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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER
31, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
 COMMISSION FILE NUMBER: 0-13994 COMPUTER NETWORK TECHNOLOGY CORPORATION 
  Minnesota
    
    41-1356476(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 6000 Nathan Lane North, Minneapolis, Minnesota 55442 
  Telephone Number: (763) 268-6000 
  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 the
filing requirements for at least the past 90 days. Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes þ No o As of October 31, 2004, the registrant had 28,701,785 shares of $.01 par value
common stock issued and outstanding.




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COMPUTER NETWORK TECHNOLOGY CORPORATION INDEX PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Consolidated Statements of Operations for the three and nine months
ended October 31, 2004 and 2003.
    
    
    3Consolidated Balance Sheets as of October 31, 2004
and January 31, 2004.
    
    
    5Consolidated Statements of Cash Flows for the nine months
ended October 31, 2004 and 2003.
    
    
    6Notes to Consolidated Financial Statements.
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    15Item 3.
    
    Market Risks.
    
    
    23Item 4.
    
    Controls and Procedures.
    
    
    24PART II
    
    OTHER INFORMATION.
    
    
    26Item 1.
    
    Legal Proceedings.
    
    
    26Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds.
    
    
    26Item 3.
    
    None.
    
    
    26Item 4.
    
    None.
    
    
    27Item 5.
    
    None.
    
    
    27Item 6.
    
    Exhibits.
    
    
    27SIGNATURES
    
    
    28EXHIBIT INDEX
    
    
    29Statement Re: Computation of Net Income (loss) Per ShareCEO Certifications Required by Rule 13a14(a)/15d14(a)CFO Certifications Required by Rule 13a14(a)/15d14(a)Certification of CEO and CFO Pursuant to Section 906
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. COMPUTER NETWORK TECHNOLOGY CORPORATION 
    Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales
    
    $
    56,773
    
    
    $
    65,871
    
    
    $
    165,013
    
    
    $
    163,764Service fees
    
    
    32,179
    
    
    
    31,462
    
    
    
    97,340
    
    
    
    80,778Total revenue
    
    
    88,952
    
    
    
    97,333
    
    
    
    262,353
    
    
    
    244,542Cost of revenue:Cost of product sales
    
    
    33,513
    
    
    
    37,023
    
    
    
    97,840
    
    
    
    97,901Impairment  developed technology
    
    
    11,198
    
    
    
    
    
    
    
    11,198
    
    
    
    Cost of service fees
    
    
    18,654
    
    
    
    18,413
    
    
    
    58,472
    
    
    
    46,884Total cost of revenue
    
    
    63,365
    
    
    
    55,436
    
    
    
    167,510
    
    
    
    144,785Gross profit
    
    
    25,587
    
    
    
    41,897
    
    
    
    94,843
    
    
    
    99,757Operating expenses:Sales and marketing
    
    
    23,757
    
    
    
    24,114
    
    
    
    71,053
    
    
    
    62,950Engineering and development
    
    
    13,386
    
    
    
    12,229
    
    
    
    40,443
    
    
    
    30,174General and administrative
    
    
    3,871
    
    
    
    4,182
    
    
    
    11,967
    
    
    
    12,005Impairment  trademark
    
    
    911
    
    
    
    
    
    
    
    911
    
    
    
    Impairment  goodwill
    
    
    73,317
    
    
    
    
    
    
    
    73,317
    
    
    
    In-process research and development charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,706Total operating expenses
    
    
    115,242
    
    
    
    40,525
    
    
    
    197,691
    
    
    
    124,835Income (loss) from operations
    
    
    (89,655
    )
    
    
    1,372
    
    
    
    (102,848
    )
    
    
    (25,078
    )Other income (expense):Net gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    747Interest expense
    
    
    (1,080
    )
    
    
    (1,116
    )
    
    
    (3,114
    )
    
    
    (3,336
    )Interest income and other, net
    
    
    575
    
    
    
    272
    
    
    
    1,038
    
    
    
    1,726Other income (expense), net
    
    
    (505
    )
    
    
    (844
    )
    
    
    (2,076
    )
    
    
    (863
    )Income (loss) before income taxes
    
    
    (90,160
    )
    
    
    528
    
    
    
    (104,924
    )
    
    
    (25,941
    )Provision for income taxes
    
    
    191
    
    
    
    (97
    )
    
    
    1,379
    
    
    
    901Income (loss) from continuing operations
    
    
    (90,351
    )
    
    
    625
    
    
    
    (106,303
    )
    
    
    (26,842
    )Discontinued operations, net of tax
    
    
    25
    
    
    
    (388
    )
    
    
    (688
    )
    
    
    (825
    )Net income (loss)
    
    $
    (90,326
    )
    
    $
    237
    
    
    $
    (106,991
    )
    
    $
    (27,667
    )
 3




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##### Table of Contents



Basic income (loss) per share:Continuing operations
    
    $
    (3.19
    )
    
    $
    0.02
    
    
    $
    (3.82
    )
    
    $
    (0.99
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )Net loss
    
    $
    (3.19
    )
    
    $
    0.01
    
    
    $
    (3.85
    )
    
    $
    (1.02
    )Shares
    
    
    28,309
    
    
    
    27,193
    
    
    
    27,800
    
    
    
    27,047Diluted income (loss) per share:Continuing operations
    
    $
    (3.19
    )
    
    $
    0.02
    
    
    $
    (3.82
    )
    
    $
    (0.99
    )Discontinued operations
    
    $
    0.00
    
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )Net loss
    
    $
    (3.19
    )
    
    $
    0.01
    
    
    $
    (3.85
    )
    
    $
    (1.02
    )Shares
    
    
    28,309
    
    
    
    28,750
    
    
    
    27,800
    
    
    
    27,047
 See accompanying notes to Consolidated Financial Statements 4




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COMPUTER NETWORK TECHNOLOGY CORPORATION 
   October 31,2004
    
    January 31,2004(unaudited)AssetsCurrent assets:Cash and cash equivalents
    
    $
    40,652
    
    
    $
    75,267Marketable securities
    
    
    17,272
    
    
    
    2,219Receivables, net
    
    
    62,995
    
    
    
    99,815Inventories
    
    
    37,775
    
    
    
    29,976Other current assets
    
    
    4,435
    
    
    
    4,400Total current assets
    
    
    163,129
    
    
    
    211,677Property and equipment, net
    
    
    42,254
    
    
    
    40,313Field support spares, net
    
    
    10,651
    
    
    
    11,951Goodwill
    
    
    31,769
    
    
    
    105,203Other intangibles, net
    
    
    16,610
    
    
    
    33,225Deferred tax asset
    
    
    288
    
    
    
    872Other assets
    
    
    12,236
    
    
    
    9,140$
    276,937
    
    
    $
    412,381Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    35,668
    
    
    $
    47,696Accrued liabilities
    
    
    32,569
    
    
    
    43,733Deferred revenue
    
    
    34,864
    
    
    
    47,058Current installments of obligations under capital lease
    
    
    2,516
    
    
    
    1,619Total current liabilities
    
    
    105,617
    
    
    
    140,106Obligations under capital lease, less current installments
    
    
    5,391
    
    
    
    4,468Convertible subordinated debt
    
    
    124,350
    
    
    
    125,000Total liabilities
    
    
    235,358
    
    
    
    269,574Shareholders equity:Preferred stock
    
    
    
    
    
    
    Common stock, $.01 par value; authorized
100,000 shares, issued and outstanding
28,701 at October 31, 2004 and
27,501 at January 31, 2004
    
    
    287
    
    
    
    275Additional paid-in capital
    
    
    194,880
    
    
    
    187,652Unearned compensation
    
    
    (2,395
    )
    
    
    (319
    )Accumulated deficit
    
    
    (153,990
    )
    
    
    (46,999
    )Accumulated other comprehensive income
    
    
    2,797
    
    
    
    2,198Total shareholders equity
    
    
    41,579
    
    
    
    142,807$
    276,937
    
    
    $
    412,381
 See accompanying notes to Consolidated Financial Statements 5




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COMPUTER NETWORK TECHNOLOGY CORPORATION 
    Nine months endedOctober 31,2004
    
    2003Operating Activities:Net loss
    
    $
    (106,991
    )
    
    $
    (27,667
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Discontinued operations
    
    
    688
    
    
    
    825Depreciation and amortization
    
    
    21,727
    
    
    
    18,065In-process research and development charge
    
    
    
    
    
    
    19,706Non-cash compensation expense
    
    
    852
    
    
    
    331Net gain on sale of marketable securities
    
    
    
    
    
    
    (747
    )Changes in deferred taxes
    
    
    584
    
    
    
    (4
    )Impairment of goodwill and other intangibles
    
    
    85,426
    
    
    
    Net gain on repurchase of convertible subordinated debt
    
    
    (141
    )
    
    
    Impairment of marketable securities
    
    
    181
    
    
    
    Changes in operating assets and liabilities:Receivables
    
    
    37,479
    
    
    
    (5,431
    )Inventories
    
    
    (6,464
    )
    
    
    12,139Other current assets
    
    
    493
    
    
    
    2,703Accounts payable
    
    
    (12,028
    )
    
    
    13,299Accrued liabilities
    
    
    (8,350
    )
    
    
    (8,930
    )Deferred revenue
    
    
    (12,194
    )
    
    
    (654
    )Net cash provided by continuing operations
    
    
    1,262
    
    
    
    22,810Net cash used in discontinued operations
    
    
    (688
    )
    
    
    (825
    )Cash provided by operating activities
    
    
    574
    
    
    
    22,810Investing Activities:Additions to property and equipment
    
    
    (12,696
    )
    
    
    (5,893
    )Additions to field support spares
    
    
    (4,121
    )
    
    
    (1,770
    )Acquisition of Inrange Technologies, net of cash acquired
    
    
    
    
    
    
    (152,585
    )Acquisition of BI-Tech, net of cash
acquired
    
    
    (840
    )
    
    
    (3,868
    )Net redemption (purchase) of marketable securities
    
    
    (15,234
    )
    
    
    107,262Other assets
    
    
    (1,588
    )
    
    
    (2,466
    )Cash used in investing activities
    
    
    (34,479
    )
    
    
    (59,320
    )Financing Activities:Repurchase of convertible subordinated debt
    
    
    (509
    )
    
    
    Proceeds from issuance of common stock
    
    
    1,346
    
    
    
    1,352Repayments of obligations under capital leases
    
    
    (1,721
    )
    
    
    (961
    )Cash provided by financing activities
    
    
    (884
    )
    
    
    391Effects of exchange rate changes
    
    
    174
    
    
    
    392Net decrease in cash and cash equivalents
    
    
    (34,615
    )
    
    
    (35,727
    )Cash and cash equivalents beginning of period
    
    
    75,267
    
    
    
    98,341Cash and cash equivalents end of period
    
    $
    40,652
    
    
    $
    62,614
 See accompanying notes to Consolidated Financial Statements 6




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) (1) BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and do not include all of the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and accompanying notes included in the
Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2004
as filed with the Securities and Exchange Commission. References to fiscal 2004
and 2003 represent the twelve months ended January 31, 2005 and 2004,
respectively. On May 5, 2003, the Company completed the acquisition of Inrange
Technologies (Inrange) for $190 million in cash. The acquisition was
accounted for as a purchase, and the Companys financial statements include the
results of Inrange since May 5, 2003. See footnote 4 Acquisition of Inrange for
further information regarding the effect of the Inrange acquisition on the
Companys balance sheet and results of operations. (2) MARKETABLE SECURITIES During the first quarter of fiscal 2003, the Company sold marketable
securities totaling $122 million, resulting in a net pre-tax gain of
approximately $747. No significant gains or losses from the sale of marketable
securities were recorded during the other periods presented. During the third
quarter of fiscal 2004, the Company recorded a $181 charge for permanent
impairment of marketable securities. The Companys investments in marketable securities primarily consist of
U.S. government and agency securities, corporate debt securities and bank
certificates of deposit. The Company also holds trading securities consisting
of various mutual funds. The Company intends to use any gain or loss from
these investments to fund the investments gains and losses allocated to
participants under the Companys executive deferred compensation plan. (3) INVENTORIES Inventories, stated at the lower of cost (first-in, first-out method) or
market, consist of: October 31,
    
    January 31,2004
    
    2004Inventories:Components and subassemblies
    
    $
    21,714
    
    
    $
    14,311Work in process
    
    
    879
    
    
    
    4,015Finished goods
    
    
    15,182
    
    
    
    11,650$
    37,775
    
    
    $
    29,976
 (4) ACQUISITION OF INRANGE Inrange On April 6, 2003, the Company entered into an agreement whereby a wholly
owned subsidiary of the Company would acquire all of the shares of Inrange
Technologies Corporation (Inrange) that were owned by SPX Corporation. The
shares acquired constituted approximately 91% of the issued and outstanding
shares of Inrange for a purchase price of approximately $2.31 per share and
$173 million in the aggregate. On May 5, 2003 the Company completed the
acquisition of Inrange and pursuant to the agreement the subsidiary merged into
Inrange, and the remaining capital stock owned by the other Inrange
shareholders was converted into the right to receive approximately $2.31 per
share in cash, resulting in a total payment of $190 million for both the stock
purchase and merger. 7




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The Company acquired Inrange to significantly broaden its portfolio of
storage networking products and solutions, particularly in the area of Fibre
Channel and FICON switching, increase its global size and scope, and expand its
customer base. The acquisition was accounted for as a purchase and the consolidated
financial statements of the Company include the results of Inrange since May 5,
2003. The purchase price was allocated to the fair value of the assets and
liabilities acquired as follows: Purchase Price:Cash paid
    
    $
    190,526Value of stock option grants
    
    
    10,286Transaction costs
    
    
    3,347Total purchase consideration paid
    
    $
    204,159Fair Value of Assets Acquired and Liabilities Assumed:Cash
    
    $
    41,088Accounts receivable
    
    
    34,542Inventory
    
    
    12,461Property and equipment
    
    
    22,538Field support spares
    
    
    7,757Developed technology
    
    
    20,248Customer list
    
    
    15,294Trademarks
    
    
    1,234In-process research and development charge
    
    
    19,706Goodwill
    
    
    86,899Deferred taxes
    
    
    75Other assets
    
    
    6,677Accounts payable
    
    
    (10,788
    )Accrued expenses
    
    
    (32,628
    )Deferred revenue
    
    
    (20,944
    )Total purchase consideration paid
    
    $
    204,159
 As part of the Inrange acquisition, the Company assumed the 2000 Inrange
stock compensation plan which provides for the issuance of up to 3,782,993
shares of the Companys common stock. The plan provided for the conversion of
pre-existing Inrange stock options into company stock options. The options
granted under the 2000 Inrange stock compensation plan were valued at $10.3
million using the Black-Scholes option-pricing model. The amount was deemed to
be part of the Inrange purchase price and was recorded as additional paid-in
capital. The intangible assets acquired included developed technology, customer
list and trademarks valued at $20.2 million, $15.3 million and $1.2 million,
respectively. The developed technology, customer list and trademarks were
initially being amortized on a straight-line basis over periods of
approximately five years, seven years and five years, respectively. These
lives were subsequently revised in the third quarter of fiscal 2004 in
connection with the Companys impairment analysis of long lived assets and
goodwill (see footnote 5). Goodwill resulting from the acquisition of $86.9
million is deductible for income tax purposes. The Company has allocated $19.7 million of the Inrange purchase price to
acquired in-process research and development to reflect the value of new Fibre
Channel switching technology that was approximately 50% complete at the time of
acquisition. At the date of acquisition, the technological feasibility of the
new Fibre Channel switching technology had not been attained and the technology
had no alternative future use. The allocation to in-process research and
development was based on an independent third party appraisal that utilized the
excess earnings approach. Significant assumptions used in the third party
appraisal include the cost to complete the project, and the projected revenue
and expense generated over the estimated life cycle of the new Fibre Channel
switching technology. 8




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The following table presents the unaudited pro forma consolidated results
of operations of the Company for the three and nine months ended October 31,
2004 and 2003 as if the acquisition of Inrange took place on February 1, 2003: Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
(Pro Forma)
    
    2004
    
    2003
(Pro Forma)Total revenue
    
    $
    88,952
    
    
    $
    97,333
    
    
    $
    262,353
    
    
    $
    284,678Income (loss) from continuing operations
    
    $
    (90,351
    )
    
    $
    625
    
    
    $
    (106,303
    )
    
    $
    (16,266
    )Income (loss) from continuing operations per share
    
    $
    (3.19
    )
    
    $
    .02
    
    
    $
    (3.82
    )
    
    $
    (.60
    )
 The pro forma results include amortization of the customer list, developed
technology and trademarks presented above. The unaudited pro forma results do
not include the $19.7 million charge for in-process research and development
related to the Inrange acquisition. The unaudited pro forma results are for
comparative purposes only and do not necessarily reflect the results that would
have been recorded had the acquisition occurred at the beginning of the period
presented or the results which might occur in the future. (5) GOODWILL AND INTANGIBLE ASSETS In August 2004, the Companys market capitalization fell substantially below
recorded net book value, indicating that goodwill and other long-lived assets may be impaired,
including developed technology, trademarks and customer lists. As part of managements evaluation
and analysis, the Company engaged an independent third party to appraise these assets. The
Companys evaluation and analysis indicated that impairment charges for developed technology,
trademarks and goodwill of $11.2 million, $911 and $73.3 million, respectively, should be
reflected in results of operations for the fiscal third quarter ended October 31, 2004. Developed
technology and trademarks intangibles resulted entirely from the Companys Inrange acquisition,
while most of the Companys goodwill resulted from the Inrange acquisition. See footnote 4 to the
consolidated financial statements for a summary of the Inrange purchase price allocation.
Developed technology was analyzed using the excess earnings method, and was impaired due to more
rapid market acceptance of the Companys new generation UMD product following its introduction this
year. Trademarks were analyzed using the relief from royalty approach and were impaired due to use
of the UltraNet name for the new generation UMD product, and the subsequent rapid market acceptance
of this product. The more rapid market acceptance of the Companys new UMD product resulted in
lower estimated revenue and excess earnings, primarily for developed technology, compared to the
Companys original estimate when Inrange was acquired. The Company determined that its customer
lists intangible was not impaired. The Companys fair value was based on a combination of the
income and market valuation approaches. The analysis indicated that the Companys net book value
exceeded its implied fair value, resulting in the $73.3 million charge for goodwill impairment.
The goodwill impairment charge resulted from the Companys later than planned launch of the UMD,
coupled with slower than planned development of the direct sales channel for these products, and
more rapid acceptance of the CNT wide area extension products by the Inrange customer set. The
remaining useful lives for developed technology and trademarks were revised to 3 and one years,
respectively. The impairment charges will not result in future cash expenditures. The change in the net carrying amount of goodwill for the first nine
months of 2004 was as follows: TotalBalance February 1, 2004
    
    $
    105,203Acquisition of Inrange
    
    
    (117
    )FAS 142 impairment
    
    
    (73,317
    )Balance as of October 31, 2004
    
    $
    31,769
 9




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The components of other amortizable intangible assets were as follows: October 31, 2004
    
    January 31, 2004Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationCustomer list
    
    $
    16,924
    
    
    $
    (3,673
    )
    
    $
    16,924
    
    
    $
    (1,883
    )Trademarks
    
    
    4
    
    
    
    (1
    )
    
    
    1,234
    
    
    
    (185
    )Developed technology
    
    
    3,606
    
    
    
    (250
    )
    
    
    20,248
    
    
    
    (3,165
    )Non-compete agreements
    
    
    250
    
    
    
    (250
    )
    
    
    250
    
    
    
    (198
    )Total
    
    $
    20,784
    
    
    $
    (4,174
    )
    
    $
    38,656
    
    
    $
    (5,431
    )Total other intangible
assets, net
    
    $
    16,610
    
    
    
    
    
    
    $
    33,225
 Amortization expense for intangible assets during the third quarter and
first nine months of 2004 was $1.0 million and $4.5 million, respectively.
Amortization expense for the remainder of 2004 is estimated to be $0.9 million.
Amortization expense is estimated to be $3.6 million in 2005, $3.5 million in
2006, $3.0 million in 2007 and $2.3 million in 2008. (6) COMPREHENSIVE LOSS Comprehensive loss consists of the following: Nine months endedOctober 31,2004
    
    2003Net loss
    
    $
    (106,991
    )
    
    $
    (27,667
    )Unrealized loss on marketable securities,
net of tax effect of $0
    
    
    (101
    )
    
    
    Foreign currency translation adjustment, net of
tax effect of $0
    
    
    700
    
    
    
    (129
    )Total comprehensive loss
    
    $
    (106,392
    )
    
    $
    (27,796
    )
 (7) CONVERTIBLE SUBORDINATED DEBT In February 2002, the Company sold $125 million of 3% convertible
subordinated notes due February 15, 2007, raising net proceeds of $121.6
million. The notes are convertible into the Companys common stock at a price
of $19.17 per share. The Company may redeem the notes upon payment of the
outstanding principal balance, accrued interest and a make whole payment if the
closing price of its common stock exceeds 175% of the conversion price for at
least 20 consecutive trading days within a period of 30 consecutive trading
days ending on the trading day prior to the date the redemption notice is
mailed. The make whole payment represents additional interest payments that
would be made if the notes were not redeemed prior to the due date. In January 2004, the Company entered into an interest-rate swap agreement
with a notional amount of $75 million that has the economic effect of modifying
that dollar portion of the fixed interest obligations associated with $75
million of its 3% convertible subordinated notes due February 2007, such that
the interest payable effectively becomes variable based on the three month
LIBOR plus 69.5 basis points. The payment dates of the swap are January 31st,
April 30th, July 31st and October 31st of each year, commencing April 30, 2004,
until maturity on February 15, 2007. The combined effective rate for the period from
August 1, 2004 through October 31, 2004 was approximately 2.375%. The combined effective rate for the period November 1, 2004 to January 31, 2005 will be 2.825%. The swap was designated
as a fair value hedge, and as such, the gain or loss on the swap, as well as
the fully offsetting gain or loss on the 10




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##### Table of Contents



notes attributable to the hedged risk,
were recognized in earnings. As part of the agreement, the Company is also
required to post collateral based on changes in the fair value of the interest
rate swap. This collateral, in the form of restricted cash, was $3.2 million at
October 31, 2004. The Company could incur charges to terminate the swap in the
future prior to February 15, 2007 if interest rates rise, or upon certain
events such as a change in control or certain redemptions of convertible
subordinated notes. In April 2001, our board of directors authorized the repurchase of up to
$50.0 million of our common stock. Subsequent to April 2001, our board changed
the authorization so that the remaining balance of the initial $50 million
authorization can be used for the repurchase of either debt or stock. As of
January 31, 2004, we had repurchased 4.1 million shares of our common stock for
$33.0 million under this authorization. No common stock was repurchased during
the nine months ended October 31, 2004. During the third quarter of fiscal
2004, the Company recognized a gain of $141 from its repurchase of
convertible subordinated notes having a face value of $650. The gain is included in Interest income and other, net in the consolidated statements of operations. (8) STOCK-BASED COMPENSATION The estimated per share weighted average fair value of all stock options
granted during the nine months ended October 31, 2004 and 2003 was $5.71 and
$4.74, respectively. The fair value of each option grant was estimated using
the Black-Scholes option pricing model with the following weighted average
assumptions: Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003Risk free interest rate
    
    
    3.80
    %
    
    
    3.25
    %
    
    
    3.88
    %
    
    
    2.89
    %Expected life
    
    5.71
    
    
    5.82
    
    
    5.79
    
    
    5.82Expected volatility
    
    92.73%
    
    
    86.20
    %
    
    93.27%
    
    
    86.20
    %
 Had the Company recorded compensation cost for its stock options based on
the estimated fair value on the date of grant, as defined by SFAS 123, the
Companys pro forma net loss would have been as follows: Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    (90,326
    )
    
    $
    237
    
    
    $
    (106,991
    )
    
    $
    (27,667
    )Add:
Total stock-based employee compensation expense included in net
income (loss), as reported
    
    $
    196
    
    
    $
    51
    
    
    $
    852
    
    
    $
    331Deduct: Total stock-based employee
compensation expense under fair value
based method of all awards, net of tax
    
    (2,205)
    
    
    (3,059
    )
    
    (7,625)
    
    
    (8,631
    )Pro forma net loss
    
    $(92,335)
    
    $
    (2,771
    )
    
    $(113,764)
    
    $
    (35,967
    )Basic & diluted net loss per share:As reported
    
    $(3.19)
    
    $
    .01
    
    
    $(3.85)
    
    $
    (1.02
    )Pro forma
    
    $(3.26)
    
    $
    (.10
    )
    
    $(4.09)
    
    $
    (1.33
    )
 11




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##### Table of Contents



(9) WARRANTY The Company records a liability for warranty claims at the time of sale.
The amount of the liability is based on contract terms and historical warranty
costs, which is periodically adjusted for recent actual experience. Warranty
terms on the Companys equipment range from 90 days to 13 months. The changes
in warranty reserve balances for the nine months ended October 31, 2004 and
2003 were as follows: October 31,2004
    
    2003Beginning balance
    
    $
    2,348
    
    
    $
    1,521Inrange acquisition
    
    
    
    
    
    
    1,709Charged to cost of product
    
    
    1,572
    
    
    
    1,649Cost of warranty
    
    
    (1,777
    )
    
    
    (2,492
    )Ending balance
    
    $
    2,143
    
    
    $
    2,387
 (10) DISCONTINUED OPERATIONS In connection with the acquisition of Inrange, the Company acquired a
non-complementary business focused on enterprise resource planning (ERP)
consulting services. In April 2004, substantially all of the business and its
net assets totaling approximately $1.7 million were sold for cash proceeds of
$934 and installments payments having a discounted value of approximately $1.2
million. The business was divested to allow the Company to focus on its core
storage networking solutions business. Revenue and expense for the ERP business
in the first nine months of 2004 totaled approximately $2.6 million and $3.3
million, respectively. The business has been accounted for as a discontinued
operation in the accompanying financial statements, meaning that its revenues
and expenses are not included in results from continuing operations, and the
net income/(loss) of the ERP business was included under the discontinued
operations caption in the statement of operations. The pre-tax gain from the sale of $450 has been recorded as reduction in
goodwill from the Inrange acquisition during the first quarter of 2004. (11) ENTERPRISE-WIDE INFORMATION Summarized information regarding enterprise-wide revenue and gross margins
from external customers are as follows: Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003Revenue:Proprietary products
    
    $
    40,533
    
    
    $
    52,710
    
    
    $
    110,947
    
    
    $
    122,042Third party products
    
    
    16,240
    
    
    
    13,161
    
    
    
    54,066
    
    
    
    41,722Professional services.
    
    
    9,982
    
    
    
    10,930
    
    
    
    31,974
    
    
    
    27,390Maintenance
    
    
    22,197
    
    
    
    20,532
    
    
    
    65,366
    
    
    
    53,388Total
    
    $
    88,952
    
    
    $
    97,333
    
    
    $
    262,353
    
    
    $
    244,542Gross margins:Proprietary products
    
    $
    20,855
    
    
    $
    26,251
    
    
    $
    58,925
    
    
    $
    58,346Third party products
    
    
    2,405
    
    
    
    2,479
    
    
    
    8,248
    
    
    
    7,475Professional services.
    
    
    2,770
    
    
    
    3,405
    
    
    
    7,689
    
    
    
    8,097Maintenance
    
    
    10,755
    
    
    
    9,762
    
    
    
    31,179
    
    
    
    25,839Total
    
    $
    36,785
    
    
    $
    41,897
    
    
    $
    106,041
    
    
    $
    99,757
 12




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##### Table of Contents



(12) INTEGRATION AND COST REDUCTION ACCRUALS A significant part of the Companys integration strategy related to the
Inrange acquisition, included the termination of duplicative employees across
most functional areas, and the closing of duplicative facilities to obtain cost
synergies. Integration planning was initiated prior to the closing of the
acquisition. Severance costs for terminated Inrange employees were treated as
an acquired liability, effectively increasing the purchase price. Severance
costs for terminated CNT employees were recorded as an expense in the statement
of operations. The integration plan resulted in the termination of 165
employees, including employees of both CNT and Inrange. The duplicative
facilities that were closed were part of the pre-acquisition Inrange business,
and the accrual for future rents associated with these facilities was treated
as an acquired liability, effectively increasing the purchase price. The
integration of product strategies for the new combined entity resulted in a
$1.6 million charge in fiscal 2003 for the write-down of inventory that CNT had
purchased prior to the acquisition. There have been no significant subsequent
sales of this inventory. During 2004, the Company experienced a continued slow-down in the IT
spending environment, competitive pressures and customers desire for more
flexibility in financing terms, particularly for large investments, such as
remote storage networking solutions. The Company also experienced a decline in
traditional large-scale ESCON projects, while FICON extension, the new
mainframe channel technology, has not grown as fast as anticipated. In the
third quarter of fiscal 2004, the Company took actions to adjust its expense
levels to reflect the current outlook for its markets, including reductions of
approximately 220 employees and consultants, along with reductions in other
discretionary expenses. The Companys results for the third quarter of
fiscal 2004 include charges of approximately $3.7 million for severance, and
$225 for facility closure costs. A summary of severance and facility accrual activity follows: Obligation
    
    
    
    
    
    
    
    
    
    ObligationAs of
    
    
    
    
    
    
    
    
    
    As ofJanuary 31, 2004
    
    New Accrual
    
    Utilization
    
    October 31, 2004Inrange Integration Related:Inrange severance
    
    $
    283
    
    
    
    
    
    
    
    (283
    )
    
    $
    CNT severance
    
    $
    50
    
    
    
    
    
    
    
    (50
    )
    
    $
    Duplicative facilities
    
    $
    5,574
    
    
    
    
    
    
    
    (1,717
    )
    
    $
    3,8572004 Cost Reduction Actions:Severance
    
    $
    
    
    
    
    3,659
    
    
    
    (3,571
    )
    
    $
    88Facility closure
    
    $
    
    
    
    
    225
    
    
    
    (67
    )
    
    $
    158
 (13) LITIGATION Inrange Technologies Corporation, which is now a wholly owned subsidiary of the
Company, has been named as a defendant in the case SBC Technology Resources,
Inc. v. Inrange Technologies Corp., Eclipsys Corp. and Resource Bancshares
Mortgage Group, Inc., No. 303-CV-418-N, pending in the United States District
Court for the Northern District of Texas, Dallas Division (the Litigation).
The Litigation was commenced on February 27, 2003. The Complaint claims that
Inrange is infringing U.S. Patent No. 5,530,845 (845 patent) by
manufacturing and selling storage area networking equipment, including Fibre
Channel directors and switches that are used in storage networks. The
Complaint asks for judgment that the 845 patent is infringed by the defendants
in the case, an accounting for actual damages, attorneys fees, costs of suit
and other relief. Inrange has answered the Complaint, denying SBCs
allegations. The case is in the discovery phase, and a claim construction of
the asserted patent is pending. Management is evaluating the litigation. At
this point, it is too early to form a definitive opinion concerning the
ultimate outcome of this matter. Eclipsys Corp. (Eclipsys) settled with SBC for an undisclosed sum. Eclipsys
has demanded that Inrange indemnify and defend Eclipsys pursuant to
documentation under which it acquired certain allegedly infringing products
from Inrange. Hitachi Data Systems Corporation (a non-party to the Litigation)
has also informed Inrange that it received a demand from Eclipsys that Hitachi
indemnify and defend Eclipsys in connection with the Litigation. Hitachi has
put Inrange on notice that it will tender to Inrange any claim by Eclipsys for
indemnification and defense of any aspect the Litigation. Inrange has not yet
responded to the indemnification demands asserted by Eclipsys and Hitachi. 13




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##### Table of Contents



A shareholder class action was filed against Inrange and certain of its
officers on November 30, 2001, in the United States District Court for the
Southern District of New York, seeking recovery of damages caused by Inranges
alleged violation of securities laws, including section 11 of the Securities
Act of 1933 and section 10(b) of the Exchange Act of 1934. The complaint, which
was also filed against the various underwriters that participated in Inranges
initial public offering (IPO), is identical to hundreds of shareholder class
actions pending in this court in connection with other recent IPOs and is
generally referred to as In re Initial Public Offering Securities Litigation.
The complaint alleges, in essence, (a) that the underwriters combined and
conspired to increase their respective compensation in connection with the IPO
by (i) receiving excessive, undisclosed commissions in exchange for lucrative
allocations of IPO shares, and (ii) trading in Inranges stock after creating
artificially high prices for the stock post-IPO through tie-in or laddering
arrangements (whereby recipients of allocations of IPO shares agreed to
purchase shares in the aftermarket for more than the public offering price for
Inrange shares) and dissemination of misleading market analysis on Inranges
prospects; and (b) that Inrange violated federal securities laws by not
disclosing these underwriting arrangements in its prospectus. The defense has
been tendered to the carriers of Inranges director and officer liability
insurance, and a request for indemnification has been made to the various
underwriters in the IPO. At this point the insurers have issued a reservation
of rights letter and the underwriters have refused indemnification. The court
has granted Inranges motion to dismiss claims under section 10(b) of the
Securities Exchange Act of 1934 because of the absence of a pleading of intent
to defraud. The court granted plaintiffs leave to replead these claims, but no
further amended complaint has been filed. The court also denied Inranges
motion to dismiss claims under section 11 of the Securities Act of 1933. The
court has also dismissed Inranges individual officers without prejudice, after
they entered into a tolling agreement with the plaintiffs. On July 25, 2003,
the Companys board of directors conditionally approved a proposed partial
settlement with the plaintiffs in this matter. In June 2004, a stipulation of
settlement was submitted to the court for preliminary approval. The settlement
would provide, among other things, a release of Inrange and of the individual
defendants for the conduct alleged in the action to be wrongful in the
complaint. Inrange would agree to undertake other responsibilities under the
partial settlement, including agreeing to assign away, not assert, or release
certain potential claims Inrange may have against its underwriters. Any direct
financial impact of the proposed settlement is expected to be borne by
Inranges insurers. The settlement was approved subject to a number of
conditions, including the participation of a substantial number of other issuer
defendants in the proposed settlement, the consent of Inranges insurers to the
settlement, and the completion of acceptable final settlement documentation.
Furthermore, the settlement is subject to a hearing on fairness and approval by
the court overseeing the IPO litigations. At this point, it is too early to
form a definitive opinion concerning the ultimate outcome of this matter. From time-to-time the Company is a party to various other legal actions
and receives threats of litigation. At this time, management does not believe
any such litigation or threats will have a material impact on the Companys
consolidated financial position or results of operations. 14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) should be read in conjunction with our interim consolidated
financial statements and notes thereto which appear elsewhere in this Quarterly
Report and the MD&A contained in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 14, 2004. Overview We are a leading provider of todays most cost-effective and reliable
storage networking solutions. For over 20 years, businesses around the world
have depended on us to improve business efficiency, increase data availability
and manage their business-critical information. We apply our technology,
products and expertise in open storage networking architecture and business
continuity to help companies build end-to-end storage solutions, including
hardware and software products, analysis, planning and design, multi-vendor
integration, implementation and ongoing remote management. We focus primarily
on helping our customers design, develop, deploy and manage storage and data
networks, including storage area networks, or SANs, a high speed network within
a business existing computer system that allows the business to manage its
data storage needs with greater efficiency and less disruption to its overall
network. We design, manufacture, market and support a wide range of solutions
that provide fast and reliable connections among networks of computers and
related devices, allowing customers to manage and expand large, complex storage
networks efficiently, without geographic limitations, including applications
such as remote data replication, or the real-time backup of data to remotely
located disks, and remote tape vaulting, or the backup of data to remotely
archived tapes. We market our storage networking products and services
directly to customers through our sales force and worldwide distributors. We
also have strategic marketing and supply relationships with leading storage,
telecommunications and fibre switching companies, including Brocade, EMC,
Hewlett-Packard, Hitachi Data Systems, IBM, StorageTek, and Dell Computer
Corporation. On May 5, 2003, we completed the acquisition of Inrange for $190 million
in cash plus transaction costs. Inrange designs, manufactures, markets and
supports switching and networking products for storage and data networks. In
July 2004, we announced a new storage networking infrastructure platform, the
UltraNet Multi-Service Director (UMD), a highly scalable family of
new-generation, multi-service enterprise directors that form the foundation for
emerging IT infrastructure strategies, such as tiered storage, information
lifecycle management and utility computing, while simplifying infrastructure
and reducing costs. With ability for customers to upgrade and scale to 512
non-blocking ports at increasing Gpbs, we believe the UMD provides a platform
from which enterprises can build storage networks with unprecedented
reliability, availability and serviceability, while providing the customer with
significant upgrade flexibility and investment protection. The acquisition of
Inrange makes us one of the worlds largest providers of complete storage
networking products, solutions and services; it significantly broadens and
strengthens our portfolio of storage networking products and solutions,
increases our global size and scope, and expands our customer base. The markets in which we operate are characterized by rapidly changing
technology and evolving industry standards, resulting in rapid product
obsolescence and frequent product and feature introductions and improvements.
We compete with several companies that have greater engineering and development
resources, marketing resources, financial resources, manufacturing capability,
customer support resources and name recognition. As a result, our competitors
may have greater credibility with existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. While the Fibre Channel and FICON switching markets have yet to develop
fully, we believe that the market for our Fibre Channel and FICON switching
products, including our next generation UMD family of products and our FC/9000®
products are highly competitive, continually evolving and subject to rapid
technology change. Our competitors in Fibre Channel and FICON switching include
Brocade Communications Systems, McData Corporation, Cisco Systems, Inc., and
Qlogic Corporation, as well as storage system vendors who may re-sell the Fibre
Channel and FICON switching products manufactured by our competitors. We anticipate that the UMD and FC/9000® Fibre Channel and FICON switching
products, will account for a significant and growing portion of our proprietary
product revenue in future periods. IDC estimates that the revenue for Fibre
Channel hubs, switches and directors will grow from $938 million in 2003 to
$2.2 billion in 2007, reflecting a compound annual growth rate of 23%. We
anticipate that we will be able to capture a larger share of this growing
segment by expanding our established relationships with leaders in the storage
networking market, including the major storage vendors, such as EMC, Hitachi
Data Systems and IBM. We believe our current and future strategic
relationships will facilitate the integration of our products, thereby
increasing our market share and reducing the length of our sales cycle. We
will also expand sales of our proprietary products, including our Fibre Channel
and FICON director products, through our direct sales force. We believe that
our ability to provide the customer with complete professional consulting 15




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##### Table of Contents



services, product maintenance and advanced networking monitoring services gives
us an advantage over our competitors that will enable us to expand sales and
grow market share. Our competitors for our wide area storage networking products, primarily
our UltraNet® Director and Edge products, include storage system vendors and
others including Akara, which is owned by Ciena, and Nishan Systems, which is
owned by McData. In addition, Cisco has acquired technology (Andiamo and
NuSpeed) with functionality similar to our product offerings. EMC has a WAN
capability for storage networking that competes with our products. Our
UltraNet® Director and Edge product revenue may be impacted as customers switch
to channels such as FICON with improved distance and price performance
capabilities or to less expensive IP based solutions. There are numerous
competitors for our third party product and solution sales. Our revenue can be significantly impacted by general economic trends in
the global economy and capital spending plans for information technology
equipment. Our revenue can also be impacted by the introduction or phase out
of products and services, either by us, or our competitors. The introductions
of new technologies by other companies, including the large storage vendors
with whom we do business, can also impact our quarterly revenue. We expect
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 us in any given period will continue to be
affected by the receipt and fulfillment of sizable new orders in both domestic
and international markets. The mix of products sold by us, (i.e. our proprietary products or third
party products), and the level of services we provide to customers has a
significant impact on our level of profitability in any given quarterly period. Acquisition of Inrange On April 6, 2003, we entered into an agreement whereby a wholly owned
subsidiary would acquire all of the shares of Inrange that were owned by SPX
Corporation. The shares acquired constituted approximately 91% of the issued
and outstanding shares of Inrange for a purchase price of approximately $2.31
per share and $173 million in the aggregate. On May 5, 2003 we completed the
acquisition of Inrange and pursuant to the agreement the subsidiary merged into
Inrange, and the remaining capital stock owned by the other Inrange
shareholders was converted into the right to receive approximately $2.31 per
share in cash, resulting in a total payment of $190 million for both the stock
purchase and merger. During all of fiscal 2003 we incurred integration charges
related to the acquisition of $5.4 million, primarily for wages and severance
for terminated employees, and extra travel costs for integration activities.
We also recorded a $1.6 million charge for the write-down of inventory
resulting from the integration of the product strategies for the new combined
entity, and a $19.7 million charge for in-process research and development
related to the acquisition of Inrange. The integration of Inrange is now
complete and no further integration charges are anticipated in fiscal 2004.
Our consolidated financial statements include the results of Inrange from May
5, 2003. See footnote 5 per the accompanying financial statements for a
summary of the purchase price allocation and pro forma results of operations as
if the acquisition of Inrange took place on February 1, 2003. Our consolidated statement of operations for the three and nine months
ended October 31, 2003 include Inrange integration charges as follows: Three Months Ended
    
    Nine Months EndedOctober 31, 2003
    
    October 31, 2003Cost of product
    
    $
    
    
    
    $
    2,223Cost of service
    
    $
    266
    
    
    $
    390Sales and marketing
    
    $
    558
    
    
    $
    1,759Engineering and development
    
    $
    92
    
    
    $
    435General and administrative
    
    $
    336
    
    
    $
    1,481
 16




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##### Table of Contents



Discontinued Operations In connection with the acquisition of Inrange in May 2003, we acquired a
non-complementary business focused on enterprise resource planning (ERP)
consulting services. In April 2004, substantially all of the business and its
net assets totaling approximately $1.7 million were sold for cash proceeds of
$934,000 and installments payments having a discounted value of approximately
$1.2 million. The business was divested to allow us to focus on our core
storage networking solutions business. Revenue and expense for the ERP
business in the first nine months of 2004 totaled approximately $2.6 million
and $3.3 million, respectively The business has been accounted for as a
discontinued operation in the accompanying financial statements, meaning that
its revenues and expenses are not included in results from continuing
operations, and the net loss of the ERP business was included under the
discontinued operations caption in the statement of operations. The pre-tax gain from the sale of $450,000 during the first quarter of
2004 has been recorded as reduction in goodwill related to the Inrange
acquisition. Convertible Debt Offering In February 2002, we sold $125 million of 3% convertible subordinated
notes due February 2007, raising net proceeds of $121.6 million. The notes are
convertible into our common stock at a price of $19.17 per share. We may redeem
the notes upon payment of the outstanding principal balance, accrued interest
and a make whole premium if the closing price of our common stock exceeds 175%
of the conversion price for at least 20 consecutive trading days within a
period of 30 consecutive trading days ending on the trading day prior to the
date we mail the redemption notice. During the third quarter of 2004, we
recognized a gain of $141,000 from our repurchase of convertible subordinated
notes having a face value of $650,000. The gain is included in Interest
income and other, net in the consolidated statements of operations. Valuation Allowance for Deferred Tax Assets In the fourth quarter of fiscal 2002, we recorded a non-cash charge of
$23.6 million to provide a full valuation allowance for our United States
deferred tax assets. As we generate taxable income in future periods, we do not
expect to record significant income tax expense in the United States until it
becomes more likely than not that we will be able to utilize the deferred tax
assets, and we reduce the valuation allowance. The establishment of the
valuation allowance does not impair our ability to use the deferred tax assets
upon achieving profitability. Our federal net operating loss carry-forwards and
credits do not expire until 15 to 20 years from now. In addition, the American Jobs Creation Act of 2004 ("the Act") was
passed in October 2004 and included numerous law changes that will affect the Company's tax computations. The
provisions of the Act include a new deduction for U.S. manufacturers, the repeal of the extraterritorial
income exclusion and a provision regarding the preparation of foreign earnings. The Company is studying the
new law to determine what impact, if any, the Act will have on its effective tax rate. Charges Related to Third Quarter 2004 Cost Reduction Actions During the second quarter of 2004 we experienced a continued slow-down in
the IT spending environment, competitive pressures and customers desire for
more flexibility in financing terms, particularly for large investments, such
as remote storage networking solutions. We also experienced a decline in
traditional large-scale ESCON projects, while FICON extension, the new
mainframe channel technology, has not grown as fast as anticipated. These
trends have negatively impacted our UltraNet® wide area extension business, and
we expect these trends to continue. As a result, we have adjusted our expense
levels to reflect the current outlook for our markets. In August of 2004 we
had a reduction of approximately 220 employees and consultants, along with a
reduction in other discretionary expenses. We anticipate these reductions will
ultimately result in approximately $7.5 million of quarterly expense savings.
Our third quarter results include charges related to our cost reduction actions
of approximately $3.7 million for severance, and $225,000 for facility
closure costs. 17




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##### Table of Contents



The aforementioned charges are reflected in our consolidated statement of
operations for the three and nine months ended October 31, 2004 as follows: Three Months Ended
    
    Nine Months EndedOctober 31, 2004
    
    October 31, 2004Cost of product
    
    $
    
    
    
    $
    Cost of service
    
    $
    1,520
    
    
    $
    1,520Sales and marketing
    
    $
    1,195
    
    
    $
    1,526Engineering and development
    
    $
    619
    
    
    $
    619General and administrative
    
    $
    550
    
    
    $
    550
 Impairment of Goodwill and Other Intangible Assets In August 2004, the Companys market capitalization fell substantially below
recorded net book value, indicating that goodwill and other long-lived assets may be impaired,
including developed technology, trademarks and customer lists. As part of managements evaluation
and analysis, the Company engaged an independent third party to appraise these assets. The
Companys evaluation and analysis indicated that impairment charges for developed technology,
trademarks and goodwill of $11.2 million, $911,000 and $73.3 million, respectively, should be reflected
in results of operations for the fiscal third quarter ended October 31, 2004. Developed technology
and trademarks intangibles resulted entirely from the Companys Inrange acquisition, while most of
the Companys goodwill resulted from the Inrange acquisition. See footnote 4 to the consolidated
financial statements for a summary of the Inrange purchase price allocation. Developed technology
was analyzed using the excess earnings method, and was impaired due to more rapid market acceptance
of the Companys new generation UMD product following its introduction this year. Trademarks were
analyzed using the relief from royalty approach and were impaired due to use of the UltraNet name
for the new generation UMD product, and the subsequent rapid market acceptance of this product.
The more rapid market acceptance of the Companys new UMD product resulted in lower estimated
revenue and excess earnings, primarily for developed technology, compared to the Companys original
estimate when Inrange was acquired. The Company determined that its customer lists intangible was
not impaired. The Companys fair value was based on a combination of the income and market
valuation approaches. The analysis indicated that the Companys net book value exceeded its
implied fair value, resulting in the $73.3 million charge for goodwill impairment. The goodwill
impairment charge resulted from the Companys later than planned launch of the UMD, coupled with
slower than planned development of the direct sales channel for these products, and more rapid
acceptance of the CNT wide area extension products by the Inrange customer set. The remaining
useful lives for developed technology and trademarks were revised to 3 and one years, respectively.
The impairment charges will not result in future cash expenditures. 18




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##### Table of Contents



Results of Operations The following table sets forth financial data for our operations for the
periods indicated as a percentage of total revenue except for gross profit,
which is expressed as a percentage of the related revenue. Three months ended
    
    Nine months endedOctober 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales
    
    
    63.8
    %
    
    
    67.7
    %
    
    
    62.9
    %
    
    
    67.0
    %Service fees
    
    
    36.2
    
    
    
    32.3
    
    
    
    37.1
    
    
    
    33.0Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Gross profit:Product sales
    
    
    41.0
    
    
    
    43.8
    
    
    
    40.7
    
    
    
    40.2Impairment  developed technology
    
    
    12.6
    
    
    
    
    
    
    
    4.3
    
    
    
    Service fees
    
    
    42.0
    
    
    
    41.5
    
    
    
    39.9
    
    
    
    42.0Total gross profit
    
    
    28.8
    
    
    
    43.0
    
    
    
    36.2
    
    
    
    40.8Operating expenses:Sales and marketing
    
    
    26.7
    
    
    
    24.8
    
    
    
    27.1
    
    
    
    25.8Engineering and development
    
    
    15.1
    
    
    
    12.5
    
    
    
    15.4
    
    
    
    12.3General and administrative
    
    
    4.4
    
    
    
    4.3
    
    
    
    4.6
    
    
    
    4.9Impairment  trademark
    
    
    1.0
    
    
    
    
    
    
    
    .4
    
    
    
    Impairment  goodwill
    
    
    82.4
    
    
    
    
    
    
    
    27.9
    
    
    
    In-process research and development charge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.1Total operating expenses
    
    
    129.6
    
    
    
    41.6
    
    
    
    75.4
    
    
    
    51.1Income (loss) from operations
    
    
    (100.8
    )%
    
    
    1.4
    %
    
    
    (39.2
    )%
    
    
    (10.3
    )%
 Revenue Product revenue Sales of our proprietary products generated revenues of $40.5 million and
$110.9 million for the third quarter and first nine months of 2004,
respectively, decreases of 23% and 9%, respectively, from $52.7 million and
$122.0 million, respectively, for the third quarter and first nine months of
2003. During 2004, we experienced a slow-down in the IT spending environment,
competitive pressures and customers desire for more flexibility in financing
terms, particularly for large investments, such as remote storage networking
solutions. There was also a decline in traditional large-scale ESCON projects,
while FICON extension, the new mainframe channel technology, has not grown as
fast as anticipated. These events impacted the sale of our proprietary
wide-area extension products during the third quarter and first nine months of
2004, when compared to 2003. We currently anticipate that this trend will
continue for the foreseeable future. Our results for the third quarter and
first nine months of 2004 and 2003 include our acquisition of Inrange
Technologies on May 5, 2003. Sales of our third party storage solution products generated revenues of $16.2
million and $54.1 million for the third quarter and first nine months of 2004,
respectively, increases of 23% and 30%, respectively, from $13.2 million and
$41.7 million, respectively, for the third quarter and first nine months of
2003. During 2004, we received several large third party storage solutions
product orders from a single customer. These orders have accounted for a large
portion of the increase in third party storage solution products revenue when
comparing the third quarter and first nine months of 2004 to 2003. Our sales
representatives have also become more proficient at selling third party storage
solutions, which also contributed to this growth. 19




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##### Table of Contents



Service revenue Maintenance revenues from our proprietary products for the third quarter
and first nine months of 2004 totaled $22.2 million and $65.4 million,
respectively, increases of 8% and 22%, respectively, from $20.5 million and
$53.4 million, for the third quarter and first nine months of 2003. The
increase for the third quarter of 2004 compared to the third quarter of 2003
was due to higher maintenance renewal rates. The increase for the first nine
months of 2004 compared to the first nine months of 2003 is primarily
attributable to our acquisition of Inrange on May 5, 2003. Our consulting fee revenue for the third quarter and first nine months of
2004 totaled $10.0 million and $32.0 million, respectively, a decrease of 8%
and an increase 17%, respectively, from $10.9 million and $27.4 million for the
third quarter and first nine months of 2003. The decrease for the third
quarter of 2004 compared to the third quarter of 2003 was due to the decline in
sales of our proprietary products, as we typically sell professional services
with these products. The increase for the first nine months of 2004 compared to
the first nine months of 2003 is primarily attributable to our acquisition of
Inrange on May 5, 2003. We now offer professional consulting services with sales of the proprietary
products we acquired from Inrange, and have trained the Inrange sales force to
sell these services, along with our proprietary and third party products. Our
sales force has also become more experienced and proficient at selling our
consulting services. A significant component of our strategy includes having a
direct sales force and professional consulting organization capable of
providing customers with complete end-to-end storage networking solutions,
thereby capturing more of the customers IT spending and increasing our overall
consulting fee and product revenue. General Revenue generated from the sale of products and services outside the
United States for the third quarter and first nine months of 2004 totaled $25.5
million and $87.8 million, respectively, compared to $34.7 million and $87.8
million, respectively, for the third quarter and first nine months of 2003.
The decline in international revenue in the third quarter of 2004 compared to
the prior year was due to the previously discussed slow-down in the IT spending
environment and our wide-area extension markets. We derived 29% and 33% of our
revenue outside the United States for the third quarter and first nine months
of 2004, compared to 36% for the same periods of 2003. We expect these
percentages to fluctuate based on the timing of when we receive and record
revenue for large orders in both domestic and international markets. IBM and its affiliates and MetLife accounted for 19% and 15%,
respectively, of our revenue during the first nine months of 2004. IBM
accounted 17% of our revenue during the first nine months of 2003. Price
discounting had a small impact on our product revenue during these periods. Gross Profit Margins Product margins Gross margins from the sale of our proprietary products for the third
quarter and first nine months of 2004 were 51% and 53%, respectively, compared
to 50% and 48%, respectively, for the third quarter and first nine months of
2003. Included in product gross margins is amortization expense for developed
technology related to the Inrange acquisition for the third quarter and first
nine months of 2004 of $426,000 and $2.5 million, respectively, compared to
$1.1 million and $2.1 million, respectively, for the third quarter and first
nine months of 2003. Also included in the first nine months of 2003 is a $1.6
million write down of inventory and $616,000 of severance costs, both related
to the integration of Inrange. Excluding these items, our gross margins for
the third quarter and first nine months of 2004 would have been 53% and 55%,
respectively, compared to 52% and 51%, respectively, for the third quarter and
first nine months of 2003. The slight improvement in gross margin percentage,
excluding the amortization of developed technology and integration charges, for
the third quarter of 2004 compared to 2003, was due to product mix. The
improvement in gross margins, excluding the amortization of developed
technology and integration charges for the first nine months of 2004, compared
to 2003, was due to the cost synergies resulting from the Inrange acquisition.
We obtained significant cost synergies by consolidating our manufacturing
operations following the acquisition of Inrange, resulting in lower labor and
overhead costs. A significant part of our product cost includes the addition
of parts and components to printed circuit boards. Following the acquisition of
Inrange, we were able to reduce our material costs by bringing this activity
in-house. We previously outsourced this activity to various third party
suppliers. 20




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##### Table of Contents



Gross margins from the sale of third party storage solutions products for
the third quarter and first nine months of 2004 were 15%, compared to 19% and
18%, respectively, for the third quarter and first nine months of 2003. The
slight decrease in gross margin percentage was primarily due to product mix. We
anticipate that product margins for third party products will remain in the mid
to high teens in future periods. Service margins Gross profit margins from maintenance of our proprietary products for the
third quarter and first nine months of 2004 were 48%, compared to 48% for the third quarter and first nine months of 2003. Included in
maintenance gross profit margins for the third quarter and first nine months of
2004 is $465,000 of severance costs related to our cost reduction actions.
Included in maintenance gross profit margins for the third quarter and first
nine months of 2003 are integration costs related to our Inrange acquisition of
$266,000 and $390,000, respectively. Excluding these items, our gross profit
margins for the third quarter and first nine months of 2004 would have been 51%
and 49%, respectively, compared to 49% for the third quarter and first nine
months of 2003. We presently anticipate that gross margins from maintenance
of our proprietary products will remain at the 50% level, plus or minus a few
percentage points, for the foreseeable future. Gross profit margins from consulting fees in the third quarter and first
nine months of 2004 totaled 28% and 24%, respectively, compared to 32% and 31%,
respectively, for the third quarter and first nine months of 2003. Included in
consulting gross profit margins for the third quarter and first nine months of
2004 is $1.1 million of severance costs related to our cost reduction actions.
Included in consulting gross profit margins for the first nine months of 2003
is $131,000 of earn-out expenses related to a prior acquisition. Excluding
these items, our gross profit margins for the third quarter and first nine
months of 2004 would have been 39% and 27%, respectively, compared to 32% and
30%, respectively, for the third quarter and first nine months of 2003. The
improvement in gross margins for the third quarter of 2004 compared to 2003 was
primarily due to better utilization of consultants resulting from our cost
reduction actions. Gross profit margins for the first nine months of 2004 were
slightly lower when compared to the first nine months of 2003, due to greater
use of third party contractors in the first quarter of 2004. Operating Expenses Sales and marketing Sales and marketing expenses for the third quarter and first nine months
of 2004 totaled $23.8 million and $71.1 million, respectively, down 1% from
$24.1 million for the third quarter of 2003, but up 13% from $63.0 million for
the first nine months of 2003. Included in sales and marketing expense is
amortization of customer list and trademarks related to our acquisition of
Inrange of $557,000 and $1.8 million, respectively, for the third quarter and
first nine months of 2004, compared to $608,000 and $1.2 million, respectively,
for the third quarter and first nine months of 2003. Also included in the
third quarter and first nine months of 2004 are $1.2 million and $1.5 million,
respectively, of severance related to our cost reduction actions. During the
third quarter and first nine months of 2003, we incurred Inrange integration
charges of $557,000 and 1.8 million, respectively, primarily for wages and
severance. The first nine months of 2003 also include $157,000 relating to an
earn-out from a prior acquisition. Excluding these items, sales and marketing
expenses for the third quarter of 2004 were $21.9 million, down 4% from $22.9
million for the third quarter of 2003. The decrease was due to our recent cost
reduction actions. Excluding the above items, sales and marketing expenses
for the first nine months of 2004 were $67.6 million, up $7.9 million or 13%
compared to the first nine months of 2003, due to our acquisition of Inrange in
May of 2003. Engineering Engineering and development expense for the third quarter and first nine
months of 2004 totaled $13.4 million and $40.4 million, respectively, up 9% and
34%, respectively, from $12.2 million and $30.2 million, respectively, for the
third quarter and first nine months of 2003. Included in the third quarter and
first nine months of 2004 is $619,000 of severance costs related to our recent
cost reduction actions. Included in the third quarter and first nine months of
2003 are integration charges of $92,000 and $435,000, respectively, related to
our acquisition of Inrange. Excluding these items, engineering and development
expense for the third quarter and first nine months of 2004 would have been
$12.7 million and $39.6 million, respectively, compared to $12.1 million and
$29.6 million, respectively, for the third quarter and first nine months of
2003. The increase in engineering and development expense for the third
quarter of 2004 when compared to 2003 is due to development of our new family
of Fibre Channel and FICON switching products, the UMD. The increase in
engineering and development expense, when comparing the first nine months of
2004 to 2003, is 21




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##### Table of Contents



due to our purchase of Inrange, and our resulting engineering investments
in Fibre Channel and FICON switching. In future periods, we expect to continue
to invest a significant portion of our resources in the engineering and
development of new products, specifically our new family of UMD Fibre Channel
and FICON switching products. General and administrative General and administrative expenses for the third quarter of 2004 totaled
$3.9 million, down $311,000 or 7% from $4.2 million in the third quarter of
2003. General and administrative expenses for the first nine months of 2004
and 2003 were approximately $12.0 million for both periods. Included in the
third quarter and first nine months of 2004 are severance and facility closure
costs of $325,000 and $225,000, respectively. General and administrative
expenses for the first nine months of 2004 also include $420,000 of non-cash
stock compensation expense, compared to $16,000 of such expense in 2003.
General and administrative expenses for the third quarter and first nine months
of 2003 include $336,000 and $1.5 million, respectively, of integration charges
related to our acquisition of Inrange. Excluding these items, general and
administrative expenses for the third quarter and first nine months of 2004
were $3.3 million and $11.0 million, respectively, compared to $3.8 million and
$10.5 million, respectively, for the third quarter and first nine months of
2003. The decrease when comparing the third quarter of 2004 to the third
quarter of 2003 was due to the cost reduction actions taken in the third
quarter of 2004. The increase when comparing the first nine months of 2004 to
2003 was primarily due to our acquisition of Inrange in May of 2003. Other Other expense for the third quarter and first nine months of 2004 totaled
$505,000 and $2.1 million, respectively, compared to other expense of $844,000
and $863,000, respectively, for the third quarter and first nine months of
2003. In February 2002, we sold $125 million of 3% convertible subordinated
notes due February 2007, raising net proceeds of $121.6 million. Coupon
interest on the notes, plus amortization of debt issuance costs, and interest
expense from our capital lease obligations resulted in interest expense for the
third quarter and first nine months of 2004 totaling $1.1 million and $3.3
million, respectively, compared to $1.1 million and $3.3 million, respectively,
for the third quarter and first nine months of 2003. In January 2004, we
entered into an interest-rate swap agreement with a notional amount of $75
million that has the economic effect of modifying that dollar portion of the
fixed interest obligations associated with $75 million of our 3% convertible
subordinated notes due February 2007, such that the interest payable
effectively becomes variable based on the three month LIBOR plus 69.5 basis
points. The combined effective rate for the three month period ended October 31,
2004 was approximately 2.375%. The combined effective rate for the period November 1, 2004 to January 31, 2005 will be 2.825%. Interest and other income totaled $575,000 and
$1.1 million for the third quarter and first nine months of 2004, compared to
$272,000 and $2.4 million for the third quarter and first nine months of 2003.
Higher interest rates accounted for most of the increase in interest and other
income when comparing the third quarter of 2004 to the third quarter of 2003.
During the first quarter of 2003, we sold substantially all of our investments
in marketable securities to finance our acquisition of Inrange on May 5, 2003.
The sale resulted in a net realized gain of $747,000, and was the primary
reason for the reduction in interest income when comparing the first nine
months of 2004 and 2003. Liquidity and Capital Resources We have historically financed our operations through the public and
private sale of debt and equity securities, bank borrowings under lines of
credit, capital and operating leases and cash generated by operations. Cash, cash equivalents and marketable securities at October 31, 2004
totaled $57.9 million, a decrease of $19.6 million since January 31, 2004.
Operations provided $574,000 of cash during the first nine months of 2004,
including $6.5 million for higher inventory levels, $20.4 million to reduce
accounts payable and accrued expenses, and $12.2 million for lower balances of
deferred revenue. These uses of cash for operating purposes were offset by
$37.5 million of additional cash provided by lower accounts receivable
balances. Other uses of cash during the first nine months of 2004 included
capital equipment and field support spares totaling $16.8 million. Expenditures
for capital equipment and field support spares have been, and will likely
continue to be, a significant capital requirement. At October 31, 2004, our available cash, cash equivalents and marketable
securities totaled $57.9 million. We believe that our available balances of
cash, cash equivalents and marketable securities, when combined with
anticipated cash flows from operations, will be adequate to fund our operating
plans and meet our current anticipated aggregate capital requirements, at least
for the next 22




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##### Table of Contents



twelve months. This belief is based upon a number of assumptions and
estimates, including obtaining certain revenue levels and payments of expenses
in line with estimates by management. If these estimates and assumptions do
not turn out to be correct, or if we encounter unanticipated difficulties or
economic conditions, our liquidity could be impaired. We believe that inflation has not had a material impact on our operations
or liquidity to date. Our future minimum contractual cash obligations at October 31, 2004,
including open purchase orders incurred in the ordinary course of business, are
as follows (in millions): Less Than
    
    
    One to
    
    
    Four to Five
    
    
    AfterCash Obligation
    
    Total
    
    
    One year
    
    
    Three Years
    
    
    Years
    
    
    Five YearsCapital leases
    
    $
    8.5
    
    
    $
    3.0
    
    
    $
    5.4
    
    
    $
    .1
    
    
    NoneOperating leases
    
    $
    42.4
    
    
    $
    9.9
    
    
    $
    22.0
    
    
    $
    10.5
    
    
    NonePurchase orders
    
    $
    49.6
    
    
    $
    36.6
    
    
    $
    13.0
    
    
    None
    
    NoneConvertible notes, plus interest
    
    $
    133.6
    
    
    $
    3.8
    
    
    $
    129.8
    
    
    None
    
    None
 
 ITEM 3. MARKET RISK Our exposure to market risk due to changes in the general level of U.S.
interest rates relates primarily to our cash, cash equivalents, and marketable
securities. The primary objective of our investment activities is the
preservation of principal while maximizing investment income and minimizing
risk. We mainly invest our cash, cash equivalents and marketable securities in
investment grade, highly liquid investments, consisting of U.S. government and
agency securities, corporate debt securities and bank certificates of deposits. At October 31, 2004, our marketable securities include $17,000 of
various mutual funds. These investments were purchased to directly offset any
investment gains or losses owed to participants under our executive deferred
compensation plan, which has been established for selected key employees. We are exposed to market risks related to fluctuations in foreign exchange
rates because some sales transactions, and the assets and liabilities of our
foreign subsidiaries, are denominated in foreign currencies, primarily the euro
and British pounds sterling. As of October 31, 2004, we had no open forward
exchange contracts. In January 2004, we entered into an interest-rate swap agreement with a
notional amount of $75 million that has the economic effect of modifying that
dollar portion of the fixed interest obligations associated with $75 million of
our 3% convertible subordinated notes due February 2007, such that the interest
payable effectively becomes variable based on the three month LIBOR plus 69.5
basis points. The payment dates of the swap are January 31st, April 30th, July
31st and October 31st of each year, commencing April 30, 2004, until maturity
on February 15, 2007. The combined effective rate for the period from August 1,
2004 through October 31, 2004 was approximately 2.375%. The combined effective
rate for the period November 1, 2004 to January 31, 2005 will be 2.825%. The
swap was designated as a fair value hedge, and as such, the gain or loss on the
swap, as well as the fully offsetting gain or loss on the notes attributable to
the hedged risk, were recognized in earnings. As part of the agreement, we are
also required to post collateral based on changes in the fair value of the
interest rate swap. This collateral, in the form of restricted cash, was $3.2
million at October 31, 2004. We could incur charges to terminate the swap in
the future prior to February 15, 2007 if interest rates rise, or upon certain
events such as a change in control or certain redemptions of convertible
subordinated notes. A 25 basis point increase in the LIBOR rate would increase
our annual interest expense by $187,500. On October 31, 2004, the reported trading price of our convertible
subordinated notes due 2007 was $82 per $100 in face amount of principal
indebtedness, resulting in an aggregate fair value of approximately $101.3 million. Our common stock is quoted on the Nasdaq National Market under the
symbol CMNT. On October 31, 2004, the last reported sale price of our common
stock on the Nasdaq Market was $4.13 per share. 23




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company reviewed and evaluated the effectiveness of its disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-14(c) and 15d-14(c)) as of the end of the period covered by this
report the (Evaluation Date). This review and evaluation was done under the
supervision and with the participation of management, including our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO). Based on their
review and evaluation, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the Evaluation Date, our disclosure controls and
procedures were adequate and effective to ensure that information required to
be disclosed by us in reports we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms. It
should be noted that the design of any system of controls is based upon certain
assumptions about the likelihood of future events, and there can be no
assurance that design will succeed in achieving its stated objective under all
potential future conditions, regardless of how remote. However, the CEO and
CFO believe the Companys disclosure controls and procedures provide reasonable
assurance that the disclosure controls and procedures are effective at the
reasonable assurance level. (b) Change in Internal Controls There have been no changes in our internal controls over financial
reporting that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting. Forward Looking Statements This Form 10-Q and other documents we have filed with the Securities and
Exchange Commission contain forward-looking statements, which may include
statements about our:  
    
    anticipated receipt of orders and their impact on quarterly sales;  
    
    business strategy;  
    
    expectations regarding future liquidity, revenue levels, gross margins, expenses, operating margins and earnings per share;  
    
    timing of and plans for the introduction or phase-out of products or services;  
    
    enhancements of existing products or services;  
    
    plans for hiring or reducing personnel;  
    
    entering into strategic partnerships;  
    
    other plans, objectives, expectations and intentions contained in this Form 10-Q that are not historical facts. When used in this Form 10-Q, the words may, should, expect, plan,
anticipate, believe, estimate, predict, intend, potential or
continue and similar expressions are generally intended to identify
forward-looking statements, although not all forward-looking statements contain
these identifying words. These forward-looking statements involve risks and
uncertainties. Actual results could differ materially from those expressed or
implied by these forward-looking statements as a result of certain risk
factors, including but not limited to (i) competitive factors, including
pricing pressures, (ii) variability in quarterly and annual sales, (iii)
economic trends in various geographic markets, including changes in IT spending
levels; (iv) relationships with our strategic partners; (v) unanticipated risks
associated with introducing new products and features; (vi) technological
change affecting our products; (vii) adverse judgments in present and future
litigation; (viii) our ability to obtain market acceptance of our new products;
(ix) our ability to anticipate end user needs; (x) dependence on sole source
and limited source suppliers; (xi) our ability to retain and attract key
personnel; (xii) the existence of undetected errors in our products; (xiii) our
ability to protect our intellectual property and defend against infringement
claims; (xiv) variability in gross profit caused by sales mix and other
factors; (xv) receipt of anticipated orders; (xvi) actual expenses meeting
anticipated levels; (xvii) the timing or amount of any restructuring or
impairment charge, and future reductions in quarterly expense levels, (xviii)
other events and other important factors disclosed previously and from time to
time in our filings with 24




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the U.S. Securities and Exchange Commission, including our Form 10-K. We assume
no obligation to update any forward-looking statements. These statements are
only predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. 25




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings The information set forth in Note 13 (Litigation) to the consolidated financial
statements included in Part I of this form 10-Q is hereby incorporated by
reference. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Issuance of securities in current quarter. On August 16, 2004, we issued 700,000 shares of our common stock to the former
owners of BI-Tech in connection with an earn-out payment pursuant to a private offering to accredited investors. The issuance of the
securities satisfied approximately $3.0 million of the Companys obligation under the earn-out for the purchase of
BI-Tech. (b) Not applicable. (c) Repurchases of securities in current quarter. In April 2001, our board of directors authorized the repurchase of up to $50.0
million of our common stock. Subsequent to April 2001, our board changed the
authorization so that the remaining balance of the initial $50 million
authorization can be used for the repurchase of either debt or stock. There is no expiration date for this program. As of
January 31, 2004, we had repurchased 4.1 million shares of our common stock for
$33.0 million under this authorization. No common stock or debt was repurchased
during the nine months ended October 31, 2004. In August of 2004, we repurchased
$650,000 in principal amount of our convertible bonds. Information with respect thereto is as follows: Total PrincipalAverage Price Paid
    
    Amount ofTotal Principal
    
    for Convertible
    
    Convertible Notes
    
    Approximate DollarAmount of
    
    Notes (as a
    
    Purchased as a
    
    Value that May YetConvertible Notes
    
    Percentage of Face
    
    Result of Publicly
    
    be Purchased UnderPeriod
    
    Purchased
    
    Amount)
    
    Announced Program
    
    ProgramAugust 1, 2004
throughAugust 31,2004
    
    $
    650,000
    
    
    
    77
    %
    
    $
    650,000
    
    
    $
    16,491,000September 1, 2004
throughSeptember 30, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    October 1, 2004
throughOctober 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    650,000
    
    
    
    77
    %
    
    $
    650,000
    
    
    $
    16,491,000
 
 Item 3. None 26




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##### Table of Contents



Item 4-5. None 
 Item 6. Exhibits 3.1
    
    Second Restated Articles of incorporation of the Company. (Incorporated by reference
to Exhibits 3(i)-1 and 3(i)-2 to current report on Form 8-K dated May 25, 1999).3.2
    
    Articles of Amendment of the Second Restated Articles of the Company.
(Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)3.3
    
    By-laws of the Company (Incorporated by reference to Exhibit 3 (ii)-1 to current report on
Form 8-K dated May 25, 1999.)4.1
    
    Rights Agreement between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent
including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares.
(Incorporated by reference to Exhibit 1 to Form 8-A dated July 29, 1998 and
Exhibit 1 to Form 8-A/A dated November 27, 2000.)4.2
    
    First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1
to Form 8-A/A dated November 27, 2000.)4.3
    
    First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating
Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)4.4
    
    Interest Rate Swap agreement between the Company and Credit Suisse First Boston International
date January 6, 2004. (Incorporated by reference to Exhibit 4.4 dated June 6, 2004.)4.8
    
    Registration Rights Agreement dated as of July 12, 2004 between the Company, Greg Scorziello, Paul
John Foskett and Owen George Smith (Incorporated by reference to Exhibit 2.3 to Registration
Statement No. 333-117917)11.
    
    Statement Re: Computation of Net income (loss) per Basic and Diluted Share. (1)31.1
    
    CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (1)31.2
    
    CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (1)32.
    
    Computer Network Technology Corporation Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
   (1)
    
    Filed herewith.(2)
    
    Furnished herewith. 27




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officers. COMPUTER NETWORK TECHNOLOGY CORPORATION
(Registrant) Date: December 9, 2004 By:
    /s/ Gregory T. BarnumGregory T. BarnumChief Financial Officer
(Principal financial officer)By:
    /s/ Jeffrey A. BertelsenJeffrey A. BertelsenCorporate Controller and Treasurer
(Principal accounting officer) 28




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##### Table of Contents



EXHIBIT INDEX 3.1
    
    Second Restated Articles of incorporation of the Company. (Incorporated by reference
to Exhibits 3(i)-1 and 3(i)-2 to current report on Form 8-K dated May 25, 1999).3.2
    
    Articles of Amendment of the Second Restated Articles of the Company.
(Incorporated by reference to Exhibit 3(i)-1 to current report on Form 8-K dated May 25, 1999.)3.3
    
    By-laws of the Company (Incorporated by reference to Exhibit 3 (ii)-1 to current report on
Form 8-K dated May 25, 1999.)4.1
    
    Rights Agreement between the Company and Chase Mellon Shareholder Services, L.L.C., as Rights Agent
including the form of Rights Certificate and the Summary of Rights to Purchase Preferred Shares.
(Incorporated by reference to Exhibit 1 to Form 8-A dated July 29, 1998 and
Exhibit 1 to Form 8-A/A dated November 27, 2000.)4.2
    
    First Amendment of Rights Agreement dated November 21, 2000. (Incorporated by reference to Exhibit 1
to Form 8-A/A dated November 27, 2000.)4.3
    
    First Amendment of Certificate of Designations, Preferences and Right of Series A Junior Participating
Preferred Stock. ($.01 Par Value Per Share) of Computer Network Technology Corporation
(Incorporated by reference to Exhibit 2 to Form 8-A/A dated November 27, 2000.)4.4
    
    Interest Rate Swap agreement between the Company and Credit Suisse First Boston International
date January 6, 2004. (Incorporated by reference to Exhibit 4.4 dated June 6, 2004.)4.8
    
    Registration Rights Agreement dated as of July 12, 2004 between the Company, Greg Scorziello, Paul
John Foskett and Owen George Smith (Incorporated by reference to Exhibit 2.3 to Registration
Statement No. 333-117917)11.
    
    Statement Re: Computation of Net income (loss) per Basic and Diluted Share. (1)31.1
    
    CEO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (1)31.2
    
    CFO Certifications Required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934. (1)32.
    
    Computer Network Technology Corporation Certification of Chief Executive Officer and ChiefFinancial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350). (2)
   (1)
    
    Filed herewith.(2)
    
    Furnished herewith. 29