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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1996
Commission file number: 0-13994
COMPUTER NETWORK TECHNOLOGY CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Minnesota 41-1356476
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(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
605 North Highway 169, Suite 800, Minneapolis, Minnesota 55441
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(Address of Principal Executive Offices) (Zip Code)
(612) 797-6000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01 par value
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 24, 1997 was approximately $127,248,000, based on a
closing price of $5.50 per share as reported by the Nasdaq National Market on
such date.
As of March 24, 1997, Registrant had 23,419,814 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Computer Network Technology Corporation's definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on May 15, 1997 are
incorporated by reference into Part III of this Form 10-K.
Portions of the Annual Report to Shareholders for the fiscal year ended December
31, 1996 are incorporated by reference into Parts I and II of this Form 10-K.
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TABLE OF CONTENTS
PART I
Item 1. Business....................................................................................1
Overview....................................................................................1
Markets.....................................................................................2
Products....................................................................................4
Customer Support............................................................................9
Marketing and Sales.........................................................................10
Revenue Recognition Policy..................................................................10
Engineering and Development.................................................................11
Manufacturing and Suppliers.................................................................11
Competition.................................................................................12
Intellectual Property Rights................................................................12
Employees...................................................................................13
Item 2. Properties..................................................................................13
Item 3. Legal Proceedings...........................................................................13
Item 4. Submission of Matters to Vote of Security Holders...........................................13
Item 4.A Executive Officers of the Company...........................................................14
PART II
Item 5. Market for the Registrant's Securities and Related Shareholders Matters.....................17
Item 6. Selected Consolidated Financial Information.................................................17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......17
Item 8. Consolidated Financial Statements and Supplementary Data....................................17
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure......................17
PART III
Item 10. Directors and Executive Officers............................................................18
Item 11. Executive Compensation......................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management..............................18
Item 13. Certain Relationships and Related Transactions..............................................18
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K...............19
SIGNATURES..............................................................................................28
ii
PART I
Item 1. Business
Overview
Computer Network Technology Corporation ("CNT" or the "Company") designs,
manufactures, markets and supports a range of enterprise-wide information
management connectivity, access and recovery hardware and software products
designed to meet the complex needs of large organizations. These products are
marketed by CNT under the Channelink(R), FileSpeed(TM), Channelink Integrated
Gateway(TM), Web Integrator(TM) and Brixton(R) tradenames.
CNT's recovery and connectivity Channelink systems create high speed, wide-area
enterprise networks that interconnect traditional data centers, peripherals,
remote users, and the growing base of open system computer servers. These
products also enable data centers to be interconnected to enable full data
center recovery in cases of disaster, unintentional data loss, or partial
interruption within seconds, hours, or days, depending on the specific
configuration selected and the nature of the disaster.
CNT's access products enable desktop computer and terminal users operating
different networking protocols (i.e. TCP/IP and SNA) to share the same physical
networks and to access applications and data on different types of mainframe and
open systems servers. In addition, legacy databases and legacy applications
(such as those based on IBM products CICS or DB2) may be made accessible from an
Internet or Intranet Web Browser.
CNT markets its products and services in North America primarily through a
direct sales force and internationally through wholly-owned subsidiaries and
distributors. Select hardware and software products are also remarketed by
original equipment manufacturers ("OEMs") under other tradenames.
CNT emphasizes comprehensive customer support and training designed to maximize
quality and customer satisfaction. CNT believes that its customer service
programs provide significant added value to its customer base, enhance the
reputation of the Company, and accelerate selling products and services to
prospective customers.
CNT's executive offices are located at 605 North Highway 169, Suite 800,
Minneapolis, Minnesota 55441 and its telephone number is 612-797-6000. Its
World Wide Web site can be accessed at http://www.cnt.com. Unless the context
otherwise requires, "CNT" or the "Company" refers to Computer Network Technology
Corporation and its subsidiaries.
This annual report includes trade names, trademarks and registered trademarks of
companies other than CNT.
1
Markets
CNT designs high-performance networking solutions that seamlessly integrate a
heterogeneous mix of technology, architectures, vendors and communication
standards that allow enterprises to preserve their investments in traditional
legacy data processing systems and today's open systems to create enterprise-
wide networks and intranets.
CNT principally addresses three enterprise information management markets: the
high-speed connectivity market with its Channelink and FileSpeed product lines,
the enterprise access market with its Channelink Integrated Gateway and Brixton
product lines, and the data center continous operations recovery market with its
Channelink and FileSpeed product lines.
Enterprise Connectivity
The Company's enterprise connectivity products facilitate data center
consolidation and centralization, while enabling certain input and output
peripherals to be more conveniently housed with geographically dispersed
regional customer operations. Increasingly, these new solutions are being
constructed by customers in conjunction with business process changes being
driven for cost efficiencies, improved customer services, or the penetration of
new markets with new services. Reducing the total number of data centers while
interconnecting the remaining centers for stability and workload sharing has
extended the life of legacy systems while deferring costly investments in these
centers as new, distributed computing systems are brought online.
These markets are also characterized by the desire to deploy open systems which
can leverage past investments in personal computers and can exploit emerging
Internet and Intranet Web-based computing architectures. By linking networks of
personal computers, UNIX-based distributed servers, and legacy data centers,
together with the Internet, data center operating processes and procedures,
perfected by 25 years of experience, can be combined with fresh approaches
fueled by the explosion and creativity engendered in the Internet. Market
expansion in the legacy - open systems interconnect market is being driven by
the significant transition from mainframe-based general accounting applications
to client-server, data-centric integrated business management systems.
CNT's products enable data centers and remotely located peripherals to
communicate over wide areas without significant degradation of performance. LAN
gateways enable communications for a wide range of LAN-based workstations and
servers with large-scale, channel-based systems used in enterprise-wide
networks. Network-based storage products provide direct network connections to
high capacity tape storage subsystems and on-line disk storage systems. Channel
networking applications have accounted for a substantial majority of CNT's
historical revenue and the Company will continue to emphasize supporting and
servicing this important market.
2
Enterprise Access
Customers deploying the distributed and Internet/intranet model of computing
desire to provide access to both old and new applications from both legacy SNA
3270 networks and, in parallel, the customer's intranet or the public Internet.
Proprietary SNA networks connect Enterprise class IBM OS/390 computers and
midrange IBM AS/400 computers to proprietary IBM 3270 and 5250 terminals. While
performing 3270 and 5250 emulation using personal computers has been available
since 1983, these systems continue to limit efficient growth by requiring
proprietary dedicated SNA networks. Similarly, even after several years of
migration from legacy data bases to client-server application architectures,
practical and operational limits require that mainframe-based data remain
resident in centralized "Information Warehouses."
CNT serves this market, represented by almost all of the 2,000 largest
organizations world-wide, by linking personal computers to legacy mainframes in
a fashion that reduces the number of physical mainframe connections required,
replaces SNA with open TCP/IP protocols, and facilitates the combination and
sharing of expensive data communication channels with voice and other data
networks. Similarly, the Company's products connect common web browsers such as
the Netscape Navigator(R) and Microsoft's Internet Explorer(R) to legacy IBM
mainframe transaction systems based on CICS, IMS, and DB/2. The Company's
products reduce the need for mainframe computing resources by performing
expensive protocol conversion and compression activities in specialized hardware
and software.
The Company's enterprise access products allow organizations to provide
application access over open networks (e.g., SNA devices to SNA applications;
SNA devices to open systems applications; and TCP/IP and Netware clients to SNA
applications), SNA device emulation for open systems desktop computers, and
integration of mainframe applications and data with the Internet and corporate
intranets. These products allow customers with significant resources invested
in SNA mainframe-based networks, supporting devices such as terminal displays
and printers, to access computers with Unix-based applications and databases.
The Company's enterprise access products also allow Unix-based systems and
Windows-based PCs to access data and applications on IBM mainframes and IBM
AS/400 midrange systems. The Company's enterprise access software products
operate on a range of open systems computing platforms, including Unix systems
from vendors such as Sun Microsystems and IBM, as well as support for Windows
and other desktop operating environments. The Company's Channelink Integrated
Gateway product provides customers with a fully integrated hardware/software
solution that provides enterprise users connected to corporate TCP/IP networks
with highly available access to IBM SNA applications through terminal emulation,
printing and file transfer.
Enterprise Recovery
Today's global approach to business requires that data centers be open for
business twenty-four hours a day. The enterprise recovery market consists of
large organizations who require data processing services as a key part of their
service or product offerings and thereby require non-stop operation. Customers
who require non-stop operations typically deploy duplicate hardware and software
to ensure continuous availability. The Company develops and provides products
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which facilitate using public recovery centers or other customer data centers as
a recovery asset. In addition, gathering routine data backup copies is
exacerbated by the shortening window of time required for full copy backups
during enforced periods of inactivity. The Company provides solutions which
enable backups to occur simultaneously with normal transaction processing
activities.
The Company's enterprise information management and recovery products provide
high speed channel-based data networking that allow organizations to move and
share large amounts of data quickly and accurately between mainframes, remote
storage devices and open servers locally and over extended distances. The
Company's Channelink products provide high performance extended distance data
archival and retrieval from remote DASD and tape storage facilities that allow
customers to employ new strategies for storing and accessing mission-critical
data, including data duplexing for disaster protection and enterprise-wide data
sharing, while reducing associated storage costs. Customers are able to
seamlessly move files and updates between primary DASD located in the original
data center and secondary DASD located in an alternate data center that may be
thousands of miles from the original data center, with little degradation in
performance. The Company's FileSpeed product is designed to provide users with a
business continuation and disaster recovery capability by providing for very
high speed bulk data transfer between mainframes and open systems for backup,
data-base updates, and other data transfer applications. In addition, FileSpeed
can also be used to quickly back-up open systems server data to the same central
data repository used by the mainframe to facilitate data recovery and
synchronization of open systems and mainframe databases.
Products
Channelink
CNT's traditional product line has been the Channelink family of network
processors and software for enterprise networking and connectivity. Channelink
products support a variety of mainframes and peripheral devices, including disk
drives, optical storage devices, magnetic tape controllers, printers, check
sorters, document processors, imaging systems, microfiche recorders, terminal
and graphic controllers, plotters, data base computers and front end processors.
LAN interfaces provide connections to a wide variety of popular LANs, including
Ethernet, Token Ring, and FDDI. WAN interfaces modules provide connectivity
between network nodes over unlimited distances using common carrier
communication links such as T1, E1, E3 and DS-3. The Company configures and
installs Channelink networks to meet the specific geographic and interface
requirements of each customer's information movement applications. The Company
recently introduced an ATM Access Unit and DS-3 Data Compression for its
Channelink product line. The Company's ATM Access Unit supports the ATM protocol
for channel networking and makes it possible for organizations to use ATM
technology to access switched wide area connectivity using very high-speed
networks. DS-3 Data Compression adds a compression engine to the Channelink DS-3
interface and delivers enhanced throughput for data center and storage
networking applications.
4
Channelink also includes support for the Small Computer Systems Interface (SCSI)
method of connecting computer peripherals to computers. SCSI device attachment
has continued to increase in performance, as NT and UNIX based computing systems
have grown in performance and customer utility. Currently, SCSI tape and disk
storage devices rival the performance of mainframe storage devices. Channelink
enables devices utilizing SCSI interfaces to be extended in a complimentary
fashion to mainframe peripherals. Since a single Channelink network processor
can support many mainframe device interfaces (ESCON, OEMI, and FIBRE) at the
same time as supporting many SCSI attached peripherals, communications costs can
be reduced by aggregating mainframe and UNIX client/server device extension
applications.
Channelink software is based on a real-time distributed operating system to
support a variety of concurrent device or channel interfaces and networking
software tasks. This technique enables protocol processing to be off-loaded from
the host and permits peripheral devices that previously were not included in
networks to be connected in enterprise-wide systems. Channelink products support
widely used industry standard communication protocols, such as TCP/IP, and a
number of de facto industry standard, device specific and peripheral interface
data transfer protocols. Channelink products incorporate software drivers,
network software functionality, error recovery functions, network management
software, pipelining, data priority and, for many types of data transfer
applications, application-specific software, to facilitate high speed
communication of information with low application processor overhead and
efficient, cost effective use of expensive, high bandwidth communications
facilities. A unique advantage of Channelink and Brixton is that it can be
transparently implemented by the customer, requiring no changes to existing
hardware and software on mainframes, servers, I/O devices and P C clients.
For managing and monitoring channel networks, the Company offers network
management software for legacy and open systems. CNT's Host Monitor Facility
software interfaces to IBM's NetView or other mainframe-based network management
subsystems. CNT's CMF is a PC-based network management system with a user
interface that connects to any network node and allows system-wide monitoring
and control facilities for Channelink networks. The Company also offers network
management software for Simple Network Management Protocol ("SNMP"), an industry
standard management protocol used by many LAN and workstation users in the
management of their networks.
To support mission-critical wide area networks ("WANs"), Channelink networks can
be configured with redundancy. CNT channel networks generally operate at
"channel speeds", which means end users may operate a number of peripheral
devices concurrently and remotely at speeds comparable to speeds that would be
achieved with direct local connections to the host. In addition, Channelink
products intelligently and transparently (to the end user) perform functions
designed to manage the network for maximum efficiency, without depending on host
computing cycles or host memory resources. The Channelink product architecture
has been enhanced continuously since its introduction in 1986 with new
interfaces, higher speed processors, faster
5
and larger memories, expanded software functionality, and expanded network
management capabilities and support tools. Depending on the application, a
single Channelink node has a dynamic bandwidth of up to 450 megabits per second
("Mbps") and multiple Channelink nodes can be configured in parallel to provide
virtually unlimited bandwidth and significant alternate pathing for continuous
operation and no single point of failure.
Enterprise Access Software
Brixton PU2.1 SNA Server
- ------------------------
The Brixton PU2.1 SNA Server provides gateway functionality and access from a
TCP/IP environment to data and applications residing on mainframe and AS/400
systems. The Brixton server runs on an open systems (UNIX) server and is
architected so that processes can be distributed across more than one server to
increase performance and availability. The product also reduces mainframe
cycles by offloading TCP/IP and telnet processing. The Brixton PU2.1 SNA Server
supports 3287 printing so that mainframe printing can be distributed to LAN
attached printers. The SNA Server also supports LU types 1, 2, 3, 6.2 and 0. A
Graphical Management Interface is provided so that the PU2.1 SNA Server and
attached resources are managed as one entity.
Brixton PU5 SNA Server
- ----------------------
The Brixton PU5 SNA Server software provides 3270 terminals, communicating in
their native SNA protocols, with access to open systems without requiring
additional software on the mainframe. The Brixton PU5 SNA Server runs on an
open system (UNIX(R)) server and performs the necessary conversions between 3270
devices and applications running on an open system (UNIX) server. The PU5 SNA
Server can also be used in conjunction with the Brixton PU2.1 SNA Server to
allow 3270 devices to communicate to a host application over a TCP/IP backbone
using the Brixton Passthru functionality. The Brixton PU5 SNA Server creates a
virtual mainframe operating on a UNIX system by emulating the functionality of
an SNA host, allowing information to flow directly from existing SNA terminal
devices to UNIX applications without a mainframe connection.
Web Integrator Product Suite
- ----------------------------
The Worldwide Web and its browser interface is quickly becoming a desktop
standard. The Web Integrator product suite allows customers to use the graphical
browser interface to simplify access to corporate data in a scalable manner. It
consists of three products that provide corporate data centers with access to
legacy applications and data using a web-based browser. The Web Integrator
product suite is server based and leverages the intranet in a high performance
and scalable implementation. The Web Integrator: Hot product eliminates the need
for TN3270E emulators on the desktop and connects into any TN3270E server. End-
users with Java-enabled browsers who need mainframe application access can
launch this 3270 Java-based emulator without any additional software on the
desktop. It runs in the Java browser environment and is downloaded from the
server when the user connects, off-loads processing from the server, and
6
simplifies software distribution and maintenance. The Web Integrator: Software
Developer Kit uses highly scalable, high-performance Application Programming
Interfaces (APIs) written in Java to access legacy data. The Web Integrator:
Access product converts 3270 datastreams to HTML at the server and eliminates
the need for a TN3270 client on user workstations when a browser is resident.
SNA Client Emulation
- --------------------
The Brixton 3270 and 5250 open client emulation software provides access to SNA
applications from a UNIX or PC desktop in a distributed environment. The 3270
and 5250 open client software emulate a wide range of IBM 3270 and 5250 devices
and have a graphical keyboard mapper that allows operators to customize keys to
map specific IBM functions. The 3270 and 5250 open clients have an intuitive
interface, featuring pull-down menus and point-and-click operations. Users can
extend the emulation features by using point-and-click macro makers to automate
frequent operator tasks. The products allow copy-and-paste within the emulator
window, between emulator windows, and between UNIX and emulator windows. The
3270 and 5250 open clients display emulation takes place only on the
workstation, freeing the client from SNA communications overhead.
Channelink Integrated Gateway
A growing number of customers seek to provide access to mainframe applications
and databases to large numbers of new and existing users. They desire however,
to minimize the access points (gateways), manage it centrally within their data
centers, as well as off-load mainframe processing cycles. The Channelink
Integrated Gateway provides this level of functionality in a very scalable
fashion. In addition, the Channelink Integrated Gateway meets the demands of
the data center manager for systems, network and server management tools and
alerts for performance and workload balancing.
The Channelink Integrated Gateway is a fully integrated hardware/software
solution that has the ability to provide thousands of TCP/IP clients connected
to corporate TCP/IP networks with access to IBM SNA applications through
terminal emulation, printing, and file transfer through a single system or
multiple systems. It accommodates growing access needs with a scalable platform
that allows new users to be added through simple configuration modifications
using a graphical management interface. This level of scalability also provides
efficient consolidation of gateway sessions served by departmental SNA gateways
or lower capacity interconnect controllers. Using TCP/IP's Domain Name Services
(DNS) standard, Channelink Integrated Gateway's Distributed Virtual Server
assures scalability by managing multiple physical gateways as though they were a
single system. Session processing is distributed throughout the gateway
network, so that as the number of sessions increases so does the capacity to
efficiently handle these sessions and the resulting increase in transactions
over the network. As users request SNA resources, sessions can be automatically
distributed across multiple systems to maximize availability and reduce traffic
on communication lines.
7
Using Channelink Integrated Gateway's Graphical Management Interface (GMI),
thousands of individual users, user pools, physical unit and logical unit
definitions can be set up and managed using a centralized, point-and-click
interface. Through GMI, the administrator can determine the on-line status of
system resources such as identifying status and usage of a particular logical
unit (LU).
Channelink Integrated Gateway's hardware design provides redundancy within each
system or across multiple systems through configurations that support multiple
system processors, dual host attachments and channel connections, and a variety
of Local Area Network (LAN) interfaces. Each Channelink Integrated Gateway
functions as a TN3270 server providing up to 8,000 TN3270 clients with
concurrent access to IBM 3270 host applications. The system provides full
support for industry standard TN3270E (RFC 16547) and TN3270 (RFC 1646) as well
as TN3287 clients. This approach eliminates the requirement for expensive
mainframe TCP/IP protocol stacks and fully offloads the SNA-to-TCP/IP conversion
processes to the Channelink Integrated Gateway. The system also functions as a
Telnet server providing Telnet clients with 3270 terminal emulation for
accessing SNA host applications.
Local printing at the desktop is supported through built-in print drivers in
TN3270E (RFC1647) and TN3287 (RFC1646). IBM LU1 and LU3 print jobs can be sent
directly to workstation printers, using sessions defined as 3287 printers.
Print management software running on the Channelink Integrated Gateway also
allows shared printing to LPR/LPRD LAN-attached printers.
Channelink Integrated Gateway provides support for both LU0 and LU6.2
applications, acting as the server for API clients on TCP/IP networks
communicating with peer programs on the SNA host. This implementation delivers
SNA over the TCP/IP backbone - TCP/IP distributed SNA, rather than TCP/IP
encapsulated SNA.
For environments where mainframe TCP/IP protocol stacks are used (for sockets
applications, FTP file transfers, and general access to IBM SNA applications),
the Channelink Integrated Gateway delivers IBM 3172 Model 3 TCP/IP pass-through
functionality to connect users and applications. In environments where
transition to an offload approach from TCP/IP pass-through is planned,
Channelink Integrated Gateway offers migration by combining the TN3270 Offload
and TCP/IP pass-through applications in a single system.
The Channelink Integrated Gateway provides a practical way to facilitate the
needs of large IT organizations to "contract" with their end users for service
level agreements. Channelink Integrated Gateway provides a complete "end-to-
end" response time view from the mainframe all the way to the client desktop,
which allows the user to identify future throughput problems before they develop
and expand or reconfigure the network to avert problems. Users can be assigned
different permissions so that they can be given access to specific functions.
Only privileged administrators can modify the configuration or initiate a trace.
LUs are protected for authorized users, and the Channelink Integrated Gateway
documents activities and tracks attempts at unauthorized entry.
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FileSpeed
The Company has partnered with a development stage software company to develop
its FileSpeed(TM) product which includes the Company's Channelink SCSI Gateway
hardware and Parallel Data Mover(TM) (PDM(TM)) software to provide for high
speed channel-based bulk data networking between MVS and open servers with
performance of up to 9 megabytes per second on a single server.
FileSpeed works over both the MVS ESCON and parallel bus-and-tag channels and
open server SCSI channels. File/data transfers can be executed interactively or
through batch mechanisms. MVS file to/from programs on UNIX (e.g., pipes) can
be transferred via Disk-to-Disk, Disk-to-Tape, or Tape-to-Tape. On MVS,
interactive facilities are found under TSO, and batch facilities run via JCL.
On UNIX, interactive facilities are provided via standard terminal input and
batch via UNIX scripts. FileSpeed offloads bulk data between MVS and open
servers from backbone networks optimizing the efficiency of bulk end
transactional data, and provides 100% FTP offload which saves expensive MVS
server cycles.
Customer Support
The Company has developed a comprehensive support strategy designed to maximize
quality and customer satisfaction. A high level of continuing customer service
is integral to the Company's strategy of developing long-term, 100% satisfied,
customer relationships. The Company supports the commitment of its employees to
achieve this strategy through extensive training and the delegation of authority
and responsibility. CNT's employees are skilled in the design of high speed,
wide-area networks for large data centers. Every network incorporates the best
techniques for robust, "fail soft, self healing" network topology for continuous
operations.
The Company's support services group becomes involved with end users during
initial presales activities by analyzing their requirements, developing proposed
solutions, and providing project management guidance during implementation or
enhancement of the customer's enterprise-wide computing network.
CNT uses remote diagnostic tools to support customer networks seven days per
week, 24 hours per day, through the unique ability to dial in to these networks
worldwide and perform on-line troubleshooting. In a sizable majority of the
cases the Company provides timely resolution to customer problems without having
to visit the customer's site. In over 45% of the cases, the customer relies on
CNT to diagnose problems that are sourced to other vendor's hardware and/or
communications. Brixton products come with on-line help, comprehensive
documentation, and diagnostic tools to allow users to monitor their lines. When
necessary, CNT dispatches trained maintenance personnel, generally third party
maintenance providers, to provide repairs at the customer's facility.
9
Marketing and Sales
The Company, along with its subsidiaries, markets its products in the United
States, Canada, the United Kingdom, France, Germany, Australia and Hong Kong
primarily through a direct sales force, and also through OEMs, systems
integrators, and value-added resellers. Outside of these countries, CNT markets
its products through independent distributors.
The Company derived approximately $25.2 million, $23.6 million, and $21.9
million, or 26%, 30%, and 28%, of its revenue from operations outside of the
United States and Canada for the years ended December 31, 1996, 1995, and 1994.
International operations are subject to various risks common to international
businesses, including exposure to currency fluctuations, political and economic
instability, the greater difficulty of administering business internationally,
and the need to comply with a wide variety of U.S. export and foreign import
laws and regulations. During 1996, sales to IBM and its multiple divisions
accounted for 18% of the Company's total revenue. Approximately 29% of the
revenue from IBM was attributable to a large number of outsourcing contracts
administered by ISSC/Advantis and 55% was attributable to OEM contracts with the
storage and networking divisions. No single customer accounted for more than
10% of the Company's total revenue in either 1995 or 1994. See note 10 to the
Company's Consolidated Financial Statements for additional information regarding
the Company's operations by geographic regions and major customers.
The Company manufactures its products based on a schedule of forecasted orders.
The Company's customers generally place orders for immediate delivery and
generally not in advance of need. Customers may generally cancel or reschedule
orders without penalties. Accordingly, the Company believes that backlog is
generally not meaningful for purposes of predicting its revenue for any fiscal
period.
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. In addition, the alienation of any major customer could have a
material effect on revenue. The level of product revenue reported by the
Company in any given period will continue to be effected by the receipt and
fulfillment of sizable new orders from OEMs and others.
Revenue Recognition Policy
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 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 service period.
10
Engineering and Development
The computer networking industry is characterized by rapidly changing
technology, new standards, and changing customer requirements. The Company
believes that its long-term success in the marketplace depends upon its
continuing ability to develop and integrate advanced network hardware and
software technologies.
During the past year, the Company completed development and announced its
Channelink Integrated Gateway, FileSpeed, and Web Integrator products and
performance enhancements for its Channelink product line including ATM support,
SCSI device connection, and DS3 compression. File mirroring of disk data was
also announced for both IBM (XRC) and EMC's (SRDF).
To meet the future networking demands of its customers, the Company expects to
continue to: (i) increase the compatibility and interoperability of its
products with the products of other vendors; (ii) emphasize the flexible and
modular architecture of its products to permit the introduction of new
capabilities in a manner that can be used within existing networks and to
provide a framework for existing customers to incorporate and install new CNT
products, features, and functions; (iii) continue to focus on providing
sophisticated diagnostic support tools to help deliver both high network
availability and, in the event of failure, rapid return to service; and (iv)
develop additional products to meet the demands of its customers, including new
technologies like ATM and fibre channel on future platforms. Engineering
and development expenses, excluding special charges, were approximately 15% of
CNT's total revenue, for each of the years in the three year period ended
December 31, 1996. The Company currently intends to continue to apply a
significant portion of its resources to product enhancements and new product
development for the foreseeable future.
Manufacturing and Suppliers
The Company manufactures its products and systems from subassemblies, parts, and
components, such as integrated circuits, printed circuit boards, power supplies,
and metal parts manufactured by other vendors. Certain items manufactured by
suppliers are made to the Company's specific design criteria. In-house
manufacturing activities for the Company's products primarily involve quality
assurance testing of subassemblies and final system assembly, integration, and
quality assurance testing. Recently, CNT was recertified under ISO 9002, an
international standard of quality, for the manufacture and support services of
high speed electronic communications devices and computer networking systems.
The Company believes that it currently possesses adequate supply channels.
Components and subassemblies used in the Company's products and systems are
generally available from a number of different suppliers; however, certain key
components in the Company's products are currently purchased from only one
source or from a limited number of sources. The Company does not anticipate any
difficulty in obtaining an adequate supply of required components. An
interruption in its existing supplier relationships or delays by some suppliers,
however, could result in production delays and have an adverse effect on the
Company.
11
Competition
The networking industry is highly competitive. It is characterized by rapidly
advancing technology and evolving industry standards, resulting in frequent
product and feature introductions and improvements in the relative
price/performance of products. CNT competes with several companies that have
greater engineering and development resources, marketing resources, financial
resources, manufacturing capability, customer support resources, and name
recognition than those of the Company.
The principal competitive factors affecting the markets for the Company's
products include customer service, flexibility, price/performance, reliability,
ease of use, and functionality. In many situations the potential customer has
an installed base of a competitor's products, which can be difficult to
dislodge. IBM, Microsoft, and others can significantly influence customers and
control technology in the Company's markets.
Rapid change, new technologies and worldwide deregulation of the
telecommunications industry are generally positive developments for the Company
because they should have the impact of reducing carrier costs and increasing
bandwidth speeds and capacity. However, the many and unpredictable nature of
the changes also carries with it some risk of dislocation for CNT.
There can be no assurance that the Company can compete successfully with its
current competitors or with competitors that may subsequently enter the market,
particularly the software market, which is characterized by low barriers to
entry. There also can be no assurance that CNT will effect technological
changes necessary to maintain its competitive position.
Intellectual Property Rights
The Company relies on a combination of trade secret, copyright, patent, and
trademark law, nondisclosure agreements, and technical measures to establish and
protect its proprietary rights to its products. Such protection may not
preclude competitors from developing products with features similar to the
Company's products. Because of the rapid pace of technological change in data
communications and in the computer and networking industries, the Company
believes that patent and copyright protection are less significant to the
Company's competitive position than factors such as the effectiveness and
quality of its support services; the knowledge, experience, and ability of the
Company's employees; and the frequency of product enhancements.
The Company has from time to time received, and may in the future receive,
communications from third parties asserting patents against the Company which
may relate to certain of the Company's products. Although the Company believes
that it possesses all required proprietary rights to the technology involved in
its products and that its products, trademarks, and other intellectual property
rights do not infringe upon the proprietary rights of third parties, there can
be no assurance that others will not claim a proprietary interest in all or a
part of such technology or assert claims of infringement. Any such claim,
regardless of its merits, could involve the Company in costly litigation and
have a material adverse effect on the Company.
12
Because of the existence of a large number of patents in the networking field
and the rapid rate of issuance of new patents, it is not economically practical
to determine in advance whether a product infringes patent rights of others.
The Company believes that, based upon industry practice, any necessary license
or rights under such patents may be obtained on terms that would not have a
material adverse effect on the Company's consolidated financial position or
results of operations; however, there can be no assurance in this regard.
Employees
As of December 31, 1996, the Company had 493 full-time employees, including 49
full-time employees of its wholly-owned foreign subsidiaries. The Company
believes that its relations with its employees are good. The Company considers
its ability to attract and retain qualified employees and to motivate such
employees to be essential to the future success of the Company. Competition for
such highly skilled personnel is particularly intense in the computer and data
communications industry, and no assurance may be given that the Company will
continue to attract and retain qualified employees.
Item 2. Properties
The Company's principal manufacturing, engineering, and development functions
are located in leased space in Maple Grove, Minnesota, a suburb of Minneapolis.
The Company's administrative offices are located in leased space in Plymouth,
Minnesota, a suburb of Minneapolis. The Company also leases space in
Westborough, Massachusetts, primarily related to the development and support of
its enterprise access software products. The Company's subsidiaries lease
office space in England, France, Germany, Australia, and Hong Kong. The Company
leases sales offices for its direct sales staff and systems consultants in a
number of locations throughout the United States and Canada. The Company
believes that its facilities are adequate to meet its current needs.
Item 3. Legal Proceedings
The Company is exposed to a number of asserted and unasserted claims encountered
in the normal course of business. In the opinion of management, the resolution
of these matters will not have a material adverse effect on the Company's
financial position or results of operations.
Item 4. Submission of Matters to Vote of Security Holders
None.
13
Item 4.A Executive Officers of the Company
The following table contains certain information regarding the current executive
officers of the Company.
Name Position Served Age
Thomas G. Hudson President, Chief Executive Officer, Acting 50
Chief Financial Officer and Director
Richard E. Carlson Vice President of Manufacturing 59
William C. Collette Vice President of Engineering 53
Peter Dixon Vice President of International 47
Richard G. Helgeson Vice President of Sales 45
B.D. (Bill) Johnson Vice President of Marketing 45
Mark R. Knittel Vice President of Architecture and Business 42
Development
Scott A. McCourt Vice President of Brixton Development 42
Kristine E. Ochu Vice President of Human Resources 35
Julie C. Quintal Vice President of Customer Support 38
14
Thomas G. Hudson was appointed President and CEO and a Director of the Company
in June 1996, and Acting Chief Financial Officer since December 1996. From 1993
to 1996, Mr. Hudson was a Senior Vice President of McGraw Hill Companies,
serving as General Manager of its F.W. Dodge Division, a leading provider of
information and economic analysis to the construction industry and as Senior
Vice President, Corporate Development. Prior to joining McGraw Hill, Mr. Hudson
served in a number of management positions at IBM from 1968 to 1993, most
recently as Vice President and General Manager of its Services Section Division.
Mr. Hudson's IBM career included varied product development, marketing and
strategic responsibilities for IBM's financial services customers and included
extensive international and large systems experience. Mr. Hudson received his
B.S. from the University of Notre Dame and his M.B.A. from New York University.
He attended the Harvard Advanced Management Program in 1990.
Richard E. Carlson was appointed Vice President of Manufacturing in January
1992. Mr. Carlson served as Director of Manufacturing from August 1990 to
January 1992. From 1981 to 1990, Mr. Carlson was employed by Zycad Corporation,
a manufacturer of special purpose computers, most recently as Vice President of
Product Development and Operations. Mr. Carlson holds a bachelor of science
degree in mechanical engineering from the University of Minnesota.
William C. Collette was appointed Vice President of Engineering in December
1995. Mr. Collette served as Director of Future Software Development and as a
Software Development Manager from June 1993 to December 1995. From 1990 to
1993, Mr. Collette was employed by SuperComputer Systems, Inc. as a Senior
Software Engineer, where he worked with Steve Chen to design the networking for
the SS1 Supercomputer. Mr. Collette holds a bachelors degree in business
management from Metro State University.
Peter Dixon was appointed Vice President of International in January 1990 and
was elected an executive officer of the Company in April 1991. He served as
Vice President of Strategic Account Marketing from January 1989 to January 1990
and as Director of Distribution Marketing and Sales from February 1988 to
January 1989. From 1985 to 1988, Mr. Dixon served as an Account Manager with
National Advanced Systems Canada, Inc. and its predecessor, Sand Technology
Systems, Inc., companies involved in the marketing of mainframe peripherals.
Richard G. Helgeson was appointed Vice President of Sales in September 1995.
From November 1994 to August 1995, Mr. Helgeson was employed by Raptor Systems,
a software development company, as a Regional Sales Manager. From June 1991
until November 1994, Mr. Helgeson was employed by Wellfleet Communications, a
computer networking company, as Pacific Northwest Regional Manager. Prior to
June 1991, Mr. Helgeson was employed by Vitalink Communications Corporation, a
data communications products manufacturer, as Pacific Northwest Account
Executive. Mr. Helgeson has a bachelors degree in english and education, and a
masters degree in english from the University of Montana.
15
B. D. (Bill) Johnson was appointed Vice President of Marketing in January 1997.
From November 1990 to January 1997, Mr. Johnson held positions of Vice President
Product Marketing, Vice President Information Systems, and Vice President of
Corporate Business Development at Banyan Systems, Inc. From March 1984 to
November 1990, Mr. Johnson was employed at Western Digital Corporation's
Ethernet Communications Business Unit, which was formed from the company
ViaNetix, Inc., a networking business, which Mr. Johnson co-founded. Mr. Johnson
has a bachelors of science degree in electrical engineering from Oklahoma State
University, and a masters degree in business administration from the University
of Colorado.
Mark R. Knittel was appointed Vice President of Architecture and Business
Development in March 1997. From 1977 to March 1997, Mr. Knittel was employed
with IBM where he held several development executive positions for both hardware
and software networking products, as well as multiple strategy positions, and
was the manager of the SNA design and architecture group. From September 1995 to
March 1997, Mr. Knittel was the Director of Campus Product Marketing within the
Network Hardware Division of IBM. Mr. Knittel has a masters degree in philosophy
from the University of Chicago.
Scott A. McCourt was appointed Vice President of Brixton Development in November
1995. From November 1992 until November 1995, Mr. McCourt served as Director of
Software Engineering for Mercury Computer Systems, a computer manufacturer.
From October 1988 until November 1992, Mr. McCourt served as Research and
Development Lab Manager - Distributed Object Computing Program for Hewlett
Packard Company. Mr. McCourt has a bachelors degree in computer science and
biology from Hofstra University, and a masters degree in computer science from
Indiana University.
Kristine E. Ochu was appointed Vice President of Human Resources in March 1996,
and served as Director of Human Resources from May 1995 to March 1996. From
January 1994 to May 1995, Ms. Ochu was employed by Data Systems and Management,
a software development company, as Manager of Human Resources. From 1991 to
1994, Ms. Ochu was employed as a Director of Human Resources by DataCard, Inc.,
a diversified high technology manufacturing company. Ms. Ochu holds a bachelors
degree in psychology and a masters degree in industrial relations from the
University of Minnesota. She attended the University of Michigan Advanced Human
Resources Executive Program in December 1996.
Julie C. Quintal was appointed Vice President of Customer Support in May 1993.
From 1985 until May 1993, Ms. Quintal was employed by Dataserv Inc., a computer
service company, most recently as Division Vice President of Custom Solutions.
Ms. Quintal holds a bachelor of science degree in business administration,
management, and industrial relations from Mankato State University.
16
PART II
Item 5. Market for the Registrant's Securities and Related Shareholders Matters
The information set forth under the captions "Price Range of the Company's
Common Stock" and "Dividends" on page 28 of the 1996 Annual Report to
Shareholders is incorporated herein by reference.
Item 6. Selected Consolidated Financial Information
The information set forth under the caption "Selected Financial Data" on page 10
of the 1996 Annual Report to Shareholders is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 11 through
14 of the 1996 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. Consolidated Financial Statements and Supplementary Data
The Consolidated Financial Statements and the accompanying Notes to Consolidated
Financial Statements on pages 15 through 26 of the 1996 Annual Report to
Shareholders is incorporated herein by reference. The information set forth
under the caption "Quarterly Financial Data" on page 27 of the 1996 Annual
Report to Shareholders is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
None.
17
PART III
Item 10. Directors and Executive Officers
The information set forth under the caption "Election of Directors" in the
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 15, 1997, to be filed with the Securities and Exchange Commission (the
"Commission") on or before April 30, 1997, is incorporated herein by reference.
For information concerning the executive officers, see Item 4.A. of this Annual
Report on Form 10-K.
Item 11. Executive Compensation
The information set forth under the captions "Summary Compensation Table",
"Option Tables", "Employment Agreements" and "Election of Directors -
Compensation of Directors" in the definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 15, 1997, to be filed with the
Commission on or before April 30, 1997, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 15, 1997, to be filed with the
Commission on or before April 30, 1997, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
18
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K.
(a) 1. Consolidated Financial Statements of Registrant
The following consolidated financial statements of the Company are incorporated
by reference to the 1996 Annual Report to Shareholders.
Pages in 1996
Annual Report to
Shareholders
------------
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994......................... 15
Consolidated Balance Sheets as of December 31, 1996 and 1995 16
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994............. 17
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994......................... 18
Notes to Consolidated Financial Statements................. 19-25
Independent Auditors' Report............................... 26
(a) 2. Consolidated Financial Statement Schedules of Registrant
Independent Auditors' Report on Consolidated Financial Statement
Schedule
Schedule II: Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1995 and 1994.
All other schedules are omitted as the required information is
inapplicable or is presented in the consolidated financial
statements or related notes thereto.
19
(a) 3. Exhibits
Of the exhibits listed below, the following are management contracts
or compensatory plans or arrangements with the Company:
Exhibit Description
-------- -----------
10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated
by reference to Exhibit 10F Form S-2 Registration
Statement No. 33-41985.)
10D. Amended and Restated Incentive Stock Option Plan
(Incorporated by reference to Exhibit 10A Form S-8
Registration Statement File No. 33-41986.)
10E. Amended 1986 Nonqualified Stock Option Plan.
(Incorporated by reference to Exhibit 10B Form S-8
Registration Statement No. 33-41986.)
10F. Certificate of Resolutions contained in Minutes of
Annual Meeting of Shareholders on May 30, 1990
increasing shares reserved under ISOP from 500,000 to
1,000,000. (Incorporated by reference to Exhibit 10C
Form S-8 Registration Statement No. 33-41986.)
10G. Certificate of Resolutions contained in Minutes of
Special Meeting of the Board of Directors on April 25,
1991 increasing the number of shares reserved under the
NSOP from 1,100,000 to 1,600,000. (Incorporated by
reference to Exhibit 10D Form S-8 Registration Statement
No. 33-41986.)
10H. 1992 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 28 Form S-8 Registration Statement
No. 33-48954.)
10I. 1992 Stock Award Plan. (Incorporated by reference to
Exhibit 28 Form S-8 Registration Statement No. 33-
48944.)
20
10L. Minutes of Annual Meeting of Shareholders on May 27,
1993 increasing shares reserved under the 1992 Stock
Award Plan from 650,000 to 1,050,000 and increasing
shares reserved under the 1992 Employee Stock Purchase
Plan from 150,000 to 300,000. (Incorporated by
reference to Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.)
10N. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)
10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 to Form S-8
Registration Statement No. 33-83266.)
10P. Amendment to 1992 Stock Award Plan increasing shares
reserved from 1,050,000 to 3,250,000. (Incorporated by
reference to Form S-8 Registration Statement No. 33-
83262.)
10Q. Amendment to Employee Stock Purchase Plan increasing
shares reserved from 300,000 to 400,000. (Incorporated
by reference to Form S-8 Registration Statement No. 33-
83264.)
10R. Amendment to and Restatement of Employment Agreement
by and between the Company and C. McKenzie Lewis, III.
(Incorporated by reference to Exhibit 10S to Annual
Report on Form 10-K for the fiscal year ended December
31, 1995.)
10S. Severance agreement by and between the Company and
Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10T to Annual Report on Form 10-K for the fiscal
year ended December 31, 1995.)
10T. Amendment No. 1 to Severance Agreement by and between
the Company and Eugene D. Misukanis. (Incorporated by
reference to Exhibit 10Y on Form 10-Q for the quarterly
period ended June 30, 1996.)
21
10U. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by reference
to Exhibit 10Z on Form 10-Q for the quarterly period
ended June 30, 1996.)
10W. Minutes of Annual Meeting of Shareholders on May 17,
1996 increasing shares reserved under the 1992 Stock
Award Plan from 3,250,000 to 4,350,000; to provide for
the automatic grant of certain stock options to
nonemployee directors upon initial election or
appointment to the Executive Committee of the Board and
upon initial election as Chairman or Vice Chairman of
the Board; and to increase the maximum number of shares
subject to options that can be awarded to any single
employee during any calendar year to 750,000; and
increasing shares reserved under the 1992 Employee Stock
Purchase Plan from 400,000 to 450,000 and to limit the
number of shares that may be purchased thereunder to
5,000 per Participant for any annual Purchase Period.
22
The following exhibits are filed herewith:
Exhibit Description
------- -----------
2A. Agreement and Plan of Merger among Computer Network
Technology Corporation, BRX Corp., Brixton Systems,
Inc., and certain Significant Shareholders of Brixton
Systems, Inc. dated as of February 4, 1994.
(Incorporated by reference to Exhibit 2 to current
report on Form 8-K dated February 22, 1994.)
3A. Restated Articles of Incorporation of the Company, as
amended. (Incorporated by reference to Exhibit 2 to
current report on Form 8-K dated June 22, 1992.)
3B. By-laws of the Company, as amended. (Incorporated by
reference to Exhibit 3B Annual Report on Form 10-K for
fiscal year ended December 31, 1991.)
10A. Lease Agreement dated November 30, 1990 by and between
TOLD Development Company, a general partnership, and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10C Form S-2 Registration
Statement No. 33-41985.)
10B. Computer Network Technology Corporation 401(k) Salary
Savings Plan effective January 1, 1991. (Incorporated by
reference to Exhibit 10F Form S-2 Registration Statement
No. 33-41985.)
10C. Subscription Agreements of Kanematsu Electronics Ltd.
and Kanematsu USA Inc. dated October 22, 1990.
(Incorporated by reference to Exhibit 10G Form S-2
Registration Statement No. 33-41985.)
10D. Amended and Restated Incentive Stock Option Plan.
(Incorporated by reference to Exhibit 10A Form S-8
Registration Statement No. 33-41986.)
10E. Amended 1986 Nonqualified Stock Option Plan.
(Incorporated by reference to Exhibit 10B Form S-8
Registration Statement No. 33-41986.)
23
10F. Certificate of Resolutions contained in Minutes of
Annual Meeting of Shareholders on May 30, 1990
increasing shares reserved under ISOP from 500,000 to
1,000,000. (Incorporated by reference to Exhibit 10C
Form S-8 Registration Statement No. 33-41986.)
10G. Certificate of Resolutions contained in Minutes of
Special Meeting of the Board of Directors on April 25,
1991 increasing the number of shares reserved under the
NSOP from 1,100,000 to 1,600,000. (Incorporated by
reference to Exhibit 10D Form S-8 Registration Statement
No. 33-41986.)
10H. 1992 Employee Stock Purchase Plan. (Incorporated by
reference to Exhibit 28 Form S-8 Registration Statement
No. 33-48954.)
10I. 1992 Stock Award Plan. (Incorporated by reference to
Exhibit 28 Form S-8 Registration Statement No. 33-
48944.)
10J. Sublease Agreement by and between ITT Consumer Financial
Corporation and Computer Network Technology Corporation
dated October 1, 1993. (Incorporated by reference to
Exhibit 10X Annual Report on Form 10-K for fiscal year
ended December 31, 1993.)
10K. First Amendment to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated October 26, 1993.
(Incorporated by reference to Exhibit 10Y Annual Report
on Form 10-K for fiscal year ended December 31, 1993.)
10L. Minutes of Annual Meeting of Shareholders on May 27,
1993 increasing shares reserved under the 1992 Stock
Award Plan from 650,000 to 1,050,000 and increasing
shares reserved under the 1992 Employee Stock Purchase
Plan from 150,000 to 300,000. (Incorporated by reference
to Exhibit 10BB Annual Report on Form 10-K for fiscal
year ended December 31, 1993.)
24
10M. Amendment No. 1 to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network
Technology Corporation dated February 9, 1994.
(Incorporated by reference to Exhibit 10CC Form 10Q for
the quarterly period ended March 31, 1994.)
10N. March 10, 1994 Incentive Stock Option Agreements.
(Incorporated by reference to Exhibit 28.2 Form S-8
Registration Statement No. 33-83266.)
10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8
Registration Statement No. 33-83266.)
10P. Amendment to 1992 Stock Award Plan increasing shares
reserved from 1,050,000 to 3,250,000. (Incorporated by
reference to Form S-8 Registration Statement No. 33-
83262.)
10Q. Amendment to Employee Stock Purchase Plan increasing
shares reserved from 300,000 to 400,000. (Incorporated
by reference to Form S-8 Registration Statement No. 33-
83264.)
10R. Amendment to and Restatement of Employment Agreement by
and between the Company and C. McKenzie Lewis III.
(Incorporated by reference to Exhibit 10S to Annual
Report on Form 10-K for fiscal year ended December 31,
1995.)
10S. Severance Agreement by and between the Company and
Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10T to Annual Report on Form 10-K for fiscal
year ended December 31, 1995.)
10T. Amendment No. 1 to Severance Agreement by and between
the Company and Eugene D. Misukanis. (Incorporated by
reference to Exhibit 10Y on Form 10-Q for the quarterly
period ended June 30, 1996.)
25
10U. Employment Agreement by and between the Company and
Thomas G. Hudson as amended. (Incorporated by reference
to Exhibit 10Z on Form 10-Q for the quarterly period
ended June 30, 1996.)
10V. Lease Agreement between Teachers Realty Corporation and
Computer Network Technology Corporation. (Incorporated
by reference to Exhibit 10AA on Form 10-Q for the
quarterly period ended June 30, 1996.)
10W. Minutes of Annual Meeting of Shareholders on May 17,
1996 increasing shares reserved under the 1992 Stock
Award Plan from 3,250,000 to 4,350,000; to provide for
the automatic grant of certain stock options to
nonemployee directors upon initial election or
appointment to the Executive Committee of the Board and
upon initial election as Chairman or Vice Chairman of
the Board; and to increase the maximum number of shares
subject to options that can be awarded to any single
employee during any calendar year to 750,000; and
increasing shares reserved under the 1992 Employee Stock
Purchase Plan from 400,000 to 450,000 and to limit the
number of shares that may be purchased thereunder to
5,000 per Participant for any annual Purchase Period.
11. Statement Re: Computation of Net Income (Loss) per
Common and Common Equivalent Share.
13. Annual Report to Shareholders for the fiscal year ended
December 31, 1996. (Only those portions specifically
incorporated by reference herein shall be deemed filed
with the Commission.)
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1996.
26
Independent Auditors' Report on Financial Statement Schedule
The Board of Directors and Shareholders
Computer Network Technology Corporation:
Under the date of January 27, 1997, except as to Note 14, which is as of March
10, 1997, we reported on the consolidated balance sheets of Computer Network
Technology Corporation and subsidiaries as of December 31, 1996 and 1995, 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, 1996, as
contained in the 1996 annual report to shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
annual report on Form 10-K for the year 1996. In connection with our audits of
the aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statement schedule
based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
January 27, 1997, except as to Note 14,
which is as of March 10, 1997
27
Schedule II
-----------
COMPUTER NETWORK TECHNOLOGY CORPORATION
Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995 and 1994
Additions
-------------------------------------------
Balance at Charged Charged Balance at
Beginning to costs & to other end of
Description of period expenses account Deductions period
- --------------------------------- ---------- ---------- ------- ---------- ----------
Year ended December 31, 1996
Allowance for doubtful accounts
and sales returns $1,130,726 -- -- (232,030) $ 898,696
Year ended December 31, 1995
Allowance for doubtful accounts
and sales returns $ 692,130 489,000 -- (50,404) $1,130,726
Year ended December 31, 1994
Allowance for doubtful accounts
and sales returns /(1)/ $ 87,000 318,000 346,500 (59,370) $ 692,130
(1) In connection with its acquisition of Brixton Systems, Inc., on March 10,
1994, the Company recorded an allowance for doubtful accounts and sales
returns in the amount of $346,500.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COMPUTER NETWORK TECHNOLOGY CORPORATION
Dated: March 28, 1997 By:/s/ Thomas G. Hudson
------------------------------------------------
Thomas G. Hudson, President and Chief
Executive Officer,
and Acting Chief Financial Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Thomas G. Hudson
- ---------------------------
Thomas G. Hudson President and Chief Executive March 28, 1997
Officer, and Acting Chief
Financial Officer (Principal
Executive and Financial Officer)
and Director
/s/ Jeffrey A. Bertelsen
- ---------------------------
Jeffrey A. Bertelsen Corporate Controller and Treasurer March 28, 1997
(Principal Accounting Officer)
/s/ Erwin A. Kelen
- ---------------------------
Erwin A. Kelen Director March 28, 1997
/s/ Lawrence Perlman
- ---------------------------
Lawrence Perlman Director March 28, 1997
/s/ John A. Rollwagen
- ---------------------------
John A. Rollwagen Director March 28, 1997
29
INDEX TO EXHIBITS
Exhibit Description Page
- ------- ----------- ----
2A. Agreement and Plan of Merger among Computer Network
Technology Corporation, BRX Corp., Brixton Systems, Inc.,
and certain Significant Shareholders of Brixton Systems, Inc.
dated February 4, 1994. (Incorporated by reference to
Exhibit 2 to current report on Form 8-K dated February
22, 1994.)
3A. Restated Articles of Incorporation of the Company, as amended.
(Incorporated by reference to Exhibit 2 to current report on
Form 8-K dated June 22, 1992.)
3B. By-laws of the Company, as amended. (Incorporated by reference
to Exhibit 3B Annual Report on Form 10-K for fiscal year ended
December 31, 1991.)
10A. Lease Agreement dated November 30, 1990 by and between TOLD
Development Company, a general partnership, and Computer Network
Technology Corporation. (Incorporated by reference to
Exhibit 10C Form S-2 Registration Statement No. 33-41985.)
10B. Computer Network Technology Corporation 401(k) Salary Savings
Plan effective January 1, 1991. (Incorporated by reference to
Exhibit 10F Form S-2 Registration Statement No. 33-41985.)
10C. Subscription Agreements of Kanematsu Electronics Ltd. and
Kanematsu USA Inc. dated October 22, 1990. (Incorporated by
reference to Exhibit 10G Form S-2 Registration Statement
No. 33-41985.)
10D. Amended and Restated Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10A Form S-8 Registration Statement No.
33-41986.)
10E. Amended 1986 Nonqualified Stock Option Plan. (Incorporated
by reference to Exhibit 10B Form S-8 Registration Statement
No. 33-41986.)
10F. Certificate of Resolutions contained in Minutes of Annual
Meeting of Shareholders on May 30, 1990 increasing shares
reserved under ISOP from 500,000 to 1,000,000. (Incorporated
by reference to Exhibit 10C Form S-8 Registration Statement
No. 33-41986.)
10G. Certificate of Resolutions contained in Minutes of Special
Meeting of the Board of Directors on April 25, 1991 increasing
the number of shares reserved under the NSOP from 1,100,000 to
1,600,000. (Incorporated by reference to Exhibit 10D Form S-8
Registration Statement No. 33-41986.)
10H. 1992 Employee Stock Purchase Plan. (Incorporated by reference
to Exhibit 28 Form S-8 Registration Statement No. 33-48954.)
10I. 1992 Stock Award Plan. (Incorporated by reference to Exhibit 28
Form S-8 Registration Statement No. 33-48944.)
10J. Sublease Agreement by and between ITT Consumer Financial
Corporation and Computer Network Technology Corporation dated
October 1, 1993. (Incorporated by reference to Exhibit 10X
Annual Report on Form 10-K for fiscal year ended
December 31, 1993.)
10K. First Amendment to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network Technology
Corporation dated October 26, 1993. (Incorporated by reference
to Exhibit 10Y Annual Report on Form 10-K for fiscal year ended
December 31, 1993.)
10L. Minutes of Annual Meeting of Shareholders on May 27, 1993
increasing shares reserved under the 1992 Stock Award Plan
from 650,000 to 1,050,000 and increasing shares reserved under
the 1992 Employee Stock Purchase Plan from 150,000 to 300,000.
(Incorporated by reference to Exhibit 10BB Annual Report on
Form 10-K for fiscal year ended December 31, 1993.)
10M. Amendment No. 1 to Sublease Agreement by and between ITT
Consumer Financial Corporation and Computer Network Technology
Corporation dated February 9, 1994. (Incorporated by reference
to Exhibit 10CC Form 10Q for the quarterly period ended
March 31, 1994.)
10N. March 10, 1994 Incentive Stock Option Agreements. (Incorporated
by reference to Exhibit 28.2 Form S-8 Registration Statement
No. 33-83266.)
10O. March 10, 1994 Non-Qualified Stock Option Agreements.
(Incorporated by reference to Exhibit 28.3 Form S-8 Registration
Statement No. 33-83266.)
10P. Amendment to 1992 Stock Award Plan increasing shares reserved
from 1,050,000 to 3,250,000. (Incorporated by reference to
Form S-8 Registration Statement No. 33-83262.)
10Q. Amendment to Employee Stock Purchase Plan increasing shares
reserved from 300,000 to 400,000. (Incorporated by reference to
Form S-8 Registration Statement No. 33-83264.)
10R. Amendment to and Restatement of Employment Agreement by and
between the Company and C. McKenzie Lewis III. (Incorporated by
reference to Exhibit 10S to Annual Report on Form 10-K for fiscal
year ended December 31, 1995.)
10S. Severance Agreement by and between the Company and Eugene D.
Misukanis. (Incorporated by reference to Exhibit 10T to Annual
Report on Form 10-K for fiscal year ended December 31, 1995.)
10T. Amendment No. 1 to Severance Agreement by and between the
Company and Eugene D. Misukanis. (Incorporated by reference to
Exhibit 10Y on Form 10Q for the quarterly period ended
June 30, 1996.)
10U. Employment Agreement by and between the Company and Thomas G.
Hudson as amended. (Incorporated by reference to Exhibit 10Z on Form
10Q for the quarterly period ended June 30, 1996.)
10V. Lease Agreement between Teachers Realty Corporation and Computer
Network Technology Corporation. (Incorporated by reference to
Exhibit 10AA on Form 10Q for the quarterly period ended
June 30, 1996.)
10W. Minutes of Annual Meeting of Shareholders on May 17, 1996
increasing shares reserved under the 1992 Stock Award Plan from
3,250,000 to 4,350,000; to provide for the automatic grant of
certain stock options to nonemployee directors upon initial
election or appointment to the Executive Committee of the Board
and upon initial election as Chairman or Vice Chairman of the
Board; and to increase the maximum number of shares subject to
options that can be awarded to any single employee during any
calendar year to 750,000; and increasing shares reserved under
the 1992 Employee Stock Purchase Plan from 400,000 to 450,000 and
to limit the number of shares that may be purchased thereunder to
5,000 per Participant for any annual Purchase
Period............................................Electronically Filed
11. Statement Re: Computation of Net Income (Loss) per Common and
Common Equivalent Share............................Electronically Filed
13. Annual Report to Shareholders for the fiscal year ended
December 31, 1996. (Only those portions specifically
incorporated by reference herein shall be deemed filed with
the Commission.)..................................Electronically Filed
21. Subsidiaries of the Registrant....................Electronically Filed
23. Independent Auditors' Consent.....................Electronically Filed
27. Financial Data Schedule...........................Electronically Filed