connecting
users to information
to growth markets
the web to corporate data
mainframes to open systems
storage devices to networks
COMPUTER NETWORK
TECHNOLOGY CORPORATION
1997 Annual Report
[LOGO OF CNT APPEARS HERE]
CORPORATE PROFILE
Computer Network Technology Corporation (CNT) is a leading worldwide provider of
high-performance networking solutions that allow mainframe systems and open
systems environments to share data and information. The company was founded in
1983 to design, manufacture, market and service high-speed connectivity
technologies, and introduced the Channelink system in 1985.
Today, CNT offers customers a diverse mix of technologies for Web-to-host
access, high-speed communications, enterprise data access and creating server
and storage networking solutions. CNT products are at the core of many of the
world's largest data centers, helping blue chip companies, research facilities
and government agencies redesign their wide area network infrastructures and
reengineer their Web-to-host applications for maximum efficiency and
manageability. The company enhances the performance of its products through its
commitment to 100 percent customer satisfaction.
Based in Minneapolis, Minnesota, CNT's products and services are sold
worldwide to end users, system integrators and original equipment manufacturers
(OEMs) through a direct sales force and a network of authorized distributors. A
public corporation since 1985, CNT is listed on the Nasdaq National Market under
the symbol CMNT.
TABLE OF CONTENTS
Connecting to Growth Markets 2
Letter to Shareholders 4
CNT At-A-Glance 6
Connecting Storage Devices to Networks 8
Connecting the Web to Corporate Applications 10
Connecting to Customer Service 12
Selected Financial Data 14
Management's Discussion and Analysis
of Financial Condition and Results of Operations 15
Consolidated Financial Statements 21
Notes to Consolidated Financial Statements 25
Independent Auditors' Report,
Report of Management 33
Quarterly Financial Data 34
Investor Information 35
Corporate Information 36
Glossary of Terms Inside Back Cover
FINANCIAL HIGHLIGHTS...........................................................
(in thousands, except per share data)
1997 1996
...............................................................................
FOR THE YEAR ENDED DECEMBER 31
Revenue $ 97,841 $ 97,109
Net income before special charges 619* 3,088*
Net income per share before special charges .03* .13*
Net income (loss) (2,314) 1,360
Net income (loss) per share (.10) .06
AT YEAR END
Total assets $ 85,487 $ 82,379
Shareholders' equity 55,607 64,161
Working capital 30,380 48,192
*Excludes special charges in 1997 of $4.9 million, or $.13 per share after tax,
associated with the acquisition of the Internet Solutions Division from Apertus
Technologies Inc. in October 1997, and subsequent integration charges; excludes
a charge in 1996 of $2.7 million, or $.07 per share after tax, for the write-
down of purchased technology.
Computer Network Technology
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Connecting to growth markets
We have refocused CNT's strategic direction and positioned the company to
address customers' needs by achieving leadership in more robust technology
markets. Our long-term goals are to provide effective business solutions in
these markets in an effort to achieve sustainable revenue growth and improved
returns to shareholders. To help CNT achieve these goals, we are addressing
dynamic markets:
Storage Area Networks (SANs) With vital corporate information dispersed over
many different servers and networks, SANs provide a high-performance
infrastructure to protect that information against loss and also make it easily
available to those who need it. By the year 2000, the SAN market is expected to
be nearly $1.2 billion according to Strategic Research Corp. (SRC), an industry
research firm.
Web-to-Host Providing rapid access to mainframe information is an escalating
requirement for corporations seeking Web-based connections to link corporate
data and applications with open systems. International Data Corporation (IDC),
an industry research firm, estimates this market to be more than $1 billion by
the year 2002.
We will grow by serving the increasing global need for Storage Area Networks
(SANs).
Businesses worldwide, including many CNT customers, now face a critical
need to make data accessible to users at all times because downtime causes
significant productivity losses and measurable costs. Millions of dollars in
annual downtime losses are not uncommon today because computer networks were not
designed for mission-critical applications such as mainframe data centers. For
this reason, a new kind of infrastructure is needed: one that provides network
availability, data accessibility, and manageability. The SAN is a high-speed
network that establishes a direct connection between multiple storage devices
and servers, thereby externalizing storage from the server and allowing
information to be shared among multiple `host' servers without affecting the
performance of the primary network. The SAN market segment is a natural
evolution of the channel networking market, encompassing both open systems and
mainframe environments.
Our new UltraNet product family with our enhanced FileSpeed software and
Channelink products are uniquely positioned to provide customers with
applications such as disk mirroring, data archiving and retrieval, backup and
restore, and data sharing
[ART APPEARS HERE]
Storage Area Networks
Web-to-Host
[ART APPEARS HERE]
between different environments. The SAN is quickly becoming an industry standard
among server and storage vendors, and CNT has established itself as a
connectivity leader in this rapidly expanding market.
We will grow by serving the accelerating need for Web-to-Host connectivity.
Web-to-host integration is helping businesses leverage their huge
investments in mainframe systems by providing access to data and applications on
these systems in cost-effective and highly flexible ways. Extending the
enterprise to employees, customers and vendors via the Web enables businesses to
become more competitive, provide new products and services, and reach new
markets.
The CNT Application Re-engineering Environment (CARE) solution suite,
comprised of the Enterprise/View (formerly the Web Integrator),
Enterprise/Connect and Enterprise/Access products, is well positioned to play a
leading role in this evolving market. As corporations begin to re-engineer their
applications for the Web, an orderly progression of development takes place,
from establishing a communications infrastructure to extending and integrating
host-based business logic and data into new applications. With CARE, these
corporations can now come to one vendor, CNT, to provide the products and
service that meet their Web-to-host integration needs.
We will grow by increasing our share of the traditional channel networking
market.
CNT has long been a market leader in channel connectivity which had total
industry sales of approximately $189 million in 1996, according to IDC, an
industry research firm. Since l985, the Channelink family of intelligent
networking products has extended channel networking to unlimited distances
between host computers, and to local area networks (LANs), wide area networks
(WANs), peripherals, and workstations. Today as users look for effective ways to
preserve their investments in mainframe systems and peripherals, Channelink
provides a powerful, industry-leading tool for data center consolidation, data
center load balancing, and remote, high-speed digital printing and imaging.
CNT's leadership of the channel networking market also provides a strong base
for the evolution to a SAN environment.
Implications of this Strategy
During l998 the successful execution of this strategy should position CNT:
. to be a leading supplier in the rapidly-growing Storage Area Network (SAN)
and Web-to-host markets;
. to be the dominant vendor in the traditional channel networking market;
. to generate more revenue from products and services outside of the
traditional corporate data center with products for administering
distributed open systems and storage;
. to derive more revenue and earnings from the sale of higher-margined
software and professional services;
. to employ broader distribution channels, including OEM partnerships,
strategic alliances and arrangements with outsourcers, service providers,
value-added resellers (VARs), and systems integrators; and
. to achieve improved expense ratios, sustainable revenue growth and
consistent profitability resulting in improved shareholder value.
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CONNECTING WITH OUR SHAREHOLDERS
In l997 we set the stage for a new, stronger CNT that's more favorably
positioned to compete in new growth markets. This strategic refocus was
essential to strengthen CNT's potential to grow and deliver better financial
results and improved shareholder returns.
We enjoyed the first signs of CNT's accelerating business momentum in the
second half of 1997. Revenue grew 33 percent between the third quarter and the
record fourth quarter of 1997. The new UltraNet product family accounted for 14
percent of fourth quarter product revenues. Fourth quarter service revenues also
rose 27 percent from the third quarter. This growth had two sources: the
addition of the service business of the Internet Solutions Division of Apertus
Technologies Inc., which we acquired in October, and CNT's growing installed
base. Fourth quarter operating earnings per share rose 50 percent compared with
the third quarter.
In 1997 we had marginal revenue growth, reporting record revenues of $97.8
million, compared with $97.1 million in 1996. Excluding non-recurring charges,
1997 net income was approximately $619,000, or $.03 per share, compared with
$3.1 million, or $.13 per share a year ago. After the acquisition and
integration charges, the 1997 net loss totaled $2.3 million, or $.10 per share.
Fourth-quarter and year-end 1997 results reflected approximately $4.9
million, or $.13 per share, in non-recurring charges associated with the Apertus
acquisition and subsequent business integration.
CNT began 1998 with $10.8 million in cash and marketable securities.
Although our net results for 1997 were not satisfactory, we are very
encouraged by our improved business momentum and the important initiatives that
continue to support our growth.
New Strategy. We refocused our strategic direction to:
. concentrate on critical new opportunities in the rapidly growing markets of
Storage Area Networks (SANs) and Web-to-host integration, which are
substantially larger than our mature, traditional markets; and
. increase our share of the traditional channel networking and SNA gateway
markets.
New Products. New products accounted for more than 30 percent of our 1997
product revenue. Among our most important new releases are:
. the UltraNet product family, which supports SANs and enables high-speed
sharing and movement of data among diverse servers and data storage
systems. The UltraNet Storage Director was named a 1998 "Hot Product" by
Data Communications magazine.
. the FileSpeed software product, which provides high-speed data transfer
between open systems and enterprise environments.
. enhancements that expand Channelink's versatility in wide area networks
(WANs) including ATM, compression and disk mirroring (IBM and EMC).
. the Enterprise/View product suite, which provides cost-effective and secure
access to mainframe applications and data from Java-enabled Web browsers.
Computer Network Technology
Investments and Acquisitions. To help support our new strategic direction, we
made several investments:
. the $11.4 million acquisition of the Internet Solutions Division from
Apertus Technologies Inc., which we expect to increase our market share in
the rapidly growing Web-to-host connectivity market. This acquisition,
along with ongoing quality and process improvements, improves our operating
efficiency and profitability and gives us a critical mass to be a more
aggressive player. We subsequently sold this division's Vision product line
for approximately $3.5 to $4 million.
. the acquisition of data movement technology for FileSpeed solutions, an
investment that is beginning to pay off in new business such as our OEM
contract with IBM.
. the purchase of more than 1.4 million shares of common stock for $6.7
million out of a planned 2 million share repurchase program.
New Customers and Partners. In 1997 we added more than 100 new accounts. We
continued to expand our distribution channels by entering into OEM agreements
with Bay Networks for our SNA gateway and Web browser technologies; Exabyte
Corp. for our UltraNet technologies; IBM for UltraNet and FileSpeed
technologies; and Hitachi Data Systems (HDS) for FileSpeed technologies. In
addition, our acquisition of the Internet Solutions Division significantly
expanded our business relationships with partners such as Lotus,
Hewlett-Packard, Sun Microsystems, Bluestone Software, and NetDynamics.
Management. Our senior management team strengthened in 1997, including the
addition of Patrick W. Gross to the board of directors, Greg Barnum as vice
president of finance and chief financial officer, Mark Knittel as vice president
of marketing and business development, and Martin Hahn as vice president and
general manager of the Internet Solutions Division.
Looking Forward. Our goals in 1998 are to successfully execute our strategic
plan, grow revenues and return the company to consistent profitability.
We are encouraged by the market's reception of our new UltraNet and CARE
solution product families. These new products, along with others planned for
l998, are designed to foster direct and OEM sales and boost 1998 revenue. We
will also benefit in 1998 from increased demand for our systems consulting
services that support complex networking and Internet solutions.
With the completed integration of the Brixton and Internet Solutions
Division, we expect to generate incremental revenues, realize significant
savings and improve profitability as we increase our presence in the gateway and
Web-to-host market.
We expect to complete installation of a new enterprise resource planning
system in 1998. This will give us a new information technology infrastructure to
handle growth into the next century.
Throughout 1998 we are seeking every opportunity to trim operating costs
as we grow revenues. Cash utilization should improve with close management of
inventories.
The elements for CNT's success are in place. Excellence in execution is
our focus. We are aggressively pursuing new opportunities in high-growth markets
with new products, new customers, OEM partners and strategic relationships. I
want to thank our outstanding employees, whose diligence and expertise embody
the revitalized CNT every day.
I believe our fourth quarter 1997 results are an indication of the good
revenue growth and steady profit improvement we hope to achieve for our patient
investors throughout 1998.
Sincerely,
/s/ Thomas G. Hudson
[PHOTO OF THOMAS G. HUDSON APPEARS HERE]
THOMAS G. HUDSON
President and Chief Executive Officer
March 23, 1998
Computer Network Technology
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MARKETS APPLICATIONS
Channel Networking Data Center Consolidation
Data Center Load Balancing
Remote, High-Speed Digital
Printing/Imaging
Storage Area Networks (SANs) Disk Mirroring
Disk mirroring avoids the serious threat
to business posed by the loss of data
[ART APPEARS HERE] between data system backups by
simultaneously creating up-to-the-minute
images of mission-critical data on
multiple backup storage disks. CNT
provides the highest level of
performance and reliability for
mainframe and open systems, supporting
all key vendor environments such as EMC,
IBM, and Hitachi Data Systems.
Data Sharing
CNT's UltraNet and FileSpeed solutions
give businesses the tools to access and
move data between and among dissimilar
storage and network environments. The
results: reduced costs, increased
productivity and improved management for
applications such as data warehousing
and data mining.
Backup and Restore
CNT's UltraNet solutions streamline an
enterprise's backup and restore
capabilities by introducing higher
storage system performance and better
usage of communications bandwidth. The
payoff: less system downtime, operating
savings, greater system availability and
flexibility.
Web-to-Host CARE (CNT Application Re-engineering
Environment)
[ART APPEARS HERE]
Access Host Applications
CNT's products provide gateways between
the Web and mainframes to cost-
effectively access corporate
information.
Extend Applications to Internal Users
CNT's products can help businesses
migrate to lower-cost Web browser
interfaces while still maintaining other
types of interfaces already in use.
Extend Interfaces to New External Users
CNT's products provide the rescreening
tools required to rejuvenate application
interfaces for new customers and
vendors.
Extend Applications to New Applications
CNT's products help companies extend and
leverage host-based business logic and
data into new applications such as
electronic (e-) commerce.
Computer Network Technology
PRODUCTS SELECTED CUSTOMERS ALLIANCES
Channelink U.S. Bancorp EMC
FileSpeed Software Reliance Electric IBM
NationsBank Hitachi Data Systems
General Electric Exabyte
Sandia National Laboratories Clariion (Data General)
Bank of Montreal
National Westminster Bank (U.K.)
KLM Royal Dutch Airlines
UltraNet Storage Director (Netherlands)
UltraNet Storage Gateway RABO Bank (Netherlands)
UltraNet Storage Multiplexer
Enterprise/Access Boeing Sun Microsystems
Enterprise/View (formerly Ameritech Bay Networks
Web Integrator) Allina Health System Cap Gemini
Enterprise/Connect ReliaStar Financial Corp. BULL
APG/Canadian Defense Dept. Lotus
Dreyfus Bluestone Software
Fleet Mortgage HAHT
GTE NetDynamics
Kas Associatie (Netherlands) Active Software
Computer Network Technology
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Today's businesses depend on the network to provide high-speed, reliable and
secure access to mission-critical stored information, whether it is centralized
or remote, from a variety of systems. CNT's UltraNet product family -- the
UltraNet Storage Director, the UltraNet Storage Gateway, and the UltraNet
Storage Multiplexer -- reduces information technology managers' resource expense
for storage management by connecting to any transport protocol on any platform,
using any operating system in any network. By providing high levels of
connectivity, performance, and manageability, the UltraNet product family
enables Storage Area Networks (SANs).
The SAN is a high-speed network that establishes a direct connection
between storage devices and servers, thereby externalizing storage from the
server and allowing information to be shared among multiple `host' servers
without impacting system performance or the primary network.
Storage Area Networks provide an infrastructure for a wide variety of
applications such as disk mirroring, backup and restore, archiving and
retrieval, and data sharing that solve widespread business problems such as data
warehousing and business resumption. CNT's UltraNet family supports these
applications by enabling external and centralized storage as well as remote
clustering.
The UltraNet product family is complemented by the existing Channelink
product line, and the two product lines can be combined in the same network.
CNT's FileSpeed software solution also works with both product lines to enable
high-speed data movement between mainframes and open systems.
By providing a SAN solution, CNT is leading the market in addressing vital
customer requirements for lower total cost of ownership for integrated networks,
more timely business recovery and cost-effective, shared access to information
across the entire enterprise.
[ART APPEARS HERE]
CONNECTING STORAGE DEVICES TO NETWORKS
Mark Sobotka of U.S. Bancorp is shown in the Computer Network Operations Center.
As the nation's 15th largest bank, U.S. Bancorp serves nearly 500,000 businesses
and 3.9 million retail customer households. Some of the applications supported
by CNT products include disk mirroring, backup and restore, and channel
extension.
Computer Network Technology
[PHOTO OF MARK SOBOTKA APPEARS HERE]
Vice President and General Manager,
Technical Services, U.S. Bancorp
St. Paul, Minnesota
U. S. BANCORP
"When we consolidated operations during the recent merger, CNT UltraNet products
allowed us to transfer customer data from Portland, Oregon, to St. Paul,
Minnesota, quickly and reliably with less disruption to customer service than
traditional tape courier methods employed in past consolidations. They also
allow data to be transferred to and from our headquarters and two remote
distribution centers that support more than 1,200 bank branches located in 17
Midwest and Western states."
Computer Network Technology
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To keep their competitive edge, businesses today understand the importance of
providing information to anyone who needs it -- customers, employees, business
partners -- regardless of location. These organizations understand the strategic
benefits of Web-to-host integration in helping them leverage their enormous
investments in existing mainframe systems.
As businesses begin to re-engineer their applications for the Web, an
orderly progression ensues. First, a communications infrastructure is
established to provide access to mainframe applications. Second, existing
applications are extended to current users or employees. Third, existing
applications are extended to new employees and customers, and other external
users. Finally, mainframe-based business logic and data are extended and
integrated into new applications that enable more efficient and targeted uses
of mission-critical information.
The CNT Application Re-engineering Environment (CARE) solution offers a
comprehensive set of products that takes an organization through each level of
the Web-to-host integration process. Enterprise/Connect provides the
interoperability between Web browsers and mainframe applications and data
through a channel-attached enterprise gateway. The Enterprise/View (formerly the
Web Integrator) is a Java-based emulator that provides familiar "green screen"
access to mainframe applications without reprogramming. The Enterprise/View Pro
(also part of the Web Integrator) is a re-screening tool that creates an instant
graphical user interface (GUI) on a Web browser for mainframe applications. The
Enterprise/Access is a powerful development tool and production environment for
extending existing applications to new environments.
The CARE solution is an industry first in supporting all the steps in the
evolution of a successful Web-to-host integration. With CARE, CNT helps its
customers compete better, lower costs and develop new markets while leveraging
their mainframe investments.
[ART APPEARS HERE]
CONNECTING THE WEB TO CORPORATE APPLICATIONS
Roberto Zanatta of Cap Gemini provides integrated solutions for large telecom
companies in Europe by using CNT's Enterprise/Access technology. Cap Gemini
Group, with revenues of $4.2 billion, is the largest European computer services
and consulting company, employing more than 30,000 people in 18 European
countries, the United States and the Far East.
Computer Network Technology
[PHOTO OF ROBERTO ZANATTA APPEARS HERE]
Skill Group Manager
Cap Gemini
Rome, Italy
CAP GEMINI
"When one of our customers undertook a multimillion dollar initiative to deliver
new products and services, we looked for a scalable Web-to-host integration
solution. We selected CNT's technology because it was reliable, it was available
on a number of different platforms, and could support thousands of users rather
than hundreds. CNT's Enterprise/Access won hands down because of the ease with
which it can be implemented, and because it is much simpler to manage and
maintain."
Computer Network Technology
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Customer satisfaction is the number one priority at CNT. This commitment affects
the way we conduct business, from the development of new products and
applications to customer service and quality assurance programs.
CNT's comprehensive support program uses remote diagnostic tools to support
customer networks. This unique ability to dial into dedicated networks worldwide
and perform on-line troubleshooting enables service teams to provide customers
with seven-days-a-week, 24-hours-a-day technical support. As a result, CNT's
customers get their problems resolved faster -- often without one of our trained
specialists having to visit their sites -- thereby reducing downtime. Customers
also depend on CNT to diagnose problems that are often identified as other
vendors' hardware and communications issues.
CNT service teams provide pre-sales support by analyzing customer
requirements, developing solutions, and offering project management guidance
during product implementation and installation. Secure records are maintained of
all changes made to each customer's network, so that the network can be restored
more quickly in the event of a failure.
With ever more complex networks handling mission-critical functions, there
is increasing customer demand for even broader services, especially
pre-installation network planning and design consultation. CNT also provides
more than 20 standard instructional courses on our product lines, as well as
customized courses geared to customers' specific networking issues.
From the customer's pre-purchase contact to post-installation
reconfigurations, CNT's value-added services are focused on helping customers
achieve maximum long-term productivity from their networking investments.
[ARTWORK APPEARS HERE]
CONNECTING TO CUSTOMER SERVICE
Jerry Theus of Reliance Electric uses CNT's FileSpeed solution to migrate the
company's computer network from mainframe to open systems. A leading
manufacturer of large industrial motors and systems controls, the billion-dollar
company has more than 40 manufacturing plants and hundreds of sales and service
facilities located in 10 countries worldwide.
Computer Network Technology
[PHOTO APPEARS HERE]
JERRY THEUS
Manager, Central Network Support
Reliance Electric, A Rockwell
Automation Business, Cleveland, Ohio
RELIANCE ELECTRIC
"CNT's customer service is highly qualified and responsive. Because they can
diagnose a situation and provide corrective action remotely, we are able to call
a technical specialist directly and get an immediate, personal response. This
means we experience very little downtime, which is critical to our Information
Technology operation. When we recently purchased additional products to upgrade
our network, we selected CNT because their service was so effective."
Computer Network Technology
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SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(in thousands, except per share data)
Years Ended December 31 1997 1996 1995 1994 1993
........................................................................................................................
Revenue $ 97,841 $ 97,109 $ 78,837 $ 79,542 $ 55,687
Income (loss) from operations (5,293) (48) 4,927 (3,049) 8,059
Income (loss) before income taxes (3,893) 2,024 6,535 (1,789) 7,901
Net income (loss) (2,314) 1,360 4,023 (4,714) 5,001
Net income (loss) per share:
Basic: $ (.10) $ .06 $ .18 $ (.21) $ .27
Diluted: $ (.10) $ .06 $ .17 $ (.21) $ .26
SELECTED CONSOLIDATED BALANCE SHEET DATA
(in thousands, except employee data)
December 31 1997 1996 1995 1994 1993
........................................................................................................................
Current assets $ 59,559 $ 66,410 $ 61,525 $ 53,062 $ 53,506
Current liabilities 29,179 18,218 17,243 17,675 17,103
........... ............ ............ ............ ...........
Working capital $ 30,380 $ 48,192 $ 44,282 $ 35,387 $ 36,403
........... ............ ............ ............ ...........
........... ............ ............ ............ ...........
Total assets $ 85,487 $ 82,379 $ 79,134 $ 73,149 $ 66,101
Long-term obligations $ 701 $ - $ - $ 163 $ 448
Shareholders' equity $ 55,607 $ 64,161 $ 60,506 $ 53,979 $ 48,550
Number of full-time employees 625 493 408 338 326
Computer Network Technology
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ACQUISITION
On October 24, 1997, the Company acquired substantially all of the assets,
including in-process research and development, of the Internet Solutions
Division (ISD) of Apertus Technologies Inc., (Apertus) a provider of
Internet-to-mainframe connectivity products and Web-access-to-legacy
applications. The purchase price totaled $16.4 million, including a cash payment
of $11.4 million, and assumption of $5.0 million of liabilities and related
acquisition costs. The amount related to in-process research and development of
$2.7 million was charged to expense in 1997 as the underlying research and
development projects had not yet reached technological feasibility. Subsequent
to the acquisition, the Company recorded a charge of $2.2 million for costs
incurred to integrate existing businesses, including accruals for severance,
facility closure, relocation of employees and other productivity initiatives.
The Company believes that it will be able to provide its customers with new and
enhanced products by combining the best elements of its existing technology with
new technology acquired from ISD. The Company anticipates that the acquisition
will increase its engineering and sales capabilities and expand its customer
base in the market for enterprise connectivity between Internet and intranet
users and IBM hosts. The Company also believes that the productivity initiatives
it has undertaken by combining ISD with its existing businesses will create
synergy and increase economies of scale.
RESULTS OF OPERATIONS
As an aid to understanding the Company's operating results, the following
table sets forth certain information derived from the Consolidated Statements of
Operations of the Company. (All amounts are expressed as a percentage of total
revenue except gross profit which is expressed as a percentage of the related
revenue.)
Percentage of Revenue 1997 1996 1995
................................................................................
REVENUE
Product sales 70.3% 76.4% 77.2%
Service fees 29.7 23.6 22.8
...... ...... ......
Total revenue 100.0 100.0 100.0
...... ...... ......
GROSS PROFIT
Product sales 67.3 65.2 70.8
Service fees 33.9 24.7 17.7
...... ...... ......
Total gross profit 57.4 55.6 58.7
...... ...... ......
OPERATING EXPENSES
Sales and marketing 34.5 33.2 29.9
Engineering and development 18.2 14.4 16.1
General and administrative 5.1 5.3 6.4
Write-down of
purchased technology - 2.8 -
Purchased in-process research
and development 2.8 - -
Integration charges 2.2 - -
...... ...... ......
Total operating expenses 62.8 55.7 52.4
...... ...... ......
Income (loss) from operations (5.4) (0.1) 6.3
Other income, net 1.4 2.2 2.0
...... ...... ......
Income (loss) before
income taxes (4.0) 2.1 8.3
Benefit (provision) for
income taxes 1.6 (0.7) (3.2)
...... ...... ......
Net income (loss) (2.4)% 1.4% 5.1%
...... ...... ......
...... ...... ......
Computer Network Technology
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REVENUE
The Company's revenue primarily includes the licensing, sale and support of
products for high-performance enterprise networking and connectivity, enterprise
access and enterprise information management and recovery that integrates
traditional legacy data processing systems with open systems to create
enterprise-wide networks.
Revenue from product sales totaled $68.8 million in 1997, a reduction of
approximately 7 percent when compared to the $74.2 million of product revenue
recorded in 1996. The decrease in 1997 product sales is primarily attributable
to a reduction in revenue from the Company's OEM partners of $8.2 million when
compared to 1996. During 1997, the Company recognized revenue from OEM products
sales to IBM, Bay Networks, Sun Microsystems and others of $4.8 million,
compared to revenue from OEM products sales of $13 million for the same period
of 1996. The reduction in 1997 OEM revenue was due to IBM's cancellation of an
order for the Company's channel connectivity controller. The decrease in 1997
product revenue resulting from lower sales to the Company's OEM partners was
partially offset by sales of the Company's new ATM and SRDF products and initial
sales of the Company's new UltraNet Storage Director products. In addition, the
sale of products acquired from ISD accounted for $2.3 million of new revenue in
1997.
Revenue from product sales totaled $74.2 million in 1996, an increase of
approximately 22 percent when compared to the $60.9 million of product revenue
recorded in 1995. The increase in 1996 product sales was primarily attributable
to OEM sales of the Company's channel connectivity controller to IBM and initial
sales of the Company's new integrated gateway product. During 1996, revenue
recognized from OEM product sales to IBM, Sun Microsystems and others increased
approximately $10.6 million when compared to 1995 OEM product sales.
Revenue from service fees, which primarily reflects maintenance, network
reconfiguration and professional services from the Company's technical support
personnel, increased in 1997 and 1996 by 27 percent and 28 percent,
respectively. The year to year growth in service fees is primarily due to the
growing base of customers using the Company's enterprise-wide networking
products and service fees resulting from the acquisition of ISD which accounted
for $1.3 million of revenue in 1997.
During 1997 and 1996, international revenue increased 8 percent and 7
percent over the prior year, respectively, primarily due to increases in service
and product sales to international distributors. The Company derived 28 percent,
26 percent and 30 percent of its revenue from international customers in 1997,
1996 and 1995, respectively. The percentage of revenue derived from
international customers for any given period is subject to fluctuation because
of the variable timing of sizable orders from customers both internationally and
in North America.
No single customer accounted for more than 10 percent of the Company's
revenue in 1997. Sales to one customer and its multiple divisions accounted for
18 percent of the Company's total revenue in 1996.
During 1997, the Company announced its new Storage Area Network (SAN)
strategy and related UltraNet family of products which provides for high-speed
connectivity between storage devices and servers from anywhere anytime. Initial
shipments of the Company's UltraNet Storage Director products accounted for $5.5
million of revenue in the last two quarters of 1997. In addition, the Company's
new UltraNet Storage Gateway and Multiplexer products are expected to be
generally available and provide incremental revenue in 1998. The Company
believes the UltraNet family of products positions the Company for growth in a
new market segment.
Integration of the ISD business acquired from Apertus with the Company's
existing business in the Gateway and Web-to-host growth markets should increase
the Company's presence in these markets and allow the Company to provide
customers with a new and improved set of products and services based on the best
elements of the existing CNT and ISD technologies.
In addition, the Company obtained a number of new OEM contracts in 1997 and
early 1998 including Bay
Computer Network Technology
Networks, Exabyte and IBM, which should provide additional revenue in future
periods. The OEM agreement with IBM should result in increased sales of the
Company's UltraNet and FileSpeed products.
The Company believes these new products and relationships should result in
increased demand for its products in both domestic and international markets.
The Company believes that it can increase revenue by continuing to acquire and
develop new products and services and by continuing to identify new applications
and markets for its technology, including the sale of these products through
OEMs, VARS, and other outbound technology initiatives.
The Company expects continued quarter-to-quarter fluctuations in revenue in
both domestic and international markets. The timing of sizable orders, because
of their relative impact on total quarterly sales, may contribute to such
fluctuations. The level of product sales reported by the Company in any given
period will continue to be affected by the receipt and fulfillment of sizable
new orders from OEMs and others.
SPECIAL ITEMS
During 1997, the Company recorded pre-tax charges of $2.7 million for
in-process research and development associated with the acquisition of ISD and
$2.2 million for productivity initiatives subsequent to the acquisition to
integrate existing businesses.
In 1996, the Company recorded a $2.7 million pre-tax charge for the
write-down of purchased technology due to changing market conditions and
evolving customer requirements for SNA, Internet and open systems gateway
products.
During 1995, the Company recorded a $2.5 million pre-tax charge related to
its management reorganization, which was included in the consolidated statement
of operations as follows: sales and marketing: $.2 million; general and
administrative: $.8 million; engineering and development: $1.5 million,
including $1.1 million to record an obligation on the part of the Company to
repurchase its common stock. Engineering and development was increased in 1997
by $.1 million and was reduced in 1996 by $.8 million to reflect changes in the
amount accrued for this obligation (see note 7 to the consolidated financial
statements).
GROSS PROFIT
Gross profit margin from product sales in 1997 was 67 percent, as compared
to 65 percent in 1996 and 71 percent in 1995. The increase in gross profit
margins from product sales in 1997 when compared to 1996 and the decrease in
gross profit margins from product sales in 1996 when compared to 1995 is
primarily due to the high level of 1996 lower margin OEM sales of the Company's
channel connectivity controller to IBM. The gross profit margins generated from
the sale of products acquired from ISD are consistent with the gross margins
from the sale of the Company's existing Web and Gateway products. Actual gross
profit margins on product sales in 1998 will depend on a number of factors,
including the mix of products, market acceptance of the Company's new products,
the relative amount of products sold through indirect distribution sources and
the level of continuing price competition.
Gross profit margins from services in 1997, 1996 and 1995 were 34 percent,
25 percent and 18 percent, respectively. The improvement in gross margins from
services in each of the last three years is primarily attributable to economies
of scale resulting from the steadily increasing base of customers contracting
for services. In addition, gross profit margins from services generated by ISD
have historically been higher than the Company's service margins. The Company
believes that any improvements resulting from economies of scale in 1998 will be
offset by additional investments the Company expects to make in its service
business to support new product introductions, including the Company's new
UltraNet family of products.
OPERATING EXPENSES
Excluding the impact of special items, sales and marketing expenses
increased in 1997 and 1996 by 5 percent and 37 percent, respectively, when
compared to the prior year. The increase in sales and marketing expense in 1997
when compared to 1996 is primarily due to marketing expenses associated with the
launch of the Company's new UltraNet family of products and investments the
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Company has made in its marketing organization to identify new market
opportunities for the Company's products. The sales and marketing organization
acquired from ISD also contributed to the increase. The increase in sales and
marketing expense in 1996 when compared to 1995 is primarily due to the
expansion of the Company's sales organization and an increase in commission
expense due to the higher level of sales. Improving the productivity of the
Company's investments in sales and marketing and controlling sales and marketing
expense as a percentage of revenue represent key objectives for the Company.
The Company has identified the Web-to-host and Storage Area Networking
markets as strategic growth markets and believes that its future success is
highly dependent on its ability to successfully compete and sell products in
these markets. The sales and marketing employees acquired from ISD have
extensive experience and knowledge in the gateway and Web-to-host markets. The
acquisition of ISD has provided the Company with an opportunity to have a
dedicated and experienced sales organization focused on the sale of products in
each of the Web-to-host and Storage Area Networking markets. The Company
believes this dedication of resource will improve its sales productivity, allow
it to compete more effectively in the Web-to-host and Storage Area Networking
markets and should result in increased revenue in future periods.
Engineering and development expense primarily relates to costs associated
with development of new products and enhancements to existing products.
Excluding the impact of special items, engineering and development expenses
increased in 1997 and 1996 by 20 percent and 32 percent, respectively, when
compared to the prior year. The increase for both periods is primarily
attributable to costs associated with continued development of new products,
including the Company's new UltraNet Storage Director that generated $5.5
million of product revenue in 1997, and its new UltraNet Storage Gateway and
Multiplexer products that are expected to add new incremental revenues in 1998.
The engineering resource acquired from ISD also contributed to the 1997
increase. The Company anticipates that the integration of the ISD engineering
team into its existing engineering organization should improve productivity in
future periods.
As a percentage of total revenue, engineering and development expense
excluding special items increased to 18 percent of total revenue in 1997,
compared to approximately 15 percent of total revenue in 1996 and 1995. The
increase in engineering and development as a percentage of total revenue in 1997
is primarily due to the expense associated with the development and launch of
the Company's UltraNet family of products. The Company anticipates investing
approximately 15 percent to 20 percent of total revenue on engineering and
development in 1998, which includes investments in current and future products.
The Company believes a sustained high level of investment in engineering and
development is essential to customer satisfaction and future revenue.
General and administrative expenses decreased in 1997 by 4 percent when
compared to 1996. The decrease is attributable to incremental costs incurred in
1996 for employee severance, and costs associated with the management
reorganization that occurred at the end of 1995. General and administrative
expenses excluding special items increased in 1996 by 23 percent when compared
to 1995, primarily due to higher costs for director and executive compensation,
including costs to recruit and retain a Chief Executive Officer and employee
severance. As a percentage of total revenue, general and administrative expenses
excluding special items were approximately 5 percent of total revenue each year
during the 1995 to 1997 period.
Interest income decreased by $.3 million or 16 percent in 1997 when
compared to 1996 due to lower balances of cash and marketable securities
resulting from the Company's common stock repurchase program and acquisition of
ISD. Interest income increased by $.2 million or 15 percent in 1996 when
compared to 1995 because cash flow from operations in 1995 and 1996 resulted in
higher available balances of cash and marketable securities for investment.
In 1997, 1996 and 1995, the Company recorded a provision for income taxes
at an effective rate of 41 percent, 33 percent and 38 percent, respectively. The
fluctuations in
Computer Network Technology
the Company's effective income tax rate for 1997 and 1996 is primarily due to
changes in the amount of non-deductible foreign losses and the large
non-recurring charges recorded each year. At December 31, 1997, the Company has
recorded deferred tax assets of $6.1 million. Based on an assessment of the
Company's taxable earnings history and prospective future taxable income,
management has determined it to be more likely than not that its net deferred
tax assets will be realized in future periods. The Company may be required to
provide a valuation allowance for this asset in the future if it does not
generate sufficient taxable income as planned. The Internal Revenue Service has
concluded its examination of the Company's United States income tax returns for
the years 1993 through 1995. No additional provision for income taxes resulted
from the examination.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through the private
and public sales of equity securities, bank borrowings under lines of credit,
capital equipment leases and cash generated by operations.
Cash, cash equivalents and marketable securities at December 31, 1997
totaled $10.8 million, a decrease of $24.2 million during 1997. The decrease is
primarily attributable to the cash paid to acquire ISD of $11.4 million and
repurchases of the Company's common stock totaling $6.7 million. Additional uses
of cash included the purchase of property and equipment, field support spares
and technology assets of $10.9 million. The use of cash noted above was
partially offset by cash provided by operations of $1.8 million, proceeds from
the sale of the Vision product line of $2.0 million, proceeds from the exercise
of stock options and issuance of stock under the employee stock purchase plan of
$.7 million and other of $.3 million.
The Company's computer systems and those of third parties with whom it does
business will be affected when the year changes to 2000, commonly known as the
"year 2000 problem." The Company is currently conducting an internal study to
determine the full scope and related costs of modifying the products it sells to
ensure proper processing of transactions into and beyond the year 2000. The
Company expects that it will begin to incur costs in 1998 to address the year
2000 issues identified during the internal study. Although the costs to modify
its products are not expected to be significant, failure to achieve timely
completion of required modifications or conversions or failure of third parties
with whom the Company has relationships to be year 2000 compliant could have a
material adverse impact on the operations and financial condition of the
Company. In addition, the Company has determined that certain of its internal
business systems are not year 2000 compliant. The Company anticipates that it
will spend up to $3 million in 1998 for new capital equipment and software to
acquire and implement a new business system that meets the processing
requirements of year 2000.
In addition, other expenditures for capital equipment and field support
spares have been, and will likely continue to be, a significant capital
requirement. Also, the Company intends to continue to repurchase shares of its
common stock on the open market from time to time pursuant to the previously
authorized common stock repurchase program.
The Company believes that its current balances of cash, cash equivalents
and marketable securities, when combined with anticipated cash flow from
operations, will be adequate to fund its operating plans and meet its currently
anticipated aggregate capital requirements, at least through 1998.
The Company believes that inflation has not had a material impact on its
operations or liquidity to date.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," effective in 1998, establishes standards of disclosure
and financial statement display for reporting total comprehensive income and the
individual components thereof.
In addition, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," effective
in 1998, establishes new standards for determining reportable segments and
disclosure of information regarding each such segment.
Management has not yet determined the impact of
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these new pronouncements on the Company's financial disclosures.
FORWARD-LOOKING STATEMENTS
Certain statements in this annual report (which are summarized below) and
in the Company's press releases and oral statements made by or with the approval
of the Company's executive officers constitute or will constitute
"forward-looking statements." All forward-looking statements involve risks and
uncertainties, and actual results may be materially different. The following
factors are among those that could cause the Company's actual results to differ
materially from those set forth in any such forward-looking statements:
. The expected benefits of the ISD acquisition, including the development of
new products and services, improvements in engineering, production and
sales capabilities and increased market presence, may be impacted by
unforeseen technological barriers, unanticipated integration expenses
(including higher than expected commitments of management, engineering,
financing and marketing resources) and customer acceptance.
. Future OEM revenue is dependent on the successful completion of engineering
activities and the level of customer demand.
. The introduction of new products and the receipt of new product revenue is
dependent upon the timely completion of required engineering activities,
obtaining any required licenses and the product offerings of competitors.
. The results of successfully implementing the Company's new market strategy
could be impacted by its ability to timely respond to customer demands
through the acquisition or development of new technologies and the actual
level and timing of the growth of the identified markets.
. The expected benefits of maintaining two sales organizations to address
each of the Web-to-host and Storage Area Networks markets may depend upon
the successful introduction of new products as planned by the Company and
the actions of existing and future competitors.
. The amounts spent on engineering and development in l998, and what
percentage this will be of total l998 revenue, may be impacted by the need
to enhance or modify products due to changing market requirements, the
success of current product programs, the need to meet unanticipated product
opportunities and the amount of total revenue received in l998.
. The cost of achieving Year 2000 compliance, including the level of l998
expenditures so related, will depend upon the actual amount of engineering
and expense required to modify the Company's products and to implement its
new business system. Successful installation of the Company's new
enterprise planning system in l998 will depend upon obtaining the
appropriate level of resources and management commitment.
. Whether the Company enjoys increased demand for its systems consulting
services in l998 will depend upon the successful introduction and market
acceptance of new service offerings.
. Whether the Company has sufficient cash resources to fund its operating
plans and capital requirements through at least l998 may depend upon the
Company's ability to generate revenue as presently expected, unexpected
expenses and the need for additional funds to react to changes in the
marketplace.
Other factors that could cause the results of the Company to differ
materially than those contained in any such forward-looking statements include
general economic conditions, costs and availability of components and
fluctuations in exchange rates. In addition, the markets for the Company's
products are characterized by significant competition and the Company's results
may be adversely affected by the actions of existing and future competitors,
including the development of new technologies, the introduction of new products
and the reduction of prices by such competitors to gain or retain market share.
The Company assumes no obligation to publicly release the results of any
revision or updates to these forward-looking statements to reflect future events
or unanticipated occurrences.
Computer Network Technology
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Years Ended December 31 1997 1996 1995
................................................................................
REVENUE
Product sales $ 68,787 $ 74,170 $ 60,890
Service fees 29,054 22,939 17,947
......... ......... .........
Total revenue 97,841 97,109 78,837
......... ......... .........
COST OF REVENUE
Cost of product sales 22,472 25,843 17,799
Cost of service fees 19,219 17,269 14,773
......... ......... .........
Total cost of revenue 41,691 43,112 32,572
......... ......... .........
GROSS PROFIT 56,150 53,997 46,265
......... ......... .........
OPERATING EXPENSES
Sales and marketing 33,717 32,192 23,586
Engineering and development 17,848 13,996 12,718
General and administrative 4,944 5,137 5,034
Write-down of purchased technology - 2,720 -
Purchased in-process research and development 2,750 - -
Integration charges 2,184 - -
......... ......... .........
Total operating expenses 61,443 54,045 41,338
......... ......... .........
INCOME (LOSS) FROM OPERATIONS (5,293) (48) 4,927
......... ......... .........
OTHER INCOME (EXPENSE)
Interest income 1,553 1,859 1,617
Interest expense (57) (46) (60)
Other, net (96) 259 51
......... ......... .........
Other income, net 1,400 2,072 1,608
......... ......... .........
INCOME (LOSS) BEFORE INCOME TAXES (3,893) 2,024 6,535
PROVISION (BENEFIT) FOR INCOME TAXES (1,579) 664 2,512
......... ......... .........
NET INCOME (LOSS) $ (2,314) $ 1,360 $ 4,023
......... ......... .........
......... ......... .........
BASIC
Net income (loss) per share $ (.10) $ .06 $ .18
......... ......... .........
......... ......... .........
Shares 22,702 23,241 22,675
......... ......... .........
......... ......... .........
DILUTED
Net income (loss) per share $ (.10) $ .06 $ .17
......... ......... .........
......... ......... .........
Shares 22,702 23,557 23,443
......... ......... .........
......... ......... .........
See accompanying notes to consolidated financial statements.
21
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22
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
December 31, 1997 December 31, 1996
.........................................................................................................................
ASSETS
Current assets:
Cash and cash equivalents $ 4,790 $ 4,847
Marketable securities 6,034 30,218
Receivables, net 32,752 18,189
Inventories 12,322 9,909
Deferred tax asset 2,284 2,425
Other current assets 1,377 822
................. .................
Total current assets 59,559 66,410
................. .................
Property and equipment, net 14,501 9,655
Field support spares, net 3,589 3,836
Deferred tax asset 3,823 1,052
Goodwill and other intangibles, net 3,530 775
Other assets 485 651
................. .................
$ 85,487 $ 82,379
................. .................
................. .................
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,656 $ 3,833
Accrued liabilities 12,135 9,064
Deferred revenue 9,207 5,321
Current installments of obligations under capital lease 181 -
................. .................
Total current liabilities 29,179 18,218
................. .................
Obligations under capital lease, less current installments 701 -
................. .................
Total liabilities 29,880 18,218
................. .................
Shareholders' equity:
Preferred stock, authorized 1,000 shares; none issued and outstanding - -
Common stock, $.01 par value; authorized 30,000 shares, issued and
outstanding 22,195 at December 31, 1997 and 23,408 at December 31, 1996 222 234
Additional paid-in capital 54,404 60,372
Retained earnings 1,412 3,726
Cumulative translation adjustment (431) (171)
................. .................
Total shareholders' equity 55,607 64,161
................. .................
$ 85,487 $ 82,379
................. .................
................. .................
See accompanying notes to consolidated financial statements.
Computer Network Technology
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Additional Retained Cumulative
Common Stock Paid-in Earnings Translation
Shares Amount Capital (Deficit) Adjustment Total
....................................................................................................................................
BALANCE, DECEMBER 31, 1994 22,360 $ 224 $ 55,801 $ (1,657) $ (389) $ 53,979
....................................................................................................................................
Shares issued pursuant to the
employee stock purchase plan and
exercise of stock options and
warrants, net of 86 shares redeemed 569 6 1,446 - - 1,452
Tax benefits related to employee
stock option transactions - - 904 - - 904
Change in cumulative
translation adjustment - - - - 149 149
Net income - - - 4,023 - 4,023
....................................................................................................................................
BALANCE, DECEMBER 31, 1995 22,929 $ 230 $ 58,151 $ 2,366 $ (240) $ 60,507
....................................................................................................................................
Shares issued pursuant to the
employee stock purchase plan
and exercise of stock options,
net of 22 shares redeemed 479 4 1,929 - - 1,933
Tax benefits related to employee
stock option transactions - - 292 - - 292
Change in cumulative
translation adjustment - - - - 69 69
Net income - - - 1,360 - 1,360
....................................................................................................................................
BALANCE, DECEMBER 31, 1996 23,408 $ 234 $ 60,372 $ 3,726 $ (171) $ 64,161
....................................................................................................................................
Shares issued pursuant to the
employee stock purchase plan
and exercise of stock options 192 2 706 - - 708
Repurchase of common stock (1,405) (14) (6,674) - - (6,688)
Change in cumulative
translation adjustment - - - - (260) (260)
Net loss - - - (2,314) - (2,314)
....................................................................................................................................
BALANCE, DECEMBER 31, 1997 22,195 $ 222 $ 54,404 $ 1,412 $ (431) $ 55,607
.......... ............. ............ ............ ............ ..........
.......... ............. ............ ............ ............ ..........
....................................................................................................................................
See accompanying notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASHFLOWS
(in thousands)
Years ended December 31 1997 1996 1995
....................................................................................................................................
OPERATING ACTIVITIES
Net income (loss) $ (2,314) $ 1,360 $ 4,023
Depreciation and amortization 7,384 7,960 7,418
Tax benefits related to employee stock option transactions -- 292 904
Write-down of purchased technology -- 2,720 --
Purchase of in-process research and development 2,750 -- --
Change in deferred taxes (2,630) (2,303) (386)
CHANGES IN OPERATING ASSETS AND LIABILITIES
Receivables (8,337) 356 5,006
Inventories (1,493) 83 (2,474)
Other current assets (468) 655 (389)
Accounts payable 3,008 1,255 415
Accrued liabilities 1,871 1,653 (801)
Deferred revenue 2,025 (1,932) (209)
........ ........ ........
Cash provided by operating activities 1,796 12,099 13,507
........ ........ ........
INVESTING ACTIVITIES
Additions to property and equipment (7,565) (4,922) (3,299)
Additions to field support spares (1,797) (2,220) (1,563)
Additions to purchased technology (1,550) -- --
Acquisition of Apertus Internet Solutions Division (11,412) -- --
Proceeds from sale of Vision product line 2,000 -- --
Purchase of marketable securities (12,190) (50,671) (31,640)
Redemption of marketable securities 36,374 42,902 11,677
Other 434 (303) (106)
........ ........ ........
Cash provided by (used in) investing activities 4,294 (15,214) (24,931)
........ ........ ........
FINANCING ACTIVITIES
Payments for repurchases of common stock (6,688) -- --
Proceeds from issuance of common stock 708 1,933 1,452
Repayments of obligations under capital lease (107) -- --
........ ........ ........
Cash provided by (used in) financing activities (6,087) 1,933 1,452
........ ........ ........
Effects of exchange rate changes (60) 69 76
........ ........ ........
Net decrease in cash and cash equivalents (57) (1,113) (9,896)
Cash and cash equivalents - beginning of year 4,847 5,960 15,856
........ ........ ........
Cash and cash equivalents - end of year $ 4,790 $ 4,847 $ 5,960
........ ........ ........
........ ........ ........
See accompanying notes to consolidated financial statements.
Computer Network Technology
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(in thousands, except per share data)
1/ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Computer Network Technology Corporation (CNT) is a leading worldwide
provider of high-performance networking solutions that allow mainframe systems
and open systems environments to share data and information.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Computer Network Technology Corporation and its subsidiaries (together, the
Company). All significant intercompany balances and transactions are eliminated
in consolidation.
REVENUE RECOGNITION
Revenue from product sales is generally recognized by the Company upon
shipment or signed customer acceptance depending on the terms of the contract or
purchase order. Revenue from software license agreements with original equipment
manufacturers (OEMs) for redistribution to the OEM's customers is recognized
when the OEM reports delivery of the software to their customer. Service fees
are recognized as revenue when earned, which is generally on a straight-line
basis over the contracted service period.
Deferred revenue primarily consists of the unearned portion of service
agreements billed in advance and amounts billed to customers prior to
recognition by the Company of the applicable revenue.
CASH EQUIVALENTS
The Company considers investments in highly liquid debt securities having
an initial maturity of three months or less to be cash equivalents.
MARKETABLE SECURITIES
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 115 "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS No. 115). The Company's marketable securities are classified
as available-for-sale and are carried at fair value in accordance with SFAS No.
115. If significant, unrealized gains and losses on available-for-sale
securities are excluded from earnings and are reported as a separate component
of shareholders' equity.
INVENTORIES
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment owned by the Company is carried at cost and
depreciated using the straight-line method over 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.
FIELD SUPPORT SPARES
Field support spares are carried at cost and depreciated using the
straight-line method over three years.
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GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of purchase price over the fair value of
net assets acquired and is amortized using the straight-line method over periods
ranging from seven to 20 years. Purchased technology and other identifiable
intangible assets are carried at cost and amortized using the units of
production or straight-line methods over periods ranging from three to seven
years.
The Company assesses the potential impairment of its goodwill and other
intangible assets based on anticipated cash flows from operations. No impairment
charges were recorded in 1997. The Company recorded an impairment charge in 1996
of $2,720 because it determined that certain purchased technology assets were
impaired due to changing market conditions and evolving customer requirements
for SNA, Internet and open systems gateway products.
ALLOWANCE FOR RETURNS AND CREDIT LOSSES
An allowance is made for potential returns and uncollectible accounts
based on current and historical experience. The allowance for returns and credit
losses at December 31, 1997 and 1996 was $2,979 and $899, respectively.
ENGINEERING AND DEVELOPMENT
The Company accounts for engineering and development costs in accordance
with Statement of Financial Accounting Standards No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS No.
86). The Company has expensed all engineering and development costs to date as
costs which meet the capitalization criteria outlined in SFAS No. 86 have not
been significant.
FOREIGN CURRENCY
The financial statements of the Company's international subsidiaries have
been translated into U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 "Foreign Currency Translation" (SFAS
No. 52). Under SFAS No. 52, assets and liabilities are translated into U.S.
dollars at year-end exchange rates, while equity accounts are translated at
historical rates. Income and expenses are translated at the average exchange
rates during the year. The resulting translation adjustments are recorded as a
separate component of shareholders' equity.
Foreign currency transaction gains and losses are included in determining
net income (loss). The Company recorded foreign currency transaction losses in
1997 and 1996 of $45 and $99, respectively. The Company recorded a foreign
currency transaction gain in 1995 of $77.
INCOME TAXES
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS No. 109). Under
SFAS No. 109, deferred tax assets and liabilities are recognized for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
STOCK COMPENSATION PLANS
The Company accounts for its stock based compensation awards in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" (APB No. 25) and provides the footnote disclosures required by
Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based
Compensation" (SFAS No. 123).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Computer Network Technology
2/ MARKETABLE SECURITIES
The Company's investments in marketable securities are summarized as
follows:
December 31 1997 1996
- -------------------------------------------------------------------
Corporate debt securities $ 5,034 $ 22,810
U.S. government and agency securities 1,000 7,408
--------- -----------
$ 6,034 $ 30,218
========= ===========
The amount of gross unrealized gains and losses with respect to the
Company's investments in marketable securities at December 31, 1997 and 1996
were not significant. The Company realized no significant gains or losses from
the sale of marketable securities during the three year period ended December
31, 1997. Proceeds from the sale of marketable securities during 1997, 1996, and
1995 were $26,252, $23,042, and $3,519, respectively. At December 31, 1997,
investments in marketable securities included $2,984 with contractual maturities
of one year or less and $3,050 with contractual maturities of from one to three
years.
3/ ACQUISITION
Effective October 24, 1997, the Company acquired substantially all of the
assets (including in-process research and development) and assumed certain
liabilities of the Internet Solutions Division (ISD) of Apertus Technologies
Inc., a provider of Internet-to-mainframe connectivity products and Web access
to legacy applications. The purchase price totaled $16,429, including a cash
payment of $11,412 and assumption of $5,017 of liabilities and related
acquisition costs. The acquisition was accounted for as a purchase and,
accordingly, the net assets acquired were recorded at their fair values at
October 24, 1997, the effective date of the acquisition. The purchase price was
allocated as follows:
Current assets $ 10,488
Property and equipment 1,000
Other assets 672
Identifiable intangibles and goodwill 1,519
In-process research and development 2,750
Current liabilities (5,017)
---------
Cash paid $ 11,412
=========
The amount related to in-process research and development as determined by
a third party appraisal of $2,750 was charged to expense in 1997 as the
underlying research and development projects had not yet reached technological
feasibility.
The Company's consolidated financial statements include the results of ISD
since October 24, 1997. The following table presents the consolidated results of
operations of the Company for 1997 and 1996 on an unaudited pro forma basis as
if the acquisition took place at the beginning of each year:
Unaudited Pro Forma
1997 1996
- ---------------------------------------------------------
Total revenue $117,000 $127,000
Net loss $ (9,882) $(11,900)
Net loss per basic and diluted share $ (.44) $ (.51)
The unaudited pro forma results of operations are for comparative purposes
only and do not necessarily reflect the results that would have been recorded
had the acquisitions occurred at the beginning of the periods presented or the
results which might occur in the future.
4/ INTEGRATION ACTIVITIES
Subsequent to the acquisition of ISD in 1997, the Company decided to
consolidate certain operations and recorded a charge of $2,184 for costs
incurred to integrate existing businesses, including accruals for severance,
facility closures, relocation of employees and other productivity initiatives.
At December 31, 1997, a significant portion of the accrued liability for
integration activities remained unpaid. The Company currently anticipates that
the remaining liability will be paid prior to the end of 1998.
In December 1997, the Company sold the assets and technologies relating to
the Vision line of products acquired from ISD for $2 million in cash, plus
additional payments ranging from $1.5 to $2 million through March 2001,
depending upon the Vision product line achieving a defined future revenue
target. The sale did not result in recognition of any gain or loss by the
Company.
Computer Network Technology
27
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5/ COMPONENTS OF SELECTED BALANCE SHEET ACCOUNTS
December 31 1997 1996
- ---------------------------------------------------------
INVENTORIES
Components and subassemblies $ 6,572 $ 3,769
Work in process 1,657 2,324
Finished goods 4,093 3,816
--------- ---------
$ 12,322 $ 9,909
========= =========
PROPERTY AND EQUIPMENT
Machinery and equipment $ 17,882 $ 12,972
Office and data
processing equipment 14,221 9,960
Furniture and fixtures 1,432 1,258
Leasehold improvements 2,096 1,886
--------- ---------
35,631 26,076
Less accumulated depreciation
and amortization 21,130 16,421
--------- ---------
$ 14,501 $ 9,655
========= =========
FIELD SUPPORT SPARES
Field support spares $ 11,985 $ 10,491
Less accumulated depreciation 8,396 6,655
--------- ---------
$ 3,589 $ 3,836
========= =========
GOODWILL AND
OTHER INTANGIBLES
Purchased technology $ 2,250 $ 4,764
Goodwill 1,085 866
Identifiable intangibles 600 -
--------- ---------
3,935 5,630
Less accumulated amortization
and impairment charges 405 4,855
--------- ---------
$ 3,530 $ 775
========= =========
ACCRUED LIABILITIES
Compensation $ 5,955 $ 5,197
Income taxes 1,950 2,020
Integration activities 1,769 -
Other 2,461 1,847
--------- ---------
$ 12,135 $ 9,064
========= =========
6/ LEASES
The Company leases all office and manufacturing space and certain
equipment under noncancelable capital and operating leases.
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
Year Ending December 31 Capital Operating
- ------------------------------------------------------------
1998 $ 226 $ 3,572
1999 226 3,028
2000 226 1,607
2001 226 1,386
2002 96 722
Thereafter - 1,325
--------- ---------
Total minimum lease payments 1,000 11,640
Less minimum sublease income - 1,477
--------- ---------
Net minimum lease payments 1,000 $ 10,163
=========
Less amount representing
interest at a rate of 5.69% 118
---------
Present value of minimum
capital lease payments 882
Less current installments 181
---------
Obligations under capital lease,
less current installments $ 701
=========
Rent expense under noncancelable operating leases, exclusive of executory
costs, for 1997, 1996, and 1995, was $2,765, $2,202 and $2,332, respectively.
7/ SHAREHOLDERS' EQUITY
COMMON EQUITY PUT OPTION
In connection with a severance agreement entered into with a former
officer and director in 1995, the Company agreed to repurchase up to 280 shares
of its common stock on the last trading day of calendar year 1997 for a price of
$8.50 per share. During 1996, the former officer and director sold 183 common
shares on the open market which were subject to the repurchase obligation. The
Company's remaining obligation was satisfied in early 1998 when 97 shares of its
common stock were repurchased from the former officer and director for $828.
Engineering and development expense was increased in 1997 and 1995 by $146
and $1,120, respectively, to record the Company's initial obligation under this
agreement and decreases in the market price of its common stock. Engineering and
development expense was decreased in 1996 by $779 to reflect termination of the
Company's repurchase obligation with respect to the 183 common shares discussed
above and an increase in
Computer Network Technology
the market price of its common stock.
COMMON STOCK REPURCHASE
On March 10, 1997 the Company's board of directors authorized the
repurchase of up to 2,000 shares of the Company's common stock. As of December
31, 1997, the Company had repurchased 1,405 shares of its common stock pursuant
to this authorization for $6,688.
STOCK OPTIONS
The Company's 1992 Stock Award Plan (the Award Plan) provides for the
grant of stock options and performance units to officers, other employees,
consultants, and independent contractors as determined by the compensation
committee of the board of directors. The Award Plan also provides for automatic
stock option grants to nonemployee directors of 50 shares upon their initial
election or appointment to the board of directors, and 20 shares each year to
nonemployee directors who are elected, re-elected, or are serving an unexpired
term as a director at any annual meeting of shareholders. A maximum of 5,400
shares of common stock are issuable under the terms of the Award Plan.
All stock options granted under the Award Plan have an exercise price
equal to fair market value on the date of grant, vest and become exerciseable
over individually defined periods, and expire ten years from the date of grant.
Performance units entitle participants to payments of cash, stock or a
combination thereof and are based upon the achievement of specified performance
targets as determined by the compensation committee. As of December 31, 1997, no
performance units have been granted under the terms of the Award Plan.
A summary of the status of the Company's outstanding stock options and
related changes for each of the years in the three year period ended December
31, 1997 is presented below:
1997 1996 1995
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------
Outstanding at
beginning of year 3,368 $ 6.19 2,778 $ 6.28 2,262 $ 5.08
Granted 1,689 4.85 1,483 5.36 1,329 7.43
Reissued 310 4.94 - - - -
Exercised (28) 3.80 (444) 3.38 (457) 3.16
Canceled (1,018) 6.91 (449) 7.10 (356) 6.49
------- ------- -------
Outstanding at
end of year 4,321 $ 5.42 3,368 $ 6.19 2,778 $ 6.28
======= ======= =======
Weighted-average
fair value of
options granted
during the year $ 2.77 $ 3.48 $ 4.16
The following table summarizes information about stock options outstanding
at December 31, 1997:
Options Outstanding Options Exercisable
Weighted-
Average
Range of Remaining Weighted- Weighted-
Exercise Number Contractual Average Number Average
Prices Outstanding Life Exercise Price Exercisable Exercise Price
- -----------------------------------------------------------------------------------
$ 3.50-4.99 1,888 8.82 $ 4.51 491 $ 4.42
5.00-7.99 2,263 7.92 5.88 1,100 6.15
8.00-11.13 170 7.39 9.83 116 9.86
----- -----
4,321 1,707
===== =====
EMPLOYEE STOCK PURCHASE PLAN
The 1992 Employee Stock Purchase Plan (the Purchase Plan) allows eligible
employees an opportunity to purchase an aggregate of 500 shares of the Company's
common stock at a price per share equal to 85 percent of the lesser of the fair
market value of the Company's common stock at the beginning or the end of each
six month purchase period. Under the terms of the Purchase Plan, no participant
may acquire more than five shares of the Company's common stock or more than
$2.5 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 1997, 1996, and 1995 were 164, 57, and 83, respectively.
The fair value of each purchase right granted in 1997, 1996, and 1995 was
$1.66, $2.06, and $1.81, respectively.
Computer Network Technology
29
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FAIR VALUE ASSUMPTIONS
In determining the compensation cost of stock option grants and shares
sold to employees under the employee stock purchase plan, as specified by SFAS
No. 123, the fair value of each award has been estimated on the date of grant
using the Black-Scholes option pricing model. The weighted average assumptions
used in these calculations are summarized below:
1997 1996 1995
- ----------------------------------------------------------
Risk free interest rate 6.42% 6.58% 6.24%
Expected life -- years 8.14 8.14 8.14
Expected volatility 39.3% 39.3% 39.4%
STOCK COMPENSATION
The Company has elected to continue to account for its plans in accordance
with APB No. 25. Accordingly, no compensation cost has been recognized in the
Company's financial statements for stock compensation awards. Had compensation
cost for the Company's stock-based compensation plans been recognized consistent
with the fair value method of SFAS No. 123, the Company's net income (loss) and
net income (loss) per basic and diluted share would have been reduced to the pro
forma amounts indicated below:
1997 1996 1995
- --------------------------------------------------------
NET INCOME (LOSS)
As reported $(2,314) $ 1,360 $ 4,023
Pro forma $(3,826) $ (704) $ 3,093
NET INCOME (LOSS)
PER SHARE
As reported
Basic $ (.10) $ .06 $ .18
Diluted $ (.10) $ .06 $ .17
Pro forma
Basic $ (.17) $ (.03) $ .14
Diluted $ (.17) $ (.03) $ .13
The pro forma disclosures presented above do not reflect the full impact
of stock based compensation on the Company's reported results under the
recognition provisions of SFAS No. 123 because compensation expense is reflected
over the vesting period of the award and compensation expense for awards granted
prior to January 1, 1995 are not considered.
8/ NET INCOME (LOSS) PER SHARE
During 1997, the Financial Accounting Standards Board released Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128)
which the Company adopted as of December 31, 1997. Under SFAS No. 128, basic net
income (loss) per share is computed based on the weighted average number of
common shares outstanding, while diluted net income (loss) per share is computed
based on the weighted average number of common shares outstanding plus potential
dilutive shares of common stock. Potential dilutive shares of common stock
include stock options which have been granted to employees and directors and
awards under the employee stock purchase plan. SFAS No. 128 also requires
restatement of net income (loss) per share amounts for all periods presented.
The components of net income (loss) per basic and diluted share are as
follows:
Weighted
Average
Net Income Shares Per Share
(Loss) Outstanding Amount
- ---------------------------------------------------------
1997
Basic $ (2,314) 22,702 $ (.10)
Dilutive effect of
employee stock
purchase awards
and options - - -
---------- --------- ----------
Diluted $ (2,314) 22,702 $ (.10)
========== ========= ==========
1996
Basic $ 1,360 23,241 $ .06
Dilutive effect of
employee stock
purchase awards
and options - 316 -
---------- --------- ----------
Diluted $ 1,360 23,557 $ .06
========== ========= ==========
1995
Basic $ 4,023 22,675 $ .18
Dilutive effect of
employee stock
purchase awards
and options - 768 (.01)
---------- --------- ----------
Diluted $ 4,023 23,443 $ .17
========== ========= ==========
Employee stock purchase awards and options for 4,346,678 and 392 common
shares were excluded from the computation of diluted net income (loss) per share
in 1997, 1996, and 1995, respectively, because their effect was anti-dilutive.
Computer Network Technology
9/ INCOME TAXES
The components of income (loss) before income taxes and income tax expense
(benefit) for each of the years in the three-year period ended December 31, 1997
consists of the following:
1997 1996 1995
.....................................................................
INCOME (LOSS) BEFORE
INCOME TAXES
U.S. $ (3,517) $ 2,396 $ 7,399
Foreign (376) (372) (864)
.......... .......... ..........
Total $ (3,893) $ 2,024 $ 6,535
.......... .......... ..........
.......... .......... ..........
INCOME TAX PROVISION
Current
U.S. $ (592) $ 1,753 $ 2,014
Foreign 119 75 243
State (170) 376 428
.......... .......... ..........
Total current (643) 2,204 2,685
.......... .......... ..........
Deferred
U.S. (741) (1,285) (195)
State (195) (255) 22
.......... .......... ..........
Total deferred (936) (1,540) (173)
.......... .......... ..........
Total income tax
expense (benefit) $ (1,579) $ 664 $ 2,512
.......... .......... ..........
.......... .......... ..........
The reconciliation of the statutory federal tax rate and the effective tax
rate for each of the years in the three year period ended December 31, 1997 is
as follows:
1997 1996 1995
...................................
Statutory tax rate (34.0)% 34.0% 34.0%
Increase (decrease) in
taxes resulting from:
State taxes, net of
federal tax benefit (6.2) 4.0 4.6
Foreign sales corporation (6.7) (13.7) (7.1)
Reduction in foreign net
operating loss carryforwards - 38.6 -
Change in valuation allowance 5.5 (31.3) 8.1
Other .8 1.2 (1.2)
.......... ......... ..........
Total (40.6)% 32.8% 38.4%
.......... ......... ..........
.......... ......... ..........
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and (liabilities) as of December
31, 1997 and 1996 is as follows:
December 31 1997 1996
......................................................................
DEFERRED TAX ASSETS
Property and equipment $ 878 $ 1,108
Inventory 1,483 1,126
Reserves for bad debts and sales returns 686 310
Accrued compensation 480 778
Foreign net operating loss carry forwards 410 194
Federal and state tax credits 501 193
Purchased in-process research
and development 1,128 -
Integration activities 493 -
Other 458 88
.......... ..........
Total gross deferred tax assets 6,517 3,797
Valuation allowance (410) (194)
.......... ..........
Net deferred tax assets 6,107 3,603
.......... ..........
DEFERRED TAX LIABILITIES
Purchased technology - (55)
Other - (71)
Total gross deferred tax liabilities - (126)
.......... ..........
Net deferred tax assets $ 6,107 $ 3,477
.......... ..........
.......... ..........
During 1997 and 1995, the Company's valuation allowance increased by $216
and $526, respectively, due to the nonrecognition of the tax benefit associated
with the loss from foreign operations. During 1996, the Company's valuation
allowance was reduced by $633 due to a decrease in the Company's available
foreign net operating loss carryforwards.
The Company has assessed its taxable earnings history and prospective
future taxable income. Based on this assessment, management has determined that
it is more likely than not that its net deferred tax assets will be realized in
future periods. The Company may be required to provide a valuation allowance for
this asset in the future if it does not generate sufficient taxable income as
planned.
10/ SUCCESS SHARING
BONUS PLAN
The Company's Success Sharing Bonus Plan (the Plan) provides a formula for
determination of cash bonus payments to eligible employees based on a defined
percentage of a participant's qualifying base compensation multiplied by the CNT
Performance Factor (CPF). The CPF is derived from a matrix formulated by the
board of directors with axes consisting of defined levels of revenue
Computer Network Technology
31
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growth and pre-tax profit.
The success sharing bonus expense for 1997, 1996, and 1995 was $43, $582,
and $325, respectively.
11/ 401(K) AND DEFERRED
COMPENSATION PLANS
The Company has a 401(k) salary savings plan which covers substantially
all of its employees. The Company matches 50 percent of a participant's annual
plan contributions up to an annual maximum per participant of $1 which vests
over a four year period.
The Company has also established an executive deferred compensation plan
for selected key employees which allows participants to defer a substantial
portion of their compensation each year. The Company matches 20 percent of a
participant's annual plan contributions up to an annual maximum per participant
of $10. Matching contributions vest over a four year period from the later of
July 1, 1997 or the participant's date of hire. In addition, the Company
provides participants with an annual earnings credit based on the investment
indexes selected by the participant prior to the start of each plan year.
The Company's expense under the 401(k) and deferred compensation plans for
1997 was $380. The Company incurred no expense under these plans prior to 1997.
12/ DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL
INSTRUMENTS
The following methods and assumptions were used to estimate the fair
values of financial instruments:
Cash And Cash Equivalents And Marketable Securities
The carrying amount approximates fair value because of the short maturity of
those instruments.
Common Equity Put Option
The carrying value of the common equity put option (see note 7) was equal to
the difference between the aggregate exercise price of the option and the
current market value for the underlying shares. The Company believes the
carrying value of the common equity put option approximated its fair value.
13/ NONCASH FINANCING AND
INVESTING ACTIVITIES AND
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash payments for interest expense in 1997, 1996, and 1995 were $57, $46,
and $60, respectively.
Cash payments for income taxes, net of refunds received in 1997 and 1995
were $986 and $5,306, respectively. Tax refunds received, net of payments, in
1996 were $304.
During 1997, the Company entered into a capital lease obligation for
equipment valued at $989.
14/ FINANCIAL INFORMATION
BY GEOGRAPHIC AREA AND
MAJOR CUSTOMERS
The Company's revenue, income (loss) from operations, and total assets,
summarized by geographic area is as follows:
1997 1996 1995
.....................................................................
REVENUE
United States
North America $ 70,644 $ 71,888 $ 55,245
European export 11,026 8,491 8,693
Pacific Rim export 6,855 7,156 5,849
Other 1,877 1,716 1,368
........... .......... ...........
Total United States 90,402 89,251 71,155
European subsidiaries 9,603 10,292 11,363
Eliminations (2,164) (2,434) (3,681)
........... .......... ...........
Total $ 97,841 $ 97,109 $ 78,837
........... .......... ...........
........... .......... ...........
INCOME (LOSS) FROM
OPERATIONS
United States $ (5,075) $ 425 $ 5,605
European subsidiaries (201) (473) (912)
Eliminations (17) - 234
........... .......... ...........
Total $ (5,293) $ (48) $ 4,927
........... .......... ...........
........... .......... ...........
TOTAL ASSETS
United States $ 82,395 $ 81,385 $ 77,963
European subsidiaries 7,323 6,984 7,124
Eliminations (4,231) (5,990) (5,953)
........... .......... ...........
Total $ 85,487 $ 82,379 $ 79,134
........... .......... ...........
........... .......... ...........
No single customer accounted for more than 10 percent of the Company's
total revenue in 1997 or 1995. Sales to one customer accounted for 18 percent of
the Company's total revenue in 1996.
Computer Network Technology
INDEPENDENT
AUDITORS' REPORT ..............................................................
................................................................................
We have audited the accompanying consolidated balance sheets of Computer
Network Technology Corporation and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Computer
Network Technology Corporation and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
January 27, 1998
REPORT OF
MANAGEMENT ....................................................................
................................................................................
The accompanying consolidated financial statements, including the notes
thereto, and other financial information presented in the Annual Report were
prepared by management, which is responsible for their integrity and
objectivity. The financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts that are based upon
our best estimates and judgments.
Computer Network Technology Corporation maintains an effective system of
internal accounting control. We believe this system provides reasonable
assurance that transactions are executed in accordance with management
authorization and are appropriately recorded in order to permit preparation of
financial statements in conformity with generally accepted accounting principles
and to adequately safeguard, verify, and maintain accountability of assets. The
concept of reasonable assurance is based on the recognition that the cost of a
system of internal control should not exceed the benefits derived.
KPMG Peat Marwick LLP, independent certified public accountants, is
retained to audit the Company's financial statements. Their accompanying report
is based on audits conducted in accordance with generally accepted auditing
standards. The audits include a review of the internal accounting control
structure to gain a basic understanding of the accounting system in order to
design an effective and efficient audit approach and not for the purpose of
providing assurance on the system of internal control.
The Audit Committee of the Board of Directors is composed of three outside
directors and is responsible for recommending the independent accounting firm to
be retained for the coming year, subject to shareholder approval. The Audit
Committee meets periodically and privately with the independent accountants, as
well as with management, to review accounting, auditing, internal accounting
controls, and financial reporting matters.
/s/ Gregory T. Barnum
GREGORY T. BARNUM
Vice President of Finance, Chief Financial Officer, and Secretary
/s/ Thomas G. Hudson
THOMAS G. HUDSON
President and Chief Executive Officer
Computer Network Technology
33
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QUARTERLY FINANCIAL DATA (UNAUDITED) ..........................................
(in thousands, except per share data)
Year ended December 31 First Quarter Second Quarter Third Quarter Fourth Quarter*
....................................................................................................................................
1997
Revenue $ 21,747 $ 20,696 $ 23,810 $ 31,588
Gross profit 12,667 11,736 13,725 18,022
Income (loss) from operations 171 (1,769) 206 (3,901)
Net income (loss) 377 (858) 373 (2,206)
Net income (loss) per share:
Basic .02 (.04) .02 (.10)
Diluted .02 (.04) .02 (.10)
1996
Revenue $ 22,357 $ 25,546 $ 23,976 $ 25,230
Gross profit 12,302 14,043 13,689 13,963
Income (loss) from operations (378) 1,278 1,055 (2,003)
Net income (loss) 19 1,181 1,076 (916)
Net income (loss) per share:
Basic .00 .05 .05 (.04)
Diluted .00 .05 .05 (.04)
* The 1997 fourth quarter includes pre-tax charges of $2.7 million associated
with the acquisition of the Internet Solutions Division from Apertus
Technologies Inc. for in-process research and development and $2.2 million of
subsequent integration charges. The 1996 fourth quarter includes a $2.7
million pre-tax charge attributable to the write-down of purchased
technology.
Computer Network Technology
INVESTOR INFORMATION
Principal Outside Counsel
Faegre & Benson LLP
Minneapolis, Minnesota
Independent Auditors
KPMG Peat Marwick LLP
Minneapolis, Minnesota
Transfer Agent
Shareholder inquiries relating to shareholder records, stock transfer, change of
ownership or change of address should be directed to the company's transfer
agent:
Chase Mellon Shareholder Services L.L.C.
Overpeck Centre
85 Challenger Road
Ridgefield Park, New Jersey 07660
(800) 288-9541
Form 10-K
A copy of our annual report on Form 10-K, filed with the Securities and Exchange
Commission, will be furnished free of charge to any CNT shareholder upon either
telephone request to (612) 797-6111, e-mail request to
investor_relations@cnt.com, or written request to:
Investor Relations
Computer Network Technology Corporation
605 North Highway 169
Minneapolis, Minnesota 55441
Information on CNT is also available through the World Wide Web at
http://www.cnt.com.
Investor Inquiries
Shareholders, securities analysts, portfolio managers and others in the
investment community seeking information about CNT should contact Investor
Relations at (612) 797-6111 or by e-mail at investor_relations@cnt.com.
Annual Meeting
Shareholders, employees and friends are invited to attend CNT's annual meeting
on Tuesday, May 19, 1998 at 10:00 a.m. at the Marquette Hotel in the IDS Center,
50th Floor, 710 Marquette Avenue, Minneapolis, Minnesota.
Price Range of the Company's Common Stock
The following table sets forth the range of high, low and closing sales prices
and volume for the Company's common stock (NASDAQ: CMNT), as reported on the
Nasdaq Stock Market.
High Low Closing Volume
(in thousands)
................................................................................
1997
First Quarter $ 7.00 $ 4.87 $ 5.37 7,180
Second Quarter 5.75 3.87 4.50 7,543
Third Quarter 6.12 3.37 5.50 11,383
Fourth Quarter 5.62 3.37 3.50 7,682
1996
First Quarter $ 5.87 $ 4.00 $ 5.62 7,723
Second Quarter 10.50 5.25 7.12 15,221
Third Quarter 8.00 4.75 5.75 5,713
Fourth Quarter 6.75 4.87 5.00 8,966
As of March 23, 1998, there were 1,100 shareholders of record. The Company
estimates that an additional 9,000 shareholders own stock held for their
accounts at brokerage firms and financial institutions.
Dividends
The Company has never paid cash dividends on any of its securities. The Company
currently intends to retain any earnings for use in its operations and does not
anticipate paying cash dividends in the foreseeable future.
Computer Network Technology
35
36
CORPORATE INFORMATION
BOARD OF DIRECTORS
John A. Rollwagen (1) (2)
Chairman of the Board
Mr. Rollwagen has been a director since June 1993 and chairman of the board
since December 1995. He is a private investor and business advisor and also acts
as a venture partner with St. Paul Venture Capital. In 1993, he served as U.S.
Department of Commerce deputy secretary-designate. Between 1981 and 1993, Mr.
Rollwagen was chairman and chief executive officer of Cray Research, Inc.
Thomas G. Hudson
Mr. Hudson has served as CNT's president and chief executive officer since June
1996 and as a director since August 1996. Prior to joining CNT, Mr. Hudson was
senior vice president of McGraw Hill Companies, general manager of that
company's F.W. Dodge Division and senior vice president of Corporate
Development. Between 1968 and 1993, Mr. Hudson served in various management
positions at IBM Corporation, most recently as vice president and general
manager of the Services Sector Division.
Patrick W. Gross
Mr. Gross joined CNT's board of directors in 1997. He co-founded American
Management Systems, Inc. (AMS) in 1970 and serves as chairman of the Executive
Committee and principal executive officer of that company. He also serves as
chairman of Baker & Taylor Holdings, Inc., a major distributor of books, videos
and software. He previously served on the staff of the U.S. Secretary of Defense
in the Office of Systems Analysis.
Erwin A. Kelen (1) (2)
Mr. Kelen has been a director since June 1988. A private investor, he is
president of Kelen Ventures and a partner of Camir Investments. Between 1984 and
1990, he was president and chief executive officer of DataMyte Corporation, a
wholly-owned subsidiary of Allen Bradley Co.
Lawrence Perlman (1) (2)
Mr. Perlman has been a director since June 1988. He is chairman and chief
executive officer of Ceridian Corporation and has held that position for more
than five years.
(1) Audit Committee
(2) Compensation Committee
EXECUTIVE OFFICERS
Thomas G. Hudson
President and Chief Executive Officer
Gregory T. Barnum
Vice President of Finance,
Chief Financial Officer and Secretary
Jeffrey A. Bertelsen
Corporate Controller and
Treasurer
Richard E. Carlson
Vice President of Manufacturing
William C. Collette
Vice President of Engineering
Thomas G. Hudson
Vice President of Worldwide Sales (Acting)
Peter Dixon
Vice President of Worldwide Distribution
Martin G. Hahn
Vice President and General Manager
Internet Solutions Division
Mark R. Knittel
Vice President of Marketing and
Business Development
Kristine E. Ochu
Vice President of Human Resources
Julie C. Quintal
Vice President of Customer Support
Computer Network Technology
GLOSSARY
ATM (Asynchronous Transfer Mode) - A high-speed
communications technology that transfers data, voice
and video information carried in fixed-sized cells.
Channel - A channel is an interface through which
mainframe computers transmit and receive information.
Channel Extension - Connection of mainframes to other mainframes, storage
devices, or peripheral devices over local area or wide area networks.
DS-1, DS-3 (Digital Signal levels 1 and 3) - Telephony
terms describing the 1.544 megabits per second and 44.7 megabits per second
digital signals.
Data Compression - The process of condensing the data in order to save storage
space and shorten transfer time; the original data is decompressed when read
back into memory.
Data Migration - Transfer of large volumes of data from one storage device to
another.
Disaster Recovery - A set of rules and procedures that allow a computer site to
be put back in operation after a disaster has occurred. The concept of moving
backups off-site constitutes the minimum basic precaution for disaster recovery.
The remote copy is used to recover data when the local storage is inaccessible
after a disaster.
Disk Mirroring - A data redundancy technique in which data is recorded
identically on multiple separate disk drives at the same time. When the primary
disk is off-line, the alternate takes over, providing continuous access to data.
Fibre Channel - Gigabit-per-second data transfer interface technology that can
merge high-speed input/output and networking functionality in a single
connectivity technology.
Gateway - A device connecting two or more networks that may use different
protocols and media. Gateways translate between the different networks and can
connect locally or over wide area networks.
HTML (Hyper Text Markup Language) - The language used in the World Wide Web to
create Web pages with links to other documents and rich text enhancements (bold,
italic, etc.).
Java - A software programming language developed at Sun Microsystems to solve a
number of problems in modern programming practice. The Java language is used
extensively on the World Wide Web.
LAN (Local Area Network) - A data network that enables communications between
multiple users (PCs, printers, etc.) in a limited geographic area -- generally
less than a mile.
Multiplexer - A networking device that condenses multiple communication streams
into one stream.
Protocol - A set of rules for communicating between computers. The use of
standard protocols allows products from different vendors to communicate on a
common network.
SAN (Storage Area Network) - A high-speed network of storage devices that
permits data movement and management.
Scalable - A scalable network is a network that can grow and adapt as customer
needs increase and change. Scalable networks can easily manage increasing
numbers of work-stations, servers, user workloads and added functionality.
SCSI (Small Computer System Interface) - A dominant, international standard
interface used by UNIX servers and many desktop computers to connect to storage
devices; a physical connection between devices.
Shared Storage - A storage resource is shared between multiple hosts and/or
clients, but each system has access only to its volumes.
SRDF - Symmetrix Remote Data Facility (SRDF) is a high-performance,
host-independent business continuance solution that enables users to maintain a
duplicate copy of all or some of their data at a remote site.
WAN (Wide Area Network) - A network which enables communications between
multiple users (PCs, printers, etc.) across a large geographic area, generally
anything outside of your home or office building. WANs typically involve
connections with telephone companies or Internet service providers.
WEB Browser - A program that allows users to access documents on the Web. They
read HTML coded pages that reside on a server and interpret the coding into what
we see as Web pages. (Netscape(R) Navigator(TM) -- Microsoft(R) Internet
Explorer(TM)).
[LOGO OF CNT APPEARS HERE]
COMPANY LOCATIONS
Computer Network Technology Corporation
(Headquarters)
605 North Highway 169, Suite 800
Minneapolis, Minnesota 55441 USA
Tel: 612-797-6000
Fax: 612-797-6800
Computer Network Technology
(Manufacturing and Development)
6500 Wedgwood Road
Maple Grove, Minnesota 55311 USA
Tel: 612-550-8000
Fax: 612-550-8800
Computer Network Technology
(Manufacturing and Development)
1700 West Park Drive
Westborough, Massachusetts 01581 USA
Tel: 508-870-3500
Fax: 508-870-3550
INTERNATIONAL OFFICES
CNT International Ltd.
2 Langley Quay, Waterside Drive
Langley, Slough SL3 6EX
United Kingdom
Tel: 44-1753-792400
Fax: 44-1753-792499
CNT International Ltd.
Gate House/Isleworth Gate
2 Richmond Road
Isleworth, Middlesex
TW7 7BL
United Kingdom
Tel: 44-181-232-1600
Fax: 44-181-232-2601
CNT France S.A.
77,81 Boulevard de la Republique
92250 La Garenne Colombes
France
Tel: 33-1-4130-1212
Fax: 33-1-4130-1213
CNT Asia Pacific Pty Ltd.
Level 5, 275 Alfred Street North
North Sydney 2060
New South Wales
Australia
Tel: 61-2-9922-4177
Fax: 61-2-9540-5487
CNT China Limited
35/F Central Plaza
18 Harbour Road
Hong Kong
Tel: 85-2-2593-1121
Fax: 85-2-2593-1285
CNT Japan K.K.
Shiroyama JT Mori Bldg. 16F
4-3-1, Toranomon, Minato-ku
Tokyo 105
Japan
Tel: 813-5403-4858
Fax: 813-5403-4646
JOINT VENTURES
CNTware GmbH
Waldstrasse 92
Dietzenbach D-63128
Germany
Tel: 49-6074-8277 0
Fax: 49-6074-827725
For further information, contact us at http://www.cnt.com.
Copyright (C)1998 Computer Network Technology Corporation (CNT).
CNT, Channelink, UltraNet and Brixton are registered trademarks, and the CNT
logo, Channelink Integrated Gateway, Web Integrator, and FileSpeed are
trademarks of Computer Network Technology Corporation. All other trademarks
identified herein are the property of their respective owners. CNT is an equal
opportunity employer. CNT is ISO9002 certified.
Printed in the U.S.A.