<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1997
------------------
Commission File Number 1-2982
------
ANCOR COMMUNICATIONS, INCORPORATED
----------------------------------
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1569659
--------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6130 Blue Circle Drive Minnetonka, Minnesota 55343
-----------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's Telephone number, including area code (612) 932-4000
--------------
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 such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes /x/ No / /
11,603,570
----------
(Number of shares of common stock of the
registrant outstanding as of October 29, 1997)
================================================================================
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30,1997
Page
----
PART I - FINANCIAL INFORMATION
- ------ ---------------------
ITEM 1: FINANCIAL STATEMENTS
Balance Sheets as of September 30,1997 (unaudited)
and December 31, 1996 3
Statements of Operations for the three and nine
month periods ended September 30,1997
and 1996 (unaudited) 4
Statements of Cash Flows for the nine
month periods ended September 30,1997
and 1996 (unaudited) 5
Notes to Financial Statements 6
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 8
PART II - OTHER INFORMATION 12
- ------- -----------------
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ANCOR COMMUNICATIONS, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,109,027 $ 507,041
Short-term investments 3,000,000 1,003,530
Accounts receivable, net of reserves 3,609,521 4,019,000
Inventories (Note 2) 2,397,987 2,695,961
Other current assets 254,177 336,734
----------- -----------
Total current assets 10,370,713 8,562,266
Equipment, net of accumulated depreciation 3,124,995 2,838,116
Patents, prepaid royalties, and other assets,
net of accumulated amortization 209,999 247,754
Capitalized software development costs
net of accumulated amortization 542,042 614,188
----------- -----------
TOTAL ASSETS $14,247,749 $12,262,324
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $69,703 $61,923
Accounts payable 1,309,579 1,752,258
Accrued liabilities 660,614 364,064
----------- -----------
Total current liabilities 2,039,896 2,178,245
Long-term Debt, less current maturities 178,370 177,382
Shareholders' Equity (Note 3)
Preferred stock, par value $.01 per share,
authorized 5,000,000 shares; issued and outstanding
Series A, 42 shares in 1997 and 174 shares in 1996 $0 $2
Series B, 620 shares in 1997 and none issued in 1996 $6 --
Common stock, par value $.01 per share,
authorized 20,000,000 shares; issued and
outstanding 11,390,664 Shares in 1997 and
10,407,687 shares in 1996 113,907 104,077
Additional paid-in capital 35,269,555 27,071,820
Accumulated deficit (23,353,986) (17,269,202)
----------- -----------
Total shareholders' equity 12,029,482 9,906,697
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $14,247,749 $12,262,324
=========== ===========
</TABLE>
See Notes to Financial Statements
3
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $3,423,837 $1,861,132 $7,328,414 $5,372,880
Cost of sales 2,587,013 929,602 4,923,271 2,836,383
------------ ------------ ------------ ------------
Gross Profit 836,824 931,529 2,405,143 2,536,497
Operating Expenses
Selling, general and administrative 2,133,671 1,079,145 5,420,468 2,908,838
Research and development 1,209,497 1,107,368 3,235,213 2,658,910
------------ ------------ ------------ ------------
Total operating expenses 3,343,168 2,186,512 8,655,681 5,567,748
------------ ------------ ------------ ------------
Operating loss (2,506,344) (1,254,983) (6,250,538) (3,031,251)
Other income (expense)
Interest expense (5,363) (97) (10,526) (63,720)
Other, net 59,070 62,161 176,281 196,094
------------ ------------ ------------ ------------
Net Loss ($2,452,636) ($1,192,920) ($6,084,783) ($2,898,877)
============ ============ ============ ============
Net loss per common share (Note 4) ($0.23) ($0.12) ($0.59) ($0.32)
============ ============ ============ ============
Weighted average common and
common equivalent shares
outstanding 10,984,569 10,092,441 10,721,111 9,027,092
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
4
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------------
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss ($6,084,783) ($2,898,877)
Adjustments to reconcile net loss to net
cash used in operating activities:
Writedown of inventory to net realizable value 500,000 0
Writedown of equipment to net realizable value 248,953 0
Depreciation and amortization 767,979 295,721
Changes in current assets and liabilities:
Accounts receivable 409,479 (2,531,961)
Inventories (202,026) (2,485,674)
Other current assets 82,557 (182,848)
Accounts payable (442,679) 316,652
Accrued liabilities 296,550 (176,260)
------------- -------------
Net cash used in operating activities (4,423,971) (7,663,247)
------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of equipment (999,981) (1,133,709)
Short-term investments (1,996,470) (1,694,247)
Purchase of other assets (115,306) (42,495)
------------- -------------
Net cash provided by (used in) investing activities (3,111,757) (2,870,451)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Loan repayments (69,856) (1,524,497)
Proceeds from preferred stock issuance 7,948,001 9,557,815
Proceeds from common stock issuance
and exercise of options 259,568 2,865,758
------------- -------------
Net cash provided by financing activities 8,137,713 10,899,076
------------- -------------
Net increase (decrease) in cash 601,986 365,378
Cash, at beginning of period 507,041 251,475
------------- -------------
Cash, at end of period $1,109,027 $616,853
============= =============
Supplemental Schedule of Noncash Investing and Financing Activities:
Equipment acquired under capital lease $78,623 $60,000
============= =============
</TABLE>
See Notes to Financial Statements
5
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information.
In the opinion of management, the interim financial statements include all
adjustments necessary for a fair presentation of the results of operations for
the interim periods presented. Operating results for the three and nine months
ended Septemnber 30, 1997 are not necessarily indicative of the operating
results to be expected for the year ending December 31, 1997.
Certain information and footnote disclosures normally included in financial
statements in accordance with generally accepted accounting principles have been
condensed or omitted.
NOTE 2 - INVENTORIES
Inventories at September 30, 1997 and December 31, 1996, consisted of:
1997 1996
- -----------------------------------------------------------------------------
Raw materials and subassemblies $ 1,447,185 $ 1,190,170
Finished goods consigned to customers and others 304,004 625,222
Finished goods 646,798 880,569
---------------------------
$ 2,397,987 $ 2,695,961
===========================
NOTE 3 - EQUITY FINANCING
In March 1997, the Board of Directors designated 900 shares of the Company's
authorized preferred stock as Series B Preferred Stock. This stock has a stated
value and liquidation preference of $10,000 per share, with a five percent per
annum conversion premium. The holders of Series B Preferred Stock are not
entitled to vote or to receive dividends.
On March 24, 1997, the Company sold 855 shares of Series B Preferred Stock
through a private placement at its stated value of $10,000 per share. Total net
proceeds from this private placement were $7,951,558, after reduction for
commissions and issuance costs of $598,442. In conjunction with the transaction,
the placement agent was granted a five year warrant to purchase 105,556 shares
of common stock at $4.86 per share. In addition, the investors have a right to
receive warrants to purchase common stock equal to 20% of their original
investment not converted to common stock as of March 24, 1998, divided by the
conversion price then in effect, with an exercise price equal to 115% of the
average closing bid price for five days ending on the one year anniversary date.
The Series B Preferred Stock outstanding on March 24, 1999, automatically
converts into common stock at the applicable conversion rate.
NOTE 4 - EARNINGS PER SHARE
Net loss per common share is computed based upon the weighted average number of
common shares outstanding during the year. Common equivalent shares, consisting
of options, warrants and convertible perferred stock for all periods, were not
included in the computation as their effect was antidilutive. However, the eight
and five percent premium earned by the preferred shareholders in 1997 was added
to the net loss for computation purposes.
6
<PAGE>
The FASB has issued Statement No. 128, "Earnings Per Share," which supersedes
APB Opinion No. 15. Statement No. 128 requires the presentation of earnings per
share by all entities that have common stock or potential common stock, such as
options, warrants and convertible securities, outstanding that trade in a public
market. Those entities that have only common stock outstanding are required to
present basic earnings per-share amounts. All other entities are required to
present basic and diluted per-share amounts. Diluted per-share amounts assume
the conversion, exercise or issuance of all potential common stock instruments
unless the effect is to reduce a loss or increase the income per common share
from continuing operations. All entities required to present per-share amounts
must initially apply Statement No. 128 for annual and interim periods ending
after December 15, 1997. Earlier application is not permitted.
The adoption of Statement No. 128 would have had no effect on reported earnings
(loss) per share.
NOTE 5 - CONTINGENCY
The Company along with Stephen O'Hara, Lee B. Lewis and Dale Showers, has been
named as a defendant in a securities action captioned In re Ancor
Communications, Inc. Securities Litigation, filed in United States District
Court for the District of Minnesota on July 24, 1997. The lawsuit, a putative
class action, alleges that the Company violated sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 when it allegedly made misleading public
disclosures relating to the Company's contract with Sequent Computer Systems,
Inc. and the Company's quarterly revenues and seeks compensatory losses in an
undetermined amount. The Company believes that the lawsuit is without merit and
intends to defend it vigorously. The Company is unable to determine if there
will be a material adverse outcome at this time.
7
<PAGE>
ITEM 2
------
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
For the three and nine months ended September 30, 1997 and 1996.
The following table sets forth, for the periods indicated, certain statements of
operations data as a percentage of net sales.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------- -----------------------
1997 1996 1997 1996
---------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold 75.6 49.9 67.2 52.8
Gross Profit 24.4 50.1 32.8 47.2
Operating Expenses:
Selling, general & admin. 62.3 58.0 74.0 54.1
Research & development 35.3 59.5 44.1 49.5
Total operating expenses 97.6 117.5 118.1 103.6
Operating loss (73.2) (67.4) (85.3) (56.4)
Other income (expense)
Interest expense (0.2) (0.0) (0.1) (1.2)
Other, net 1.7 3.3 2.4 3.6
------ ------ ------ ------
Net Loss (71.6)% (64.1)% (83.0)% (54.0)%
====== ====== ====== ======
</TABLE>
Net Sales. Net sales for the third quarter 1997 increased by approximately
$1,563,000 (84%) from 1996 to $3,423,837. Net sales for the nine months ended
September 30, 1997, increased by approximately $1,956,000 (36%) from the same
period 1996 to $7,328,414. This increase in net sales is due primarily to a
significant increase in net sales to an international customer, offset by a
decrease in sales domestically. International net sales in the third quarter
increased from approximately $114,000 in 1996 to approximately $2,985,000 in
1997, representing 87% of net sales to all customers for the third quarter 1997.
International net sales in the first nine months comprised 83% of net sales and
increased from approximately $1,254,000 in 1996 to approximately $6,112,000 in
1997. Domestic sales volume in the three and nine month periods ending September
30, 1997, decreased by 75% and 70%, respectively, from similar periods in 1996,
because several large sales transactions included in domestic revenue for the
1996 periods were not replaced in the similar 1997 periods.
8
<PAGE>
The increase in net sales for the third quarter 1997 includes the effect of an
allowance against sales of $300,000 for product returns and customer stock
rotation. The increase in net sales for the first nine months 1997 includes the
effect of an allowance against sales of $1,000,000 for product returns and
customer stock rotation. The Company does not generally provide customers with
a right of return at the date of sale; however, in response to significant
pressures from the marketplace, the Company has allowed product returns in the
past from certain customers as a marketing concession to stimulate a positive
impression of the Company and its products in the marketplace. In addition,
resellers have incorrectly anticipated the configuration needed by end user
equipment purchasers and have requested that purchased but unused product be
exchanged for the product needed to meet the end user requirements. Further,
certain end users have requested that they purchase their initial products from
the Company, instead of the reseller, which resulted in credits issued to the
resellers in the second half of 1996 and first quarter of 1997. As a result of
all of these factors, the Company's net assets include a reserve to provide for
potential future return of product sold in the current and previous periods.
The reserve at September 30, 1997, was approximately $340,000 ($680,000 gross
sales less the estimated value of product to be returned).
While the Company achieved record revenues for the third quarter 1997, the
timing of orders and shipments will result in revenues varying from quarter to
quarter. The Company currently expects that fourth quarter revenues will be
less than record third quarter revenues because of an anticipated reduction in
international shipments.
A significant portion of the Company's revenues (14% in fiscal 1996 and 83% in
the first nine months of 1997) were generated by a single customer, Hucom, Inc.
Product purchased from the Company by Hucom is remarketed to end users. A
significant portion of Hucom's sales of Ancor's products in fiscal 1996 and
fiscal 1997 have been to one end user. In future periods, Hucom's sales of
Ancor's products to this end user are expected to be significantly less than in
fiscal 1997. The Company's business would be materially, adversely impacted if
other end users are not found to replace this level of business or if Hucom
ceased doing business with the Company unless and until additional resellers are
established.
Gross Profit. Gross profit in the third quarter of 1997 decreased to
$836,824, or 24.4% of sales, from $931,529, or 50.1% of sales, in the third
quarter of 1996. Gross profit in the first nine months of 1997 decreased to
$2,405,143, or 32.8% of sales, from $2,536,497, or 47.2% of sales, for the same
period of 1996. Included in the cost of sales for the third quarter is a
$500,000 provision for excess and obsolete inventory which had the effect of
decreasing gross profit as a percentage of sales by 14.6%. The Company made
this provision because it believes its inventory of certain host bus adapter
cards exceeds current and future market demands as customers transition to newer
server and workstation platforms.
Gross profit is impacted by the mix of product sold within a period. In
general, adapter cards have lower margins than switches and different switch
types have different margins. Gross margins for the third quarter and first
nine months of 1997 were negatively impacted because the mix of product sold
during these periods carried lower margins than those sold in comparable periods
in 1996.
9
<PAGE>
Operating Expense. The Company's operating expenses for the third quarter
of 1997 were $3,343,168, or 97.6% of net sales, compared to $2,186,512, or
117.5% of net sales, in the third quarter of 1996. Operating expenses for the
first nine months of 1997 were $8,655,681, or 118.1% of net sales, compared to
$5,567,748, or 103.6% of net sales, in the same period of 1996. The Company
believes that the level of expense incurred is appropriate to address the
opportunities available to it in the networking and Original Equipment
Manufacturer ("OEM") storage marketplaces. The increase in operating expenses is
due to an increase in the cost for personnel, increased marketing and sales
expenses to prepare for the OEM storage market, and increased depreciation. The
number of employees at September 30, 1997 was 10% greater than at September 30,
1996, resulting in personnel and related expenses increasing $604,000 in the
third quarter 1997 as compared with the third quarter 1996, and $1,420,000 in
the first nine months of 1997 as compared with the same period 1996.
Additionally, the Company's ongoing aggressive commitment to front end spending
for marketing and sales tactics resulted in advertising and marketing expenses
increasing $208,000 in the third quarter 1997 as compared with the third quarter
1996, and $764,000 in the first nine months of 1997 as compared with the same
period 1996. Further, primarily due to amortization of capitalized software
development costs, depreciation and amortization expense increased $165,000 in
the third quarter 1997 as compared with the third quarter 1996, and $472,000 in
the first nine months of 1997 as compared with the same period 1996.
In the third quarter 1997 a charge of $250,000 was recorded to reflect
compensation owed a former executive of the Company whose services are being
discontinued. The amount of the accrual was based on the compensation payable
to such officer under the terms of the officer's employment contract.
Other Income (Expense) Interest expense decreased in the first nine months
of 1997 to $10,526 from $63,720 in the first nine months of 1996 as a result of
the Company's repayment of a $1.5 million note payable in June 1996. Interest
income of $59,070 and approximately $62,161 in the third quarters of 1997 and
1996, respectively, and $176,281 and $196,094 in the first nine month periods of
1997 and 1996, respectively, was earned from the investment of the net proceeds
of preferred stock offerings occurring in March of each year.
Net Loss The Company's net loss increased to $2,452,636, or $0.23 per
share in third quarter 1997, compared to a net loss of $1,192,920, or $0.12 per
share in third quarter 1996. Net loss for the first nine months of 1997
increased to $6,084,783, or $0.59 per share, compared to a net loss of
$2,898,877, or $0.32 per share in the same period 1996. The greater net loss is
primarily attributable to greater operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash, cash equivalents and short-term investments were $4,109,027
as of September 30, 1997, compared to $1,510,571 as of December 31, 1996. Cash
flows used in operating activities totaled $4,423,971, due to the operating
loss, net payments to vendors and inventory purchases in anticipation of future
sales, as offset by net collections of accounts receivable. Cash flows used in
investing activities totaled $3,111,757 as a result of the purchase of short-
term investments and equipment, which included upgrades of engineering desktop
10
<PAGE>
systems and continued internal construction of testing and tooling equipment for
the next generation of Fibre Channel switching products. In March 1997, the
Company completed a private placement transaction by selling 855 shares of
Series B Preferred Stock which provided net proceeds of approximately
$8,000,000. Approximately 490 of these preferred shares remain unconverted as of
October 29, 1997. In conjunction with the transaction, the placement agent was
granted a five year warrant to purchase 105,556 shares of common stock at $4.86
per share. Approximately 90,000 of these warrants remain unexercised as of
October 29, 1997. In addition, the investors have a right to receive warrants to
purchase common stock equal to 20% of their original investment not converted to
common stock as of March 24, 1998, divided by the conversion price then in
effect, with an exercise price equal to 115% of the average closing bid price
for five days ending on the one year anniversary date.
The Company believes that the capital received from the private placement,
together with interest earned thereon, and anticipated revenues from operations
will provide adequate liquidity to fund growth, operations, and capital
expenditures for 1997. However, the Company aniticipates the need to secure
additional financing in order to fund operating and working capital requirements
in the first half of 1998. There can be no assurance that additional financing
can be obtained with terms acceptable to the Company. Any additional equity
financings may be dilutive to existing shareholders, and any debt financing may
contain restrictive covenants. The Company's inability to obtain additional
financing if and when needed could adversely affect the Company and its
operations.
Shareholder Litigation. The Company along with Stephen O'Hara, Lee B.
Lewis and Dale Showers, has been named as a defendant in a securities action
captioned In re Ancor Communications, Inc. Securities Litigation, filed in
United States District Court for the District of Minnesota on July 24, 1997.
The lawsuit, a putative class action, alleges that the Company violated sections
10(b) and 20(a) of the Securities Exchange Act of 1934 when it allegedly made
misleading public disclosures relating to the Company's contract with Sequent
Computer Systems, Inc. and the Company's quarterly revenues and seeks
compensatory losses in an undetermined amount. The Company believes that the
lawsuit is without merit and intends to defend it vigorously. The Company is
unable to determine at this time if there will be a material adverse outcome.
No provision has been made for any loss that may occur as a result of an adverse
outcome of the suit.. At September 30, 1997, the Company had incurred
approximately $25,000 in legal expenses related to the suit.
Year 2000 Issue. Per SEC Staff Legal Bulletin No. 5 issued October 8,
1997, the Company has investigated the impact of the Year 2000 ("Y2K") issue on
its information systems. During fiscal 1996 the Company purchased from a world-
wide supplier and developer of information systems an enterprise-wide
information system. The developer of this information system has provided its
clients written assurance that the system will correctly function across the
year 2000, as verified by previous system tests. The developer has informed the
Company it will continue its testing throughout 1997 and advise its clients of
these test results as they are available. Additionally, the Company's products,
including software, are not date sensitive as to functionality. Therefore, Y2K
is not expected to have a material effect on the Company's financial position,
operations or cash flow.
11
<PAGE>
SAFE HARBOR CAUTIONARY STATEMENT
- --------------------------------
Statements made in this Management's Discussion and Analysis that are not
historical in nature, including statements regarding the level of future
revenues and expenses, are "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties. Factors that may affect the Company's future performance and
results are set forth in the Company's filings with the Securities and Exchange
Commission and include the level of market acceptance of Fibre Channel
technology and the Company's products, the Company's ability to retain current
customers and attract new customers, the Company's ability to compete with
others providing Fibre Channel technology, competition from existing and new
technologies, the Company's ability to manage growth, the Company's ability to
attract and retain qualified personnel and the ability of the Company's products
to interoperate with products manufactured by others.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company along with Stephen O'Hara, Lee B. Lewis and Dale Showers, has
been named as a defendant in a securities action In re Ancor
Communications, Inc. Securities Litigation, filed in United States District
Court for the District of Minnesota on July 24, 1997. The lawsuit, a
putative class action, alleges that the Company violated sections 10(b) and
20(a) of the Securities Exchange Act of 1934 when it allegedly made
misleading public disclosures relating to the Company's contract with
Sequent Computer Systems, Inc. and the Company's quarterly revenues and
seeks compensatory losses in an undetermined amount. The Company believes
that the lawsuit is without merit and intends to defend it vigorously.
Item 2. Changes in Securities.
(a.) None.
(b.) None.
(c.) None.
Item 3 Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Securities Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
4.1/a/ Loan and Warrant Purchase Agreement, dated as of June 24,
1992, between Ancor Communications, Incorporated and
International Business Machines Incorporated.
4.2/a/ Agreement and Amendment to Loan and Warrant Purchase
Agreement, dated March 10, 1994, by and among Ancor
Communications, Incorporated, International Business Machines
Corporation and IBM Credit Corporation.
13
<PAGE>
4.3/b/ Second Amendment to Loan and Warrant Purchase Agreement dated
April 25, 1994, by and among Ancor Communications,
Incorporated, International Business Machines Corporation and
IBM Credit Corporation.
4.4/a/ Shareholders Agreement, dated as of June 24, 1992, among Ancor
Communications, Incorporated, International Business Machines
Incorporated and the shareholders of the Company named on the
signature page thereto.
4.5/c/ Representative's Warrant.
4.6/a/ Form of Warrant issued November 8, 1993.
4.7/f/ Form of Warrant issued April 28, 1995.
4.8/g/ Form of Warrant issued to Andcor Human Resources on August 28,
1995.
4.9/g/ Form of Warrant issued to John G. Kinnard & Company on October
23, 1995.
4.10/h/ Certificate of Designation of Series A Preferred Stock.
4.11/h/ Form of Warrant issued to Swartz Investments, Inc. on March 7,
1996.
4.12/j/ Form of Warrant issued to Dunwoody Brokerage Services, Inc. on
March 24, 1997.
4.13/j/ Form of Warrant to be issued to Purchasers of the Company's
Series B Preferred Stock.
4.14/j/ Certificate of Designation of Series B Preferred Stock.
10.1/a/ Form of Promissory Note, dated June 24, 1992, made by Ancor
Communications, Incorporated in favor of IBM Credit
Corporation in connection with the Loan and Warrant Purchase
Agreement referenced in Exhibit 4.2 above.
10.2/a/ Ancor Communications, Incorporated 1990 Stock Option Plan.
10.3/a/ Ancor Communications, Incorporated 1994 Long-Term Incentive
and Stock Option Plan.
14
<PAGE>
10.4/a/ Employment Agreement, dated January 1, 1994, between Ancor
Communications, Incorporated and Dale C. Showers.
10.5/a/ Employment Agreement, dated January 1, 1994, between Ancor
Communications, Incorporated and Stephen C. O'Hara.
10.6/a/ Employment Agreement, dated June 30, 1992, between Ancor
Communications, Incorporated and Terry M. Anderson.
10.7/a/ Employment Agreement, dated June 30, 1992, between Ancor
Communications, Incorporated and Robert S. Cornelius.
10.8/a/ Sublease, dated March 29, 1988, by and between Anderson
Cornelius and Unisys Corporation, formerly known as Burroughs
Corporation.
10.9/a/ Sublease, Amendment Agreement, dated March 8, 1989, by and
between Anderson Cornelius and Unisys Corporation, formerly
known as Burroughs Corporation.
10.10/a/ Sublease, Amendment Agreement, dated August 31, 1992, by and
between the Company and Unisys Corporation, formerly known as
Burroughs Corporation.
10.11/a/ Development and License Agreement between the Company and
International Business Machines Corporation dated June 4,
1992, as amended on February 8, 1993, May 10, 1993 and
October 5, 1993 (a request for confidentiality of certain
portions of this agreement has been granted).
10.12/c/ Underwriting Agreement.
10.13/d/ Amendment No. 1 to Employment Agreement dated November 4,
1994 between the Company and Dale C. Showers amending the
Employment Agreement dated January 1, 1994 between the
Company and Mr. Showers filed as exhibit No 10.4
10.14/e/ Form of Change of Control Agreement dated January 1, 1995
between the Company and each of Lee B. Lewis, Timothy W.
Donaldson and William F. Walker.
10.15/f/ Agency Agreement between the Company and John G. Kinnard and
Company, Incorporated dated April 20, 1995.
15
<PAGE>
10.16/g/ Agency Agreement between the Company and John G. Kinnard &
Company, Inc. dated October 23, 1995.
10.17/g/ Ancor Communications, Inc. 1995 Employee Stock Purchase Plan.
10.18/g/ Ancor Communications, Inc. Non-Employee Director Stock Option
Plan.
10.19/h/ Form of Subscription Agreement between the Company and
Purchasers of the Company's Series A Preferred Stock (March
1996).
10.20/h/ Registration Rights Agreement dated March 7, 1996 between the
Company, Swartz Investments, Inc. and Purchasers of the
Company's Series A Preferred Stock.
10.21/h/ Letter Agreement between the Company and Swartz Investments,
Inc. dated February 1996.
10.22/i/ Separation and General Release Agreement between the Company
and William F. Walker.
10.23/j/ Form of Subscription Agreement between the Company and
Purchasers of the Company's Series B Preferred Stock (March
1997).
10.24/j/ Registration Rights Agreement dated March 24, 1997 between
the Company, Swartz Investments, Inc. and Purchasers of the
Company's Series B Preferred Stock.
10.25/k/ Letter Employment Agreement with Kenneth E. Hendrickson dated
July 25, 1997.
10.26/k/ Letter Employment Agreement with Steven E. Snyder dated
September 23, 1997.
27.1/k/ Financial Data Schedule.
/a/ Incorporated by reference to the Company's Registration Statement on form
SB-2 filed March 11, 1994.
/b/ Incorporated by reference to Amendment No. 2 to the Company's Registration
Statement on form SB-2 Filed April 28, 1994.
16
<PAGE>
/c/ Incorporation by reference to the Company's Form 10-QSB filed for the
quarterly period ended March 31, 1994.
/d/ Incorporated by reference to the Company's Form 10-QSB filed for the
quarterly period ended September 30, 1994.
/e/ Incorporated by reference to the Company's Form 10-KSB filed for the fiscal
year ended December 31, 1994.
/f/ Incorporated by reference to the Company's form 10-QSB filed for the
quarterly period ended March 31, 1995.
/g/ Incorporated by reference to the Company's form 10-QSB filed for the
quarterly period ended September 30, 1995.
/h/ Incorporated by reference to the Company's Form 10-KSB filed for the fiscal
year ended December 31, 1995.
/i/ Incorporated by reference to the Company's form 10-QSB filed for the
quarterly period ended March 31, 1996.
/j/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended March 31, 1997.
/k/ Included herewith.
(b.) Reports on Form 8-K
None.
17
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANCOR COMMUNICATIONS, INCORPORATED
----------------------------------
Dated: November 14, 1997 By / S/ Kenneth E. Hendrickson
------------------------------
Kenneth E. Hendrickson
Chairman of the Board &
Chief Executive Officer
Dated: November 14, 1997 By /S/ Steven E. Snyder
-----------------------
Steven E. Snyder
Vice President,
Chief Financial Officer &
Secretary
18
<PAGE>
Exhibit 10.25
[Letterhead of Ancor Communications]
July 25, 1997
Mr. Ken Hendrickson
22385 Pineglen
Mission Viejo, CA 92692
Dear Ken:
I would like to thank you for spending the time to get to know Ancor
Communications. The following is a summary of the components of the offer that
is being extended to you from the Board of Directors, for the position of CHIEF
EXECUTIVE OFFICER:
SALARY AND BONUS
- - The monthly base compensation will be $13,333 ($160,000 annually)
- - Participation in the Executive Incentive Program (see enclosures)
- - $3,000 signing bonus to offset moving expenses
- - Two airplane tickets from California to Minnesota
EQUITY PARTICIPATION
- - An option for 200,000 shares of Company stock, which represents
approximately 2% of the outstanding, fully diluted stock, with vesting as
follows:
- 1/3rd after six months
- 1/3rd on 1st year anniversary
- 1/3rd on 2nd year anniversary
- - Please recognize that this option is subject to future dilution.
TERMINATION FOR CAUSE:
- - Any situation that involves termination "without cause" (the influence of a
venture capital firm being an example), carries a one year salary severance
benefit and full vesting of stock options. There will be no one year salary
severance benefit or full vesting of options in situations of termination
for "cause." However, unless the termination were for a criminal or
material offense, notification of the "cause" will be provided by the
Company, and a reasonable period of time will be allowed to "cure" same.
BENEFITS
- - Health Care and Dental Insurance: Our benefit package covers the health,
dental and insurance programs typically seen in this industry.
Specifically, medical, dental, life insurance, long-term disability,
vacation, sick leave and 401(k) retirement programs are provided (see
enclosures)
- - The position of Chief Executive Officer includes a seat on the Board of
Directors
On behalf of Ancor Communications, we are all very enthusiastic about your
ability to be a catalyst for the organization's growth and success. Please
review this information and let me know no later than July 29th as to whether or
not you are willing to accept this position as offered herein.
Very best regards,
/S/ Dale Showers
- --------------------------
Dale Showers
Chairman of the Board
<PAGE>
Exhibit 10.26
[Letterhead of Ancor Communications]
September 23, 1997
Mr. Steve Snyder
11701 Tanglewood Drive
Eden Prairie, MN 55347
Dear Steve:
I would like to thank you for spending the time to get to know Ancor
Communications. The following is a summary of the components of the offer that
is being extended to you for the position of CHIEF FINANCIAL OFFICER:
SALARY AND BONUS
- - The monthly base compensation will be $10,416.67 ($125,000 annually)
- - Participation in the Executive Incentive Program (potential payout up to
65% of base compensation - see current year profile attached for your
review). Your enrollment in an incentive program would begin with the 1998
plan that will parallel our 1998 calendar fiscal year.
EQUITY PARTICIPATION
- - An option for 60,000 shares of Company stock, which represents
approximately 0.5% of the outstanding, fully diluted stock, with vesting as
follows:
- 1/3rd on 1st year anniversary
- 1/3rd on 2nd year anniversary
- 1/3rd on 3rd year anniversary
- - Please recognize that this option is subject to Board approval and
potential future dilution. A copy of the governing option plan and an
example of the option agreement is also attached. You will note that option
vesting is protected in a "change of control" situation.
TERMINATION FOR CAUSE
- - Any situation that involves termination "without cause" carries a six (6)
month salary severance benefit. There will be no six (6) month salary
severance benefit in situations of termination for "cause." However, unless
the termination were for a criminal or material offense, notification of
the "cause" will be provided by the Company, and a reasonable period of
time will be allowed to "cure" same. Your options will continue to vest
during the six (6) month severance period.
BENEFITS
- - Health Care and Dental Insurance: Our benefit package covers the health,
dental and insurance programs typically seen in this industry.
Specifically, medical, dental, life insurance, long-term disability,
vacation, sick leave and 401(k) retirement programs are provided.
- - To facilitate continuous coverage, Ancor will waive its normal thirty (30)
day waiting period for insurance protection. We will make coverage
effective on an agreed to date for a seamless transition.
On behalf of Ancor Communications, we are all very enthusiastic about your
ability to be a catalyst for the organization's growth and success. Please
review this information and let me know no later than September 26th as to
whether or not you are willing to accept this position as offered herein.
Very best regards,
/S/ Ken Hendrickson
- --------------------------
Ken Hendrickson
Chairman of the Board
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,109,027
<SECURITIES> 3,000,000
<RECEIVABLES> 3,949,640
<ALLOWANCES> (340,119)
<INVENTORY> 2,397,987
<CURRENT-ASSETS> 10,370,713
<PP&E> 5,511,236
<DEPRECIATION> (2,386,241)
<TOTAL-ASSETS> 14,247,749
<CURRENT-LIABILITIES> 2,039,896
<BONDS> 178,370
0
7
<COMMON> 113,907
<OTHER-SE> 11,915,569
<TOTAL-LIABILITY-AND-EQUITY> 14,247,749
<SALES> 3,423,837
<TOTAL-REVENUES> 3,423,837
<CGS> 2,587,013
<TOTAL-COSTS> 2,587,013
<OTHER-EXPENSES> 3,343,168
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,363
<INCOME-PRETAX> (2,452,636)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,452,636)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,452,636)
<EPS-PRIMARY> (0.233)
<EPS-DILUTED> (0.233)
</TABLE>
