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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,D.C.20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF 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 (I.R.S.Employer Identification No.)Organization)
6000 Nathan Lane North,Plymouth,Minnesota 55442(Address of Principal ExecutiveOffices)(Zip Code)
[phone]
(Registrant's telephone number,including area code)
Securities registered pursuant to Section 12(b)of the Act:None
Securities registeredpursuant to Section 12(g)of the Act:Common Stock $.01 par value
Indicate by check mark whether the Registrant (1)has filed all reports required to be filed by Section 13 or 15(d)of theSecuritiesExchangeActof1934duringthepreceding12months(or for such shorter period that the Registrant was requiredtofilesuchreports),and (2)has been subject to such filing requirements for the past 90 days.Yes X 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 definitiveproxy or informationstatements incorporatedbyreferenceinPartIIIofthisForm10-K or any amendment to this Form 10-K.Œl
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct).Yes X No
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State the aggregate market value of voting and non-votingcommon equity held L 2n-affiliates computed 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 NetworkTechnology Corporation'sdefinitiveProxy Statement for the Annual Meeting of
Shareholders to be held on June 25,2003 are incorporated by reference into Part III of this Form 10-K.
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PART I
Item 1.Business
Item 2._Properties
Item 3.L_egal_Proceedings
Item 4.Submission of Matters to a Vote of Security_H_oldersItem4A.Executive Officers of the CompanyPARTII
Item 5.Market for _the Registrant's Common Equity and Related Shareholder MattersPRICERANGEOFCOMMONSTOCKDIVIDENDPOLICY
Item 7.Management's Discussion and Analysis of Financial Condition and Results ofOperations
Item 7A.Quantitative and Qualitative Disclosures about Market RiskItem8.Consolidated Financial Statements and Supplementar'LDataCONSOLIDATEDSTATEMENTSOFOPERATIONSNOTESTOCONSOLIDATEDFINANCIALSTATEMENTS
Item_9._Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure
PART III
Item li Directors and Executive_Officers_of the RegistrantItert11.-Executive Corip_ensation
Item 12.Security Ownership_ofCertain Beneficial Owners and ManagementItem13.Certain Relationships and Related TransactionsItem14.Controls and Procedures
PART IV
Item 15.Exhibits.Consolidated Financial Statement SemSIGNATURES
ÒÈRÌÏÌÌÒÄÌIONS
EX-10.2A Amended/Restated 1999 Non-QualifiedPlanEX-10.4 Amended/Restated1992 Employee Stock PlanEX-12 Ratio of Earnings to Fixed Charges
Ex-21 Subsidiaries of the Registrant
EX-23 IndependentAuditors'Consent
EX-99.1 Cautionary Statements
EX-99.2 Certification of CEO and CFO
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TABLE OF CONTENTS
PART I
Item 1.Business 1
Overview I
Our Market Opportunities 2
Selected Recent Developments 3
Storage NetworkingOverview 4
Our Storage NetworkingSolutions 5
Our Storage NetworkingStrategy 6
Our Storage NetworkingProducts 7
Our Storage NetworkingServices 8
Strategic Storage NetworkingRelationships 9
Sales and Marketing 9
Customers 9
Research and Development 9
Manufacturingand Suppliers 10
Competition 10
Intellectual Property Rights 12
Employees 13
Discontinued Operations 13
Website Access to Reports 13
Special Note Regarding Forward-LookingStatements 13
Item 2.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
Shareholder Matters 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 58PARTIII
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 60SIGNATURES66CERTIFICATIONS67
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PART I
Item 1.Business
BUSINESS
Overview
We are a leading providerof end-to-end storage solutions,including hardware and software products,related consulting
and integration services,and managed services in the growingstorage 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
network within a business'existing computer system that allows the business to manage its data storage needs with greater
efficiencyand 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 archived tapes.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 networking solutions enable businesses to cost-effectively design,implement,monitor and manage their
storage requirements,connect geographically dispersed storage networks,providecontinuous availability to greater amounts
of data and protect increasing amounts of data more efficiently.We market our storage networking products and services
directly to customers through our sales force and worldwidedistributors.We also have strategic marketing and supply
relationships with leading storage,telecommunications 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 providerof,the following storage networking solutions:
Storage networking over WANs.Our solutions for storage networking over 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 networking over 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 February 2000,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 mirroringthat 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
communicating between computers and IP refers to internet protocol.These products uniquely enable businesses that
use virtual privateIP-based networks,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.
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Followingthese technological firsts,we expanded our solutions offeringswith the acquisition of Articulent Inc.in April
2001,a storage solutions providerin the Northeast United States,and the acquisition of Business Impact Technology
Solutions Limited (BI-Tech)in June 2002,a storage solutions providerin the United Kingdom.Our expanded solutions
offeringsinclude 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 networking solutions operate across most business computing environments,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.Compared to available alternatives,we
believe our storage networking products offergreater ability to connect various applications and heterogeneous environments
using differentinterfaces,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 benefit existing
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 leasing 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-growthopportunities 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 networking products,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 April2001 and BI-Techin 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 integration services for data replication,enterprise back-up and restore,SAN implementation and
network performance monitoring.
Our Market Opportunities
We believe several forces will continue to drive the demand for our storage networking products and services:
The volume of enterprise data is expected to increase significantly due to the proliferationof 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 financiallyattractive for our customers.The decrease in telecommunications costs,coupled
with an overall increase 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.
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Storage networking applications over IP-based networks will furtherexpand the type and amount of data our customerswillbackupandreplicatetoremotelocations.This will also make these applications more affordable for customers withfewerstoragerequirements.
The increased complexities of storage applications,such as interoperability,storage effectiveness,and businessefficiencyissues,results in customers requiringstorage integration and implementation expertise.We believe our
services permit customers to effectivelysolve these issues,driving demand for our products and services and increasing
our revenues.
Customers require that their business critical applications have effectivedisaster recovery solutions.The events of
September 11,2001 demonstrate the need for and functionalityof our products and services.Our customers had 40
systems located in lower Manhattan that were significantly impacted.Because our products were routing data to remotefacilitiesonbehalfofcustomerslocatedinandaroundtheWorldTradeCenter,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 worldwide
revenue 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 networking solutions is the growth ofthe Fibre
Channel industry.IDC estimates the revenue for Fibre Channel hubs,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.During2002,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 networking solutions issignificantandwillcontinuetoincreaseoverthelongterm.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 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 Improvements Act 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 ourliquidity.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 providers of complete storage networking
products,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 and networking products and solutions,expands our customer base,and
provides us with significant scale and cost reduction opportunities.
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On January 30,2003,we announced a number of actions to streamline our business,enhance customer service,and
improvefuture 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.Overthe
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 provideworld-
class support.We continue to see excellent acceptance of our Fibre Channel IP product,the UltraNet®Edge.The UltraNet®
Edge provides enterprise wide access to information and helps companies manage their storage infrastructure for maximum
performance and efficiency.Because of the Edge product,the need for future upgrades to our legacy products is reduced.We
expect to extend our competitive lead in fiscal 2003 via the introduction of 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 worldwideworkforceby 80 people or about 10%.While difficult,the reduction in workforcewas necessary to
improvefuture efficiencyand profitability.
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-Techsince
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
formerstockholders,and in cash to the BI-Techemployees,additional consideration based on achievement of certain
earnings for each of the next two years starting July 1,2002.The portion payable to the formerstockholders will be recorded
as goodwill.The portion payable to BI-Techemployees will be recorded as 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 $l25 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 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 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 proliferationof Web-based content,digital media,e-mail,supply
chain management,customer relations management and other data-driven business applications.
Limitations ofTraditionalStorage 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 burdened by an increased number of input/output,or I/O,
transactions they must perform.However,traditional storage
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architecture has inherent speed,distance,capacity and performance constraints.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 performance can be significantly degraded whilethe LAN is being used for storage backup
applications.
AdventofStorage NetworkingServices
Storage networkingis necessary for the effectiveuse of large data-intensive applications 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 drivedemand for our products and demand for our
consulting,integration,and managed services for end-to-end storage solutions.As a result of the installation of these
solutions,we expect there will also be increased demand for support services.
Complexity and interoperability issues associated with storage networks,coupled with budgetary constraints,cause
customers to struggle with the effectiveimplementation of storage networking environments.We believe this will cause
many potential customers to look outside their organization for help.Thorough knowledge across a wide variety of
proprietarytechnologies and standards,combining storage expertise and networking knowledge,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,networking and 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 implementation
of 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 networking over 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,OC12),packet over sonet,or WAN protocols like IP,Fibre Channel and fiber
optics.We believe our products connect with substantially all storage vendors.
Infrastructureoptions -Our products enable the use of IP,ATM,Fibre Channel and fiber optics for expanded use of a
storage network infrastructure.This supports the growingamounts of storage created by applications like e-mail and
increases due to user demands to access applications in a continuous mode.
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IP-basednetworkingsolutions -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 application support 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 Articulentin 2001 and BI-Techin June 2002.We believe these value-added services assist customers
in designing,integrating,implementing,and managing storage networks more effectivelythan they could on their own.
Our integration services help customers deal with 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 allowus to
capture more of our customers'spending.We offerbundled telecommunications access with our products and services
to providecustomers a complete end-to-end operating solution.
Managedservices -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 manufactured products,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 monitorand manage complete end-to-end storage solutions for our customers and help drivedemand for our
storage networking products.
Our storage networking solutions are used for immediate,or real-time,backup and recovery,and support a technology
knownas 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 dramatically improves
the performance of remote tape backup,making it a viablesolution for business continuity and disaster recovery.Our remote
data replication technology 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.TraditionalLAN-based storage management requires manual handling
and transportation of storage to an off-site location.While this ensures a physically-separated copy of valuable corporate
data,it requires additional time and expense for handling and transportation.By bridgingthe 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 NetworkingStrategy
We intend to build upon our position as a leading providerof storage networking solutions.Key elements of this strategy
are as follows:
Extend Storage NetworkingTechnology Leadership
We intend to extend our storage networking technology leadership by continuing to broaden our product and service
offeringsand by expanding our storage networking solutions 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
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conjunction with software products from EMC,IBM,Hitachi and Hewlett-Packard and remote tape vaultingover 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 performingefficiently 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 datareplication,enterprise backup and recovery,remote tape vaultingand network management capabilities of our products.
Expand Our 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 capability with the acquisition of Articulent in April 2001
and BI-Techin June 2002.We believe these value-added services assist customers in designing,integrating,implementing,
and managing storage networks more effectivelythan they could on their own.Our integration services eliminate thecomplexityofimplementingastoragenetworkthatisscalableandcompatiblewithcustomerresources.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-end storage solutions for our
customers and help drive demand for our storage networking products.An example of this is the recent introduction of ournetworkmanagementservicethathelpsourcustomersmonitortheirUltraNet®products,third party manufactured products,
and third-partytelecommunication lines 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.
FurtherStrengthen Relationships with Storage NetworkingIndustry Leaders
We have established relationships with leaders in the storage networking market,including storage vendors,
telecommunications providers,storage management software providers and Fibre Channel switch manufacturers.The partieswithwhomwehavestrategicrelationshipsincludecompaniessuchasBrocade,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 NetworkingProducts
Our storage networkingproducts include the UltraNet®family of storage products,and our channel networking product
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 mixedplatformsupportofferedbytheUltraNet®Storage Director.The UltraNet®Edge Storage Router is designed to reduce thetotalcostofownershipofenterprise-wide storage networking solutions by leveraging the lower-cost bandwidth offered by IPnetworksandtheperformanceimprovementsprovidedbyFibreChannel.
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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.
Thirdparty manufactured storage 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 NetworkingServices
Our storage networking services 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-Techstrengthened our service offerings,and providedus access to a family of
integrated storage services,including consulting,integration and managed services.
ConsultingServices
Our consulting services analyze a company's storage needs,determine a storage networking solution to meet those
needs,and assist in the development of 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 infrastructure and network performance to assist informationtechnologymanagersandcorporateexecutivesresponsibleforplanningandfundingresourcesinmakingsounddata
management and storage decisions.
Integration Services
Our integration services help companies implement storage networking solutions.These services include project
planning,analyzing,designing and documenting a detailed network,installing storage components,integrating storage
components,and testing the functionalityof the implemented storage solution.Our storage networking products are at the
core of our storage architecture implementations,and our long-standing relationships with well-knownand successful storage
equipment and software manufacturers place us at the forefrontof 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 manufactured products and telecommunications networks 24x7x365.We believe this service allows our customers tooptimizenetworkperformance,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 offertelecommunications services to our customers.
SupportServices
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
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purchasing our UltraNet®Directorpre t generally purchase maintenance contracts to ¿plement their one-year limited
warranty.Customers are offereda variety of
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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 effectivestorage networking solutions requires integrating diverse components,including disk and
tape storage devices,storage management software,network management products and Fibre Channel products.Our storagenetworkingrelationshipsincludethosewithkeystoragevendors,storage management software providers and manufacturersofFibreChannelandopticalnetworkingproducts.We market our storage networkingproducts directly and throughworldwidedistributors.We have strategic marketing and supplier relationships with leading storage,telecommunications andfibreswitchingcompanies,including Brocade,EMC,Hewlett-Packard,Hitachi Data Systems,IBM,McDATA,StorageTek,Dell Computer Corporation and Veritas.These relationships allow us to providecomplete end-to-end storage solutions for
our customers.Approximately34%of our revenues during fiscal year ended January 31,2003 were represented by products
that we supplied on behalfof the parties with whom we have strategic relationships.
Sales and Marketing
We market storage networking products 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 staffand 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 OtherAmericanExpressAT&T Computer Sciences Best Buy
Corporation
Bank of America British Electronic Data Systems Wal-Mart
Telecommunications
Barclays Sprint IBM Global Services EchoStar
JP Morgan France Telecom Sungard Boeing
Chase Verizon Lockheed
MartinCitiGroupMattelMerrillLynchTarget
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 rapidlychanging technology,new standards and changing
customer requirements.Our long term success in these markets depends upon our continuing ability to develop advancednetworkhardwareandsoftwaretechnologies.
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To meet the future demands of our customers,we expect to:
increase the compatibility of our products with the products made by others;
emphasize the flexible and modular architecture of our products to permit the introduction of new and improved
products within existing systems;
continue to focus on providingsophisticated diagnostic support tools to help deliverhigh network availabilityand,in the
event of failure,rapid return to service;and
develop new products based on customer feedback and market trends.
Research and development expenses were 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
development for the foreseeable future.We cannot assure you that our research and development activities will be successful.
Manufacturing and Suppliers
In-house manufacturing activities for our products primarily involve quality assurance testing of subassemblies and final
system assembly,integration and quality assurance testing.We became ISO 9002 certified in 1993.In fiscal 2002,we
achieved certification under the ISO 2000 standard.
We manufacture our products based on forecasted orders.Forecasting orders is difficult as most shipments occur at the
end of each quarter.Our customers generally place orders for immediate delivery,not in advance of need.Customers may
generally cancel or reschedule orders without penalties.At January 31,2003 we had a backlog of $13.7 million.We believe
approximately $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,manufactured by others.Some items manufactured
by 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 inventorywill be used in the ordinary course of our business over the next five years.Relevant parts 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 available from a number of differentsuppliers.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.
Competition
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 enterprise.
This market has a diverse set of needs,often dictated by the total cost of ownership,that include high availability,
archive,large scale,high volumegrowth,flexibility,heterogeneous and interoperability requirements for a spectrum of
solutions for the enterprise.Data movement and replication (mirroring)aretwo 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 recoverytime for the
application user,for auditors and regulators;and risk and cost management for the entire enterprise.These needs have a
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furthercommunications 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 Tl to OC48+,to diverse protocols frompointtopoint,ATM and IP,to free space optics and wireless,as well as the availabilityof dark fiber or wave length services.
Finally,customers often use existing technologies (includingmulti-generations of products)and methods that must be
compared and integrated for total enterprise storage management.These data movement solutions would include:manualtruckandarchivestorage,server based software for data movement and replication,LAN,SAN,MAN and WAN fabric
switching products and technologies,wave divisionmultiplexing,or WDM,products and technologies,and services across
an array of providers both in house and outsourced to the customer.
CNT believes it has positioned itselfto be a leading competitor of storage networking products and services,particularly
in providingcustomers and service providers a wide range of integrated storage networking solutions,from us and others,
that address high performance,guaranteed data reliability,large scale storage handling that addresses the above requirementsfortheglobal2000customers.Our key assets include not only our patents,engineering technologies and products,but our
7x24 services,our professional consulting and our 20 years of diverse implementations experience in networking our clients
most mission critical information.
Our products are sold in markets where other market participants have significantly greater revenues and internationally
known brand names.Many of those market participants do not currently sell products 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 the future,and new products we develop may compete with products sold bywell-knownmarket participants.Our competitors in channel networking and storage networking include storage system
vendors and others including Akara,Inrange,Nishan Systems,SAN Valley,Sanera,Maxxan and SANcastle.In addition,
Cisco has acquired technology (Andiamo and NuSpeed)with functionalitysimilar to our product offerings.Also,EMC and
Network Appliance recently announced a WAN capability for storage networking that may compete with our products.IBM
and others continue to push the distance,performance and 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 providing
similar long distance IP based connectivity features with an integrated card.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 and integration services offered by storage vendors,telephone companies,dense wavedivisionmultiplexortechnologyprovidersandserviceproviders.Specialist firms have begun with large amounts of invested
capital to assist large enterprises in the challenge of large scale storage management for the enterprise,including Storage
Networks,Inc,Giant Loop and MSI.In addition,nearly every major storage vendor,including EMC,IBM,HP,Sun,Hitachi,providevarious 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 evolvingindustry standards,
resulting in rapid product obsolescence and frequent product and feature introductions and improvements.We compete with
several companies that have greater engineering and development resources,marketing resources,financial resources,
manufacturing capability,customer support resources and name recognition.As a result,our competitors may have greatercredibilitywithexistingandpotentialcustomers.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.
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The competitive environments of 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 networkingproducts present unique competitive pressures.We anticipate pricing
pressures may increase in these markets.Consolidation of competing vendors of these products could also have negative
consequences.
The principal competitive factors affecting our products include 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
advantage over 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 availabilityare 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 believe
that the market for the products manufactured by us upon closing of the Inrange transaction will be highly competitive,
continually evolvingand subject to rapid technology change.Upon consummation of the transaction,we will compete against
Brocade Communications Systems,McData Corporation,Cisco Systems,Inc.,and Qlogic Corporation with respect to Fibre
Channel switches.As the market for storage area network products grows,the products we acquire in the Inrange transaction
may face competition from traditional networking companies and other manufacturers of networking equipment who may
enter the storage area network market with their own switching products as well as several privatelyfunded start-up
companies who have products currently under development.
Intellectual Property Rights
We rely on a combination of trade secret,copyright,patent and trademark laws,nondisclosure agreements and technical
measures to establish and protect our intellectual property rights.That protection may not preclude competitors from
developing products with features similar to our products.
We currently own 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 infringement or prevent others from claiming that our technology infringes
that of third parties.Failure to protect our intellectual property could materially harm our business.We believe that patent
and copyright protection are less significant to our competitive position because of the rapid pace of technological change in
the markets in which our products are sold and because of the effectiveness and quality of our support services,the
knowledge,experience and ability of our employees and the frequency of our enhancements.
We rely upon a patent license agreement to manufacture our Channelink®and UltraNet®products that use ESCON.
This license expires on December 31,2004.
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
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required proprietary rights to the technology included in our products and that our products,trademarks and other intellectual
property rights do not infringeupon the proprietary rights of others.However,there can be no assurance that others will not
claim a proprietary interest in all or a part of the technology we use or assert claims of infringement.Any such claim,
regardless of its merits,could 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 development cycles means it is not economically practical to determine in advance whether a
product infringes patent rights of others.We believe that,based upon industry practice,any necessary license or rights under
such patents may be obtained on terms that would not materially harm our consolidated financial position or results of
operations.However,there can be no assurance in this regard.
Employees
As of January 31,2003,we had 692 full-time employees.We consider our ability to attract and retain qualified
employees and to motivate such employees to be essential to our future success.Competition for highly skilled personnel is
particularly intense in the computer and data communications industry,and we cannot assure that we will continue to attract
and retain qualifiedemployees.
DiscontinuedOperations
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 integration of 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 Integration Solutions Divisionto Propelis Software,Inc.Duringfiscal 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 networking products 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-lookingstatements"within the meaning of the securities laws.These forward-looking
statements 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 regarding our 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-lookingstatements contain these identifyingwords.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 varietyof 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-
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looking statements speak only as of the date of this Form 10-K.We assume no obligation to update or revise any forward-
looking statements,whether as a result of new information,future events or otherwise.These statements are only predictions.
Althoughwe believe that the expectations reflected in the forward-lookingstatements 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 2.Properties
Our principal administrative,manufacturing,engineering and development functions 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 staffand 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
Thomas G.Hudson Chairman of the Board,President and ChiefExecutive Officer 57
Gregory T.Barnum ChiefFinancial Officer,Vice President of Finance and 48
Corporate Secretary
JeffreyA.Bertelsen Corporate Controllerand Treasurer 40WilliamC.Collette ChiefTechnology Officer and Vice President of Advanced 59
Technology
James A.Fanella Executive Vice-President WorldwideSales and Services 45
Mark R.Knittel Group Vice President of WorldwideProduct Operations 48
Thomas G.Hudson has served as our President and as our ChiefExecutive 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 informationservices provider,serving also as General Manager of its F.W.
Dodge Division,and as Senior Vice President,Corporate Development.From 1968 to 1993,Mr.Hudson served in a number
of management positions at IBM Corporation,most recently as Vice President Services Sector Division.Mr.Hudson's IBM
career included varied product development,marketing and strategic responsibilities for IBM's financial services customers
and extensive international and large systems experience.Mr.Hudson is a graduate of the Universityof Notre Dame and
New York University.Mr.Hudson attended the HarvardAdvanced Management 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,ChiefFinancial 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 TricordSystems,Inc.,a manufacturer of enterprise servers.From May 1988 to
September 1992,Mr.Barnum served as the
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Executive Vice President,Finance,Chief Financial Officer,Treasurer and Corporate Secretary for Cray Computer
Corporation,a development stage company engaged in the design of supercomputers.Prior to that time,Mr.Barnum served
in various accounting and financial management capacities for Cray Research,Inc.,a manufacturer of supercomputers.
Mr.Barnum is a graduate of the Universityof St.Thomas.
JeffreyA.Bertelsen was appointed Corporate Controllerand Treasurer in December 1996.Mr.Bertelsen served as ourControllerfromMarch1995toDecember1996.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 Universityof Minnesota.
William C.Collette was appointed ChiefTechnology Officer in December 1998 and Vice President of Advanced
Technology in October 1999.Mr.Collette served as our Vice President of Engineering from December 1995 to October
1999,and as our Directorof Future Software Development and as a Software Development Manager from June 1993 to
December 1995.From 1990 to 1993,Mr.Collette was employed by SuperComputer Systems,Inc.as a Senior Software
Engineer,where he worked with Steve Chen to design the networking for the SSI Supercomputer.Mr.Collette holds a
bachelors degree in business management from Metro State University.
James A.Fanella was appointed Executive Vice-President WorldwideSales 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 November1999 to September 2000,Mr.Fanella served as Group President and
General Manager of AppNet,Inc.,an e-commerce company acquired by Commerce One in September 2000.From August
1994 to October 1999,Mr.Fanella held various positions with Unisys Corporation,a large systems integration company,asManagingPrincipal/Partner from 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 Illinois University.Mr.Fanella also serves
on the board of directors of Avatech,Inc.,a public company.
Mark R.Knittel was appointed Group Vice President of WorldwideProduct 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 withIBMwhereheheldseveralexecutivedevelopmentpositionsforbothhardwareandsoftwarenetworkingproducts,as well asmultiplestrategypositions.Most recently,Mr.Knittel held the position of Director of Campus Product Marketing within theNetworkHardwareDivisionofIBM.Mr.Knittel has a masters degree in philosophy from the Universityof Chicago.
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PART II
Item 5.Market for the Registrant's Common Equity and RelatedShareholderMatters
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the Nasdaq National Market under the symbol "CMNT."The followingtable sets forthfortheindicatedperiodstherangeofhighandlowpersharesalespricesforourcommonstockasreportedontheNasdaqNationalMarket:
Price Range of
Common Stock
High Low
Fiscal Year Ended January31,2001
First Quarter $27.00 $11.50
Second Quarter 19.88 11.56
ThirdQuarter 35.25 15.25
Fourth Quarter 40.00 18.69
Fiscal Year Ended January31,2002
First Quarter $29.88 $8.44
Second Quarter 12.59 7.80ThirdQuarter15.73 8.05
Fourth Quarter 24.90 14.10
Fiscal Year Ended January31,2003
First Quarter $21.75 $8.80
Second Quarter 9.70 5.41ThirdQuarter7.99 3.79
Fourth Quarter 9.88 5.91
As of April 1,2003,there were approximately 1,000 shareholders of record.The Company estimates that approximately
an additional 10,500 shareholders own stock held for their accounts at brokerage firms and financial institutions.
DIVIDEND POLICY
We have not paid any cash dividends since our inception,and we do not intend to pay any cash dividends in the future.
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Item 6.Selected ConsolidatedFinancial Data
Years Ended January 31,Years Ended December31,
2003(6)2002 2001 1999(1)1998
(in thousands,except per share data)ConsolidatedStatements ofOperationsData:(8)
Revenue:
Product sales $145,355 $129,276 $125,432 $89,248 $74,969Servicefees66,160 57,747 50,674 36,741 28,052
Total revenue 211,515 187,023 176,106 125,989 103,021
Cost of revenue 127,125 111,257 83,181 56,795 45,616Costofrevenue-special charges 195(5)2,325(4)-1,414(2)
Total cost of revenue 127,320 113,582 83,181 58,209 45,616
Gross profit 84,195 73,441 92,925 67,780 57,405
Operating expenses:
Sales and marketing 57,849 52,156 41,019 34,626 32,255Engineeringanddevelopment26,872 23,452 22,572 18,456 14,236Generalandadministrative10,694 9,311 8,697 6,922 6,252Specialcharges1,666(5)996(4)(287)(3)1,331(2)
Total operating expenses 97,081 85,915 72,001 61,335 52,743
Income (loss)from operations (12,886)(12,474)20,924 6,445 4,662
Loss on sale and write down of
webMethods stock -(10,283)(4)---
Other income,net 869(5)5,537 3,152 110 427
Income (loss)from continuing
operations before income taxes (12,017)(17,220)24,076 6,555 5,089Provision(benefit)for income taxes 16,527(5)(5,292)7,947 2,229 1,730
Income (loss)from continuing
operations (28,544)(11,928)16,129 4,326 3,359
Income (loss)from discontinued
operations,net of tax 207 8,222 (4,135)329 1,370
Net income (loss)before
cumulative effect of a change in
accounting (28,337)(3,706)11,994 4,655 4,729Cumulativeeffectofchangein
accounting principle (10,068)(6)-
Net income (loss)$(38,405)$(3,706)$11,994 $4,655 $4,729
....n............mm...............m........
Diluted income (loss)per share:
Continuingoperations $(1.02)$(.40)$.58 $.17 $.15
...........m m.........a mm um...............
Discontinued operations $.01 $.28 $(.15)$.01 $.06
Cumulativeeffect of change in
accounting principle $(.36)$-$-$-$-
Net income (loss)$(1.37)$(.12)$.43 $.18 $.21
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Dilutedshares 28,111 29,892 27,813 25,818 22,572
Other Financial Data(7):
Ratio of earnings to fixed charges --12.41x 5.13x 5.55x
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As of January 31,As of December 31,
2003 2002 2001 1999 1998
ConsolidatedBalance Sheet Data:
Cash,cash equivalents and marketable securities $209,484 $118,014 $150,477 $26,895 $12,362Workingcapital229,736 160,271 182,625 50,715 35,587Totalassets339,169 269,738 268,623 110,654 87,596Long-term obligations 125,000 708 1,952 1,780 1,816Totalshareholders'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 fourthquarter 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-downof webMethods common stock acquired from the disposition of a portion of our discontinued
operations.
(5)Includes special charges in the fourth quarter of fiscal 2002 of $1.7 million for severance and professional fees related tocanceledacquisitionactivity.It also includes an earn-out payable to the employees of BI-Techof $744,000,of which
$195,000 was recorded as cost of service,and $549,000 as operating expense.Other income for fiscal 2002 was reducedbya$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 OtherIntangibleAssets",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 andfixedchargesby(b)fixed charges.Fixed charges include interest expense plus a portionof rental expense attributable to
interest.
(8)See "Management's Discussion and Analysis of Financial Condition and Results of Operations"and "The ConsolidatedFinancialStatements"included herein for a discussion of accounting changes,business combinations and dispositions of
businesses affectingthe comparability of the informationreflected in the selected financial data.
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Item 7.Management'sDiscussion and Analysis of Financial Condition and Results of Operations
The following section should be read in conjunction with Item 1:Business;Item 6:Selected Consolidated Financial
Data;and Item 8:Consolidated Financial Statements and Supplementary Data.
Overview
We are a leading providerof end-to-end storage solutions,including hardware and software products,related consulting
and integration services,and managed services in the growing storage networking market.We focus primarilyon helping ourcustomersdesign,develop,deploy and manage storage networks,including storage area networks,or SANs,a high speednetworkwithinabusiness'existing computer system that allows the business to manage its data storage needs with greaterefficiencyandlessdisruptiontoitsoverallnetwork.We design,manufacture,market and support a wide range of solutionsforcriticalstoragenetworkingapplicationssuchasremotedatareplication,or the real-time backup of data to remotely
located disks,and remote tape vaulting,or the backup of data to remotely archived tapes.We also supply storage systems,Fibre Channel switches,telecommunications capacity and storage application software.
Our storage networking solutions enable businesses to cost-effectively design,implement,monitor and manage their
storage requirements,connect geographically dispersed storage networks,providecontinuous availabilityto greater amountsofdataandprotectincreasingamountsofdatamoreefficiently.We market out storage networking products and servicesdirectlytocustomersthroughoursalesforceandworldwidedistributors.We also have strategic marketing and supply
relationships with leading storage,telecommunications and fibre switching companies,including Brocade,EMC,Hewlett-Packard,Hitachi Data Systems,IBM,McDATA,StorageTek,Dell Computer Corporation and Veritas.
Integration of Networking and Storage Solutions Team
During fiscal 2002,we integrated our networking and storage solutions sales,support and service functions into a single
unit.The integration allows us to execute our strategy for continued growth and enhanced customer service,while achievingimprovedefficiencyandprofitability.Our customers will now have a single point of contact for their networking and storage
solutions requirements.As a result,it is no longer possible to allocate costs and prepare separate meaningful statements forwhathadbeenournetworkingandstoragesolutionssegments.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 the number of employees needed toprovideworld-class support.We continue to see excellent acceptance of our Fibre Channel IP product,the UltraNet®Edge.The UltraNet®Edge provides enterprise-wide access to informationand helps companies manage their storage infrastructureformaximumperformanceandefficiency.Because of the Edge product,the need for future upgrades to our legacy products
is reduced.We expect to extend our competitive lead in fiscal 2003 via the introduction of new products within theUltraNet®family,and several new joint development arrangements with other leaders in the storage networking industry.
These actions,along with the integration of our Networkingand Storage Solutions sales,support and service functions,
allowed us to reduce our worldwideworkforceby 80 people or about 10%.While difficult,the reduction in workforcewas
necessary to improvefuture efficiency and profitability.In the fourth quarter of fiscal 2002,we recorded a $1.7 millionrestructuringchargeforseveranceresultingfromthereductioninworkforceandprofessionalfeesrelatedtocanceled
acquisition activity.Of this amount $1.3 million was paid priorto January 31,2003,with the balance to be paid prior toApril30,2003.We anticipate the annual operating cost savings related to these reductions will be approximately
$6.4 million,offset by any incremental costs added during fiscal 2003.
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Acquisition of Inrange Corporation
On April 6,2003,we entered into an agreement where our wholly owned subsidiary will acquire all of the shares ofInrangeTechnologiesCorporationthatareownedbySPXCorporation.The shares acquired will constitute approximately91%of the issued and outstanding shares of Inrange for a purchase price of $2.3132 per share and $173 million in theaggregate.Pursuant to the agreement,immediately following the acquisition,the subsidiary will be merged into Inrange,andtheremainingcapitalstockownedbyotherInrangeshareholderswillbeconvertedintotherighttoreceive$2.3132 per shareincash,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 waitingperiodundertheHart-Scott-Rodino Antitrust Improvements Act of 1976,as amended.
Upon completion of the acquisition,we will be one of the world's largest providers of complete storage networking
products,solutions and services,with 2002 pro forma annual revenues of approximately $435 million and global leadershippositionsinFibreChannelandwideareanetworkswitching,and operations worldwide.The acquisition would significantlybroadenandstrengthenourportfolioofstorageandnetworkingproductsandsolutions,expand our customer base,andprovideuswithsignificantscaleandcostreductionopportunities.
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 ofapproximately$8.7 million of tangible assets.The accompanying financial statements include the results of BI-Techsince
June 24,2002.The purchase agreement requires that we pay at our option,in the form of a note payable or our stock to theformerstockholders,and in cash to the BI-Techemployees,additional consideration based on achievement of 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 goodwill and compensation expense,
respectively,and a corresponding liability was recorded.
Valuation Allowance for Deferred Tax Assets
In the fourth quarter of fiscal 2002,we recorded a non-cash charge of $23.6 million to providea valuation allowance for
our United States deferred tax 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 deferred tax assets,and we
reduce the valuation allowance.The establishment of the valuationallowance does not impair our ability to use the deferredtaxassetsuponachievingprofitability.Our federal net operating loss carry-forwards and credits do not expire for the next 15-20 years.
Convertible SubordinatedDebt Offering
In February 2002,we sold $125 million of 3%convertiblesubordinated 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 uponpaymentoftheoutstandingprincipalbalance,accrued interest and a make whole payment if the closing price of our commonstockexceeds175%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 representsadditionalinterestpaymentsthatwouldbemadeifthenoteswerenotredeemedpriortotheirduedate.On August 15,2002 aregistrationstatementfortheresaleofthenotesandthe6.5 million shares of common stock issuable upon conversion of thenotesbecameeffective.
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Special Chargesin Fiscal Year 2001
Economic conditions in early 2001 caused our customers to reevaluate their capital spending plans,and to defer
previouslyplanned projects for informationtechnology 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-downslow movinginventory
$325,000 for the write-off of a product;and
$996,000 for restructuring,principally severance.
Sale and Write-down of webMethods Stock
Duringthe first quarter of fiscal 2001,we sold 232,511 shares of webMethods stock received from the sale of
IntelliFramefor approximately $6.2 million,resulting in a pre-tax loss of approximately $8.7 million.We also wrote-down
the carrying valueof 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 ArticulentInc.,a privatelyheld,leading providerof 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
EffectiveFebruary 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 formerstorage solutions segment.This valuation indicated that the goodwill associated with our acquisition of
Articulent in April of2001 was impaired,resulting in a $10.1 million non-cash charge.This non-cash charge was recognized
as a cumulative effect of change in accounting principle in our first quarter ended April 30,2002.
Discontinued Operations-Divestiture of Propelis Software,Inc.
Propelis Software,Inc.,formerlyknown 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
networking business.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
IntelliFramesubsidiary to webMethods and 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 furtherbonus payments under their employment agreements.The sale resulted in an after tax gain of
$12.6 million in the first quarter of 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.
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On August 23,2001,we sold sub sially all of the remaining assets and liabilities Propelis Software,Inc.to JacadaLtd.for $6.0 million in cash,plus a warrant to purchase 350,000 ordinary shares
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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 twelvemonths ended January 31,2003,2002 and 2001,respectively.
Critical Accounting Policies
In preparing the consolidated financial statements in conformitywith 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 analysisoftherelevantcircumstances.Reported results may differ from these estimates if differentassumptions or conditions were to
be made.Our most critical accounting estimates include valuation of accounts receivable,which impacts bad debt expense;valuationof inventory,which impacts gross margin;recognition and measurement of current and deferred income tax assets
and liabilities,which impact our tax provision;and valuation of long-livedintangible assets 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 performance in accordance with its customer's specifications prior to
shipment providedthat (a)evidence of an arrangement exists,(b)deliveryhas 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 doubtfulof collection.In addition,we also make estimates of
potential future product returns.In making the determination of the appropriate allowance for doubtful accounts and product
returns,we consider specific accounts,changes in customer payment terms,historical write-offsand 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-offsand product
returns.
Valuation ofInventory
We reviewobsolescence to determine that inventoryitems deemed obsolete are appropriately reserved.In making the
determination we 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 introductions and other matters could affect the level of inventory
obsolescence in the future.
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Valuation ofDeferredTaxes
Significant management judgment is required in determining the provisionfor incomes taxes,deferred tax assets andliabilitiesandanyvaluationallowancerecordedagainstnetdeferredtaxassets.We are required to estimate our income taxesineachjurisdictionwhereweoperate.This process involvesestimating our actual current tax exposure together with
assessing temporary differences resulting from differing treatment of items,such as the depreciable life of fixed assets for taxandaccountingpurposes.These differences result in deferred tax assets and liabilities,which are included in our consolidated
balance sheet.We then assess the likelihoodthat our deferred tax assets will be recovered from future taxable income,and totheextentwebelieverecoveryisunlikely,we must establish a valuation allowance.To the extent we establish a valuation
allowance or increase the valuation allowance in a givenperiod,we must increase tax expense within our statement of
operations.
In the fourthquarter of fiscal 2002,we recognized a non-cash charge of $23.6 million to providea valuation allowanceforourUnitedStatesdeferredtaxassets.Our cumulative valuation allowance recorded against our deferred tax assets at
January 31,2003 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 deferred tax assets,and wereducethevaluationallowance.The establishment of the valuation allowance does not impair our ability to use the deferredtaxassetsuponachievingprofitability.Our federal net operating loss carry-forwards and credits do not expire for the next 15-
20 years.
Valuation ofLong-Livedand IntangibleAssets and Goodwill
We assess the impairment of long-livedand intangible assets and goodwillwhenever events or changes in circumstances
indicate that the carrying value may not be recoverable.Factors we consider important which could triggeran impairmentreviewincludesignificantunderperformancerelativetoexpectedoperatingresults,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 relativeto our net book value.
When we determine that the carrying value of long-livedand intangibles assets and goodwillmay 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 quantifyany 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.
EffectiveFebruary 1,2002,we adopted SFASNo.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 reviewof ourgoodwillinfiscal2002,and an annual impairment reviewthereafter.SFAS No.142 provides a six-month transitional periodfromtheeffectivedateofadoptiontoperformanassessmentofwhetherthereisanindicationofgoodwillimpairment.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 areportingunitwithinourformerStorageSolutionssegment.This valuation indicated that the goodwillassociated with our
acquisition of Articulent in April of2001 was impaired.The performance ofthis business has not met management's originalexpectations,primarily due to the unexpected global slow down in capital spending for informationtechnology equipment.Accordingly,a non-cash impairment charge of $10.1 million from the adoption of SFAS No.142 was recognized as acumulativeeffectofchangeinaccountingprincipleinourfirstquarterendedApril30,2002.Impairment adjustments
recognized after adoption,if any,generally are required to be recognized as an operating expense.
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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
Operating expenses:
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 January 31,2003 and 2002
Product revenue
Sales of our networking products 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
profitablepart of our business and a key application for many of our storage networking customers.We expect that revenue
from our storage networking products 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 networking products 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-Techin 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.
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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 proficient at selling solutions that include our service offerings.
During fiscal 2002,BI-Techcontributed $3.0 million of storage consulting fee revenue.
Years Ended January 31,2002 and 2001
Product revenue
Sales of our networking products generated revenue of $92.0 million in fiscal 2001,a decrease of24%,from
$121.1 million in fiscal 2000.Storage networking related product revenue decreased 16%in fisca12001 to $69.8 million
from $83.5 million in fiscal 2000.Approximately $3.2 million of storage networking product revenue in fisca12001 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 Compaq generated 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/RDEproduct line in March 2001,and are transitioning the 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
offeringsand accounted for most of the increase when comparing fiscal 2001 to fiscal 2000.
Service revenue
Service revenue from maintenance of our networking products increased 6%in fisca12001 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
networking products.
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.Duringfiscal 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-Techacquisition in
June of 2002.BI-Techincreased our international sales in fiscal 2002 by $15.1 million.BI-Techis 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 informationoutsourcing industries,respectively.
We primarily sell our networking and 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
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initial sales and design cycle,from first contact through shipment,can vary from 90 days to 12 months or more.We expectthatthiscyclewillcontinue.
We expect continued quarter-to-quarter fluctuations in revenue in both domestic and international markets.The timing ofsizableorders,because of their relativeimpact on total quarterly sales,may contribute to such fluctuations.The level ofproductsalesreportedbyusinanygivenperiodwillcontinuetobeaffectedbythereceiptandfulfillmentofsizablenew
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 networkingproducts were 49%in fiscal 2002,compared to 51%in fiscal 2001.
Excluding the $2.0 million write-downof slow movinginventoryand the $325,000 write-off of a product in the first quarteroffiscal2001,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 alowermarginthanourolderChannelink®products,and higher levels of sales discounts.We believe that margins for ournetworkingproductswilltrendupwardasvolumesincrease,particularly 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 offered by 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 networking maintenance 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 improvement in gross service margin percentage in fiscal 2002 compared to fiscal 2001 was due to higherutilizationofouremployeeconsultants.Our storage consulting fees revenue increased to $22.8 million in fiscal 2002 from
$12.9 million in fiscal 2001,an increase of77%.Costs associated with our storage consulting fees were $15.5 million or
$15.3 million,excluding the BI-Techearn-out,up from $14.4 million in fiscal 2001.
Years Ended January 31,2002 and January 31,2001
Product margins
Gross margins from the sale of our networking products were 51%in fisca12001.Excluding the $2.0 million write-down
of slow movinginventoryand 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
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lowermargin third party products resulting from the acquisition of Articulentin 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 improvement was due to the steadily increasing base of customers contracting for maintenance services,actions
taken in April 2001 to reduce employee costs,including a workforcereduction 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 a positive 13%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 improve as 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-Techadded $1.7 million to sales and marketing expense in fiscal 2002.The remainder
of 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 development expense increased 15%or $3.4 million in fisca1 2002 to $26.9 million from $23.5 million
in fiscal 2001.The increase in engineering and development expense for fiscal 2002 was primarilydue to continued
development of our UltraNet®family of products,particularlythe UltraNet®Edge product,which generated $13.2 million
of revenue in fiscal 2002.
Generaland administrative
General and administrative expense 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-Techadded $776,000 to general and administrative expense in fiscal 2002.The
remaining increase in expense for fiscal 2002 was due to higher costs for employee wages,fringebenefits,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 effectiveFebruary 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 remaining increase
in sales and marketing expense was due to a planned expansion of our sales force.During fiscal 2001,we increased our sales
force by over 25%,and
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added additional sales management,resulting in additional expense for employee wages,fringebenefits 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 development of 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 workforcereduction,wage cuts and
reductions in discretionary spending.
General and Administrative
General and administrative expenses 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 January 31,2003 and 2002
Interest and other income in fisca12002 totaled $5.2 million,including a $1.0 write-downofan 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.Higherbalances of cash and marketable securities available for investment in fiscal
2002 were partially offset by lower investment yields.We also had foreignexchange 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%convertible subordinated 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-bearing securities.
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 offeringof common stock
increased the balances of cash and marketable securities available for investment.
Income Taxes
Givenour losses in fiscal 2002 and 2001,and our cautious outlook for informationtechnology spending,we concluded
that it was necessary to providea valuationallowance for our United States deferred tax assets,resulting in a non-cash charge
of $23.6 million in our fourthquarter 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 valuationallowance.The establishment of the valuationallowance does not impair our
ability to use the deferred tax assets upon achieving profitability.Our federal net operating loss carry-forwards and 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 effectivetax rate of
33%in fiscal 2000.The fluctuations in our effectivetax rate were primarily due to the large special charges recorded in fiscal
2001,including the $10.3 million loss on the sale of webMethods
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stock,the amount of nondeductible foreign losses and fluctuations in the level of benefit from our foreignsales corporation.
We also recorded an $830,000 valuationallowance in fiscal 2001 for certain state and foreign tax credits and loss carry-
forwards.Utilization of these benefits in future periods was determined to be unlikely.
Liquidity and Capital Resources
We have historically financed our operations through the public and privatesale of debt and equity securities,bank
borrowingsunder lines of credit,capital and operating equipment leases and cash generated by operations.
Cash,cash equivalents and marketable securities at January 31,2003 totaled $209.5 million,an increase of $91.5 million
since January 31,2002.In February 2002,we sold $125 million of 3%convertible subordinated notes due February 2007,
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 deferred revenue,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 purchase plan
providedcash in fiscal 2002 of $3.0 million.Uses of cash in fiscal 2002 included $7.7 million for the purchase of BI-Tech,
$1.5 million for repayment of capital lease obligations,and purchases of property and equipment and field support spares
totaling $12.4 million.We also used $32.2 million of cash in fiscal 2002 to repurchase 4.0 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 the outstanding common stock of
Inrange Technologies Corporation for $190 million in cash.Upon closing of the transaction,Inrange will become our wholly
owned subsidiary.We anticipate that our available cash after closing for the combined entity will be approximately $50-
$60 million before transaction costs.We believe that our available cash after closing,when combined with our anticipated
cash flows from the combined operations of the two companies,including cash flow improvements resulting from increased
scale and cost synergies,will be adequate to fund our operating plans and meet our current anticipated aggregate capital
requirements,at least through fiscal 2003.
In April 2001,our board of directors authorized the repurchase of up to $50.0 million of our common stock.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 remaining balance 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-QualifiedStock Award Plan increasing the
number of shares authorized for issuance from 3,230,000 to 4,730,000.In fiscal 2002,our board and shareholders also
approved our 2002 Stock AwardPlan providingfor the issuance of 1,000,000 shares of our common stock.In February 2003,
our board of directors adopted an amendment to our 1999 Non-QualifiedStock Award Plan increasing the number of shares
authorized for issuance by 250,000 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 incurred in the ordinary
course of business,are as follows (in millions):
Less Than One to Three Four to Five After Five
Cash Obligation Total One Year Years Years Years
Capital leases $.7 $.7 None None None
Operating leases $22.6 $4.6 $8.2 $4.6 $5.2
Purchase orders $13.5 $12.9 $.6 None None
Convertiblesubordinated debt,plus interest $140.0 $3.8 $11.3 $124.9 None
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On December 3,2002 we entered into a product development agreement 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-Techrequires that we pay to the former stockholders and the BI-Techemployees 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
February 2007.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 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-yearterm using the straight-line method,which approximates the effectiveinterest rate method.The
amortization of these debt issuance costs will accelerate upon early redemption of the notes.The net proceeds remain
available for general workingcapital 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 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 reported trading price of our convertible subordinated 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
Duringfiscal 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 bandwidth was purchased from Dynegy Connect because they offeredus the best pricing.We have purchased
bandwidth from competitors of Dynegy Connect when their pricing has been more attractive.Our board member,Lawrence
McLernon was formerlychief executive officerof 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 participation on our board,and in consideration of
such services to be performed in the future.
Thomas G.Hudson's son-in-law is 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.
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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,"LiabilityRecognition for Certain Employee TerminationBenefits and Other Costs to Exit anActivity(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 our consolidated
financial statements.
In December 2002,the EITF reached a consensus on EITF 00-21,"Revenue Arrangements with Multiple Deliverables".
This Issue addresses certain aspects of the accounting by a vendorfor arrangements under which it will perform multiple
revenue-generating activities.In some arrangements,the differentrevenue-generating activities (deliverables)are sufficiently
separable and there exists sufficientevidence 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 sufficientevidence of their fair values to account for them separately.This Issue addresses when
and,if so,how an arrangement involvingmultiple 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.We do not expect the adoption of EITF 00-21 will
have a material effect on our financial statements.
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 thefairvaluebasedmethodofaccountingforstock-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 interim financial statements about the method of accounting for stock-based employee compensation,and the effect of
the method used on reported results.We adopted the disclosure provisions of SFAS 148 effectiveJanuary 31,2003.
In November2002,the FASB issued FASB Interpretation (FIN)No.45,Guarantor's Accounting and Disclosure
Requirements for Guarantees,IncludingIndirect Guarantees of Indebtedness of Others.FIN No.45 requires companies to
recognize,at the inception of a guarantee,a liability for the fair value of the obligation undertaken in issuing the guarantee.
Guarantees in existence at December 31,2002 are grandfathered for the purposes of recognition and would only need to be
disclosed.We do not expect that the adoption of FIN No.45 will have an effect on our consolidated financial statements.We
will adopt the initial recognition and measurement provisions of FIN No.45 for guarantees issued or modified after
December 31,2002.
Item 7A.Quantitative and 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,consisting of money market instruments,bankcertificatesofdepositsandinvestmentsincommercialpaper.
At January 31,2003,our marketable securities include a $149,000 investment in 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 our executive deferred compensation plan,which has been
established for selected key employees.
We are exposed to market risks related to fluctuations in foreign exchange rates because some sales transactions,and the
assets and liabilities of our foreign subsidiaries,are denominated in foreign currencies,primarily the euro and British pounds
sterling.As of January 31,2003,we had no open forwardexchange contracts.
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Item 8.ConsolidatedFinancial Statements and SupplementaryData
COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands,except per share data)
January31,
2003 2002
Assets
Current assets:
Cash and cash equivalents $98,341 $34,402Marketablesecurities111,143 83,612
Receivables,net 56,040 53,962
Inventories 24,091 31,410
Deferred tax asset -5,134Othercurrentassets2,118 4,l38
Total current assets 291,733 212,658
Property and equipment,net 22,566 25,604Fieldsupportspares,net 6,009 4,562
Deferred tax asset -11,048Goodwill,net 14,113 14,070
Other intangibles,net 1,669 463Otherassets3,079 1,333
$339,169 $269,738
Liabilities and shareholders'equity
Current liabilities:
Accounts payable $16,889 $17,240Accruedliabilities25,060 20,158
Deferred revenue 19,340 13,466
Current installments of obligations under capital lease 708 1,523
Total current liabilities 61,997 52,387
Convertiblesubordinated debt 125,000 -
Deferred tax liability 541 -
Obligations under capital lease,less current installments -708
Total liabilities 187,538 53,095
Shareholders'equity:
Undesignated preferred stock,authorized 965 shares;none issued
and outstanding -
Series A junior participating preferred stock,authorized 40 shares;
none issued and outstanding --
Common stock,$.01 par value;authorized 100,000 shares;issued
and outstanding 26,921 at January 31,2003,and 30,383 at
January 31,2002.269 304Additionalpaid-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
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See accompanying notes to consolidated financial statements
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands,except per share data)
Years Ended January 31,
2003 2002 2001
Revenue:
Product sales $145,355 $129,276 $125,432
Service fees 66,160 57,747 50,674
Total revenue 211,515 187,023 176,106
Cost of revenue:
Cost of product sales 89,110 76,254 52,873
Cost of service fees 38,210 37,328 30,308
Total cost of revenue 127,320 113,582 83,181
Gross profit 84,195 73,441 92,925
Operating expenses:
Sales and marketing 57,849 52,156 41,019
Engineering and development 26,872 23,452 22,572
General and administrative 10,694 9,311 8,697
Abandoned facility --(287)
Restructuring charge 1,666 996 -
Total operating expenses 97,081 85,915 72,001
Income (loss)from operations (12,886)(12,474)20,924
Other income (expense):
Write-down of investment (1,000)-
Loss on sale and write-downof webMethods stock -(10,283)-
Interest income 6,183 6,166 3,802
Interest expense (4,326)(285)(338)
Other,net 12 (344)(312)
Other income (expense),net 869 (4,746)3,152
Income (loss)from continuing operationsbefore
income taxes (12,017)(17,220)24,076
Provision (benefit)for income taxes 16,527 (5,292)7,947
Income (loss)from continuing operations (28,544)(11,928)16,129
Discontinued operations:
Gain on disposition of discontinued operations,net of tax -8,222 -
Income (loss)from discontinued operations,net of tax 207 -(4,135)
207 8,222 (4,135)
Net income (loss)before cumulative effect of change in
accounting principle (28,337)(3,706)11,994
Cumulative effect of change in accounting principle (10,068)-
Net income (loss)$(38,405)$(3,706)'
$11,994
Basic income (loss)per share:
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Continuing operations $(1.02)(.40)$.64
Discontinued operations $.01 $.28 $(.16)
Cumulativeeffect 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
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'EQUITY
(in thousands)
Retained Accumulated
Common Stock Additional Earnings Other
Paid-in Unearned (Accumulated Comprehensive
Shares Amount Capital Compensation Deficit)Income (Loss)Total
Balance,January 31,2000 23,841 $238 $69,434 $(1,130)$7,171 $(602)$75,111
Shares issued pursuantto 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 ---110,235Taxbenefitsfromemployeestocktransactions--8,106 ---8,106Compensationexpense---501 --501
Comprehensive income:
Net income l 1,994 11,994Translationadjustment,net of tax effect of $0 (364)(364)
Total comprehensive income -----
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)--6,406Taxbenefitsfromemployeestocktransactions--978 ---978Repurchaseofcommonstock(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 510Translationadjustment,net of tax effect of $0 (428)(428)
Total comprehensive loss ------(3,624)
Balance,January 31,2002 30,383 $304 $202,996 $(1,232)$15,459 $(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)--2,964Repurchaseofcommonstock(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 393Translationadjustment,net of tax effect of $0 1,519 1,519
Total comprehensive loss --)
Balance,January 31,2003 26,921 $269 $173,955 $(675)$(22,946)$1,028 $151,631
See accompanying notes to consolidated financial statements
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COMPUTER NETWORK TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended January 31,
2003 2002 2001
Operating Activities:
Net income (loss)$(38,405)$(3,706)$11,994
Cumulative effect of change in accounting principle 10,068 --
Discontinued operations (207)(8,222)4,135
Depreciation and amortization 15,868 15,127 11,812
Compensation expense 722 568 346
Loss on sale and write-downof webMethods stock -10,283 -
Write-downof investment 1,000 --
Change in deferred taxes 16,077 (1,268)(5,344)
Changes 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)11,036Accruedliabilities(2,670)(7,606)17,754Deferredrevenue5,875 (2,091)5,569
Net cash providedby (used in)continuing operations 17,322 (24,926)38,307
Net cash providedby (used in)discontinued operations 207 (8,830)(1,490)
Cash providedby (used in)operating activities 17,529 (33,756)36,817
Investing Activities:
Additions to property and equipment (6,878)(8,198)(14,329)Additionsto field support spares (5,486)(2,770)(2,520)Additionsto purchased technology --(375)Acquisition of Articulent,net of cash acquired -(11,145)
Acquisition of BI-Tech,net of cash acquired (7,723)-
Net proceeds from sale of discontinued operations -l 1,800 -
Proceeds from the sale of webMethods stock -6,281 -
Purchase of marketable securities (163,860)(87,786)(148,389)
Proceeds from redemption of marketable securities 136,988 115,717 45,998
Other assets 695 876 (1,967)
Discontinued operations -additions to long-term assets --(158)
Cash providedby (used in)investing activities (46,264)24,775 (121,740)
Financing Activities:
Net proceeds from issuance of convertible subordinated
debt 121,559 -
Payments for repurchases of common stock (32,205)(787)-
Proceeds from issuance of common stock 2,964 6,406 117,754
Repayments of obligations under capital leases (1,523)(1,421)(1,187)
Cash providedby financing activities 90,795 4,198 116,567
Effects of exchange rate changes 1,879 (259)(174)
Net increase (decrease)in cash and cash equivalents 63,939 (5,042)31,470
Cash and cash equivalents -beginning of year 34,402 39,444 7,974
Cash and cash equivalents -end of year $98,341 $34,402 $39,444
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See accompanying notes to consolidated financial statements
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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
DescriptionOf Business
Computer NetworkTechnology Corporation is a leading providerof end-to-end storage solutions,related consulting and
integration services,and managed services in the high-performance storage networking market.
DiscontinuedOperations
In 2001,the Company divested Propelis Software,Inc.formerlyknown 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 twelvemonths ended January 31,2003,2002
and 2001,respectively.
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts of Computer NetworkTechnology
Corporation and 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 configurations and product sales with other than
standard configurations which have demonstrated performance in accordance with customer specifications prior to shipment
providedthat (a)evidence of an arrangement exists,(b)deliveryhas 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 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,including amounts both collected and uncollected.
Valuation ofAccounts Receivable
Accounts receivable are reviewed to determine which are doubtfulof collection.Estimates are also made of potential
futureproduct returns.In making the determination of the appropriate allowance for doubtfulaccounts 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 provision for 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
doubtfulaccounts and sales returns of $2,416,000 and $1,848,000,respectively.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS----(Continued)
ValuationofInventory
Inventories are stated at the lower of cost (determined on a first in,first out basis)or market.The Company reviews
obsolescence to determine that inventoryitems deemed obsolete are appropriately reserved.In making the determination,
consideration is givento the history of inventorywrite-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.
Valuationof DeferredTaxes
Significant management judgment is required in determining the provisionfor incomes taxes,deferred tax assets and
liabilities and any valuationallowance recorded against net deferred tax assets.The Company is required to estimate income
taxes in each jurisdiction where it operates.This process involvesestimating actual current tax exposure together with
assessing temporary differences resulting from differingtreatment 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 likelihoodthat its deferred tax 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 expensewithinitsstatementsofoperationswhenavaluationallowanceisestablishedorincreasedinagivenperiod.
In the fourth quarter of fiscal 2002,the Company recorded 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
deferred tax 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 valuationallowance.The establishment of the valuation allowance does not
impair the Company's ability to use the deferred tax assets upon achieving profitability.The Company's federal net operating
loss carry-forwards and credits do not expire for the next 15-20 years.
Goodwilland Other IntangibleAssets
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 quarter of 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 ofLong-lived and IntangibleAssets
The Company accounts for long-livedassets in accordance with the provisions of SFAS No.144,"Accounting for the
Impairment or Disposal of Long-LivedAssets."This Statement requires that long-livedand intangible assets be reviewed for
impairment whenever events 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 tofuturenetundiscountedcashflowsexpectedtobegeneratedbytheasset.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 ofthe asset
exceeds the fair valueof the asset.Assets to be disposed of are reported at the lower ofthe carrying amount or fair value less
costs to sell.
The Company reviews goodwillfor impairment annually or more frequently if changes in circumstances or the
occurrence of events suggest the remaining value may not be recoverable.An asset is
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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 itscarryingvalueinaccordancetotheprovisionsofSFASNo.142.In connection with SFAS No.142's transitional goodwillimpairmentevaluation,the Statement requires the Company to perform an assessment of whether there is an indication thatgoodwillisimpairedasofthedateofadoption.Impairment adjustments recognized after adoption,if any,generally arerequiredtoberecognizedasoperatingexpenses,captioned in general and administrative expenses.
Cash Equivalents
The Company considers investments in highly liquid debt securities havingan initial maturity of three months or less to
be cash equivalents.
MarketableSecurities
Unrealized gains and losses on available-for-sale securities are excluded from earnings and are reflected as a separatecomponentofshareholders'equity.Unrealized gains 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 improvements are amortized using the straight-line method over the terms of the respective
leases.Expenditures for repairs and maintenance are charged to expense as incurred.Capital lease equipment is amortized
over the life of the lease.
The carrying value of long-livedassets is reviewed whenever events 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.Whenthereviewindicatesthatthecarryingvalueoftheassetorgroupofassetsrepresentingthelowestlevelofidentifiablecashflowsexceedsthesumoftheexpectedfuturecashflows(undiscounted and without interest charges),an impairment loss isrecognized.The amount of the impairment loss is the amount by which the carrying value exceeds the fair value of theimpairedassetorgroupofassets.
Field SupportSpares
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 development costs to date.
Foreign Currency
The financial statements of the Company's international subsidiaries have been translated into U.S.dollars.Assets andliabilitiesaretranslatedintoU.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 foreigncurrencies.The Company had
no outstanding forward exchange contracts as of January 31,2003.Gains
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
and losses from transactions denominated in foreign currencies and forwardexchange 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
OpinionNo.25 "Accounting for Stock Issued to Employees"(APB No.25)and provides the footnote disclosures required by
Statement of Financial Accounting Standards No.123 "Accounting for Stock Based Compensation"(SFAS No.123).
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's
stock-based compensation plans been recognized consistent with the fair value method of SFAS No.123,the Company's net
income (loss)and net income (loss)per basic and diluted share would have been reduced to the pro forma amounts indicated
below:
Years Ended January 31,
2003 2002 2001
Net income (loss),as reported $(38,405)$(3,706)$11,994
Deduct:Total stock-based employee compensation expense
under fair value based method of all awards,net of tax
effects (12,301)(7,109)(6,368)
Pro forma net income (loss)$(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 determining the compensation cost of stock option grants and shares sold to employees under the employee stock
purchase plan,as specified by SFAS No.123,the fair value of each award has been estimated on the date of grant using the
Black-Scholes option pricing model.The weighted average assumptions used in these calculations are summarized below:
Years Ended January 31,
2003 2002 2001
Risk free interest rate 3.71%4.51%5.90%
Expected life 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 ofEstimates
The preparation of financial statements in conformitywith accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect the
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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
determination of the valuation of the deferred tax asset,recoverabilityof goodwill,valuationof accounts receivable and
valuationof 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 dilutiveshares 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 convertible subordinated 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-dilutiveeffect.
Comprehensive Income (loss)
Comprehensive income (loss)consists of the Company's net income (Ioss),foreign currency translation adjustment and
unrealized gains and losses from available-for-sale securities and is presented in the consolidated statement of shareholders'
equity.
New AccountingPronouncements
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,"LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (includingCertain 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,"Revenue Arrangements with Multiple Deliverables".
This Issue addresses certain aspects of the accounting by a vendorfor arrangements under which it will perform multiple
revenue-generating activities.In some arrangements,the differentrevenue-generating activities (deliverables)are sufficiently
separable and there exists sufficientevidence 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 involvingmultiple deliverables should be dividedinto 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.
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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 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 interim financialstatements about the method of accounting for stock-based employee compensation and the effect of the
method used on reported results.The Company adopted the disclosure provisions of SFAS 148 effectiveJanuary 31,2003.
In November2002,the FASB issued FASB Interpretation ("FIN")No.45,"Guarantor's Accounting and Disclosure
Requirements for Guarantees,IncludingIndirectGuarantees of Indebtedness of Others."FIN 45 requires companies to
recognize,at the inception of a guarantee,a liability for the fair value of the obligation undertaken in issuing the guarantee.
Guarantees in existence at December 31,2002 are grandfathered for the purposes of recognition and would only need to be
disclosed.The Company does not expect that the adoption of FIN 45 will have an effect on its consolidated financial
statements.The Company will adopt the initial recognition and measurement provisions of FIN 45 for guarantees issued ormodifiedafterDecember31,2002.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(2)Componentsof 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-Techearn-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 determination of 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 indefiniteuseful lives no longer be amortized but instead be tested for
impairment at least annually using atwo-step impairment test.The application of SFAS No.141 did not affect previously
reported amounts included in goodwill and other intangible assets.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
EffectiveFebruary 1,2002,the Company adopted SFAS No.142.SFAS No.142 provides a six-month transitional
period from the effectivedate of adoption for the Company to perform an assessment of whether there is an indication ofgoodwillimpairment.The Company tested its reporting units for impairment by comparing fair value to carrying value.Fairvaluewasdeterminedusingadiscountedcashflowandcostmethodology.The Company engaged a third-party appraisal
firm to determine the fair value of a reporting unit within its formerStorage Solutions segment.This valuation indicated that
the goodwill associated with the acquisition of Articulent in April of2001 was impaired.The performance of this business
has not met management's originalexpectations,primarily due to the unexpected global slow down in capital spending forinformationtechnologyequipment.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.Impairmentadjustments recognized after adoption,if any,generally are required to be recognized as an operating expense.
(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 January 31,2003 and 2002 was as follows:
Years Ended
January 31,
2003 2002
Beginning of year $14,070 $500
Acquisition of Articulent -13,558
Acquisition of BI-Tech 10,177 -
Translation adjustment (66)12
Impairment charge (10,068)-
End of year $14,113 $14,070
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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 Accumulated
Amount Amortization Amount Amortization
Customerlists $1,630 $(161)$505 $(42)
Non-competeagreements 250 (50)--
Total $1,880 $(211)$505 $(42)
Total other intangible assets,net $1,669 $463
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 68,816 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 January 31,2003 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 of232,511shares 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-
sale securities with contractual maturities of less than twelvemonths and one to five years totaled $32,334,000 and
$77,350,000,respectively.
An additional loss of $1,536,000 was realized in fiscal 2001 when the remaining 41,031 shares of webMethods stock
received in connection with the sale of IntelliFrameexperienced 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.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
The Company's trading securities consist of a mutual fund investment that 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 lossfromtheseinvestmentstofundtheinvestmentgainsorlossesallocatedtoparticipantsundertheCompany'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 $8.7 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 financialstatements include the results of BI-Techsince June 24,2002.
The following table presents the unaudited pro forma consolidated results of operations of the Company forthe years
ended January 31,2003 and 2002 as if the acquisition of BI-Techtook place on February 1,2002 and 2001,respectively:
Pro Forma Years Ended
January 31,
2003 2002
Total revenue $223,470 $216,626
Net loss $(36,010)$(2,601)
Net loss per share $(1.28)$(.09)
The pro-formaresults include amortization of the customer list and non-compete agreement presented above.The
unaudited pro-formaresults 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-Techemployees.The portion payable to the former
stockholders will be recorded as goodwill.The portion payable to BI-Techemployees will be recorded as compensation
expense.During fiscal 2002 and based on BI-Tech'soperations since July 1,2002,an additional $3.6 million was recorded togoodwilland$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 ArticulentInc.,a privatelyheld,leading provider
of 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
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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 andliabilitiesacquiredasfollows:
Purchase Price:
Cash paid $12,360
Fair Value of Assets Acquired and Liabilities Assumed:
Cash $624Accountsreceivable10,287Inventory4,446Fixedassets3,393
Customer list 505Goodwill13,809
Deferred taxes 3,107Otherassets583Accountspayable(18,302)Accrued expenses (2,324)
Note payable (3,768)
Total purchase consideration $12,360
The following table presents the unaudited pro forma consolidated results of operations of the Company for the years
ended January 31,2002 and 2001 as if the acquisition of Articulenttook place on February 1,2001 and 2000,respectively:
Pro Forma Years Ended
January 31,
2002 2001
Total revenue $194,740 $245,030Netincome(loss)$(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 unaudited pro-forma
results are for comparative purposes only and do not necessarily reflect the results that would have been recorded had theacquisitionoccurredatthebeginningoftheperiodpresentedortheresultswhichmightoccurinthefuture.
(7)DiscontinuedOperations
Propelis Software,Inc.formerly known as the Enterprise Integration Solutions Division,including IntelliFrame,developed and sold EAI software that automates the integration of computer software applications,and business workflowprocesses.In August 2000,the Company determined to divest Propelis Software,Inc.and focus on its core storagenetworkingbusiness.As a result,Propelis Software,Inc.has been accounted for as a discontinued operation in theaccompanyingfinancialstatements.
In February 2001,the Company sold all of the outstanding stock of IntelliFrame Corporation,including the technology
underlyingthe Propelis BPmm 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 itspubliclyreportedtradingpriceduetotheinitialrestrictionsplacedontheCompany's ability to freely sell the stock.In
connection with this transaction,the Company paid $3,000,000 to two employees,who were formershareholders of
IntelliFrame,to satisfy all
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
obligations to make furtherbonus 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 Company received $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 manufacturing space 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 Lease
Commitments
Capital Operating
Year Ending January 31,
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 $-
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Rent expense under noncancelable operating leases,exclusive of executory costs,for fiscal 2002,2001 and 2000 was
$6,244,000,$5,857,000,and $5,315,000,respectively.Duringthe year ended January 31,2001,the Company reversed
$287,000 representing the unused portion of an accrual for an abandoned facility.
(9)Convertible Subordinated Debt Offering
In February 2002,the Company sold $125 million of 3%convertible subordinated notes due February 15,2007,raising
net proceeds of $121.6 million.The notes are convertible into 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 redeemedpriortotheduedate.
(10)Shareholders'Equity
Common Stock Repurchase
In April 2001,the Company's board of directors authorized the repurchase ofup to $50,000,000 of the Company's
common stock.During fiscal 2002 and 2001,pursuant to this authorization,the Company repurchased 4,045,000 and 90,000
shares of its common stock for $32,205,000 and $787,000,respectively.
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 dividendat the rate of one preferred share purchase right for each outstanding share of common stock of the
Company.The rights will expire on July 23,2008 unless extended,earlier redeemed or exchanged by the Company.
Stock Options 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 determined
by 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 performance criteria are achieved.
Compensation expense is recognized over the applicable vesting period.During fiscal 2002,2001 and 2000,the Company
issued 5,000,106,000,and 61,100 restricted shares,respectively,havingan 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.
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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 fiscal 2002,2001 and 2000
is presented below:
January 31,
2003 2002 2001
Weighted Weighted Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
Outstanding at beginning of year 5,753 $11.99 4,655 $13.45 4,798 $10.02
Granted 2,970 8.52 2,666 9.71 1,552 18.77
Exercised (231)5.26 (549)7.61 (1,123)5.93
Canceled (975)11.59 (1,019)15.30 (572)13.92
Outstanding at end of year 7,517 $10.87 5,753 $11.99 4,655 $13.45
Exercisable at end of year 3,028 $11.80 2,107 $l l.01 1,633 $8.08
Weighted-average fair value of grants during the
year $6.25 $7.26 $13.56
The following table summarizes informationabout stock options outstanding at January 31,2003:
Options Outstanding Options Exercisable
Weighted-Average
Remaining Weighted-Weighted-
Contractual Average .Average
Range of Number Life Exercise Number Exercise
Exercise Prices Outstanding (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 an opportunity to purchase an
aggregate of 1,500,000 shares of the Company's common stock at a price per share equal to 85%of the lesser ofthe fair
market value of the Company's common stock at the beginning or the end of each six-month purchase period.Under the
terms of the Purchase Plan,no participant may acquire more than 5,000 shares of the Company's common stock or more than
$5,000 in aggregate fair market value of common stock (as defined)during any six-month purchase period.Common shares
sold to employees under the Purchase Plan in fiscal 2002,2001 and 2000 were 346,982,163,705 and 102,920,respectively.
The weighted-average fair value of each purchase right granted in fiscal 2002,2001 and 2000 was $4.41,$7.34 and
$3.72,respectively.
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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 January 31,
2003:
Basic $(38,405)28,111 $(1.37)Dilutive effect of employee stock purchase
awards and options and shares issuable upon
the conversion of convertible subordinated
debt ---
Diluted $(38,405)28,11I $)
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 $.47Dilutiveeffectofemployeestockpurchase
awards and options -2,430 (.04)
Diluted $11,994 27,813 $
The total weighted average number of common stock equivalents excluded from the calculation of net loss per share due
to their anti-dilutiveeffect 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-dilutiveeffect of the assumed conversion.
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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 oftheyearsinthethree-year period ended January 31,2003 consists of the following:
Years Ended January 31,
2003 2002 2001
Income (loss)from continuing operations before income
taxes:
U.S $(12,657)$(17,756)$19,595
Foreign 640 536 4,481
Total $(12,017)$(17,220)$24,076
Income tax provision:
Current:
U.S $-$-$5,180
Foreign 533 284 1,348
State --1,027
Total current 533 284 7,555
Deferred:
U.S 15,361 (5,198)458
Foreign -
State 633 (378)(66)
Total deferred 15,994 (5,576)392
Total income tax expense (benefit)$16,527 $(5,292)$7,947
The reconciliation of the statutory federal tax rate and the effectivetax rate for each of the years in the three-year period
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 .4Valuationallowance177.5 4.8 -
Other (2.3)1.7 (2.1)
Total 137.5%(30.7)%33.0%
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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 deferred tax 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 $4,658
Accrued compensation 1,111 1,145
Reserves for bad debts and sales returns 867 636
Foreign net operating loss carryforwards -410
Tax credits 3,655 1,265
Net operating loss carryforwards 14,596 7,895
Write down of webMethods stock 1,133 1,071
Other 590 900
Total gross deferred tax assets 26,051 17,980
Valuation allowance (24,808)(1,240)
Net deferred tax assets 1,243 16,740
Deferred tax liabilities:
Property and equipment (166)(109)
Unrealized gains on marketable securities (565)(299)
Other (1,053)(150)
Total gross deferred tax liabilities (1,784)(558)
Net deferred tax assets (liabilities)$(541)$16,182
The valuationallowance for deferred tax 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 determining the valuation allowance recorded against net deferred tax
assets.The Company assesses the likelihood that its deferred tax 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 valuationallowance is established or increased in a givenperiod.
In the fourth quarter of fiscal 2002,the Company recorded a non-cash charge of $23,568,000 to providea valuation
allowance for its United States deferred tax 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 valuation allowance.The establishment of the valuation
allowance does not impair the Company's ability to use the deferred tax assets upon achieving profitability.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 federal net
operating loss and credit carry-forwards will expire between the years 2019 and 2023.The utilization of a portion of the
Company's federal net operating loss and credit carry-forwards is subject to annual limitations under Internal Revenue Code
Section 382.Subsequent
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
equity changes could furtherlimit the utilization of these federal net operating loss and credit carry-forwards.
In future years,the recognized tax benefits relating to the reversal of the valuationallowance for deferred tax assets as of
January 31,2003 will be recorded as follows:
Total
Income tax benefit from continuing operations $24,519
Additional paid in capital 289
Total $24,808
E------M
(13)Annual Bonus Plan
The Company's Annual Bonus Plan provides a formulafor determination of cash bonus payments to eligible employees
based on a defined percentage of a participant's qualifyingbase compensation multiplied by the Company's annual bonus
plan factor.The annual bonus plan factor is based on a chart outliningpayout percentages for achievement of defined levels
of operating profit.
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 CompensationPlans
The Company has a 401(k)salary savings plan which covers substantially all of its employees.The Company matches
100%of a participant's annual plan contributions up to an annual maximum per participant of $2,500 which vests over a
four-yearperiod from the participant's date of hire.
The Company has also established an executive deferred compensation plan for selected key employees which allows
participants to defer a substantial portion of their compensation each year.The Company matches 20%of a participant's
annual plan contributions up to an annual maximum per participant of $10,000.Matching contributions vest over a four-year
period from the later of July 1,1997 or the participant's date of hire.In addition,the Company provides participants with an
annual earnings credit based on the investment indexes selected by the participant prior to the start of each plan year.
The Company's expense under the 401(k)and deferred compensation plans for fiscal 2002,2001 and 2000 was
$1,674,000,$1,969,000 and $1,132,000,respectively.
(15)Segment Information
During fiscal 2002,the Company consolidated its storage solutions and networking sales,support and service functions
into a single unit.As a result,it is no longer possible to allocate costs and prepare separate meaningful statements for what
had been its networkingand storage solutions segments.The
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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 2001
Foreign OperationsInformation:
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-livedassets (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-year period
ended January 31,2003:
Balance at Charged to
Years Ended beginning cost of Revisions to Cost of Balanceat
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 fourthquarter of fiscal 2002,the Company recorded a $1.7 million restructuring charge for severance resulting
from a reduction in workforceand 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 Investing Activities and SupplementalCash 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.
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COMPUTER NETWORK TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
The Company did not enter into any capital leases during fiscal 2002.Duringfisca12001 and 2000,the Company entered
into capital lease obligations for equipment valued at $279,000 and $1,849,000,respectively.
Duringfiscal 2001 and 2000,deferred tax 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 fairvaluebecauseoftheshortmaturityofthoseinstruments.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 ofprincipalindebtedness.
(20)Related Party Transactions
Duringfiscal 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 bandwidth from competitors of Dynegy Connect when their pricing was more attractive.The
Company's board member,Lawrence McLernon,was formerly chiefexecutive 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 performed in 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 development manager.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 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
$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 toreceive$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 Improvements Act of 1976,as amended.
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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 forthe 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 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 allocation of the purchase to the acquired assets and liabilities of Inrange Technologies 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.
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INDEPENDENT AUDITORS'REPORT
The Board of Directors and Shareholders
Computer Network Technology Corporation:
We have audited the accompanying consolidated balance sheets of Computer NetworkTechnology Corporation and
subsidiaries as of January 31,2003 and 2002,and the related consolidated statements of operations,shareholders'equity,and
cash flows for each of the years in the three year period ended January 31,2003.These consolidated financial statements aretheresponsibilityoftheCompany's management.Our responsibility is to express an opinion on these consolidated financialstatementsbasedonouraudits.
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 whether the financialstatementsarefreeofmaterialmisstatement.An audit includes examining,on a test basis,evidence supporting the amounts
and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant
estimates made by management,as well as evaluating the overallfinancial statement presentation.We believe that our auditsprovideareasonablebasisforouropinion.
In our opinion,the consolidated financial statements referred to above present fairly,in all material respects,the financial
position of Computer NetworkTechnology Corporation and subsidiaries as of January 31,2003 and 2002,and the results oftheiroperationsandtheircashflowsforeachoftheyearsinthethreeyearperiodendedJanuary31,2003,in conformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.
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
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QUARTERLY FINANCIAL DATA
(unaudited)
Years Ended January 31,2003 and 2002
First Second Third Fourth
Quarter(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 24,615
Income (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)(.81)
Diluted (.48)(.07)(.03)(.81)
2001(1)
Revenue $29,413 $41,583 $55,362 $60,665
Gross profit 10,465 16,560 22,027 24,389
Income (loss)from operations (10,478)(2,597)(326)927
Income from discontinued operations,net of tax 6,423 -1,799 -
Net income (loss)(6,555)(821)2,398 1,272
Net income (loss)per share:
Basic (.22)(.03).08 .04
Diluted (.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
principlerelated to the implementation of SFAS No.142.Continuing operations for the first quarter of fiscal 2001
includes a $2.0 million write down of inventory,a $325,000 write-off of a product and a $1.0 million restructuring
charge.Continuingoperations also includes a loss on the sale and write-downof webMethods stock of $10.3 million.
Discontinued operations for the first quarter of fiscal 2001 includes a provisionof $6.2 million,net of tax,to accrue for
the estimated future operating losses of Propelis Software,Inc.through the expected date of divestiture.Discontinued
operations for the first quarter of2001 includes an after tax gain of $12.6 million resulting from the sale of IntelliFrame.
(3)Continuing operations for the second quarter of 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 fisca12002 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 deferred tax 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.
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PART III
Item 10.Directors and Executive Officers of the Registrant
The informationset forth under the captions "Election of Directors"and "Section 16(a)Beneficial Ownership Reporting
Compliance"in the definitiveProxy Statement for the Annual Meeting of Shareholders to be held on June 25,2003,to befiledwiththeSecuritiesandExchangeCommission(the "Commission")on or before May 26,2003,is incorporated herein
by reference.For informationconcerning the executives officers,see Item 4A of this Annua1 Report on Form 10-K.
Item 11.ExecutiveCompensation
The informationset forth under the captions "Summary Compensation Table,""Option Tables,""Employment
Agreements,""Election of Directors -Compensation of Directors,""InternalRevenue Code Section 162(m)"and"ComparativeStock Price Performance"in the definitiveProxy Statement for the Annual Meeting of Shareholders to be held
on June 25,2003,to be filed with the Commission on or before May 26,2003,is incorporated herein by reference.
Item 12.Security Ownership of Certain BeneficialOwners and Management
The informationset forth under the caption "Security Ownership of Certain Beneficial Owners and Management"in the
definitiveProxy Statement for the Annual Meeting of Shareholders to be held on June 25,2003,to be filed with the
Commission on or before May 26,2003,is incorporated herein by reference.
The informationset forth under the caption "Equity Compensation Plan Informationas of January 31,2003"in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on June 25,2003,to be filed with the
Commission on or before May 26,2003,is incorporated herein by reference.
Item 13.Certain Relationshipsand Related Transactions
During 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 bandwidth was purchased from Dynegy Connect because they offered us the best pricing.We have purchased
bandwidth from competitors of Dynegy Connect when their pricing has been more attractive.Our board member,Lawrence
McLernon,was formerly chiefexecutive officer of Dynegy Global Communications.
On May 3,2002 our board granted Mr.Erwin 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 participation on our board,and in consideration of
such services to be performed in the future.
Thomas G.Hudson's son-in-law is 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.
Item 14.Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
The Company reviewedand evaluated the effectiveness of our disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-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 reviewand evaluation was done under the supervision and with the
participation of management,including our Chief
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Executive Officer ("CEO")and Chief Financial Officer ("CFO").Based on their reviewand evaluation,the CEO and CFO
have concluded that,as of the EvaluationDate,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,
particularlyduring the period in which this annual report on Form 10-K was being prepared,and that no changes are required
at this time.
The coinpany's management,including the CEO and CFO,does not expect that our disclosure controls or our internal
controls will prevent all 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 the inherent limitations in all control systems,no evaluation of controls can provideabsolute assurance that all
control issues and instances of fraud,if any,within the company have been detected.These inherent limitations include the
realities that judgments in decision-making can be faulty,and that breakdowns can occur because of simple error or mistake.
Additionally,controls can be circumvented by the individualacts of some persons,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 likelihoodof future events,and there can be no assurance that any design will succeed in achieving its 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 Evaluation Date,or any significant deficiencies or material weaknesses in such internal
controls requiringcorrective 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
Independent Auditors'Report
(a)2.ConsolidatedFinancial Statement Schedule of Registrant
Independent Auditors'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 informationis inapplicable or is presented in the consolidated financial
statements or related notes thereto.
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Schedule II
COMPUTER NETWORK TECHNOLOGY CORPORATION
Valuation and Qualifying Accounts
Years ended January 31,2003,2002 and 2001
(in thousands)
Additions
Balance at Charged to Charged to
beginning costs &other Balance at
Description of year expenses account Deductions end of year
Year ended January 31,2003
Allowancefor doubtfulaccounts and sales
returns $1,848 1,388 -(820)$2,416
Year ended January 31,2002
Allowancefor doubtful accounts and sales
returns $2,383 898 -(1,433)$1,848
Year ended January 31,2001
Allowancefor doubtfulaccounts and sales
returns $1,128 1,600 -(345)$2,383
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INDEPENDENT AUDITORS'REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Shareholders
Computer NetworkTechnology Corporation:
Under the date of February 17,2003,except as to note 21,which is as of April 6,2003,we reported on the consolidated
balance sheets of Computer NetworkTechnology Corporation and subsidiaries as of January 31,2003 and 2002,and the
related consolidated statements of operations,shareholders'equity,and cash flows for each of the years in the three year
period ended January 31,2003 as contained in the fiscal 2002 annual report on Form 10-K.These consolidated financial
statements and our report thereon are included in the annual report on Form 10-K for fiscal 2002.In connection with our
audits of the aforementioned consolidated financial statements,we also have audited the related financial statement schedule
as listed in the accompanying index.This financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule based on our audits.
In our opinion,such financial statement schedule,when considered in relation to the basic consolidated financial
statements taken as a whole,presents fairly,in all material respects,the informationset forth therein.
/s/KPMG LLP
Minneapolis,Minnesota
February 17,2003
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(a)3.Exhibits
The Company undertakes to furnish to any shareholder so requesting a copy of any of the following exhibits upon
payment to the Company of the reasonable costs incurred by the Company in furnishing any such exhibit.
Exhibit Description
2.Purchase Agreement as of April 3,2001 between Computer NetworkTechnology Corporation and
Ernest J.Parsons (Articulent,Inc.).(Incorporated by reference to Exhibit 2 Form 10-K for the year ended
January 31,2002 and Exhibit 99.1 to Form 8-K dated April 3,2001.)
2.1 Purchase Agreement dated June 24,2002 between Computer NetworkTechnology Corporation,Greg
Scorziello,Paul John Foskett and Owen George Smith and agreed form of registration rights agreement
set forth in Annex I thereto.(Incorporated by reference to Exhibit 2.2 Registration Statement No.333-
87376.)
2.2 Agreement as of April 6,2003 among SPX Corporation,Computer NetworkTechnology and Basketball
Corporation (Incorporated by reference to Exhibit 99.2 to current report on Form 8-K dated April 8,
2003.)
3.1 Second Restated Articles of Incorporation of the Company.(Incorporated by reference to Exhibits 3(i)-1
and 3(i)-2 to current report on Form 8-K dated May 25,1999.)
3.2 Articles of Amendment of the Second Restated Articles of the Company.(Incorporated by reference to
Exhibit 3(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 on Form 8-K
dated May 25,1999.)
4.1 Rights Agreement between the Company and Chase Mellon Shareholder Services,L.L.C.,as Rights
Agent including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares.
(Incorporated by reference to Exhibit 1 to Form 8-A dated July 29,1998 and Exhibit 1 to Form 8-A/A
dated November 27,2000.)
4.2 First Amendment of Rights Agreement dated November21,2000.(Incorporated by Reference to
Exhibit 1 to Form 8-A/A dated November27,2000.)
4.3 First Amendment of Certificate of Designations,Preferences and Rights of Series A Junior Participating
Preferred Stock.($.01 Par Value Per Share)of Computer NetworkTechnology Corporation
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27,2000.)
4.4 Form of Common Stock Certificate.(Incorporated by reference to Exhibit 4.2 to Form S-3 Registration
Statement No.333-80841.)
4.5 Registration Rights Agreement,dated as of February 20,2002,among Bear,Sterns &Co.Inc.,SG
Cowan Securities Corporation and Soundview Technology Corporation.(Incorporated by reference to
Exhibit 4.5 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 National Association,as
Trustee.(Incorporated by reference to Exhibit 4.6 Form 10-K for the year ended January 31,2002.)
4.7 Form of Note (included in Exhibit 4.6)(Incorporated by reference to Exhibit 4.7 Form 10-K for the year
ended January 31,2002.)
10.0 BuildingLease by and between Opus Northwest,L.L.C.,and Computer NetworkTechnology
Corporation.(Incorporated by reference to Exhibit 10A Form 10-Q for the quarterly period ended
September 30,1998.)
10.lA Amended and Restated 1992 Stock AwardPlan.(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on August 5,2002.)(l)
10.lB Form ofNon-Qualified Stock Option AwardAgreement for employees to be used in conjunction with the
Amended and Restated 1992 Stock Award Plan.(Incorporated by reference to Exhibit 10.2 to Form 8-K
filed on August 5,2002.)(l)
10.lC Form ofNon-Qualified Stock Option Award Agreement for directors to be used in conjunction with the
Amended and Restated 1992 Stock AwardPlan.(Incorporated by reference to Exhibit 10.3A to Form 8-
K filed on August 5,2002.)(l)
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Exhibit Description
10.1D Form of Restricted Stock Agreement to 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.)(l)
10.2A Amended and Restated 1999 Non-QualifiedStock AwardPlan.(1)(2)
10.2B Form of Restricted Stock Agreement to be used in conjunction with the Amended and Restated 1999
Non-QualifiedStock AwardPlan.(Incorporated by reference to Exhibit 10.4B to Form 8-K filed on
August 5,2002.)(1)
10.2C Form ofNon-Qualified Stock Option AwardAgreement for employees to be used in conjunction with the
Amended and Restated 1999 Non-QualifiedStock AwardPlan.(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 on April 26,
2002.)(l)
10.4 Amended and Restated 1992 Employee Stock Purchase Plan.(1)(2)
10.5A Amended and Restated 2002 Stock AwardPlan.(Incorporated by reference to Exhibit 10.14 to Form 8-K
filed on August 5,2002.)(1)
10.5B Form of IncentiveStock Option AwardAgreement for employees to be used in conjunction with the
Amended and Restated 2002 Stock AwardPlan.(Incorporated by reference to Exhibit 10.15 to Form 8-K
filed on August 5,2002.)(1)
10.5C Form ofNon-Qualified Stock Option AwardAgreement for employees to be used in conjunction with the
Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to Exhibit 10.16 to Form 8-K
filed on August 5,2002.)(l)
10.5D Form of Non-QualifiedStock Option AwardAgreement for directors to be used in conjunction with the
Amended and Restated 2002 Stock Award Plan.(Incorporated by reference to Exhibit 10.17 to Form 8-K
filed on August 5,2002.)(1)
10.5E Form of Restricted Stock Agreement in conjunction with the Amended and Restated 2002 Stock Award
Plan.(Incorporated by reference to Exhibit 10.18 to Form 8-K filed on August 5,2002.)(l)
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.)(I)
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 Deferred Compensation Plan.(Incorporated by reference to
Exhibit 10P on Form 10-K for the year ended December 31,1998.)(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
Technology Corporation and Thomas G.Hudson.(Incorporated by reference to Exhibit 10.1 to Form 8-K
filed on March 19,2003.)(l)
10.10 Employment Agreement dated as of March 5,2003,between Computer Network Technology
Corporation and Gregory T.Barnum.(Incorporated by reference to Exhibit 10.2 to Form 8-K filed on
March 19,2003.)(l)
10.11 Employment Agreement effectiveFebruary 18,2003,between Computer NetworkTechnology
Corporation and James A.Fanella.(Incorporated by reference to Exhibit 10.3 to Form 8-K filed on
March 19,2003.)(l)
10.12 Employment Agreement by and between the Company and Mark Knittel.(Incorporated by 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.Independent Auditors'Consent.(2)
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Exhibit Description
99.1 Cautionary Statements.(2)
99.2 Computer NetworkTechnology Corporation Certification of ChiefExecutive officerand 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.
(b)Reports on Form 8-K
The registrant furnished a Form 8-K on December 13,2002 with the certifications required under Section 906 of the
Sarbanes-Oxley Act of2002 that accompanied its Form 10-Q for the period ended October 31,2002.
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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 behalfby the undersigned,thereunto duly 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 following
persons on behalfof the Registrant and in the capacities and on the dates indicated.
/s/THOMAS G.HUDSON President and ChiefExecutive Officer (Principal April 17,2003
Executive Officer)and Director
Thomas G.Hudson
/s/GREGORY T.BARNUM Vice President of Finance,ChiefFinancial April 17,2003
Officer and Secretary (Principal Financial
Gregory T.Barnum Officer)
/s/JEFFREY A.BERTELSEN Corporate Controllerand Treasurer (Principal April 17,2003
Accounting Officer)
JeffreyA.Bertelsen
/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
/s/JOHNA.ROLLWAGEN Director April 17,2003
John A.Rollwagen
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CERTIFICATIONS
I,Thomas G.Hudson,certify that:
1.I have reviewedthis annual report on Form 10-K of Computer NetworkTechnology 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 under which 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 informationincluded in this annual report,fairly
present in all material respects the financialcondition,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 defmed 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 "EvaluationDate");and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures
based on our evaluation as 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 equivalent function):
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 have identified for the registrant'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 whether or 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,includingany corrective actions with regard to significant deficiencies and material
weaknesses.
Date:April 17,2003
By:/s/Thomas G.Hudson
Thomas G.Hudson
ChiefExecutive Officer
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CERTIFICATIONS
I,Gregory T.Barnum,certify that:
1.I have reviewedthis annual report on Form 10-K of Computer NetworkTechnology Corporation;
2.Based on my knowledge,this annual report does not contain any untrue statement of a material fact or omit to state amaterialfactnecessarytomakethestatementsmade,in light of the circumstances under which 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 informationincluded in this annual report,fairlypresentinallmaterialrespectsthefinancialcondition,results of operations and cash flows of the registrant as of,and for,theperiodspresentedinthisannualreport;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls andprocedures(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 informationrelating to the registrant,including its consolidated subsidiaries,is made known to us by others within those entities,particularly during the periodinwhichthisannualreportisbeingprepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days priortothefilingdateofthisannualreport(the "EvaluationDate");and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and proceduresbasedonourevaluationasoftheEvaluationDate;
5.The registrant's other certifyingofficers 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 performingthe equivalent function):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect theregistrant's ability to record,process,summarize and report financial data and have identifiedfor the registrant's auditorsanymaterialweaknessesininternalcontrols;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 certifyingofficers and I have indicated in this annual report whether or not there weresignificantchangesininternalcontrolsorinotherfactorsthatcouldsignificantlyaffectinternalcontrolssubsequent to thedateofourmostrecentevaluation,includingany corrective actions with regard to significant deficiencies and material
weaknesses.
Date:April 17,2003
By:/s/Gregory T.Barnum
Gregory T.Barnum
ChiefFinancial Officer
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INDEX TO EXHIBITS
Exhibit Description
2.Purchase Agreement as of April 3,2001 between Computer Network Technology Corporation andErnestJ.Parsons (Articulent,Inc.).(Incorporated by reference to Exhibit 2 Form 10-K for the year endedJanuary31,2002 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,GregScorziello,Paul John Foskett and Owen George Smith and agreed form of registration rights agreementsetforthinAnnexIthereto.(Incorporated by reference to Exhibit 2.2 Registration Statement No.333-87376.)
2.2 Agreement as of April 6,2003 among SPX Corporation,Computer NetworkTechnology and BasketballCorporation(Incorporated by reference to Exhibit 99.2 to current report on Form 8-K dated April 8,2003.)
3.1 Second Restated Articles of Incorporation of the Company.(Incorporated by reference to Exhibits 3(i)-1and3(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 by reference toExhibit3(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 on Form 8-KdatedMay25,1999.)
4.1 Rights Agreement between the Company and Chase Mellon Shareholder Services,L.L.C.,as RightsAgentincludingtheformofRightsCertificateandtheSummaryofRightstoPurchasePreferredShares.(Incorporated by reference to Exhibit 1 to Form 8-A dated July 29,1998 and Exhibit 1 to Form 8-A/AdatedNovember27,2000.)
4.2 First Amendment of Rights Agreement dated November21,2000.(Incorporated by Reference toExhibit1toForm8-A/A dated November27,2000.)
4.3 First Amendment of Certificate of Designations,Preferences and Rights of Series A Junior ParticipatingPreferredStock.($.01 Par Value Per Share)of Computer NetworkTechnology Corporation(Incorporated by 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-3 RegistrationStatementNo.333-80841.)
4.5 Registration Rights Agreement,dated as of February 20,2002,among Bear,Sterns &Co.Inc.,SGCowanSecuritiesCorporationandSoundviewTechnologyCorporation.(Incorporated by reference toExhibit4.5 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 National Association,asTrustee.(Incorporated by reference to Exhibit 4.6 Form 10-K for the year ended January 31,2002.)4.7 Form of Note (included in Exhibit 4.6)(Incorporated by reference to Exhibit 4.7 Form 10-K for the yearendedJanuary31,2002.)
10.0 Building Lease by and between Opus Northwest,L.L.C.,and Computer NetworkTechnologyCorporation.(Incorporated by reference to Exhibit 10A Form 10-Q for the quarterly period endedSeptember30,1998.)10.lA Amended and Restated 1992 Stock Award Plan.(Incorporated by reference to Exhibit 10.1 to Form 8-KfiledonAugust5,2002.)(1)10.1B Form of Non-QualifiedStock Option AwardAgreement for employees to be used in conjunction with theAmendedandRestated1992StockAwardPlan.(Incorporated by reference to Exhibit 10.2 to Form 8-KfiledonAugust5,2002.)(1)10.lC Form ofNon-Qualified Stock Option AwardAgreement for directors to be used in conjunction with theAmendedandRestated1992StockAwardPlan.(Incorporated by reference to Exhibit 10.3A to Form 8-K filed on August 5,2002.)(l)10.lD Form of Restricted Stock Agreement to be used in conjunction with the Amended and Restated 1992StockAwardPlan.(Incorporated by reference to Exhibit 10.3B to Form 8-K filed on August 5,2002.)(I)
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Exhibit Description
10.2A Amended and Restated 1999 Non-QualifiedStock Award Plan.(1)(2)10.2B Form of Restricted Stock Agreement to be used in conjunction with the Amended and Restated 1999Non-QualifiedStock AwardPlan.(Incorporated by reference to Exhibit 10.4B to Form 8-K filed onAugust5,2002.)(l)
10.2C Form of Non-QualifiedStock Option Award Agreement for employees to be used in conjunction with theAmendedandRestated1999Non-QualifiedStock Award Plan.(Incorporated by reference toExhibit10.4C 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 on April 26,2002.)(1)
10.4 Amended and Restated 1992 Employee Stock Purchase Plan.(1)(2)10.5A Amended and Restated 2002 Stock AwardPlan.(Incorporated by reference to Exhibit 10.14 to Form 8-KfiledonAugust5,2002.)(l)
10.5B Form of IncentiveStock Option Award Agreement for employees to be used in conjunction with theAmendedandRestated2002StockAwardPlan.(Incorporated by reference to Exhibit 10.15 to Form 8-KfiledonAugust5,2002.)(1)
10.5C Form of Non-QualifiedStock Option Award Agreement for employees to be used in conjunction with theAmendedandRestated2002StockAwardPlan.(Incorporated by reference to Exhibit 10.16 to Form 8-KfiledonAugust5,2002.)(1)
10.5D Form of Non-QualifiedStock Option AwardAgreement for directors to be used in conjunction with theAmendedandRestated2002StockAwardPlan.(Incorporated by reference to Exhibit 10.17 to Form 8-KfiledonAugust5,2002.)(1)
10.5E Form of Restricted Stock Agreement in conjunction with the Amended and Restated 2002 Stock AwardPlan.(Incorporated by reference to Exhibit 10.18 to Form 8-K filed on August 5,2002.)(l)10.6 Amended and Restated 401(k)Salary Savings Plan.(Incorporated by reference to Exhibit 10.19 toForm8-K filed on August 5,2002.)(l)
10.7 CNT 2002 Annual Bonus Plan.(Incorporated by reference to Exhibit 10.7 on Form 10-K for the yearendedJanuary31,2002.)(l)
10.8A Amended and Restated Executive Deferred Compensation Plan.(Incorporated by reference toExhibit10PonForm10-K for the year ended December 31,1998.)(l)10.8B Amendment to Amended and Restated Executive Deferred Compensation Plan.(Incorporated byreferencetoExhibit10IonForm10-K for the year ended January 31,2001.)(l)10.9 Amended and Restated Employment Agreement dated as of March 5,2003,between Computer NetworkTechnologyCorporationandThomasG.Hudson.(Incorporated by reference to Exhibit 10.1 to Form 8-KfiledonMarch19,2003.)(l)
10.10 Employment Agreement dated as of March 5,2003,between Computer NetworkTechnologyCorporationandGregoryT.Barnum.(Incorporated by reference to Exhibit 10.2 to Form 8-K filed onMarch19,2003.)(l)
10.11 Employment Agreement effectiveFebruary 18,2003,between Computer NetworkTechnologyCorporationandJamesA.Fanella.(Incorporated by reference to Exhibit 10.3 to Form 8-K filed onMarch19,2003.)(1)
10.12 Employment Agreement by and between the Company and Mark Knittel.(Incorporated by reference toExhibit10AAonForm10-K for the year ended December 31,1997.)(1)12.Ratio of Earnings to Fixed Charges.(2)
http://www.sec.gov/Archives/edgar/data/701319/000095013403006792/c73645e10vk.htm 7/25/2003
e10vk Page 97 of 97
Table of Contents
Exhibit Description
21.Subsidiaries of the Registrant.(2)
23.Independent Auditors'Consent.(2)
99.1 Cautionary Statements.(2)
99.2 Computer Network Technology Corporation Certification of ChiefExecutive officerand 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.
http://www.sec.gov/Archives/edgar/data/701319/000095013403006792/c73645e10vk.htm 7/25/2003
EXHIBIT 5
MAP OF PROPOSED SERVICE
11
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and Company Areas
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963 Custer PineBMSTNEIPPE
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EXHIBIT 6
ILLUSTRATIVE TAIUFF
12
COMPUTER NETWORK TECHNOLOGY
CORPORATION
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:TITLE PAGE
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
PRIVATE LINE SERVICE TARIFF
of
Computer Network Technology Corporation.
REGULATIONS AND SCHEDULE OF CHARGES
APPLICABLE TO COMMUNICATIONS SERVICES
REGULATED BY THE
PUBLIC UTILITIES COMMISSION OF IDAHO
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:CHECK SHEET
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
CHECK SHEET
SECTION PAGE REVISION SECTION PAGE REVISION I
Title 1
ORIGINAL*2 29 ORIGINAL*
Check Sheet 1
ORIGINAL*2 30 ORIGINAÏ ¯
Check Sheet 2 ORIGINAL*2 31 ORIGINAL*
Check Sheet 3 ORIGINAL*2 32 ORIGINAL*
Check Sheet 4 ORIGINAL*2 33 ORIGINAL*
2 34 ORIGINAL*
2 35 ORIGINAL*
2 36 ORIGINAL*
Contents 1 ORIGINAL*2 37 ORIGINAL*
Index 1 ORIGlNAL*
Preface 1
ORIGINAL*
Preface 2 ORIGINAL*
3 1 ORIGINAL*
1 1
ORIGINAL*3 2 ORIGINAL*
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*Indicatespages submitted with most recent filing.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:CHECK SHEET
EFFECTIVE:ORIGINAL PAGE 2
BY:Gregory Barnum -Vice President
CHECK SHEET
SECTION PAGE REVISION SECTION PAGE REVISION
6 1 ORIGINAL*13 1
ORIGINAL*
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,13 2 ORIGINAL*
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11 1 ORIGINAL*17 1 ORIGINAL*
12 1 ORIGINAL*18 1 ORIGINAL*
18 2 ORIGINAL*
18 3 ORIGINAL*
18 4 ORIGINAL*
*Indicates pages submitted with most recent filing.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:CHECK SHEET
EFFECTIVE:ORIGINAL PAGE 3
BY:Gregory Barnum -Vice President
CHECK SHEET
SECTION PAGE REVISION 'SECTION PAGE REVISION
19 1 ORIGINAL*
Price List 1 ORIGINAL*
Price List 2 ORIGINAL*
Price List 3 ORIGINAL*
I Price List 4 ORIGINAL*
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Price List 30 ORIGINAL*
Price List 31 ORIGINAL*
Price List 32 ORIGINAL*
Price List 33 ORIGINAL*
Price List 34 ORIGINAL*
Price List 35 ORIGINAL*
*Indicates pages submitted with most recent filing.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:CHECK SHEET
EFFECTIVE:ORIGINAL PAGE 4
BY:Gregory Barnum -Vice President
CHECK SHEET
SECTION PAGE REVISION SECTION PAGE REVISION
I
*Indicates pages submitted with most recent filing
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:CONTENTS
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
MASTER TABLE OF CONTENTS
Section
Title Page
Check Sheet
TOC Table of Contents
Preface How To Use This Tariff
1 Application of Tariff
2 General Regulations
3 General Description
4 Mileage Measurement
5 Special Arrangements
6 T1.5 Service-Interoffice
7 1.544 MBPS-Local Channel Service
8 T45 Service-Interoffice
09 T45 MBPS-Local Channel Service
10 Asynchronous Transfer Mode
11 (Reserved for future use)
12 (Reserved for future use)
13 Voice Grade Local Channel Services
14 SONET Services -Interoffice
15 SONET Services -Local
16 CNT Regional Frame Relay Services
17 Miscellaneous Equipment and Arrangements
18 Additional Administrative and Operational Functions
19 (Reserved for future use)
Price List
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:INDEX
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
INDEX
Section Price List Paqe
Title Page
Check Sheet
TOC Table of Contents
Preface How To Use This Tariff
1 Application of Tariff
2 General Regulations
3 General Description
4 Mileage Measurement
5 Special Arrangements
6 T1.5 Service-Interoffice 1-2
7 1.544 MBPS-Local Channel Service 3-4
8 T45 Service-Interoffice 5
9 T45 MBPS-Local Channel Service 6
10 Asynchronous Transfer Mode 7
11 (Reserved for future use)8
12 (Reserved for future use)9
13 Voice Grade Local Channel Services 10-21
14 SONET Services -Interoffice 22-23
12 SONET Services -Local 24
16 CNT Regional Frame Relay Services 25-27
17 Miscellaneous Equipment and Arrangements 28
18 Additional Administrative and Operational Functions 29-34
19 (Reserved for future use)35
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:PREFACE
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
PREFACE
HOW TO USE THIS TARIFF
Explanation of Symbols for Coding Tariff Revisions
Revisions to this tariff are coded through the use of symbols.These symbols appear in the right margin
of the page.The symbols and their meanings are:
C -indicates changed regulation.
D -indicates discontinued rate or regulation.
N -indicates new rate or regulation,and/or text.
T -indicates a change in text but no change in rate or regulation
I
-indicates an increase in rate.
R -indicates a reduction in rate.
M -indicates relocation of material from or to another part of the tariff
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:PREFACE
EFFECTIVE:ORIGINAL PAGE 2
BY:Gregory Barnum -Vice President
PREFACE
HOW TO USE THIS TARIFF
ABBREVIATIONS AND DEFINITIONS -Following is a list of the abbreviations used in this tariff (see
Explanation of Abbreviations,below).In addition,the General Regulations section contains definitions of
certain technical terms and terms with specific meaning in the context of this tariff.
EXPLANATION OF ABBREVIATIONS
Ac -alternating current
CNT -Computer Network Technology Corporations
bps -bits per second
COC -Central Office Connection
dB -decibel
dc -direct current
DSO -Digital Signal Level 0
DS1 -Digital Signal Level 1
DS3 -Digital Signal Level 3
F.C.C.-Federal Communications Commission
Hz -Hertz
ICB -Individual Case Basis
IOC -interoffice channel
kpbs -kilobits per second
kHz -kilohertz
LATA -Local Access and Transport Area
LDMTS -Long Distance Message Telecommunications Service
LEC -Local Exchange Company
Mbps -Megabits per second
Mcs -microseconds
MF -Multifrequency Pulsing
MHz -Megahertz
MTS -Message Telecommunications Service
NPA -Numbering Plan Area
NXX -Local Exchange Central Office Code
PBX -Private Branch Exchange
P.U.C.-Public Utilities Commission
USOC -Uniform Service Order Code
V &H -Vertical and Horizontal
WATS -Wide Area Telecommunications Service
wpm -Words-per-minute
2W -Two-wire
4W -Four-wire
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 1
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
1.APPLICATION OF TARIFF
1.1 Application
1.1.1 General
A.This tariff contains the regulations and rates applicable to private line services furnished in the
State of Idaho for intrastate communications.
Private line services are furnished by means of wire,radio,fiber optics or any suitable technology
or combination of technologies.
B.Private line services are provided by Computer Network Technology Corporation.(herein referred
to as "CNT"or "the Company").
1.1.2 Jurisdiction
Jurisdiction refers to the classification of a private line service as intrastate (subject to the
jurisdiction of the Idaho State Public Utilities Commission)or as interstate (subject to the
jurisdiction of the Federal Communications Commission).
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 1
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.1 Undertakingof CNT
2.1.1 General
A private line service is furnished for the transmission of communications.It may include one or
more interoffice and/or local channels,office connections,office functions,miscellaneous
functions,miscellaneous equipment,and channel options.A private line service may also consist
solely of an office connection or solely of an office function.
Private line services are provided on a monthly basis.
CNT is responsible for end-to-end service between customers'premises when (1)a private line
service uses the Access Coordination Function and a Local Channel,or (2)a private line service
uses the Access Coordination Function and other access.Service dates of components may be
independent of each other when the customer obtains access other than that furnished under the
Local Channel sections of this Tariff.
CNT does not transmit messages.However,the private line facilities it furnishes may be used for
that purpose.
2.1.2 Transmission Medium
CNT selects and/or arranges for the facilities and/or equipment used to provide a private line
Service.CNT may modify or change the facilities and/or equipment at any time subject to the
regulations within this tariff.Any suitable technology or combination of technologies may be used.
2.1.3 Provision of Private Line Services
The services offered under this tariff are subject to the availability of suitable facilities and
equipment.
A.Engineering,Installation,and Maintenance
CNT fully supports the private line services provided under this tariff through engineering,
installation,and maintenance efforts.CNT will ensure that each private line service functions
properly within its specified transmission,signaling,or switching parameters.The technical
characteristics and specifications of each type of private line service are described or referenced
in the respective service sections.
1.Engineering
CNT will engineer a private line service to meet its transmission parameters and/or equipment
specifications.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 2
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.1 Undertaking of CNT (Cont'd)]
2.1.3 Provision of Private Line Services (Cont'd)
A.Engineering,Installation,and Maintenance (Cont'd)
2.Installation
CNT will schedule installation activity to meet the due date of the private line service.If the
customer's request that installation activity be performed at other than CNT's scheduled time
results in premium payment for labor,additional charges will apply.
The local channels provided under this tariff (a)will include any entrance cable or drop wiring and
wire in intrabuilding cable to that point where provision is made for termination of the LEC's
outside distribution network facilities at a suitable location inside a customer's premises,and (b)
will be installed to such point of termination.
3.Maintenance
CNT will maintain and repair,or arrange for the maintenance and repair of only the private line
service which it provides.The testing of a service which is routed through a designated CNT
central office will be made from that office.
If a trouble condition occurs,the customer is responsible for determining if the trouble is in any
customer equipment or customer-provided communications system which is connected at the
customer's premises.A Maintenance of Service Charge will apply if,at the customer's request,a
repair person is dispatched to the customer premises and testing discloses that the private line
service is functioning correctly.No charge will apply,however,if at a later time the trouble
condition is actually determined to be a malfunction of any CNT-provided private line service.
2.1.4 Through Transmission of Signals
CNT is responsiblefor the quality of transmission and signaling on the private line services it
provides.
2.1.5 Limitations on the Provision of a Private Line Service
A.Availability
A private line service is offered subject to the availability of the facilities and equipment required
to provide the service.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 3
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.1 Undertaking of CNT (Cont'd)
2.1.5 Limitations on the Provision of a Private Line Service (Cont'd)
A.Availability (Cont'd)
CNT bases the rates and charges quoted in this tariff on services furnished under normal
conditions.Where installation of facilities involves unusual costs because of factors such as the
time period,type of facility or location requested by the customer,special construction charges
based on maintenance,operation,depreciation,engineering,return on investment and other
expenses associated with furnishing the service may apply.Special construction charges may
consist of recurring charges,nonrecurring charges,or both.Special construction charges may
also includetermination charges.Special equipment and arrangements not otherwise provided in
this tariff will be provided on an individual case basis.These services will be provided only if CNT
deems them to be practical and only if the special equipment or arrangement is in accord with
and used in connection with other services provided by CNT.Charges for these services will be
based on the estimated service costs including maintenance,operation,depreciation,
administration,taxes,and other service specific costs,and a reasonable amount for return and
contingencies.
B.Restoration of Private Line Services
In the event of failure,private line services will be restored in compliance with Part 64,Subpart D,
of the FCC's Rules and Regulations.
C.Hazardous Locations
Service will not be furnished at a location that CNT considers hazardous (e.g.explosive
atmosphere environments).In such cases,CNT,if so requested,may terminate the facilities at a
mutually agreeable alternate location.The customer will then be responsible for extension to the
hazardous location.
D.Billing Capability
Services offered under this tariff will be provided only if billing capabilities for the services exist.
2.1.6 Transfer or Assignment
A private line service may be transferred or assigned to a new customer,provided that:
A.The customer of record (former customer)requests in writing that CNT transfer or assign the
private line service to the new customer.
B.The new customer notifies CNT in writing that it agrees to assume all obligations of the former
customer at the time of transfer or assignment.These obligations include:(1)all outstanding
indebtedness for the private line service,(2)the unexpired portion of any applicable minimum
payment period(s),and (3)any applicable termination liability(ies).
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 4
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.1 Undertaking of CNT (Cont'd)
2.1.6 Transfer or Assignment (Cont'd)
C.The private line service is not interrupted or relocated at the time the transfer or assignment is
made.
D.CNT acknowledges the transfer or assignment in writing.The acknowledgment will be made
within 15 days of receipt of notification.
The transfer or assignment does not relieve or discharge the former customer from remaining
jointly and severally liable with the new customer for any obligations existing at the time of
transfer or assignment.These obligations include:(1)all outstanding indebtedness for the private
line service,(2)the unexpired portion of any applicable minimum payment period(s),and (3)any
applicable termination liability(ies).
2.1.7 Provision of a Design Layout Report
The customer may order a Design Layout Report describing the makeup of the facilities used to
provide the interoffice channel portion of a service,the makeup of local channels used to provide
a service,or both.The rates for the report(s)and a description of the information provided are
contained in within this tariff.Design Layout Reports can only be provided on services ordered
after the effective date of this Tariff.
2.2 Use
2.2.1 General
A private line service may be used for any purpose permitted by law and consistent with its
transmission or switching parameters.
2.2.2 Resale or Shared Use
When a private line service is resold or shared,the customer may advise its user that a portion of
its service is provided by CNT.However,the customer shall not represent that CNT jointly
participates with the customer in the provision of its services.
2.2.3 Interference,Impairment,and Hazard
The customer's use of a private line service must not interfere with,or impair,any services
provided by CNT to others.In addition,it must not endanger the safety of
installation/maintenance personnel or the public;damage or interfere with the functioning of CNT
equipment or service;or otherwise injure the public in its use of these offerings.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 5
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.3 Responsibilities of CNT
2.3.1 Liability
A.CNT's liability,if any,for its willful misconduct is not limited by this tariff.With respect to any other
claim or suit,by a customer or by any others,for damages associated with the installation,
provision,termination,maintenance,repair,or restoration of a private line service,and subject to
the provisions of B.through J.following,CNT's liability,if any,shall not exceed an amount equal
to the proportionate charge provided for under this tariff for the private line service for the period
during which the service was affected.
B.CNT is not liable for damages associated with service,channels,or equipment which it does not
furnish.
C.CNT is not liable for any act or omission of any other carrier providing a portion of a private line
service,nor shall CNT for its own act or omission hold liable any other carrier providing a portion
of a private line service.
D.CNT is not liable for damages to a premises resulting from the furnishing of service,including the
installation and removal of equipment and associated wiring,unless the damage is caused by
CNT's negligence.
E.CNT shall be indemnified,defended and held harmless by the customer and user against all
claims,losses,or damages arising from the use of private line services furnished pursuant to this
tariff,involving:
1.Claims for libel,slander,invasion of privacy,or infringement of copyright arising from any
communication;
2.Claims for patent infringement arising from combining or using the private line service furnished
by CNT in connection with facilities or equipment furnished by others;or
3.All other claims arising out of any act or omission of others relating to private line services
provided pursuant to this tariff.
F.No license under patents (other than the limited license to use)is granted by CNT or shall be
implied or arise by estoppel,with respect to any private line service offered under this tariff.CNT
will defend the customer and user against claims of patent infringement arising solely from the
use by the customer or user of private line services offered under this tariff and will indemnify
such customer or user for any damages awarded based solely on such claims.
G.CNT's failure to provide or maintain private line services under this tariff shall be excused by labor
difficulties,governmental orders,civil commotions,natural catastrophes,and other circumstances
beyond CNT's reasonable control,subject to the provisions for Credit Allowances for Interruptions
in this tariff.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 6
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.3 Responsibilities of CNT (Cont'd)
2.3.1 Liability (Cont'd)
H.CNT does not guarantee or make any warranty with respect to its local channel services when
used in an explosive atmosphere.CNT shall be indemnified,defended,and held harmless by the
customer and user against all claims,losses,or damages by any person relating to the servicesprovidedpursuanttothistariffwhenusedinanexplosiveatmosphere.
I.CNT shall not be liable for any failure of performance hereunder if such failure is due to any
causes beyond the reasonable control of the Company.Such causes shall include,without
limitation,acts of GOD,fire,explosion,vandalism,cable cut,storm or other similar occurrence,
any law,order,regulation,direction,action or request of the Unites States government or of anyothergovernmentorofanycivilormilitaryauthority,national emergencies,insurrections,riots,
wars,strikes,lockouts or work stoppages or other labor difficulties,supplier failures,shortages,breaches or delays,or preemptions of existing service to restore service in compliance with the
Commission's Rule and Regulations.
J.CNT shall not be liable for interruptions,delays,errors,or defects in transmission,or for any
injury whatsoever,caused by the Customers,or the Customer's agents,End Users,or
customers,or by facilities or equipment provided by the Customers.
2.3 Responsibilities of CNT (Cont'd)
2.3.2 Changes in Minimum Protection Criteria,Facilities,or Procedures
CNT is not responsible to any party if a change in a local channel service's Minimum Protection
Criteria,facilities,operations or procedures (1)affects any facilities,customer equipment or
customer-provided communications system in any way,or (2)requires their modification in order
to be used.However,if such changes can be reasonably expected to materially affect the
operating or transmission characteristics of the CNT Service,or render any customer equipment
or customer-provided communications system incompatible,CNT will provide adequate notice,in
writing,to allow the customer an opportunity to maintain uninterrupted service.
2.3.3 Service Dates
When a customer orders a local channel service,all components of the resulting end-to-end
arrangement which are provided by CNT will begin service on the same date,unless otherwise
specified by the customer.
2.3.4 Registration Information
CNT will make information available as required by Part 68 of the FCC's Rules and Regulations
(e.g.,the number of ringers that may be connected to a particular local channel service).
CDulPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 7
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.4 Responsibilitiesof the Customer
2.4.1 General
The customer's general responsibilities are described in this section.When other access is
connected to a private line service,the customer assumes additional responsibilities that aredescribedintheConnectionssectionofthistariff.
A.Placement of Orders,Payment of Bills,and Compliance with Regulations
The customer is responsible for placing orders,complying with tariff regulations,and assuring
that its users comply with tariff regulations.The customer is also responsible for the payment of
bills for private line service.The customer may appoint an agent to act on its behalf,as specified
in B.following.
1.Information the Customer Must Provide
When a customer places an order for private line service,the following information must beprovidedbythecustomersothatCNTcandesign,install,maintain,and bill the private line
service ordered:
The category of interoffice and local channel private line service,interface,and signaling (if
required),The designated CNT central office to which the local channel service is to be routed(when the customer elects to specify routing or when the local channel service consists solely of
access coordination function),
The customer's billing name and address,
The contact name,telephone number,and address at each customer premises where theinstallationwillbemade,
The customer's desire to use LEC bridging (when a multipoint local channel service is ordered),
and the location of Local Exchange Company bridges (when the customer elects to specify LEC
bridge locations),
Information regarding customer equipment as specified in Part 68.106 of the FCC Rules andRegulations-(Notification to telephone company).
The design information contained in the design layout record for other access when an order is
placed to connect other access without the Access Coordination Function,and
Exemption certification when the Special Access Surcharge within this tariff does not apply.
COMPUTER NETWORK TECHNOLOGY
CORPORATIONS
STATE OF IDAHO
PRIVATE LINE SERVICES TARIFF
ISSUED:SECT ON 2
EFFECTIVE:ORIGINAL PAGE 8
BY:Gregory Barnum -Vice President
2.GENERAL REGULATIONS
2.4 Responsibilities of the Customer (Cont'd)
2.4.1 General (Cont'd)
B.Agency Agreement -CNT will accept orders from an agent appointed by the customer.An
agency appointment must be sent to CNT in writing.If directed by the customer,the bill for the
private line service will be sent to the agent and issued in the name of the customer,in care of the
agent.
The customer retains responsibility for compliance with tariff regulations and for any act or
omission of the agent,regardless of any limitations the customer may place on the agent's
authority.
When the customer elects to order solely the access coordination function from CNT,the
customer must give CNT written authorization to act on its behalf and is responsible for the
access charges incurred.
C.Floor Space,Conduit,and Electrical Power at a Customer's Premises The customer must provide
the equipment space,supporting structure,conduit,and electrical power required to terminate a
local channel service at a customer's premises without charge to CNT.The space,structure,
conduit,and power must be made available in sufficient time to permit the installation of the local
channel service to be completed prior to its due date.Selection of AC or DC power will be a
matter of mutual agreement between the customer and CNT.
D.Access to Customer's Premises
The customer is responsible for arranging customer premises access at any reasonable time so
that installation/maintenance personnel may install,repair,maintain,inspect,or remove a local
channel service.Customer premises access must be made available at a time mutually
agreeable to the customer and CNT.
E.Locations Involving High Voltage Power
When a customer orders a local channel service installed at a customer's premises where high
voltage power is present,the customer shall:
1.Install,maintain,and pay for special facilities and protective apparatus required by federal,state,
or local regulations.
2.Pay for required protective apparatus recommended for the location by CNT.
F.Availability for Maintenance,Testing,or Modifications The customer must make a private line
service available for maintenance,testing,or implementation of changes it has ordered,at any
reasonable,mutually agreeable time.Occasionally an impairment may only be evident at certain
times (e.g.,a certain hour of the day).In such cases,the private line service must be made
available for testing during the same time periods if the trouble condition is to be corrected.