount of principal indebtedness,
resulting in an aggregate fair value of approximately $94.4 million.Our common stock is quoted on the
Nasdaq National Market under the symbol "CMNT".On January 31,2003,the last reported sale price of
our common stock on the Nasdaq Market was $7.49 per share.
Related Party Transactions
During fiscal 2002 and 2001,we purchased $374,000 and $491,000,respectively,of bandwidth from
Dynegy Connect,an entity wholly owned by Dynegy Global Communications.At January 31,2003 we
have commitments to purchase $933,000 of additional bandwidth from Dynegy Connect through fiscal
2006.All of the bandwidth purchases were for re-sale at a profit.The bandwidthwas purchased from
Dynegy Connect because they offeredus the best pricing.We have purchased bandwidthfrom competitors
of Dynegy Connect when their pricing has been more attractive.Our board member,LawrenceMcLernon
was formerly chief executive officer of Dynegy Global Communications.
On May 3,2002 our board of directors granted Mr.Kelen,a board member,an option to purchase
50,000 shares of our common stock at a price of $8.77 per share in consideration of his special
participationon our board,and in consideration of such services to be performedin the future.
Thomas G.Hudson's son-in-lawis employed by us as a regional sales manager.In fiscal 2002,he was '
paid $128,688 in compensation,commissions and bonuses.Erwin A.Kelen's son is employed by us as an
area business development manager.In fiscal 2002,he was paid $146,896 in compensation,commissions
and bonuses.
30
New Accounting Pronouncements
In July 2002,the Financial Accounting Standards Board ("FASB")issued Statements of FinancialAccountingStandards("SFAS")No.146,"Accounting for Costs Associated with Exit or DisposalActivities."SFAS 146 addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")Issue No.94-3,"LiabilityRecognitionforCertainEmployeeTerminationBenefitsandOtherCoststoExitanActivity(includingCertainCostsIncurredinaRestructuring)"and must be applied beginning January 1,2003.SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when theliabilityisincurredratherthanwhentheexitordisposalplanisapproved.The adoption of SFAS 146 did
not have an effect on our consolidated financial statements.
In December 2002,the EITF reached a consensus on EITF 00-21,"RevenueArrangements withMultipleDeliverables".This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generatingactivities.In some arrangements,
the different revenue-generating activities (deliverables)are sufficientlyseparable and there exists sufficient
evidence of their fair values to separately account for some or all of the deliverables (that is,there are
separate units of accounting).In other arrangements,some or all of the deliverables are not independentlyfunctional,or there is not sufficient evidence of their fair values to account for them separately.This Issue
addresses when and,if so,how an arrangement involving multiple deliverables should be divided into
separate units of accounting.This Issue does not change otherwise applicable revenue recognition criteria.The guidance in this Issue is effectivefor revenue arrangements entered into in fiscal periods beginningafterJune15,2003.We do not expect the adoption of EITF 00-21 will have a material effect on ourfinancialstatements.
In December 2002,the FASB issued SFAS 148,"Accounting for Stock-Based Compensation-Transition and Disclosure,an amendment to FASB Statement 123".SFAS 148 provides alternative
methods of transition for a voluntarychange to the fair value based method of accounting for stock-based
employee compensation.In addition,SFAS 148 amends the disclosure requirements of SFAS 123,"Accounting for Stock-Based Compensation",to require prominent disclosures in both annual and interimfinancialstatementsaboutthemethodofaccountingforstock-based employee compensation,and theeffectofthemethodusedonreportedresults.We adopted the disclosure provisions of SFAS 148 effectiveJanuary31,2003.
In November2002,the FASB issued FASB Interpretation (FIN)No.45,Guarantor'sAccountingandDisclosureRequirementsforGuarantees,Including Indirect Guarantees of Indebtedness of Others.
FIN No.45 requires companies to recognize,at the inception of a guarantee,a liability for the fair valueoftheobligationundertakeninissuingtheguarantee.Guarantees in existence at December31,2002 aregrandfatheredforthepurposesofrecognitionandwouldonlyneedtobedisclosed.We do not expect that
the adoption of FIN No.45 will have an effect on our consolidated financial statements.We will adopt theinitialrecognitionandmeasurementprovisionsofFINNo.45 for guarantees issued or modified afterDecember31,2002.
Item 7A.Quantitativeand Qualitative Disclosures about Market Risk
We have no derivativefinancial instruments in our cash,cash equivalents and marketable securities.We mainly invest our cash and cash equivalents in investment grade,highly liquid investments,consistingofmoneymarketinstruments,bank certificates of deposits and investments in commercial paper.
At January 31,2003,our marketable securities include a $149,000 investmentin a Standard &Poors
500 stock price index fund and a $259,000 investment in a NASDAQ 100 index tracking stock.These
investments were purchased to directly offset any investment gains or losses owed to participants under ourexecutivedeferredcompensationplan,which has been established for selected key employees.
We are exposed to market risks related to fluctuations in foreign exchange rates because some sales
transactions,and the assets and liabilities of our foreign subsidiaries,are denominated in foreign currencies,primarily the euro and British pounds sterling.As of January 31,2003,we had no open forwardexchange
contracts.
31
Item 8.ConsolidatedFinancial Statements and SupplementaryData
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands,except per share data)
January 31,
2003 2002
Assets
Current assets:
Cash and cash equivalents ........................$98,341 $34,402
Marketable securities ........................111,143 83,612
Receivables,net .....................56,040 53,962
Inventories .....................24,091 31,410
Deferredtax asset ..............
--5,134
Other current assets .....................2,118 4,138
Total current assets ......................291,733 212,658
Property and equipment,net......................22,566 25,604
Field support spares,net ......................6,009 4,562
Deferredtax asset ............
-11,048
Goodwill,net ....................14,113 14,070
Other intangibles,net .....................1,669 463
Other assets ....................3,079 1,333
$339,169 $269,738
Liabilities and shareholders'equity
Current liabilities:Accountspayable..........................$16,889 $17,240
Accrued liabilities ......................25,060 20,158
Deferredrevenue ......................................19,340 13,466
Current installments of obligations under capital lease .....................708 1,523
Total current liabilities .....................61,997 52,387
Convertible subordinated debt .......................125,000 -
Deferredtax liability ...................................541 -
Obligations under capital lease,less current installments ............-708
Total liabilities ......................187,538 53,095
Shareholders'equity:
Undesignated preferredstock,authorized 965 shares;none issued and
outstanding ....................................................--
Series A junior participatingpreferredstock,authorized 40 shares;none issued
andoutstanding .......................................--
Common stock,$.01 par value;authorized 100,000 shares;issued and
outstanding 26,921 at January 31,2003,and 30,383 at January 31,2002......269 304
Additional paid-in capital ........................173,955 202,996
Unearned compensation .....................(675)(1,232)
Retained earnings (accumulated deficit)......................(22,946)15,459
Accumulated other comprehensive income (loss)....................1,028 (884)
Total shareholders'equity .....................151,631 216,643
$339,169 $269,738
See accompanying notes to consolidated financial statements
32
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands,except per share data)
Years Ended January 31,
2003 2002 2001
Revenue:Productsales.......................................................$145,355 $129,276 $125,432Servicefees........................................................66,160 57,747 50,674
Total revenue .....................211,515 187,023 176,106
Cost of revenue:
Cost of product sales ...................89,110 76,254 52,873Costofservicefees..................38,210 37,328 30,308
Total cost of revenue ....................127,320 113,582 83,181
Gross profit ....................84,195 73,441 92,925
Operating expenses:
Sales and marketing ......................57,849 52,156 41,019Engineeringanddevelopment..............................26,872 23,452 22,572Generalandadministrative...........................................10,694 9,311 8,697Abandonedfacility..................................................--(287)Restructuringcharge ................................................1,666 996 -
Total operating expenses ....................97,081 85,915 72,001
Income (loss)from operations.....................(12,886)(12,474)20,924
Other income (expense):Write-down of investment...........................................(1,000)-
Loss on sale and write-down of web Methods stock .......................-(10,283)-
Interestincome..............................................6,183 6,166 3,802Interestexpense....................................................(4,326)(285)(338)Other,net .........................................................12 (344)(312)
Other income (expense),net ..........................869 (4,746)3,152
Income (loss)from continuing operations before income taxes ..............(12,017)(17,220)24,076Provision(benefit)for income taxes ...................16,527 (5,292)7,947
Income (loss)from continuing operations ...................(28,544)(l 1,928)16,129
Discontinued operations:
Gain on disposition of discontinued operations,net of tax ............-8,222 ---
Income (loss)from discontinued operations,net of tax ..................207 -(4,135)
207 8,222 (4,135)
Net income (loss)before cumulative effect of change in accounting principle ..(28,337)(3,706)11,994Cumulativeeffectofchangeinaccountingprinciple.......................(10,068)--
Net income (loss).....................$(38,405)$(3,706)$11,994
Basic income (loss)per share:
Continuing operations ....................$(1.02)$(.40)$.64
Discontinued operations ........................$.01 $.28 $(.16)
Cumulative effect of change in accounting principle ....................$(.36)$-$-
Net income (loss).....................$(1.37)$(.12)$.47
Shares ....................28,111 29,892 25,383
Diluted income (loss)per share:
Continuing operations .....................$(1.02)$(.40)$.58
Discontinued operations .....................$.01 $.28 $(.15)
Cumulative effect of change in accounting principle ....................$(.36)$-$-
Net income (loss)......................$(1.37)$(.12)$.43
Shares ...................28,111 29,892 27,813
See accompanying notes to consolidated financial statements
33
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY
(in thousands)
Retained Accumulated
Additional Earnings Other
Common Stock Paid-in Unearned (Accumulated Comprehensive
Shares Amount Capital Compensation Deficit)Income (Loss)Totaf
Balance,January 31,2000 ...............23,841 $238 $69,434 $(1,130)$7,171 $(602)$75,111
Shares issued pursuant to the employee
stock purchase plan,restricted stock plan
and exercise of stock options ...........1,215 13 8,181 (675)--7,519
Shares issued pursuant to a secondary stock
offering,net of offering costs ...........4,600 46 110,189 ---110,235
Tax benefits from employee stock
transactions ..................--8,106 ---8,106
Compensation expense .............---501 --501
Comprehensive income:
Net income ......................11,994 11,994
Translation adjustment,net of tax effectof$0..........................
(364)(364)
Total comprehensive income .............
------11,630
Balance,January 31,2001 ...............29,656 $297 $195,910 $(1,304)$19,165 $(966)$213,102
Shares issued pursuant to the employee
stock purchase plan,restricted stock plan
and exercise of stock options ...........817 8 6,894 (496)--6,406
Tax benefits from employee stock
transactions ................--978 ----978
Repurchase of cornmon stock ............(90)(1)(786)-----(787)
Compensation expense ...............
----568 --568
Comprehensive income:
Net loss ..........................-----(3,706)-(3,706)
Unrealized gain on marketable securities,
net of tax effect of $299 ............------510 510
Translation adjustment,net of tax effectof$0.........................(428)(428)
Total comprehensive loss ..............-_------(3,624)
Balance,January 31,2002 ...............30,383 $304 $202,996 $(1,232)$l 5,459 $(884)$216,643
Shares issued pursuant to the employee
stock purchase plan,restricted stock plan
and exercise of stock options ...........583 5 3,124 (165)--2,964
Repurchase of common stock ............(4,045)(40)(32,165)----(32,205)
Compensation expense .............---722 --722
Comprehensive income:
Net loss ..........................-----(38,405)-(38,405)
Unrealized gain on marketable securities,
net of tax effect of $266 .............-----393 393
Translation adjustment,net of tax effect 1,519 1,519of$0....
Total comprehensive loss .............
------(36,493)
Balance,January 31,2003 ...............26,921 $269 $173,955 $(675)$(22,946)$1,028 $151,63 I
See accompanying notes to consolidated financial statements
34
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended January 31,
2003 2002 2001
perating Activities:
Net income (loss)....................................$(38,405)$(3,706)$11,994
Cumulative effect of change in accounting principle ............10,068 -
Discontinued operations ..................(207)(8,222)4,135
Depreciationand amortization................15,868 15,127 11,812
Compensation expense ..........................722 568 346
Loss on sale and write-down of web Methods stock ...........-10,283 -
Write-down of investment ..................1,000 --
hange in deferredtaxes .................................16,077 (1,268)(5,344)
Thanges in operating assets and liabilities,net of acquisitions:
Receivables .................1,714 (40)(14,833)
Inventories .................7,370 (4,517)(3,717)
Other current assets ................2,020 (1,575)(445)
Accounts payable ..................(2,110)(21,879)11,036
Accrued liabilities .................(2,670)(7,606)17,754
Deferred revenue ..................5,875 (2,091)5,569
Net cash provided by (used in)continuing operations .........17,322 (24,926)38,307
Net cash provided by (used in)discontinued operations .......207 (8,830)(1,490)
Cash provided by (used in)operating activities ............17,529 (33,756)36,817
esting Activities:
kdditions to property and equipment ..................(6,878)(8,198)(14,329)
Edditions to field support spares ................(5,486)(2,770)(2,520)idditions to purchased technology ..........--(375)
Ecquisition of Articulent,net of cash acquired ...........-(I1,145)
Ecquisition of BI-Tech,net of cash acquired ................(7,723)-
Jet proceeds from sale of discontinued operations ............-11,800 -
'roceeds from the sale of webMethods stock ...........-6,281 -
'urchase of marketable securities .......................(163,860)(87,786)(148,389)
'roceeds from redemptionof marketable securities .............136,988 115,717 45,998
Ither assets .......................................695 876 (1,967)
)iscontinued operations -additions to long-term assets ........--(158)
Cash provided by (used in)investing activities.............(46,264)24,775 (121,740)
incing Activities:
let proceeds from issuance of convertiblesubordinated debt .....121,559 -
ayments for repurchases of common stock ..................(32,205)(787)-
roceeds from issuance of common stock .................2,964 6,406 117,754
epayments of obligations under capital leases ................(1,523)(1,421)(1,187)
Cash provided by financing activities ...............90,795 4,198 116,567
cts of exchange rate changes ...............1,879 (259)(174)
increase (decrease)in cash and cash equivalents .............63,939 (5,042)31,470
h and cash equivalents -beginning of year ................34,402 39,444 7,974
i and cash equivalents -end of year ..................$98,341 $34,402 $39,444
See accompanying notes to consolidated financial statements
35
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31,2003,2002 and 2001
(tabular amounts in thousands except per share data)
(1)Summary of Significant Accounting Policies '
Description Of Business
ComputerNetwork Technology Corporation is a leading providerof end-to-end storage solutions,
related consulting and integrationservices,and managed services in the high-performancestorage
networkingmarket.
Discontinued Operations
In 2001,the Company divested Propelis Softwarë,Inc.formerly known as the Enterprise Integration
Solutions Division.Accordingly,Propelis Software,Inc.has been accounted for as discontinued operation
in the accompanying consolidated financial statements.
Fiscal Year End
References in these footnotes to fiscal 2002,2001 and 2000 represent the twelve months ended
January 31,2003,2002 and 2001,respectively.
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts of ComputerNetwork
Technology Corporationand its subsidiaries (together,the Company).All significant intercompany
balances and transactions are eliminated in consolidation.
Revenue Recognition
Revenue is recognized upon shipment for product sales with standard configurationsand product sales
with other than standard configurations which have demonstrated performancein accordance with
customer specifications prior to shipment providedthat (a)evidence of an arrangement exists,(b)delivery
has occurred,(c)the price to the customer is fixed and determinable,and (d)collectibility is assured.All
other product sales are recognized as revenue when customer acceptance is received or upon passage of
the customer acceptance period.Warranty costs and sales returns are accrued at the time of shipment
based on experience,In transactions that include multiple products and/or services,the sales value is
allocated among each of the deliverables based on their relativefair values.
Service fees are recognized as revenue when earned,which is generally on a straight-line basis over
the contracted service period or as the services are rendered.Deferred revenue primarily consists of the
unearned portion of service agreements billed in advance to customers,including amounts both collected
and uncollected.
Valuation ofAccounts Receivable
Accounts receivable are reviewedto determinewhich are doubtful of collection.Estimates are also
made of potential future product returns.In making the determinationof the appropriate allowance for
doubtful accounts and product returns,the Company considers specific accounts,changes in customer
payment terms,historical write-offs and returns,changes in customer demand and relationships,
concentrations of credit risk and customer credit worthiness.The provisionfor doubtful accounts and
product returns was $1,388,000,$898,000 and $1,600,000 in 2002,2001 and 2000,respectively.The
accounts receivable balances at January 31,2003 and 2002 were $56,040,000 and $53,962,000,respectively,
net of an allowance for doubtful accounts and sales returns of $2,416,000 and $1,848,000,respectively.
36
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---(Continued)
Valuation of Inventory
Inventoriesare stated at the lower of cost (determined on a first in,first out basis)or market.The
Company reviews obsolescence to determine that inventory items deemed obsolete are appropriately
reserved.In making the determination,consideration is given to the history of inventory write-offs,future
sales of related products,and quantity of inventory at the balance sheet date,assessed against past usage
rates and future expected usage rates.
Valuation of DeferredTaxes
Significant management judgment is required in determining the provisionfor incomes taxes,deferred
tax assets and liabilities and any valuation allowance recorded against net deferredtax assets.The
Company is required to estimate income taxes in each jurisdiction where it operates.This process involves
estimating actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items,such as the depreciable life of fixed assets for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,which are included in the consolidated
balance sheet.The Company assesses the likelihood that its deferredtax assets will be recovered from
future taxable income and to the extent recovery is believed unlikely,establishes a valuation allowance.
The Company has increased tax expense within its statements of operations when a valuation allowance is
established or increased in a given period.
In the fourth quarterof fiscal 2002,the Companyrecorded a non-cash charge of $23,568,000 to
providea valuation allowance for its United States deferred tax assets.The Company's cumulative
valuation allowance recorded against its deferredtax assets at January 31,2003 was $24,808,000.As the
Company generates taxable income in future periods,it does not expect to record significant income tax
expense in the United States until it becomes likely that the Company will be able to utilize the deferred
tax assets,and reduce its valuation allowance.The establishment of the valuation allowance does not
impair the Company's ability to use the deferredtax assets upon achievingprofitability.The Company's
federal net operating loss carry-forwardsand credits do not expire for the next 15-20 years.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets.Upon adoption
of Statement of Financial Accounting Standard (SFAS)No.142,"Goodwill and Other Intangible
Assets,"in the first quarterof fiscal 2002,the Company no longer amortized goodwill.See Note 4 for the
effects of adopting this standard.Other intangible assets are related to the acquisitions of Articulent and
BI-Tech and are amortized on a straight-line basis over periods ranging from two to ten years.
Impairment of Long-lived and Intangible Assets
The Company accounts for long-lived assets in accordance with the provisions of SFAS No.144,
"Accounting for the Impairment or Disposal of Long-Lived Assets."This Statement requires that long-
lived and intangible assets be reviewed for impairment wheneverevents or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.Recoverabilityof assets to be held
and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash
flows expected to be generated by the asset.If the carrying amount of an asset exceeds its estimated future
cash flows,an impairment charge is recognized by the amount by which the carrying amount of the asset
exceeds the fair value of the asset.Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell
The Company reviews goodwill for impairment annually or more frequently if changes in
circumstances or the occurrence of events suggest the remainingvalue may not be recoverable.An asset is
37
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
deemed impaired and written down to its fair value if estimated related net undiscounted future cash flows
are less than its carrying value in accordance to the provisions of SFAS No.142.In connection with
SFAS No.142's transitional goodwill impairment evaluation,the Statement requires the Company to
perform an assessment of whetherthere is an indication that goodwill is impaired as of the date of
adoption.Impairment adjustments recognized after adoption,if any,generally are requiredto be
recognized as operating expenses,captioned in general and administrativeexpenses.
Cash Equivalents
The Company considers investments in highly liquid debt securities havingan initial maturity of three
months or less to be cash equivalents.
Marketable Securities
Unrealizedgains and losses on available-for-salesecurities are excluded from earnings and are
reflected as a separate component of shareholders'equity.Unrealizedgains and losses on trading securities
are included in earnings.
Property And Equipment
.Property and equipment owned by the Company is carried at cost and depreciated using the straight-
line method over three to eight years.Leasehold improvementsare amortized using the straight-line
method over the terms of the respective leases.Expenditures for repairs and maintenance are charged to
expense as incurred.Capital lease equipment is amortized over the life of the lease.
The carrying value of long-livedassets is reviewedwheneverevents or changes in circumstances such
as market value,asset utilization,physical change,legal factors or other matters indicate that the carrying
value may not be recoverable.When the review indicates that the carrying value of the asset or group of
assets representmg the lowest level of identifiable cash flows exceeds the sum of the expected future cash
flows (undiscounted and without interest charges),an impairment loss is recognized.The amount of the
impairment loss is the amount by which the carrying value exceeds the fair value of the impaired asset or
group of assets.
Field Support Spares
Field support spares are carried at cost and depreciated using the straight-line method over three
years.
EngineeringAnd Development
The Company has expensed all engineering and developmentcosts to date.
Foreign Currency
The financial statements of the Company's international subsidiaries have been translated into U.S.
dollars.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.
The Company is exposed to market risks related to fluctuations in foreign exchange rates because
some sales transactions,and the assets and liabilities of its foreign subsidiaries,are denominated in foreign
currencies.The Company had no outstanding forward exchange contracts as of January 31,2003.Gains
38
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and losses from transactions denominated in foreign currencies and forward exchange contracts are
included in net income (loss).
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
providesthe footnote disclosures required by Statement of Financial Accounting Standards No.123
"Accounting for Stock Based Compensation"(SFAS No.123).
The Company has elected to continue to account for its plans in accordance with APB No.25.
Accordingly,no compensation cost associated with the fair value of stock option grants or shares sold to
employees under the Employee Stock Purchase Plan has been recognized in the Company's financial
statements.Had compensation cost for the Company'sstock-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:
Years Ended January 31,
2003 2002 2001
Net income (loss),as reported .........................$(38,405)$(3,706)$11,994
Deduct:Total stock-based employee compensation expense
under fair valuebased method of all awards,net of tax
effects......................(12,301)(7,109)(6,368)
Pro forma net income (loss).........................$(50,706)$(10,815)$5,626
As reported
Basic........................$(1.37)$(.12)$.47
Diluted.........................$(1.37)$(.12)$.43
Pro forma
Basic.........................$(1.80)$(.36)$.22
Diluted ........................$(1.80)$(.36)$.20
In determiningthe compensation cost of stock option grants and shares sold to employees under the
employee stock purchase plan,as specified by SFAS No.123,the fair value of each award has been
estimated on the date of grant using the Black-Scholes option pricing model.The weighted average
assumptions used in these calculations are summarized below:
Years Ended January 31,
2003 2002 2001
Risk free interest rate ............:........3.71%4.51%5.90%
Expectedlife.....................5.68 5.73 5.33
Expected volatility .......................87.29%86.88%85.06%
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 accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the
39
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
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.
Estimates that could significantly affect the results of operations or financial condition of the
Company include the determinationof the valuationof the deferredtax asset,recoverabilityof goodwill,
valuation of accounts receivable and valuation of inventory.Further discussion on these estimates can be
found in related disclosures elsewhere in these notes to the consolidated financial statements.
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 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,awards under
the employee stock purchase plan and common shares issuable upon conversion of the Company's
outstanding convertiblesubordinated debt.Net loss per basic and diluted share is based on the weighted
average number of common shares outstanding.Potential dilutive shares of common stock have been
excluded from the computation of net loss per share due to their anti-dilutive effect.
Comprehensive Income (loss)
Comprehensive income (loss)consists of the Company's net income (loss),foreign currency
translation adjustment and unrealized gains and losses from available-for-salesecurities and is presented in
the consolidated statement of shareholders'equity.
New Accounting Pronouncements
In July 2002,the Financial Accounting Standards Board ("FASB")issued Statements of Financial
Accounting Standards ("SFAS")No.146,"Accounting for Costs Associated with Exit or Disposal
Activities."SFAS 146 addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")Issue No.94-3,"Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)"and must be applied beginning January 1,2003.SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the
liability is incurred rather than when the exit or disposal plan is approved.The adoption of SFAS 146 did
not have an effect on the Company's consolidated financial statements.
In December 2002,the EITF reached a consensus on EITF 00-21,"RevenueArrangements with
Multiple Deliverables".This Issue addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generatingactivities.In some arrangements,
the different revenue-generatingactivities (deliverables)are sufficiently separable and there exists sufficient
evidence of their fair values to separately account for some or all of the deliverables (that is,there are
separate units of accounting).In other arrangements,some or all of the deliverables are not independently
functional,or there is not sufficient evidence of their fair values to account for them separately.This Issue
addresses when and,if so,how an arrangement involving multiple deliverables should be divided into
separate units of accounting.This Issue does not change otherwise applicable revenue recognition criteria.
The guidance in this Issue is effectivefor revenue arrangements entered into in fiscal periods beginning
after June 15,2003.The Company does not expect the adoption of EITF 00-21 to have a material effect
on its financial statements.
40
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
In December 2002,the FASB issued SFAS 148,"Accounting for Stock-Based Compensation-Transition and Disclosure,an amendment to FASB Statement 123".SFAS 148 provides alternativemethodsoftransitionforavoluntarychangetothefairvalue,based method of accounting for stock-basedemployeecompensation.In addition,SFAS 148 amends the disclosure requirements of SFAS 123,"Accounting for Stock-Based Compensation",to require prominent disclosures in both annual and interimfinancialstatementsaboutthemethodofaccountingforstock-based employee compensation and the effectofthemethodusedonreportedresults.The Company adopted the disclosure provisions of SFAS 148effectiveJanuary31,2003.
In November 2002,the FASB issued FASB Interpretation ("FIN")No.45,"Guarantor'sAccountingandDisclosureRequirementsforGuarantees,Including Indirect Guarantees of IndebtednessofOthers."FIN 45 requires companie.s to recognize,at the inception of a guarantee,a liability for the fairvalueoftheobligationundertakeninissuingtheguarantee.Guarantees in existence at December31,2002
are grandfatheredfor the purposes of recognition and would only need to be disclosed.The Company doesnotexpectthattheadoptionofFIN45willhaveaneffectonitsconsolidatedfinancialstatements.TheCompanywilladopttheinitialrecognitionandmeasurementprovisionsofFIN45forguaranteesissued ormodifiedafterDecember31,2002.
41
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(2)Components of Selected Balance Sheet Accounts
January 31,
2003 2002
Inventories:
Components and subassemblies .......................$16,918 $22,391
Work in process ...................306 3,834
Finished goods ....................6,867 5,185
$24,091 $31,410
Property and equipment:
Land ............................$1,226 $1,186
Machinery and equipment .....................47,841 43,161
Office and data processing equipment .......................23,574 21,388
Furniture and fixtures ...................4,299 3,895
Leasehold improvements ....................2,849 2,183
79,789 71,813
Less accumulated depreciation and amortization....................57,223 46,209
$22,566 $25,604
Field support spares:
Field support spares .....................$28,191 $22,704
Less accumulated depreciation ......................22,182 18,142
$6,009 $4,562
Accrued liabilities:
Compensation ......................$10,817 $10,323
Income taxes ....................1,697 3,084
Interest ...................1,731 -
Product warranty ...................1,521 1,935
BI-Tech earn-out ....................4,380 --
Other....................4,914 4,816
$25,060 $20,158
(3)Cumulative Effect of Change in Accounting Principle
In June 2001,the Financial Accounting Standards Board (FASB)issued Statement of Financial
Accounting Standard (SFAS)No.141,"Business Combinations"and SFAS No.142,"Goodwill and
Other Intangible Assets."SFAS No.141 requires use of the purchase method of accounting for all
business combinations initiated after June 30,2001.SFAS No.141 also provides new criteria in the
determinationof intangible assets,including goodwill acquired in a business combination,and expands
financial disclosure concerning business combinations consummated after June 30,2001.SFAS No.142
requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead
be tested for impairment at least annually using a two-step impairment test.The application of SFAS
No.141 did not affect previously reported amounts included in goodwill and other intangible assets.
42
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Effective February.1,2002,the Company adopted SFAS No.142.SFAS No.142 provides a six-
month transitional period from the effective date of adoption for the Companyto perform an assessment of
whetherthere is an indication of goodwill impairment.The Company tested its reporting units for
impairment by comparing fair value to carrying value.Fair value was determinedusing a discounted cash
flow and cost methodology.The Company engaged a third-party appraisal firm to determine the fair value
of a reporting unit within its former Storage Solutions segment.This valuation indicated that the goodwill
associated with the acquisition of Articulent in April of 2001 was impaired.The performanceof this
business has not met management's original expectations,primarily due to the unexpected global slow
down in capital spending for information technology equipment.Accordingly,a non-cash impairment
charge of $10,068,000 from the adoption of SFAS No.142 was recognized as a cumulative effect of
change in accounting principle in the first quarter ended April 30,2002.Impairment adjustments
recognized after adoption,if any,generally are requiredto be recognized as an operatingexpense.
(4)Goodwill and Intangible Assets
As described previously,the Company adopted SFAS No.142 as of February 1,2002.The following
table reflects the consolidated results adjusted as if the adoption of SFAS No.142 occurred as of the
beginning of the year ended January 31,2001:
Years Ended January 31,
2003 2002 2001
Net income (loss),as reported ....................$(38,405)$(3,706)$11,994
Add back amortization of goodwill ...........-624 29
Net income (loss),as adjusted ..................$(38,405)$(3,082)$12,023
Basic income (loss),per share,as reported ..........$(1.37)$(.12)$.47
Add back amortization of goodwill ...........-.02 -
Basic income (loss)per share,as adjusted ........$(1.37)$(.10)$.47
Diluted income (loss),per share,as reported ........$(1.37)$(.12)$.43
Add back amortization of goodwill ............-.02 -
Diluted income (loss)per share,as adjusted ......$(1.37)$(.10)$.43
The change in the net carrying amount of goodwill for the years ended January31,2003 and 2002
was as follows:
Years EndedJanuary31,
2003 2002
Beginningof year ......................$14,070 $500
Acquisition of Articulent ............-13,558
Acquisition of BI-Tech ...................10,177 -
Translationadjustment ................(66)12
Impairment charge....................(10,068)-
End of year......................$14,113 $14,070
43
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The components of other amortizable intangible assets as of January 31,2003 and 2002 were as
follows:
January 31,2003 January 31,2002
Gross Carrying Accumulated Gross Carrying AccumulatedAmountAmortizationAmountAmortization
Customer lists ....................$1,630 $(161)$505 $(42)
Non-competeagreements ...........250 (50)
Total ....................$1,880 $(211)$505 $(42)
Total other intangible assets,net ...$1,669
Amortization expense for intangible assets for the year ended January 31,2003 was $169,000.
Amortization expense is estimated to be $288,000 in fiscal 2003,$238,000 in fiscal 2004 and $163,000 in
fiscal 2005 through 2007.
(5)Marketable Securities
The Company's investments in marketable securities are summarized as follows:
January 31,
2003 2002
Available-for-Sale:
Bank certificates of deposit .......................$-$35,096
U.S.government and agency securities ...................40,868 10,362
Corporate debt securities .....................68,8 16 36,538
Corporate equity securities ...................1,051 1,068
110,735 83,064
Trading:
Standard &Poors 500 stock price index fund ...............149 258
NASDAQ 100 tracking stock ................259 290
$111,143 $83,612
The amount of gross unrealized gains with respect to investments in available-for-salesecurities at
January31,2003 and 2002 was $1,468,000 and $809,000,respectively.The amount of gross unrealized
losses with respect to investments in available-for-salesecurities at January 31,2003 and 2002 was not
significant.The Company realized a loss of $8,747,000 in 2001 from the sale of 232,511 shares of
webMethods stock received in connection with the sale of IntelliFrame in 2001 (see note 7 to the
consolidated financial statements).Proceeds from the sale of available-for-salesecurities in fiscal 2002,
2001 and 2000 were $34,373,000,$47,723,000 and $1,204,000,respectively.At January 31,2003,
investments in available-for-salesecurities with contractual maturities of less than twelve months and one
to five years totaled $32,334,000 and $77,350,000,respectively.
An additionalloss of $1,536,000 was realized in fiscal 2001 when the remaining41,031 shares of
webMethods stock received in connection with the sale of IntelliFrame experienced a decline in value that
was determined to be other than temporary,resulting in a write-downof the shares.The Company realized
no other significant gains or losses with respect to available-for-salesecurities during the three-year period
ended January 31,2003.
44
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company's trading securities consist of a mutual fund investmentthat seeks to providea return
corresponding to the Standard &Poors 500 stock price index and a NASDAQ 100 tracking stock.The
Company intends to use any gain or loss from these investments to fund the investmentgains or losses
allocated to participants under the Company's executive deferred compensation plan.The amount of
unrealized holding losses with respect to trading securities included in net income (loss)for fiscal 2002,
2001 and 2000 was $132,000,$266,000 and $168,000,respectively.
(6)Acquisitions
On June 24,2002,the Company acquired all the outstanding stock of BI-Tech,a leading providerof
storage management solutions and services,for $12 million in cash plus the assumption of approximately
$3.6 million of liabilities and the acquisition of approximately $Š.7 million of tangible assets.The
Company has allocated $6.5 million,$1.1 million and $250,000 of the purchase price to goodwill,customer
list and non-compete agreements,respectively.The customer list and non-compete agreements are
currently being amortized over periods of ten and two years,respectively.The accompanying financial
statements include the results of BI-Tech since June 24,2002.
The following table presents the unauditedpro forma consolidated results of operations of the
Company for the years ended January 31,2003 and 2002 as if the acquisition of BI-Tech took place on
February 1,2002 and 2001,respectively:
Pro Forma Years EndedJanuary31,
2003 2002
Total revenue ......................$223,470 $216,626
Net loss......................$(36,010)$(2,601)
Net loss per share ....................$(1.28)$(.09)
The pro-forma results include amortizationof the customer list and non-compete agreement presented
above.The unaudited pro-forma results are for comparative purposes only and do not necessarily reflect
the results that would have been recorded had the acquisition occurred at the beginning of the period
presented or the results which might occur in the future.
The purchase agreement requires payment of additional consideration to the former stockholders and
the BI-Tech employees based on achievement of certain earnings for each of the next two years starting
July 1,2002.The purchase agreement requires the Company to pay this additional consideration at its
option,in the form of a note payable or the Company's stock to the former stockholders,and in cash to
the BI-Tech employees.The portion payable to the former stockholders will be recorded as goodwill.The
portion payable to BI-Tech employees will be recorded as corapensation expense.During fiscal 2002 and
based on BI-Tech's operations since July 1,2002,an additional $3.6 million was recorded to goodwill and
$744,000 was recorded as compensation expense,and a corresponding liability was recorded.
On April 3,2001 the Company acquired all of the outstanding stock of Articulent Inc.,a privately
held,leading providerof storage solutions and services for $12,360,000 in cash,plus the assumption of
approximately$24,394,000 of liabilities and the acquisition of approximately $19,333,000 of tangible assets.
The acquisition was accounted for as a purchase and the consolidated financial statements of the Company
45
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
include the results of Articulent since April 3,2001.The purchase price was allocated to the fair value of
the assets and liabilities acquired as follows:
Purchase Price:
Cash paid.....................$12,360
Fair Value of Assets Acquired and Liabilities Assumed:
Cash ....................$624
Accounts receivable .................10,287
Inventory ..................4,446
Fixed assets .................3,393
Customerlist................505
Goodwill...................13,809
Deferred taxes ..................3,107
Other assets................583
Accounts payable ...................(18,302)
Accrued expenses ................(2,324)
Notepayable....................(3,768)
Total purchase consideration ....................$12,360
The following table presents the unauditedpro forma consolidated results of operations of the
Company for the years ended January 31,2002 and 2001 as if the acquisition of Articulent took place on
February 1,2001 and 2000,respectively:
Pro Forma Years Ended
January 31,
2002 2001
Total revenue ......................$194,740 $245,030
Net income (loss)....................$(5,772)$2,454
Net income (loss)per share......................$(.19)$.09
The pro-formaresults include amortization of the customer list and goodwill presented above.The
unauditedpro-forma results are for comparativepurposes only and do not necessarily reflect the results
that would have been recorded had the acquisition occurred at the beginning of the period presented or the
results which might occur in the future.
(7)DiscontinuedOperations
Propelis Software,Inc.formerly known as the Enterprise Integration Solutions Division,including
IntelliFrame,developed and sold EAI software that automates the integrationof computer software
applications,and business workflow processes.In August 2000,the Companydetermined to divest Propelis
Software,Inc.and focus on its core storage networkingbusiness.As a result,Propelis Software,Inc.has
been accounted for as a discontinued operation in the accompanying financial statements.
In February 2001,the Company sold all of the outstanding stock of IntelliFrame Corporation,
including the technology underlying the Propelis BPm"product,to webMethods,Inc.for $8,800,000 in
cash and 273,542 shares of webMethods common stock.The stock received from webMethods,Inc.was
valued at $17,058,000,which reflects a discount from its publicly reported trading price due to the initial
restrictions placed on the Company's ability to freely sell the stock.In connection with this transaction,the
Company paid $3,000,000 to two employees,who were former shareholders of IntelliFrame,to satisfy all
46
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
obligations to make further bonus payments under their employment agreements.The sale resulted in an
after tax gain of $12,620,000 in the first quarter of fiscal 2001.
In the first quarter of fiscal 2001,the Company accrued $9,250,000 for the estimated future operating
losses of Propelis Software,Inc.through the potential date of divestiture,resulting in an after tax loss of
$6,197,000.
In August 2001,the Company sold substantially all of the remaining assets and liabilities of Propelis
Software,Inc.to Jacada Ltd.for $6,000,000 in cash,plus a warrant to purchase 350,000 ordinary shares of
Jacada Ltd.stock at a price of $3.26 per share.The final sales price was subject to adjustment based on
the closing balance sheet of Propelis.The transaction resulted in an after tax gain of $1,799,000 in the
third quarter of fiscal 2001.
In the third quarter of fiscal 2002,the Companyreceived $207,000 of royalty income,net of tax,
related to the discontinued operations sold in fiscal 2001.
(8)Leases
The Company leases all office and manufacturingspace and certain equipment under noncancelable
capital and operating leases.At January 31,2003 and 2002,leased capital assets included in property and
equipment were as follows:
January 31,
2003 2002
Property and equipment:
Office and data processing equipment ......................$3,345 $4,836
Less accumulated amortization ....................2,304 2,605
$1,041 $2,231
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:
Minimum LeaseCommitments
Capital Operating
Year Ending January31,
2004.......................$742 $4,550
2005 ............-3,334
2006 ...........-2,544
2007 ............-2,344
2008 ...........-2,337
Thereafter ............
_
--7,476
Total minimum lease payments ....................742 $22,585
Less amounts representing interest at rates ranging from
9.57%to 11.29%........................34
Present value of minimum capital lease payments ...............708
Less current installments ....................708
Obligations under capital lease,less current installments .........$-
47
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
Rent expense under noncancelable operatingleases,exclusive of executory costs,for fiscal 2002,2001
and 2000 was $6,244,000,$5,857,000,and $5,315,000,respectively.During the year ended January 31,
2001,the Company reversed $287,000 representing the unused portion of an accrual for an abandoned
facility.
(9)ConvertibleSubordinated Debt Offering
In February 2002,the Company sold $125 million of 3%convertiblesubordinated notes due
February 15,2007,raising net proceeds of $121.6 million.The notes are convertibleinto the Company's
common stock at a price of $19.17 per share.The Company may redeem the notes upon payment of the
outstanding principal balance,accrued interest and a make whole payment if the closing price of its
common stock exceeds 175%of the conversion price for at least 20 consecutive trading days within a
period of 30 consecutive trading days ending on the trading day prior to the date the redemption notice is
mailed.The make whole payment represents additional interest payments that would be made if the notes
were not redeemed prior to the due date.
(10)Shareholders'Equity
Common Stock Repurchase
In April 2001,the Company's board of directors authorized the repurchase of up to $50,000,000 of
peu
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Rights Plan
On July 24,1998 the Company's board of directors adopted a shareholders rights plan pursuant to
which rights were distributed as a dividend at the rate of one preferredshare 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 And Restricted Stock
The Company maintains stock option and restricted stock plans (the Plans)which providefor the
grant of stock options,restricted stock and stock based awards to officers,other employees,consultants,
and independent contractors as determinedby the compensation committee of the board of directors.A
maximum of 14,280,000 shares of common stock were issuable under the terms of the Plans as of
January 31,2003,of which no more than 6,330,000 shares may be issued as restricted stock or other stock
based awards,As of January 31,2003,there were 2,868,465 shares of common stock available for future
grants under these plans.
Restricted stock issued under the Plans is recorded at fair market value on the date of grant and
generally vests over a two to four year period.Vesting for some grants may be accelerated if certain
performancecriteria are achieved.Compensation expense is recognized over the applicable vesting period.
During fiscal 2002,2001 and 2000,the Companyissued 5,000,106,000,and 61,100 restricted shares,
respectively,having an aggregate weighted fair market value per share of $14.15,$10.63,and $17.43,
respectively.Compensation expense recognized for restricted shares in fiscal 2002,2001 and 2000 was
$722,000,$568,000 and $346,000,respectively.
All stock options granted under the Plans have an exercise price equal to fair market value on the
date of grant,vest and become exercisable over individually defined periods,generally four years,and
expire ten years from the date of grant.
48
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A summary of the status of the Company's outstanding stock options and related changes for fiscal2002,2001 and 2000 is presented below:
January 31,
2003 2002 2001WeightedWeightedWeighted-Average Average AverageExerciseExerciseExerciseOptionsSharesPriceSharesPriceSharesPriceOutstandingatbeginningofyear..........5,753 $11.99 4,655 $13.45 4,798 $10.02Granted.....................2,970 8.52 2,666 9.71 1,552 18.77Exercised.....................(231)5.26 (549)7.61 (1,123)5.93Canceled.......................(975)I L59 (1,019)15.30 (572)13.92Outstandingatendofyear...............7,517 $10.87 5,753 $11.99 4,655 $13.45Exercisableatendofyear................3,028 $11.80 2,107 $11.01 1,633 $8.08Weighted-averagefair value of grants duringtheyear......................$6.25 $7.26 $13.56
The following table summarizes information about stock options outstanding at January31,2003:
Options Outstanding Options ExercisableWeighted-
AverageRemaining Weighted-Weighted-Contractual Average AverageRangeofNumberLifeExerciseNumberExerciseExercisePricesOutstanding(in years)Price Exercisable Price$3.50 --$4.99 ....................1,033 7.6 $4.46 404 $4.37$5.00-$7.99.....................1,368 7.1 $6.45 571 $6.06$8.00 -$14.99 ....................3,611 8.0 $10.40 1,181 $10.49$15.00 -$19.99 ................644 7.2 $17.55 295 $17.56$20.00 -$32.75 ...................861 6.5 $22.55 577 $22.38
7,517 3,028
Employee Stock Purchase Plan
The 1992 Employee Stock Purchase Plan (the Purchase Plan)allows eligible employees anopportunitytopurchaseanaggregateof1,500,000 shares of the Company's common stock at a price pershareequalto85%of the lesser of the fair market value of the Company's common stock at the beginningortheendofeachsix-month purchase period.Under the terms of the Purchase Plan,no participant mayacquiremorethan5,000 shares of the Company's common stock or more than $5,000 in aggregate fairmarketvalueofcommonstock(as defined)during any six-month purchase period.Common shares soldtoemployeesunderthePurchasePlaninfiscal2002,2001 and 2000 were 346,982,163,705 and 102,920,respectively.
The weighted-averagefair value of each purchase right granted in fiscal 2002,2001 and 2000 was$4.41,$7.34 and $3.72,respectively.
49
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(11)Net Income (Loss)Per Share
The components of net income (loss)per basic and diluted share are as follows:
Weighted
Net Income Average Shares Per Share(loss)Outstanding Amount
Years Ended January31,
2003:
Basic...............................$(38,405)28,111 $(1.37)
Dilutive effect of employee stock purchase
awards and options and shares issuable upon
the conversion of convertiblesubordinateddebt............-
Diluted .....................$(38,405)28,111 $(1.37)
2002:
Basic...................:...$(3,706)29,892 $(.12)
Dilutive effect of employee stock purchase
awards and options ...........-
Diluted .........................$(3,706)29,892 $(.12)
2001:
Basic...........................$11,994 25,383 $.47
Dilutive effect of employee stock purchase
awards and options .............--2,430 (.04)
Diluted ........................$11,994 27,813 $.43
The total weighted average number of common stock equivalents excluded from the calculation of net
loss per share due to their anti-dilutive effect for fiscal 2002 and 2001 was 567,761 and 1,292,016,
respectively.The company also excluded 6,521,900 shares of common stock issuable upon conversion of
the Company's convertiblesubordinated debt from the calculation of net loss per share in fiscal 2002 due
to the anti-dilutive effect of the assumed conversion.
50
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(12)Income Taxes
The components of income from continuing operations before income taxes and income tax expense(benefit)for each of the years in the three-yearperiod ended January 31,2003 consists of the following:
Years Ended January 31,
2003 2002 2001
Income (loss)from continuingoperations beforemcometaxes:
U.S .....................$(12,657)$(17,756)$19,595Foreign..................640 536 4,48 1Total.......................$(12,017)$(17,220)$24,076
Income tax provision:
Current:
U.S.......................$-$-$5,180Foreign.................533 284 1,348State............--1,027
Total current ...............533 284 7,555
Deferred:
U.S....................15,361 (5,198)458Foreign..............----State..................633 (378)(66)Total deferred ....................15,994 (5,576)392Totalincometaxexpense(benefit)...............$16,527 $(5,292)$7,947
The reconciliationof the statutory federal tax rate and the effectivetax rate for each of the years inthethree-yearperiod ended January 31,2003 is as follows:
Years Ended January 31,
2003 2002 2001
Statutory tax rate ..........................(34.0)%(34.0)%34.0%Increase (decrease)in taxes resulting from:
State taxes,net of federal tax benefit..................(3.5)(3.3)2.6Extraterritorialincomeandforeignsalescorporation......(.8)(.5)(1.9)Meals and entertainment .....................6 .6 .4Valuationallowance.....................177.5 4.8 -Other ......................(2.3)1.7 (2.1)Total......................137.5%(30.7)%g%
51
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The tax effects of temporary differences that give rise to significant portions of the Company's
deferredtax assets and (liabilities)as of January 31,2003 and 2002 were as follows:
Years Ended January 31,
2003 2002
Deferred tax assets:
Inventory.....................$4,099 $4,658
Accrued compensation .....................1,111 1,145
Reserves for bad debts and sales returns ..................867 636
Foreign net operating loss carryforwards............
-410
Tax credits .............
.......3,655 1,265
Net operating losi carryforwards.........:..........14,596 7,895
Write down of webMethods stock .....................1,133 1,071
Other....................590 900
Total gross deferred tax assets .....................26,051 17,980
Valuation allowance .....................(24,808)(1,240)
Net deferred tax assets ...................1,243 16,740
Deferred tax liábilities:
Property and equipment ..................(166)(109)
Unrealizedgains on marketable securities .................(565)(299)
Other.....................(1,053)(150)
Total gross deferred tax liabilities ...................(1,784)(558)
Net deferred tax assets (liabilities).................$(541)$16,182
The valuation allowance for deferredtax assets as of January 31,2003 and 2002 was $24,808,000 and
$1,240,000,respectively.The net change in the total valuation allowance for the years ended January 31,
2003 and 2002 was an increase of $23,568,000 and $830,000,respectively.
Significant management judgment is required in determiningthe valuation allowance recorded against
net deferredtax assets.The Company assesses the likelihood that its deferredtax assets will be recovered
from future taxable income and to the extent recovery is believed unlikely,establishes a valuation
allowance.The Company must increase tax expense within its statements of operations when a valuation
allowance is established or increased in a given period.
In the fourth quarter of fiscal 2002,the Company recorded a non-cash charge of $23,568,000 to
provide a valuationallowance for its United States deferredtax assets.As the Company generates taxable
income in future periods,it does not expect to record significant income tax expense in the United States
until it becomes more likely than not that the Company will be able to utilize the deferred tax assets,and
therefore reduce its valuationallowance.The establishment of the valuation allowance does not impair the
Company's ability to use the deferredtax assets upon achievingprofitability.The deferred tax liability that
still exists is attributable to foreign operations.
As of January 31,2003,the Company has federal net operating loss and credit carry-forwards
available to reduce income taxes payable in future years of approximately $39,000,000 and $3,655,000,
respectively.If not used,these federalnet operating loss and credit carry-forwardswill expire between the
years 2019 and 2023.The utilization of a portion of the Company's federal net operating loss and credit
carry-forwardsis subject to annual limitations under Internal RevenueCode Section 382.Subsequent
52
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
equity changes could further limit the utilization of these federal net operatingloss and credit carry-forwards.
In future years,the recognized tax benefits relating to the reversal of the valuation allowance fordeferredtaxassetsasofJanuary31,2003 will be recorded as follows:
Total
Income tax benefit from continuing operations .....................$24,519Additionalpaidincapital............
......289Total....................$24,808
(13)Annual Bonus Plan
The Company's Annual Bonus Plan provides a formula for determination of cash bonus payments toeligibleemployeesbasedonadefinedpercentageofaparticipant's qualifying base compensation multipliedbytheCompany's annual bonus plan factor.The annual bonus plan factor is based on a chart outliningpayoutpercentagesforachievementofdefinedlevelsofoperatingprofit.
There was no annual bonus for fiscal 2002.The annual bonus expense for fiscal 2001 and 2000 was$1,134,000 and $2,035,000,respectively.
(14)401(k)and Deferred Compensation Plans
The Company has a 401 (k)salary savings plan which covers substantially all of its employees.TheCompanymatches100%of a participant's annual plan contributions up to an annual maximum perparticipantof$2,500 which vests over a four-year period from the participant's date of hire.
The Company has also established an executive deferred compensation plan for selected keyemployeeswhichallowsparticipantstodeferasubstantialportionoftheircompensationeachyear.TheCompanymatches20%of a participant's annual plan contributions up to an annual maximum perparticipantof$10,000.Matching contributions vest over a four-yearperiod from the later of July 1,1997ortheparticipant's date of hire.In addition,the Company provides participants with an annual earningscreditbasedontheinvestmentindexesselectedbytheparticipantpriortothestartofeachplanyear.
The Company's expense under the 401(k)and deferredcompensation plans for fiscal 2002,2001 and2000was$1,674,000,$1,969,000 and $1,132,000,respectively.
(15)Segment Information
During fiscal 2002,the Companyconsolidated its storage solutions and networkingsales,support andservicefunctionsintoasingleunit.As a result,it is no longer possible to allocate costs and prepareseparatemeaningfulstatementsforwhathadbeenitsnetworkingandstoragesolutionssegments.The
53
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----(Continued)
Company's management now reviews and makes decisions utilizing financial information for the
consolidated business.
Years Ending January 31,
2003 2002 2004
Foreign Operations Information:
Revenue:
United States ........................$153,235 $140,667 $123,717
United Kingdom .......................26,412 17,245 16,554
France ...................6,072 6,327 5,213
Other ....................25,796 22,784 30,622
Total ......$211,515 $187,023 $176,106
Long-lived assets (end of period):
United States..........................$30,554 $43,897 $29,678
United Kingdom .....................13,709 693 856
Other ..................94 109 327
Total........................$44,357 $44,699 $30,861
Revenue has been attributed to the country where the end-user customer is located.
One customer accounted for 10%of the Company's revenue in fiscal 2002.No single customer
accounted for more than 10%of the Company's revenue in fiscal 2001 or 2000.
(16)Product Warranty
The following is a roll forwardof the Company's product warranty accrual for each of the years in the
three-yearperiod ended January 31,2003:
Balance at Charged to
Years Ended beginning cost of Revisions to Cost of Balance at
January 31,of year product estimates warranty end of year
2003 ..........$1,935 2,429 -(2,843)$1,521
2002 ..........$1,629 2,836 -(2,530)$1,935
2001 ..........$904 3,290 -(2,565)$1,629
(17)Restructuring Charge
In the fourth quarter of fiscal 2002,the Company recorded a $1.7 million restructuringcharge for
severance resulting from a reduction in workforce and professional fees related to canceled acquisition
activity.Of this amount $1.3 million was paid prior to January 31,2003,with the balance to be paid prior
to April 30,2003.
(18)Noncash Financing and InvestingActivities and Supplemental Cash Flow Information
Cash payments for interest expense in fiscal 2002,2001,2000 were $1,946,000,$285,000 and
$338,000,respectively.
Cash payments for income taxes,net of refunds received,in fiscal 2002,2001 and 2000 were
$3,535,000,$17,000 and $3,286,000,respectively.
54
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
The Company did not enter into any capital leases during fiscal 2002.During fiscal 2001 and 2000,
the Company entered into capital lease obligations for equipmentvalued at $279,000 and $1,849,000,
respectively.
During fiscal 2001 and 2000,deferredtax assets increased by $994,000 and $5,736,000,respectively,
as a result of the tax benefit from employee stock transactions that could not be currently utilized.
(19)Disclosures about Fair Value of Financial Instruments
The carrying amount for cash and cash equivalents,accounts receivable and capital lease obligations
approximates fair value because of the short maturity of those instruments.Marketable securities are
recorded at market value at January 31,2003.
At January 31,2003,the Company's 3%convertiblesubordinated notes due February 15,2007 in the
amount of $125,000,000 had a fair value of $94,375,000,based on a reported trading price of $75.50 per
$100 in face amount of principal indebtedness.
(20)Related Party Transactions
During fiscal 2002 and,2001,the Company purchased $374,000 and $491,000,respectively,of
bandwidth from Dynegy Connect,an entity wholly owned by Dynegy Global Communications.At
January 31,2003 the Company had commitments to purchase $933,000 of additional bandwidth from
Dynegy Connect through fiscal 2006.All of the bandwidth purchases were for re-sale at a profit.The
bandwidth was purchased from Dynegy Connect because they offered the best pricing.The Company has
purchased bandwidthfrom competitors of Dynegy Connect when their pricing was more attractive.The
Company's board member,Lawrence McLernon,was formerly chief executive officer of Dynegy Global
Communications.
On May 3,2002 the Company's board granted Mr.Kelen,a board member,an option to purchase
50,000 shares of the Company's common stock at a price of $8.77 per share in consideration of
Mr.Kelen's special participation on the Company's board,and in consideration of such services to be
performedin the future.
Thomas G.Hudson's son-in-law is employed by the Company as a regional sales manager.In fiscal
2002,he was paid $128,688 in compensation,commissions and bonuses.Erwin A.Kelen's son is employed
by the Company as an area business developmentmanager.In fiscal 2002,he was paid $146,896 in
compensation,commissions and bonuses.
(21)Subsequent Event
On April 6,2003,the Company entered into an agreement where a wholly owned subsidiary of the
Company will acquire all of the shares of Inrange Technologies Corporationthat are owned by SPX
Corporation.The shares acquired will constitute approximately 91%of the issued and outstanding shares of
Inrange for a purchase price of $2.3132 per share and $172,954,108 in the aggregate.Pursuant to the
agreement,immediately following the acquisition,the subsidiary will be merged into Inrange,and the
remaining capital stock owned by other Inrange shareholders will be converted into the right to receive
$2.3132 per share in cash,resulting in a total payment of approximately $190,000,000 for both the stock
purchase and the merger.Consummation of these transactions is subject to significant conditions,including
filing and expiration of the waiting period under the Hart-Scott-Rodino Antitrust ImprovementsAct of
1976,as amended.
55
COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The following table presents the unaudited pro forma consolidated results of operations of the
Company for the years ended January 31,2003 and 2002 as if the acquisition of Inrange took place on
February 1,2002 and 2001,respectively:
Pro Forma Years
Ended January 31,
2003 2002
Total revenue .....................$435,099 $447,874
Net loss.....................$(70,199)$(37,355)
Net loss per share ....................$(2.50)$(1.25)
The unaudited pro forma results are for comparativepurposes only and do not necessarily reflect the
results that would have been recorded had the acquisition occurred at the beginning of the period
presented or the results which might occur in the future.The allocation of the purchase to the acquired
assets and liabilities of InrangeTechnologies Corporation is subject to adjustment pending completion of a
purchase price allocation study and will likely result in changes to the proforma net loss amounts.
56
INDEPENDENT AUDITORS'REPORT
The Board of Directors and Shareholders
Computer Network Technology Corporation:
We have audited the accompanying consolidated balance sheets of Computer Network TechnologyCorporationandsubsidiariesasofJanuary31,2003 and 2002,and the related consolidated statements ofoperations,shareholders'equity,and cash flows for each of the years in the three year period endedJanuary31,2003.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 auditing standards generally accepted in the United
States of America.Those standards require that we plan and perform the audit to obtain reasonable
assurance about whetherthe 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.Anauditalsoincludesassessingtheaccountingprinciplesusedandsignificantestimatesmadeby
management,as well as evaluatingthe overall financial statement presentation.We believe that our auditsprovideareasonablebasisforouropinion.
In our opinion,the consolidated financial statements referredto above present fairly,in all material
respects,the financial position of Computer Network Technology Corporationand subsidiaries as of
January 31,2003 and 2002,and the results of their operations and their cash flows for each of the years inthethreeyearperiodendedJanuary31,2003,in conformity with accounting principles generally accepted
in the United States of America.
As discussed in notes 1,3 and 4 to the consolidated financial statements,the company adopted the
provisions of Statement of Financial Accounting Standard No.142,"Goodwill and Other Intangible
Assets",on February 1,2002.
/s/KPMG LLP
Minneapolis,Minnesota
February 17,2003,except as to note 21,
which is as of April 6,2003
57
QUARTERLY FINANCIAL DATA
(unaudited)
Years Ended January 31,2003 and 2002
First Second Third FourthQuarter(2)Quarter(3)Quarter(4)Quarter(5)
(in thousands,except per share data)
2002
Revenue ......................$45,212 $48,866 $55,903 $61,534
Gross profit .......................18,084 19,946 21,550 24,615Income(loss)from operations ....................(6,674)(3,547)(1,823)(842)Income from discontinued operations,net of tax ........--207 ---
Net income (loss).....................(13,765)(2,106)(864)(21,670)Net income (loss)per share:
Basic ..................(.48)(.07)(.03)(.8 1)Diluted .................(.48)(.07)(.03)(.81)
2001(1)
Revenue .......................$29,413 $41,583 $55,362 $60,665
Gross profit .......................10,465 16,560 22,027 24,389Income(loss)from operations ......................(10,478)(2,597)(326)927Incomefromdiscontinuedoperations,net of tax ........6,423 -1,799 -Net income (loss)...................(6,555)(821)2,398 1,272Netincome(loss)per share:
Basic ..................(.22)(.03).08 .04Diluted.................(.22)(.03).08 .04
(1)In fiscal 2001,we divested Propelis Software,Inc.formerly known as our Enterprise Integration
Solutions Division to focus all of our resources on our core storage networking business.Accordingly,
the financial information for Propelis Software,Inc.has been accounted for as discontinued
operations.
(2)Continuing operations for the first quarter of 2002 includes a $10.1 million cumulative effect of
change in accounting principle related to the implementationof SFAS No.142.Continuing operationsforthefirstquarteroffiscal2001includesa$2.0 million write down of inventory,a $325,000 write-offofaproductanda$1.0 million restructuringcharge.Continuing operations also includes a loss on the
sale and write-down of webMethods stock of $10.3 million.Discontinued operations for the firstquarteroffiscal2001includesaprovisionof$6.2 million,net of tax,to accrue for the estimatedfutureoperatinglossesofPropelisSoftware,Inc.through the expected date of divestiture.
Discontinued operations for the first quarter of 2001 includes an after tax gain of $12.6 million
resulting from the sale of IntelliFrame.
(3)Continuing operations for the second quarterof fiscal 2002 includes an $89,000 earn-out payable to
the employees of BI-Tech.
(4)Continuing operations for the third quarter of fiscal 2002 includes a $537,000 earn-out payable to the
employees of BI-Tech.Discontinued operations for the third quarter of fiscal 2001 includes an after
tax gain of $1.8 million from the sale of substantially all of the remaining assets and liabilities of
Propelis Software,Inc.to Jacada Ltd.
(5)Continuing operations for the fourth quarter of fiscal 2002 includes a $1.7 million restructuring
charge,a $1.0 million investment write-down,and a $23.6 million valuation allowance for our United
States deferredtax assets.Continuing operations also includes $118,000 related to the earn-out
payable to the employees of BI-Tech.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
58
PART III
Item 10.Directors and Executive Officers of the Registrant
The information set forth under the captions "Election of Directors"and "Section 16 (a)BeneficialOwnershipReportingCompliance"in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on June 25,2003,to be filed with the Securities and Exchange Commission (the"Commission")on or before May 26,2003,is incorporatedherein by reference.For informationconcerningtheexecutivesofficers,see Item 4A of this Annual Report on Form 10-K.
Item 11.Executive Compensation
The information set forth under the captions "Summary Compensation Table,""Option Tables,""Employment Agreements,""Election of Directors -Compensation of Directors,""Internal RevenueCodeSection162(m)"and "Comparative Stock Price Performance"in the definitive Proxy Statement fortheAnnualMeetingofShareholderstobeheldonJune25,2003,to be filed with the Commission on orbeforeMay26,2003,is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Certain Beneficial Owners andManagement"in the definitive Proxy Statement for the Annual Meeting of Shareholders to be held onJune25,2003,to be filed with the Commission on or before May 26,2003,is incorporatedherein byreference.
The information set forth under the caption "Equity Compensation Plan Information as ofJanuary31,2003"in the definitive Proxy Statement for the Annual Meeting of Shareholders to be held onJune25,2003,to be filed with the Commission on or before May 26,2003,is incorporatedherein byreference.
Item 13.Certain Relationshipsand Related Transactions
During 2002 and 2001,we purchased $374,000 and $491,000,respectively,of bandwidthfrom DynegyConnect,an entity wholly owned by Dynegy Global Communications.At January 31,2003 we havecommitmentstopurchase$933,000 of additional bandwidthfrom Dynegy Connect through fiscal 2006.Allofthebandwidthpurchaseswereforre-sale at a profit.The bandwidth was purchased from DynegyConnectbecausetheyofferedusthebestpricing.We have purchased bandwidth from competitors ofDynegyConnectwhentheirpricinghasbeenmoreattractive.Our board member,Lawrence McLernon,was formerly chief executive officer of Dynegy Global Communications.
On May 3,2002 our board granted Mr.Erwin Kelen,a board member,an option to purchase50,000 shares of our common stock at a price of $8.77 per share in consideration of his specialparticipationonourboard,and in consideration of such services to be performedin the future.
Thomas G.Hudson's son-in-lawis employed by us as a regional sales manager.In fiscal 2002,he waspaid$128,688 in compensation,commissions and bonuses.Erwin A.Kelen's son is employed by us as anareabusinessdevelopmentmanager.In fiscal 2002,he was paid $146,896 in compensation,commissionsandbonuses.
Item 14.Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
The Company reviewed and evaluated the effectiveness of our disclosure controls and procedures (asdefinedintheSecuritiesExchangeActof1934Rules13a-14(c)and 15d-14(c))as of a date within
90 days of the filing date of this annual report on Form 10-K (the "Evaluation Date").This reviewandevaluationwasdoneunderthesupervisionandwiththeparticipationofmanagement,including our Chief
59
Executive Officer ("CEO")and Chief Financial Officer ("CFO").Based on their reviewand evaluation,
the CEO and CFO have concluded that,as of the Evaluation Date,our disclosure controls and procedures
were adequate and effectiveto ensure that material information relating to us and our consolidated
subsidiaries has been made known to them in a timely manner,particularly during the period in which this
annual report on Form 10-K was being prepared,and that no changes are requiredat this time.
The company's management,including the CEO and CFO,does not expect that our disclosure
controls or our internal controls will preventall error and all fraud.A control system,no matter how well
conceived and operated,can provideonly reasonable,not absolute,assurance that the objectives of the
control system are met.Further,the design of a control system must reflect the fact that there are
resource constraints,and the benefits of controls must be considered relative to their costs.Because of theinherentlimitationsinallcontrolsystems,no evaluationof controls can provide absolute assurance that all
control issues and instances of fraud,if any,within the company have been detected.These inherentlimitationsincludetherealitiesthatjudgmentsindecision-making can be faulty,and that breakdowns can
occur because of simple error or mistake.Additionally,controls can be circumventedby the individual actsofsomepersons,by collusion of two or more people,or by management override of the control.The
design of any system of controls also is based in part upon certain assumptions about the likelihood offutureevents,and there can be no assurance that any design will succeed in achievingits stated goals
under all potential future conditions;over time,control may become inadequate because of changes in
conditions,or the degree of compliance with the policies or procedures may deteriorate.Because of the
inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and
not be detected.
(b)Change in Internal Controls
There have been no significant changes in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the EvaluationDate,or any significant deficiencies
or material weaknesses in such internal controls requiring corrective actions.As a result,no corrective
actions have been taken.
PART IV
Item 15.Exhibits,Consolidated Financial Statement Schedules,and Reports on Form 8-K.
(a)1.ConsolidatedFinancial Statements and Schedules of Registrant
Consolidated Statements of Operations for the Years Ended January 31,2003,2002 and 2001.
Consolidated Balance Sheets as of January 31,2003 and 2002.
Consolidated Statements of Shareholders'Equity for the Years Ended January 31,2003,2002 and
2001.
Consolidated Statements of Cash Flows for the Years Ended January 31,2003,2002 and 2001.
Notes to Consolidated Financial Statements
IndependentAuditors'Report
(a)2.Consolidated Financial Statement Schedule of Registrant
IndependentAuditors'Report on Consolidated Financial Statement Schedule
Schedule II:Valuation and Qualifying Accounts for the Years Ended January 31,2003,2002 and
2001.
All other schedules are omitted as the required information is inapplicable or is presented in the
consolidated financial statements or related notes thereto.
60
Schedule H
COMPUTER NETWORK TECHNOLOGY CORPORATION
Valuation and Qualifying Accounts
Years ended January 31,2003,2002 and 2001
(in thousands)
Additions
Balance at Charged to Charged tobeginningcosts&other Balance atDescriptionofyearexpensesaccountDeductionsendofyearYearendedJanuary31,2003
Allowance for doubtful accounts and salesreturns.........................$1,848 -1,388 -
.(820)$2,416
Year ended January 31,2002
Allowance for doubtful accounts and salesreturns........................$2,383 898 --(1,433)$1,848
Year ended January 31,2001
Allowance for doubtful accounts and sales
returns .......................$1,128 1,600 -(345)$2,383
61
INDEPENDENT AUDITORS'REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Computer Network TechnologyCorporation:
Under the date of February 17,2003,except as to note 21,which is as of April 6,2003,we reportedontheconsolidatedbalancesheetsofComputerNetworkTechnologyCorporationandsubsidiariesasofJanuary31,2003 and 2002,and the related consolidated statements of operations,shareholders'equity,andcashflowsforeachoftheyearsinthethreeyearperiodendedJanuary31,2003 as contained in the fiscal2002annualreportonForm10-K.These consolidated financial statements and our report thereon areincludedintheannualreportonForm10-K for fiscal 2002.In connection with our audits of theaforementionedconsolidatedfinancialstatements,we also have audited the related financial statementscheduleaslistedintheaccompanyingindex.This financial statement schedule is the responsibility of theCompany's management.Our responsibility is to express an opinion on the financial statement schedulebasedonouraudits.
In our opinion,such financial statement schedule,when considered in relation to the basicconsolidatedfinancialstatementstakenasawhole,presents fairly,in all material respects,the informationsetforththerein.
/s/KPMG LLP
Minneapolis,Minnesota
February 17,2003
62
(a)3.Exhibits
The Company undertakes to furnish to any shareholder so requesting a copy of any of the followingexhibitsuponpaymenttotheCompanyofthereasonablecostsincurredbytheCompanyinfurnishinganysuchexhibit.
Exhibit Description
2.Purchase Agreement as of April 3,2001 between Computer Network TechnologyCorporation andErnestJ.Parsons (Articulent,Inc.).(Incorporated by reference to Exhibit 2 Form 10-K for theyearendedJanuary31,2002 and Exhibit 99.1 to Form 8-K dated April 3,2001.)2.1 Purchase Agreement dated June 24,2002 between Computer Network Technology Corporation,Greg Scorziello,Paul John Foskett and Owen George Smith and agreed form of registrationrightsagreementsetforthinAnnexIthereto.(Incorporated by reference to Exhibit 2.2RegistrationStatementNo.333-87376.)
2.2 Agreement as of April 6,2003 among SPX Corporation,Computer Network Technology andBasketballCorporation(Incorporated by reference to Exhibit 99.2 to current report on Form 8-KdatedApril8,2003.)
3.1 Second Restated Articles of Incorporation of the Company.(Incorporatedby reference toExhibits3(i)-1 and 3(i)-2 to current report on Form 8-K dated May 25,1999.)3.2 Articles of Amendment of the Second Restated Articles of the Company.(Incorporated byreferencetoExhibit3(i)-1 to current report on Form 8-K dated May 25,1999.)3.3 By-laws of the Company.(Incorporated by reference to Exhibit 3(ii)-1 to current report onForm8-K dated May 25,1999.)
4.1 Rights Agreement between the Company and Chase Mellon ShareholderServices,L.L.C.,asRightsAgentincludingtheformofRightsCertificateandtheSummaryofRightstoPurchasePreferredShares.(Incorporated by reference to Exhibit 1 to Form 8-A dated July 29,1998 andExhibit1toForm8-A/A dated November27,2000.)
4.2 First Amendment of Rights Agreementdated November 21,2000.(Incorporatedby Reference toExhibit1toForm8-A/A dated November27,2000.)
4.3 First Amendmentof Certificate of Designations,Preferences and Rights of Series A JuniorParticipatingPreferredStock.($.01 Par Value Per Share)of Computer Network TechnologyCorporation(Incorporatedby reference to Exhibit 2 to Form 8-A/A dated November27,2000.)4.4 Form of Common Stock Certificate.(Incorporated by reference to Exhibit 4.2 to Form S-3RegistrationStatementNo.333-80841.)
4.5 Registration Rights Agreement,dated as of February 20,2002,among Bear,Sterns &Co.Inc.,SG Cowan Securities Corporation and SoundviewTechnologyCorporation.(IncorporatedbyreferencetoExhibit4.5 Form 10-K for the year ended January 31,2002.)4.6 Indenture,dated as of February 20,2002,between the Company and U.S.Bank NationalAssociation,as Trustee.(Incorporated by reference to Exhibit 4.6 Form 10-K for the year endedJanuary31,2002.)
4.7 Form of Note (included in Exhibit 4.6)(Incorporatedby reference to Exhibit 4.7 Form 10-K fortheyearendedJanuary31,2002.)
10.0 Building Lease by and between Opus Northwest,L.L.C.,and Computer Network TechnologyCorporation.(Incorporated by reference to Exhibit 10A Form 10-Q for the quarterlyperiod endedSeptember30,1998.)
10.lA Amended and Restated 1992 Stock Award Plan.(Incorporated by reference to Exhibit 10.1 toForm8-K filed on August 5,2002.)(1)10-lB Form of Non-Qualified Stock Option Award Agreement for employees to be used in conjunctionwiththeAmendedandRestated1992StockAwardPlan.(Incorporated by reference toExhibit10.2 to Form 8-K filed on August 5,2002.)(1)10.lC Form of Non-Qualified Stock Option Award Agreementfor directors to be used in conjunctionwiththeAmendedandRestated1992StockAwardPlan.(Incorporated by reference toExhibit10.3A to Form 8-K filed on August 5,2002.)(1)
63
Exhibit Description
10.1D Form of Restricted Stock Agreementto be used in conjunction with the Amended and Restated
1992 Stock Award Plan.(Incorporated by reference to Exhibit 10.3B to Form 8-K filed on
August 5,2002.)(1)
10.2A Amended and Restated 1999 Non-Qualified Stock Award Plan.(1)(2)
10.2B Form of Restricted Stock Agreementto be used in conjunction with the Amended and Restated
1999 Non-Qualified Stock Award Plan.(Incorporated by reference to Exhibit 10.4B to Form 8-K
filed on August 5,2002.)(1)
10.2C Form of Non-Qualified Stock Option Award Agreement for employees to be used in conjunction
with the Amended and Restated 1999 Non-Qualified Stock Award Plan.(Incorporated by
reference to Exhibit 10.4C to Form 8-K filed on August 5,2002.)(1)
10.3 1997 Restricted Stock Plan.(Incorporated by reference to Exhibit 10.11 to Form 10-K filed onApril26,2002.)(1)
10.4 Amended and Restated 1992 Employee Stock Purchase Plan.(1)(2)
10.5A Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to Exhibit 10.14 to
Form 8-K filed on August 5,2002.)(1)
10.5B Form of Incentive Stock Option Award Agreement for employees to be used in conjunction with
the Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to Exhibit 10.15
to Form 8-K filed on August 5,2002.)(1)
10.5C Form of Non-Qualified Stock Option Award Agreementfor employees to be used in conjunction
with the Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to
Exhibit 10.16 to Èorm 8-K filed on August 5,2002.)(1)
10.5D Form of Non-Qualified Stock Option Award Agreement for directors to be used in conjunction
with the Amended and Restated 2002 Stock Award Plan.(Incorporatedby reference to
Exhibit 10.17 to Form 8-K filed on August 5,2002.)(1)
10.5E Form of Restricted Stock Agreementin conjunctionwith the Amended and Restated 2002 Stock
Award Plan.(Incorporated by reference to Exhibit 10.18 to Form 8-K filed on August 5,
2002.)(1)
10.6 Amended and Restated 401 (k)Salary Savings Plan.(Incorporated by reference to Exhibit 10.19
to Form 8-K filed on August 5,2002.)(1)
10.7 CNT 2002 Annual Bonus Plan.(Incorporatedby reference to Exhibit 10.7 on Form 10-K for the
year ended January 31,2002.)(1)
10.8A Amended and Restated Executive DeferredCompensation Plan.(Incorporatedby reference to
Exhibit 10P on Form 10-K for the year ended December31,1998.)(1)
10.8B Amendment to Amended and Restated Executive Deferred Compensation Plan.(Incorporated by
reference to Exhibit 10I on Form 10-K for the year ended January 31,2001.)(1)
10.9 Amended and Restated Employment Agreement dated as of March 5,2003,between Computer
Network TechnologyCorporationand Thomas G.Hudson.(Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on March 19,2003.)(1)
10.10 Employment Agreementdated as of March 5,2003,between Computer Network Technology
Corporationand Gregory T.Barnum.(Incorporatedby reference to Exhibit 10.2 to Form 8-K
filed on March 19,2003.)(1)
10.11 Employment Agreement effectiveFebruary 18,2003,between Computer Network Technology
Corporationand James A.Fanella.(Incorporatedby reference to Exhibit 10.3 to Form 8-K filed
on March 19,2003.)(1)
10.12 Employment Agreementby and between the Company and Mark Knittel.(Incorporatedby
reference to Exhibit 10AA on Form 10-K for the year ended December 31,1997.)(1)
12.Ratio of Earnings to Fixed Charges.(2)
21.Subsidiaries of the Registrant.(2)
23.IndependentAuditors'Consent.(2)
64
Exhibit Description
99.1 Cautionary Statements.(2)
99.2 ComputerNetwork TechnologyCorporation Certification of Chief Executive officer and ChiefFinancialOfficerPursuanttoSection906oftheSarbanes-Oxley Act of 2002(18 U.S.C.1350).(2)
(1)Management contracts or compensatory plans or arraligements with the Company.(2)Filed herewith.
(b)Reports on Form 8-K
The registrant furnished a Form 8-K on December 13,2002 with the certifications requiredunderSection906oftheSarbanes-Oxley Act of 2002 that accompanied its Form 10-Q for the period endedOctober31,2002.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d)of the Securities Exchange Act of 1934,the
Registrant has duly caused this report to be signed on its behalf by the undersigned,thereuntoduly
authorized.
COMPUTER NETWORK TECHNOLOGY CORPORATION
Dated:April 17,2003 By:/s/THOMAS G.HUDSON
Thomas G.Hudson,President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed
below by the followingpersons on behalf of the Registrant and in the capacities and on the dates
indicated.
/s/THOMAs G.HUDSON President and Chief Executive Officer April 17,2003
Thomas G.Hudson (Principal Executive Officer)and Director
/s/GREGORY T.BARNUM Vice President of Finance,Chief Financial April 17,2003
Gregory T.Barnum Officer and Secretary (Principal Financial
Officer)
/s/JEFFREY A.BERTELSEN CorporateController and Treasurer April 17,2003
JeffreyA.Bertelsen (Principal Accounting Officer)
/s/PATRICK W.GROss Director April 17,2003
Patrick W.Gross
/s/ERWIN A.KELEN Director April 17,2003
Erwin A.Kelen
/s/LAWRENCE McLERNON Director April 17,2003
Lawrence McLernon
Is/JOHN A.ROLLWAGEN Director April 17,2003
John A.Rollwagen
66
CERTIFICATIONS
I,Thomas G.Hudson,certify that:
1.I have reviewed this annual report on Form 10-K of Computer Network TechnologyCorporation;
2.Based on my knowledge,this annual report does not contain any untrue statement of a materialfactoromittostateamaterialfactnecessarytomakethestatementsmade,in light of the circumstancesunderwhichsuchstatementsweremade,not misleading with respect to the period covered by this annualreport;
3.Based on my knowledge,the financial statements,and other financial information included in thisannualreport,fairly present in all material respects the financial condition,results of operations and cashflowsoftheregistrantasof,and for,the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintainingdisclosurecontrolsandprocedures(as defined in Exchange Act Rules 13a-14 and 15d-14)for theregistrantandwehave:
a)designed such disclosure controls and procedures to ensure that material information relatingtotheregistrant,including its consolidated subsidiaries,is made known to us by others within thoseentities,particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a datewithin90dayspriortothefilingdateofthisannualreport(the "Evaluation Date");and
c)presented in this annual report our conclusions about the effectiveness of the disclosurecontrolsandproceduresbasedonourevaluationasoftheEvaluationDate;
5.The registrant's other certifying officers and I have disclosed,based on our most recent evaluation,to the registrant's auditors and the audit committee of registrant's board of directors (or personsperformingtheequivalentfunction):
a)all significant deficiencies in the design or operation of internal controls which could adverselyaffecttheregistrant's ability to record,process,summarize and report financial data and haveidentifiedfortheregistrant's auditors any rnaterial weaknesses in internal controls;and
b)any fraud,whetheror not material,that involvesmanagement or other employees who have asignificantroleintheregistrant's internal controls;and
6.The registrant's other certifying officers and I have indicated in this annual report whetheror notthereweresignificantchangesininternalcontrolsorinotherfactorsthatcouldsignificantlyaffectinternalcontrolssubsequenttothedateofourmostrecentevaluation,including any correctiveactions with regardtosignificantdeficienciesandmaterialweaknesses.
Date:April 17,2003 By:/s/Thomas G.Hudson
Thomas G.Hudson
Chief Executive Officer
67
CERTIFICATIONS
I,Gregory T.Barnum,certify that:
1.I have reviewed this annual report on Form 10-K of Computer Network Technology Corporation;
2.Based on my knowledge,this annual report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,in light of the circumstances
underwhich such statements were made,not misleading with respect to the period covered by this annual
report;
3.Based on my knowledge,the financial statements,and other financial information included in this
annual report,fairly present in all material respects the financial condition,results of operations and cash
flows of the registrant as of,and for,the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the
registrant and we have:
a)designed such disclosure controls and procedures to ensure that material information relating
to the registrant,including its consolidated subsidiaries,is made known to us by others within those
entities,particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date
within 90 days prior to the filing date of this annual report (the "Evaluation Date");and
c)presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluationas of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed,based on our most recent evaluation,
to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalentfunction):
a)all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record,process,summarize and report financial data and haveidentifiedfortheregistrant's auditors any material weaknesses in internal controls;and
b)any fraud,whether or not material,that involvesmanagement or other employees who have a
significant role in the registrant's internal controls;and
6.The registrant's other certifying officers and I have indicated in this annual report whetheror not
there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,including any correctiveactions with regard
to significant deficiencies and material weaknesses.
Date:April 17,2003 By:/s/Gregory T.Barnum
Gregory T.Barnum
Chief Financial Officer
68
INDEX TO EXHIBITS
Exhibit Description
2.Purchase Agreement as of April 3,2001 between Computer Network TechnologyCorporation andErnestJ.Parsons (Articulent,Inc.).(Incorporated by reference to Exhibit 2 Form 10-K for theyearendedJanuary31,2002 and Exhibit 99.1 to Form 8-K dated April 3,2001.)2.1 Purchase Agreement dated June 24,2002 between Computer Network TechnologyCorporation,Greg Scorziello,Paul John Foskett and Owen George Smith and agreed form of registrationrightsagreementsetforthinAnnexIthereto.(Incorporated by reference to Exhibit 2.2RegistrationStatementNo.333-87376.)2.2 Agreement as of April 6,2003 among SPX Corporation,Computer Network TechnologyandBasketballCorporation(Incorporatedby reference to Exhibit 99.2 to current report on Form 8-KdatedApril8,2003.)
3.1 Second Restated Articles of Incorporationof the Company.(Incorporatedby reference toExhibits3(i)-I and 3(i)-2 to current report on Form 8-K dated May 25,1999.)3.2 Articles of Amendment of the Second Restated Articles of the Company.(Incorporated byreferencetoExhibit3(i)-1 to current report on Form 8-K dated May 25,1999.)3.3 By-laws of the Company.(Incorporated by reference to Exhibit 3(ii)-1 to current report onForm8-K dated May 25,1999.)
4.1 Rights Agreement between the Company and Chase Mellon ShareholderServices,L.L.C.,asRightsAgentincludingtheformofRightsCertificateandtheSummaryofRightstoPurchasePreferredShares.(Incorporatedby reference to Exhibit 1 to Form 8-A dated July 29,1998 andExhibitItoForm8-A/A dated November27,2000.)4.2 First Amendment of Rights Agreement dated November 21,2000.(Incorporated by Reference toExhibit1toForm8-A/A dated November27,2000.)4.3 First Amendmentof Certificate of Designations,Preferences and Rights of Series A JuniorParticipatingPreferredStock.($.01 Par Value Per Share)of Computer Network TechnologyCorporation(Incorporatedby reference to Exhibit 2 to Form 8-A/A dated November27,2000.)4.4 Form of Common Stock Certificate.(Incorporated by reference to Exhibit 4.2 to Form S-3RegistrationStatementNo.333-80841.)4.5 Registration Rights Agreement,dated as of February 20,2002,among Bear,Sterns &Co.Inc.,SG Cowan Securities Corporationand SoundviewTechnology Corporation.(Incorporated byreferencetoExhibit4.5 Form 10-K for the year ended January 31,2002.)4.6 Indenture,dated as of February 20,2002,between the Company and U.S.Bank NationalAssociation,as Trustee.(Incorporatedby reference to Exhibit 4.6 Form 10-K for the year endedJanuary31,2002.)
4.7 Form of Note (included in Exhibit 4.6)(Incorporated by reference to Exhibit 4.7 Form 10-K fortheyearendedJanuary31,2002.)
10.0 Building Lease by and between Opus Northwest,L.L.C.,and Computer Network TechnologyCorporation.(Incorporatedby reference to Exhibit 10A Form 10-Q for the quarterlyperiod endedSeptember30,1998.)
10-lA Amended and Restated 1992 Stock Award Plan.(Incorporated by reference to Exhibit 10.1 toForm8-K filed on August 5,2002.)(1)10.lB Form of Non-Qualified Stock Option Award Agreementfor employees to be used in conjunctionwiththeAmendedandRestated1992StockAwardPlan.(Incorporated by reference toExhibit10.2 to Form 8-K filed on August 5,2002.)(1)10.1C Form of Non-Qualified Stock Option Award Agreement for directors to be used in conjunctionwiththeAmendedandRestated1992StockAwardPlan.(Incorporatedby reference to Exhibit10.3A to Form 8-K filed on August 5,2002.)(1)10.lD Form of Restricted Stock Agreement to be used in conjunction with the Amended and Restated1992StockAwardPlan.(Incorporated by reference to Exhibit 10.3B to Form 8-K filed onAugust5,2002.)(1)
Exhibit Description
10.2A Amended and Restated 1999 Non-Qualified Stock Award Plan.(1)(2)
10.2B Form of Restricted Stock Agreement to be used in conjunction with the Amended and Restated
1999 Non-Qualified Stock Award Plan.(Incorporated by reference to Exhibit 10.4B to Form 8-KfiledonAugust5,2002.)(1)
10.2C Form of Non-Qualified Stock Option Award Agreement for employees to be used in conjunction
with the Amended and Restated 1999 Non-Qualified Stock Award Plan.(Incorporated by
reference to Exhibit 10.4C to Form 8-K filed on August 5,2002.)(1)
10.3 1997 Restricted Stock Plan.(Incorporated by reference to Exhibit 10.11 to Form 10-K filed onApril26,2002.)(1)
10.4 Amended and Restated 1992 Employee Stock Purchase Plan.(1)(2)
10.5A Amended and Restated 2002 Stock Award Plan:(Incorporated by reference to Exhibit 10.14 to
Form 8-K filed on August 5,2002.)(1)
10.5B Form of Incentive Stock Option Award Agreementfor employees to be used in conjunction with
the Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to Exhibit 10.15
to Form 8-K filed on August 5,2002.)(1)
10.5C Form of Non-Qualified Stock Option Award Agreement for employees to be used in conjunctionwiththeAmendedandRestated2002StockAwardPlan.(Incorporated by reference toExhibit10.16 to Form 8-K filed on August 5,2002.)(1)
10.5D Form of Non-Qualified Stock Option Award Agreement for directors to be used in conjunction
with the Amended and Restated 2002 Stock Award Plan.(Incorporatedby reference to
Exhibit 10.17 to Form 8-K filed on August 5,2002.)(1)
10.5E Form of Restricted Stock Agreementin conjunction with the Amended and Restated 2002 Stock
Award Plan.(Incorporatedby reference to Exhibit 10.18 to Form 8-K filed on August 5,
2002.)(1)
10.6 Amended and Restated 401(k)Salary Savings Plan.(Incorporated by reference to Exhibit 10.19
to Form 8-K filed on August 5,2002.)(1)
10.7 CNT 2002 Annual Bonus Plan.(Incorporated by reference to Exhibit 10.7 on Form 10-K for the
year ended January 31,2002.)(1)
10.8A Amended and Restated Executive DeferredCompensation Plan.(Incorporated by reference to
Exhibit 10P on Form 10-K for the year ended December 31,1998.)(1)
10.8B Amendmentto Amended and Restated Executive DeferredCompensation Plan.(Incorporated by
reference to Exhibit 10I on Form 10-K for the year ended January 31,2001.)(1)
10.9 Amended and Restated EmploymentAgreement dated as of March 5,2003,between Computer
Network Technology Corporationand Thomas G.Hudson.(Incorporated by reference to
Exhibit 10.1 to Form 8-K filed on March 19,2003.)(1)
10.10 Employment Agreement dated as of March 5,2003,between Computer Network Technology
Corporationand Gregory T.Barnum.(Incorporatedby reference to Exhibit 10.2 to Form 8-K
filed on March 19,2003.)(1)
10.11 Employment Agreement effectiveFebruary 18,2003,between Computer Network TechnologyCorporationandJamesA.Fanella.(Incorporatedby reference to Exhibit 10.3 to Form 8-K filed
on March 19,2003.)(1)
10.12 Employment Agreement by and between the Company and Mark Knittel.(Incorporatedby
reference to Exhibit 10AA on Form 10-K for the year ended December 31,1997.)(1)
12.Ratio of Earnings to Fixed Charges.(2)
Exhibit Description
21.Subsidiaries of the Registrant.(2)
23.Independent Auditors'Consent.(2)
99.1 CautionaryStatements.(2)
99.2 Computer Network Technology Corporation Certification of Chief Executive officer and ChiefFinancialOfficerPursuanttoSection906oftheSarbanes-Oxley Act of 2002(18 U.S.C.1350).(2)
(1)Management contracts or compensatory plans or arrangements with the Company.
(2)Filed herewith.