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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the year ended December 31, 1999
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-2982
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ANCOR COMMUNICATIONS, INCORPORATED
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(Exact name of registrant as specified in its charter)
Minnesota 41-1569659
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(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
6321 Bury Drive, Eden Prairie, Minnesota 55346-1739
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(Address of principal executive offices) (Zip code)
Registrant's Telephone number, including area code (952) 932-4000
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value Pacific Exchange, Inc.
$.01 per share
Securities registered pursuant to Section 12(g) of the Act:
Preferred Share Purchase Rights
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 10, 2000, the Company had 29,154,450 shares of Common Stock
outstanding. The aggregate market value of the 29,037,134 shares of Common Stock
held by non-affiliates of the Company was $1,359,315,354, based on the closing
share price on March 15, 2000 on the Nasdaq Stock Market.
Documents incorporated by reference: Certain responses to Part III are
incorporated herein by reference to information contained in the Company's
definitive proxy statement for its 2000 annual meeting of shareholders to be
filed with the Securities and Exchange Commission on or before April 29, 2000.
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TABLE OF CONTENTS
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 16
Item 3. Legal Proceedings................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders................. 16
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters................................................. 17
Item 6. Selected Financial Data............................................. 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 19
Item 7A. Quantitative and Qualitative Disclosures about Market Risks......... 25
Item 8. Financial Statements and Supplementary Data......................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................ 26
Part III
Item 10. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act................... 27
Item 11. Executive Compensation.............................................. 27
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 27
Item 13. Certain Relationships and Related Transactions...................... 27
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K... 28
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PART I
Item 1. Business
Overview
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Ancor Communications, Inc. ("the Company") provides a wide range of fibre
channel switching solutions for storage area networks ("SANs"), which are
networks that connect a company's data storage systems and computer servers. The
Company's GigWorks and SANBox brands of fibre channel switches enable a company
to cost-effectively manage growth of its data storage requirements, improve the
data transfer performance between its servers and data storage systems, increase
user access to data, increase the size and scope of its SAN, and improve the
performance of its local area network, or LAN, by offloading data storage
applications to the SAN. The Company sells its fibre channel switching solutions
primarily to original equipment manufacturers ("OEMs"), and its customers
include Sun Microsystems, MTI Technology, Hitachi Data Systems, INRANGE
Technologies, Prisa Networks, Advanced Digital Information Corp, Thomson
Broadcast and Forefront Graphics.
The Company's key technological advantages lie in its ability to design
highly-integrated application specific integrated circuits, or ASICs, which
provide cost, reliability and performance benefits compared to other fibre
channel switches, and in its fibre channel architecture, which significantly
improves the scalability and performance of large SANs. These advantages allow
the Company to provide fibre channel switches that offer what the Company
believes is the broadest line of switches with the best combination of
scalability, reliability, performance and cost of any fibre channel switch on
the market.
Industry Overview
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Significant growth in critical data requirements
During the past decade, the volume of data created, processed and accessed
throughout organizations has increased dramatically. This growth has been driven
by a number of factors, including companies' increased dependence on
data-intensive software applications to manage and grow their businesses. These
applications include: complex enterprise resource planning, or ERP, systems;
sophisticated database gathering and retrieval techniques, known as data
warehousing and data mining; and imaging and graphics applications. More
recently, the volume of business-critical data has accelerated as organizations
have embraced the internet and electronic commerce initiatives as key components
of their strategies. As companies expand electronic transactions with both
suppliers and customers, the need for access to large volumes of data on a
real-time basis will continue to increase. Growth in data storage has also been
driven by the continued use of digital media, including voice, video and music,
which is being stored and transmitted in electronic form to more efficiently
reach a broad group of users. International Data Corporation, an independent
research firm, estimated in December 1999 that the worldwide volume of server
stored data would increase at a compound annual growth rate of 80% between 1999
and 2003.
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Server-to-storage traffic jam
As data has increased significantly in both volume and importance, the ability
of businesses to access this data in a fast, reliable and efficient basis
throughout the organization has become extremely important. In recent years,
there have been significant technological advancements in LANs for the transfer
of data between the server, which delivers the data, and the client, which
receives the data over the network. For example, the adoption of high-speed
technologies like gigabit ethernet has increased LAN transmission speeds
dramatically. Improvements have also been made in the ability to share access to
multiple servers, increase the number of connected devices on a network, and
increase the distance between the devices.
The server-to-storage connection has not kept pace with the enhancements made in
LAN technologies. During the 1980s, the small computer systems interface, or
SCSI, was adopted as the standard for the server-to-storage interface. This
standard, which has traditionally governed the input-output, or I/O,
communication between the server and its dedicated storage system, has several
limitations including the number of connections which can be supported, the
distance by which connected devices can be separated, and the performance and
capacity of the connection. As a result, employees, customers and suppliers
attempting to access data on a real-time basis often experience difficulty as a
data traffic jam develops between the server and the attached storage device.
This problem is exacerbated by the greater volume of transactions on corporate
networks and the increased complexity associated with the management of a larger
number of storage devices.
Emergence of fibre channel technology
To address the limitations of traditional server-to-storage connections, fibre
channel standards were developed in the early 1990s to facilitate
high-performance storage connectivity solutions. Fibre channel enables transfers
of large blocks of data from one network device to another at speeds of up to
one gigabit per second. Fibre channel is capable of supporting a large number of
devices while providing transmission reliability, guaranteed delivery and
transmission distances significantly greater than SCSI provides. Fibre channel
can also transport multiple LAN and I/O protocols, including SCSI and Internet
Protocol, enabling the transport of both storage and network traffic over the
same physical connection. These features make fibre channel well suited for
transferring data between servers and storage systems.
Fibre channel provides significant advantages over SCSI. Most importantly, it
enables any server to access any storage device on a given storage area network.
In addition, fibre channel provides the ability to scale, or expand, networks to
millions of devices and the ability to connect devices that are separated by up
to 10 kilometers, or beyond in some instances. Specific advantages are
summarized in the following table:
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<TABLE>
<CAPTION>
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Attribute Fibre Channel SCSI*
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<S> <C> <C>
Maximum number of connections Up to 16 million 15
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Maximum bandwidth 200 megabytes (2 gigabits)/second in full 80 megabytes/second
duplex mode
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Data transmission Full duplex or half duplex Half duplex
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Connection distance 10 kilometers 12 meters
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Functionality Networking and storage Storage
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Protocol support SCSI, Internet Protocol, others SCSI
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</TABLE>
* As specified in the Ultra2SCSI specification, the highest performance SCSI
implementation for which both host computer and peripheral storage solutions are
commercially available.
Development of storage area networks
Fibre channel's capabilities have enabled the development of SANs, which are
high-speed networks of shared storage devices, including disk arrays and tape
drives, and computers, including servers and clients. SANs enable fast,
efficient and reliable transfer of data between multiple storage devices and
servers and facilitate the management of storage devices. In addition, by
offloading storage traffic from the LAN, SANs enhance LAN performance. A SAN
essentially transforms dedicated servers and storage devices into resources that
can be directly accessed by any user on a given network, greatly improving the
performance of an organization's data storage systems. Many hardware and
software components comprise a SAN including, but not limited to a combination
of switches, hubs, routers, host adapters, wide area network bridges, disk
drives, storage arrays and controlling software.
SAN topologies
SANs can be constructed using arbitrated loop or switched fabric topologies.
The arbitrated loop topology consists of multiple devices that are sequentially
connected to form a continuous path, with the first and last devices connected
to form the loop. This topology permits as many as 126 devices to be
interconnected within a single loop, whether they are servers, workstations or
storage subsystems. Rather than wire all of these devices in sequence, a hub or
switch is often used as a central wiring point to simplify the loop architecture
to a hub-and-spoke configuration. Key drawbacks of the arbitrated loop standard
are that only one communication path is available at any point in time and that
only 126 devices can be interconnected.
The switched fabric topology consists of a network of fibre channel switches
which provide connectivity and data routing for up to 16 million devices. By
providing multiple, simultaneous gigabit paths between every connection in the
system, switched fabrics provide the highest degree of capacity, or bandwidth,
to large SANs. As their name implies, switched fabrics require the use of fibre
channel switches, and cannot be implemented with hubs alone. The network of
fibre channel switches creates a high-throughput system that strongly resembles
the traditional telephone network in that any two devices can be connected at
full bandwidth, and any number of conversations can take place simultaneously.
Switched fabrics are intrinsically reliable given that
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the multiple connections between any two devices provide alternative data paths
in case of failure of a particular device in the network.
The need for switched SANs
Devices in a SAN can be interconnected via either hubs or switches. Hub
architectures typically require that each device on the hub share bandwidth,
causing bandwidth per device to decrease as more devices are added. In addition,
SANs based on hubs are limited to a total of 126 devices. In today's
environment, it is often desirable to build much larger SANs. Hub-based SANs are
also limited in their ability to allow the network configuration to be modified
without causing disruption to the environment, reducing the network's
flexibility. Further, hub-based SANs are unable to provide the management
capabilities that are necessary in many networking environments.
Before LANs became prevalent, LAN users faced issues of performance,
scalability, flexibility and manageability similar to those currently
confronting the SAN market. In the LAN environment, switches have become
critical in satisfying those needs and have replaced hubs as the cornerstone of
demanding networks. For the same reasons switches were critical to the
widespread adoption of high-performance LANs, the Company believes switches will
be equally critical to the evolution of the SAN market.
Fibre channel switches provide intelligent bandwidth allocation, meaning that
the full bandwidth of the network can be allocated to each device. In addition,
switched SANs can scale from a single-switch supporting a small number of
devices to a multiple-switch configuration supporting up to 16 million devices.
In a switched SAN, devices may be added or removed from the network or the
configuration can be otherwise modified without disrupting the overall
environment, thereby increasing the flexibility of the network. A switch-based
SAN also provides advanced management capabilities similar to those found in
LANs. Specifically, if a device on a loop is disconnected or malfunctioning, the
switch can help the network isolate and accommodate the problem device without
disrupting the remaining devices. These attributes of switched SANs provide the
scalability, bandwidth, flexibility and manageability that the Company believes
are critical for the wide-scale adoption of SAN solutions.
In the past, the market has embraced hubs due to their low cost and because most
early SANs were small enough that the limitations of hubs did not significantly
degrade network performance. Today, as SANs are growing in size and complexity,
and as the cost of low-end switches is approaching that of hubs, organizations
are increasingly demanding switch-based solutions. International Data
Corporation estimates that the factory revenue for fibre channel switches will
grow from approximately $167 million in 1999 to approximately $2.7 billion in
2003, representing a compound annual growth rate of 99%.
The Ancor Solution
The Company provides fibre channel switches that it believes offer the best
combination of scalability, reliability, performance and cost of any fibre
channel switch available. The
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Company's switches enable flexible SAN implementations ranging from low-cost,
single-switch configurations to large, multi-switch SANs.
The key components in our switching products are its ASICs. The Company's years
of experience designing switches has resulted in highly-integrated ASICs,
meaning that a significant amount of functionality is combined on a single chip.
With more functionality combined on a single chip, fewer parts are required,
resulting in reduced costs and increased reliability. Relative to other switch
products, the Company's product performs more of the basic switch operations in
hardware and less in software, resulting in higher performance because hardware
is inherently faster than software. In addition, the Company's technology and
highly-integrated ASICs allow its switches to be used in a cross-connect
architecture. This enables large SANs to exhibit significantly higher bandwidth
and reduced latency, or time required to make a connection, resulting in
increased scalability and performance relative to other fibre channel switches.
The tables below summarize the Company's key advantages in comparison to other
fibre channel switch providers.
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Ancor Differentiators Competitive Advantages
o Cross-connect architecture o Greater scalability
o High level of circuit integration o Enhanced performance
o Extensive experience in ASIC development o Increased reliability
and network technology o Greater cost-efficiency
o Improved manageability
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The Ancor Strategy
The Company's goal is to be the leading supplier of fibre channel switching
products for SAN applications. Key elements of its strategy to achieve this goal
include the following:
Capitalize on core technology to offer low-cost, high-performance solutions. The
Company's leadership position in developing highly-integrated ASICs, combined
with its extensive experience with fibre channel architecture, has enabled it to
develop highly scalable, low cost, high performance and highly reliable
products. The Company was the first to offer a fibre channel switch, the first
to develop a gigabit-speed fibre channel switch, and the first to offer fibre
channel switches with features like multi-stage support, cross-connectivity,
arbitrated loop support and self-configuring ports. The Company intends to
continue to leverage its core technological expertise and leadership in ASIC
design to introduce industry-leading fibre channel switch products.
Leverage original equipment manufacturer relationships to expand customer base.
The Company targets its fibre channel switch solutions primarily to original
equipment manufacturers. For example, in June 1999, the Company entered into an
agreement with Sun Microsystems to supply switches for incorporation into Sun's
storage products. Sun is the leading supplier of storage subsystems for
UNIX-based systems, as reported by International Data Corporation. The Company
believes Sun's selection of it to supply switches for incorporation into Sun's
products has significantly enhanced the perception of it and its products
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in the marketplace. The Company intends to establish additional relationships
with leading original equipment manufacturers, and to leverage its relationships
to attract additional customers.
Broaden product offering to meet customers' developing SAN needs. The Company
designed its fibre channel architecture to enable it to expand its product line
both to provide low-cost switching solutions to smaller SAN users upgrading from
hub to switch performance and to continue to meet the developing needs of
sophisticated users. As the SAN market develops, the Company expects that
customers will require switch products ranging from single switch
implementations supporting a small number of devices to multi-stage
implementations supporting thousands of devices. The Company has developed a
switch which supports small, non-fabric SAN implementations. This switch also
provides for fabric, non-fabric and the inter-connection of fabric and
non-fabric devices. During 1999 the Company added to its 8- and 16-port switch
product lines 64- and 128-port switches. The Company intends to add a 256-port
switch to support a comprehensive product line. The Company also intends to
build upon its technological leadership to continue to develop fibre channel
switches offering features and capabilities to meet the needs of the SAN market
as it develops.
Continue leadership in the expansion of the fibre channel standard to promote
interoperability. The Company has been a pioneer in the development of fibre
channel standards. As the fibre channel standard continues to progress to
provide additional features and functionality, it is important to the Company's
customers and the overall growth of the fibre channel market that
interoperability between fibre channel products of different vendors be
established. The Company is a leading participant in interoperability
initiatives. In addition, the Company is building relationships with leaders in
the storage, networking and computing industries in an effort to promote
interoperability between fibre channel products and to facilitate the
development of SAN products across the industry. The Company believes that by
promoting a fibre channel standard and by partnering with vendors of fibre
channel products complementary to its switch products, it can facilitate the
development of products that meet the needs of the SAN market, promote the
expansion of the SAN market as a whole and facilitate the integration of its
products with the products of these industry partners.
Products
The Company develops and markets the GigWorks and SANBox lines of fibre channel
switches and switch management products. The Company's products provide reliable
performance within a variety of SAN environments, including UNIX, NT and IBM
MVS. The Company's switches can be deployed in single or multi-stage fabrics of
many sizes, making its switches effective in a wide range of SAN solutions. In
1997, the Company introduced the GigWorks line with the 16-port MKII switch for
large, full-scale SAN implementations, which represented the first of its fourth
generation switch products. The Company introduced its newer 8-port MKII switch
in 1998 to provide a low-cost switch enabling a high-performing, easy-to-manage
SAN at an affordable price. The MKII-8 retains the gigabit-speed throughput and
most of the features of the Company's 16-port MKII switch. Additionally, since
the Company's MKII-8 is only 1.75 inches tall, the switch occupies only one rack
space which makes it especially attractive in multi-switch configurations, and
as a replacement for hubs. In 1999 the Company introduced its SANBox
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series of switches, its fifth generation switch products, to provide for fabric,
non-fabric and the inter-connection of fabric and non-fabric devices. The
broadest, most scalable line of switches in the industry, the SANBox line
features 8- and 16-port switches, as well as 64- and 128-port Director class
switches.
As part of each switch, the Company includes its fabric management software
tools that are modular in nature and allow original equipment manufacturers to
select the specific software tools that will be integrated into their product
offerings. This flexibility in configuration allows customers to use all or only
some of the Company's software tools and to integrate its software tools with
their own. Designed for ease-of-use and flexibility, the Company's management
software's open management system provides a single point of access to all
levels of switch information, from simple monitoring to detailed low-level
diagnostics. The Company's switch management software uses an open systems
architecture. This makes it relatively easy to modify the software to interface
effectively with a wide variety of protocols, operating systems and storage
management products.
The Company's ASICs provide building blocks at the chip level for implementing
fibre channel technology. These ASICs combine a number of fibre channel
functions in a single chip and thereby substantially reduce the number of
components needed in the Company's fibre channel switches. The Company has
licensed the use of one of its ASICs to INRANGE Technologies, and may sell its
ASICs as a separate product in the future.
Technology
The Company is focused on developing fibre channel switch products which provide
superior features and functionality. The Company's years of technological
leadership in the fibre channel industry have allowed it to develop products
that offer its customers significant technological advantages. The Company's
core technological advantages lie in two areas: ASIC design and its scalable
multi-switch architecture.
ASICs
The Company continues to develop some of the most sophisticated ASICs in the
commercial electronics industry. The Company's dedicated ASIC engineers have an
average of over 13 years of ASIC design experience, and are currently working on
the development of its sixth generation ASIC. The Company's ASIC strategy is to
use the newest silicon fabrication technologies as soon as they are stable and
economical. This strategy has allowed the Company to integrate more
functionality onto each of its ASICs at an earlier time than any other fibre
channel switch supplier. In addition to greater functionality on the chip, the
Company's ASIC design allows it to build switches with fewer parts and at a
lower cost. The Company is not dependent on the fibre channel intellectual
property of its chip manufacturer to produce its ASICs. This gives the Company
the advantage of being able to change chip suppliers with fewer complications
than would be experienced by manufacturers of switches who are more dependent
upon the intellectual property of their chip suppliers. The Company's ability to
develop ASICs has been, and will continue to be, a key element in its product
design capability. It is not possible to design
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products with the features and performance of the Company's fibre channel
switches without access to a very strong ASIC design engineering capability.
Multi-Switch Scalability in GigWorks and SANBox Fabrics
To meet the needs of various installations, the Company offers a unique range of
connecting options, allowing customers to choose levels of resiliency,
scalability, and performance appropriate to their specific project and budget
parameters. Customers can select from virtually unlimited wiring alternatives in
three distinct categories: cascaded, meshed and multi-staged. In each of these
categories, network traffic is shared and balanced using switches that enable
more efficient overall performance. If a device on the fabric fails, rerouting
around that device prevents additional disruption in the fabric.
Cascading. The Company's least expensive connectivity option is similar to
traditional network structures that sequentially connect switches. Like any
topology that shares common resources among devices, cascading is most
appropriate when aggregate bandwidth requirements are low or when only a few
devices need to be interconnected, for instance in test beds and other smaller
installations.
Although well suited to certain applications, cascaded architectures do not
scale as well as other multi-switch architectures. Adding switches can
significantly reduce performance, due to compound latency caused by multiple
switch-to-switch "hops," and to the limited bandwidth between switches.
Bandwidth and latency vary unpredictably depending on where messages enter and
exit the fabric, which means network planners using this approach must pay close
attention to changing traffic patterns when designing and redesigning their
system.
Mesh. For projects requiring a more predictable environment, mesh architectures
offer a cost-effective entry to true high-performance multi-switch topologies.
Because each switch is directly connected to every other switch in the fabric,
this configuration maintains a low number of switch-to-switch "hops" as the
fabric scales, minimizing bandwidth loss and the effects of compound latency.
Eventually, however, the high number of required inter-switch connections
overwhelms the ability to add more I/O ports, limiting the number of devices
that can be supported and creating the need for a more flexible, robust
topology.
Multi-stage. For fabrics above 8-10 switches or for fabrics that require a high
degree of redundancy, the Company's multi-stage architecture provides the
ultimate high-bandwidth solution. In this topology, some switches are dedicated
to perform "cross-connect" functions, creating a variety of performance,
resiliency and cost-per-gigabit benefits not found in any other configuration.
Features and benefits of multi-stage fabrics include the following:
Performance and Expandability. Multi-stage fabrics maintain the highest
aggregate bandwidth by allowing network designers to control the ratio of
I/O ports to cross-connect ports, creating as many redundant paths as
necessary to achieve a given performance goal. Multi-stage networks can be
expanded in three ways:
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1. By adding more cross-connect links. This raises the overall fabric
capacity and the percentage of time each port has uncontested network
access without requiring additional switches, but does lower the number
of available I/O ports.
2. By adding additional I/O switches. This increases the number of
available end ports and overall fabric capacity while incurring only
minimal additional blocking, depending on the number of cross-connect
links used.
3. By adding more cross-connect switches. This raises overall system
performance considerably while maintaining approximately the same
number of I/O ports.
Resiliency. Multi-stage makes it easy to configure systems with no single
point of failure, since each I/O switch is linked to multiple cross-connect
switches. Redundant data paths mean that even in the unlikely event of a
total switch outage, the network as a whole continues to function at normal
or near-normal capacity.
Cost-per-gigabit. Finally, although multi-stage environments can involve
extra hardware costs, their enhanced performance often makes up for this
initial expense when cost is measured on a per-gigabit basis. When the
economic impact of easy expandability and a truly resilient, fail-safe
infrastructure is factored in, the Company believes multi-stage topologies
provide the best return on investment for a wide range of large- and
mid-sized installations.
Customers
The Company's target customers are primarily original equipment manufacturers.
The Company currently has relationships with the following original equipment
manufacturers which it announced on the dates indicated:
<TABLE>
<CAPTION>
<S> <C>
Thomson Broadcast - October 1999 nStor--March 1999
Advanced Digital Information Corp - September 1999 JNI--February 1999
MTI Technology--July 1999 INRANGE --January 1999
Sun Microsystems--June 1999 Forefront Graphics--January 1999
Hitachi Data Systems--April 1999 Prisa Networks--December 1998
MicroNet--April 1999
</TABLE>
The Company has achieved only limited revenue to date from these customers. The
Company's goal is to increase its revenue from its existing original equipment
manufacturer customers and to attract additional customers. The Company
anticipates that a significant percentage of its future revenue may be derived
from a limited number of original equipment manufacturer customers. In 1998
sales from two customers accounted for 72% of total revenues. In 1999 sales from
four customers accounted for 73% of total revenues. (See Note 5 to the financial
statements.)
In addition to its original equipment manufacturer customers, the Company also
has relationships with system integrators, including Netmarks; CONSAN, a
Gates/Arrow company; and Intelligent Solutions.
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Sales and marketing
The Company's sales and marketing strategy focuses on an indirect sales model
executed through original equipment manufacturers and system integrators. The
Company's original equipment manufacturer customers incorporate the Company's
switches into their end user products which are installed and field-serviced by
the original equipment manufacturer's technical support organizations. The sales
cycle used in selling to an original equipment manufacturer customer can vary
significantly in terms of its length and complexity. Typically it includes the
use of the Company's equipment in the potential customer's development labs,
where substantial testing takes place. It also often involves the submission of
proposal documentation and presentations to the potential customer. This sales
process generally involves the combined efforts of the Company's sales and
marketing, engineering and management teams and can take from several weeks to
in excess of one year.
The Company also intends to continue selling its products to a limited number of
distributors, value added resellers and technically capable system integrators
who combine its products with products of other vendors to provide complete
solutions. System integrators typically provide installation, service and
technical support to their end-user customers.
In addition to these sales channels, in September 1998 the Company entered into
a license agreement with INRANGE Technologies whereby INRANGE was granted a
license to use the Company's 4-port ASIC in fibre channel switch product
offerings targeting the IBM MVS operating system market. Under the agreement,
INRANGE is required to pay to the Company a royalty on INRANGE's sales of
products incorporating the Company's technology. As part of the agreement, the
Company agreed not to license its ASIC to a competitor for use in the IBM MVS
operating system market or to sell switches in configurations that compete
directly with INRANGE's products in that market. Through this arrangement, the
Company is able to participate in the IBM MVS market without dedicating the
resources necessary to address this complex market segment on its own. The
Company intends to focus its product offerings on the UNIX and NT markets,
which, according to International Data Corporation, are expected to grow
significantly faster than the IBM MVS market. The agreement does not preclude
INRANGE from selling products competitive with the Company's products in the
UNIX and NT markets, although the obligation to pay a royalty to the Company for
any such sales would likely result in a competitive disadvantage to them.
Additionally, the Company has entered into a reseller agreement with INRANGE
whereas the Company will purchase the 64- and 128-port systems from INRANGE and
resell them to Ancor's customers.
Customer service and support
As the SAN market is still in the early stages of development, the Company
believes that superior customer service and support are critical as its products
are introduced and integrated with products of other manufacturers. The
Company's experience in integrating its switch products in the LAN market has
provided it with extensive knowledge and expertise in both fibre channel and
networking environments.
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The Company's customer service strategy is to provide technical support to its
original equipment manufacturers and system integrators, enabling them to
provide technical support to their end-users. The Company does this by providing
training classes, documentation and hands-on training to its original equipment
manufacturer customers together with 24 hours per day, seven days per week
support. The Company operates a lab at its headquarters that allows it to
replicate a field environment for training and troubleshooting purposes. The
Company can also remotely monitor its products over the internet or conventional
phone circuits.
Manufacturing
The Company subcontracts the majority of its production activities, including
the manufacture, assembly and testing of its proprietary fibre channel switch
and ASIC designs, to organizations specializing in contract manufacturing. LSI
Logic manufactures the Company's current generation ASICs, and Pemstar
manufactures and assembles the Company's switch products. Use of subcontractors
results in dependence on the timely delivery of high quality products from these
manufacturers and may leave the Company with less flexibility and control over
the manufacturing process than if it conducted all of these operations
internally. Using contract manufacturing, however, reduces the Company's total
production costs because it is able to time-share the expensive capital
equipment and personnel required to manufacture its products. This also provides
greater peak capacity than would otherwise be cost effective. Although the
Company relies on third parties for many of its manufacturing functions, it
conducts its own development, design and quality management efforts.
The majority of the components used in the Company's products are generally
available from multiple sources. However, certain of the components used in the
Company's products are available only from a single supplier or from a limited
number of suppliers. For example, the Company's ASICs and the microprocessor it
uses in its products are available from only a single supplier and the power
supplies and other specific electronic components used in its products are
available from only a limited number of suppliers. The unavailability of
adequate quantities of components, a reduction or interruption in component
supply, a disruption of existing supplier relationships, an inability to develop
alternative sources or a significant increase in the price of components could
each have a material adverse effect on the Company's ability to produce and
market its products in a timely manner.
Research and development
The SAN market is characterized by rapid technological change, including changes
in customer requirements, frequent new product introductions and enhancements,
and developing industry standards. The Company believes that continued research
and development efforts are an important factor in its ability to maintain
technological competitiveness. The Company plans to continue to invest in
research and development efforts that are focused on the development and
enhancement of switches, ASICs and the associated software offerings that
address the needs of the SAN market. In addition, the Company intends to
dedicate resources to the continued development of the fibre channel standards
and to achieve interoperability with the fibre channel devices of other
companies.
13
<PAGE>
On November 24, 1999, the Company and Intel entered into a Collaboration
Agreement to develop and market switches based on the new InfiniBand
architecture. The InfiniBand architecture is a widely supported interconnect
specification that will bring new levels of reliability and performance to
Intel-based server solutions beginning in 2001. The Company will work with Intel
and other members of the InfiniBand Trade Association to define optimal ways of
building InfiniBand architecture interconnects and complete relevant standards.
The Company will also work to bring some of the first InfiniBand
architecture-based switches to market in 2001. InfiniBand is a service mark and
a trademark of the InfiniBand Trade Association.
Competition
Although the competitive environment in the fibre channel switching market has
yet to develop fully, the Company anticipates that the current and potential
market for its products will be highly competitive, continually progressing and
subject to rapid technological change. The Company's primary competitor in the
fibre channel switch market is Brocade Communications. Other companies are also
providing fibre channel switches and other products to the SAN market, including
Gadzoox, McData and Vixel. In addition, a number of companies, including Emulex,
Interphase, JNI and QLogic are developing, or have developed, fibre channel
products other than switches, like adapters or hubs, and the Company anticipates
that these and other manufacturers of network equipment may introduce fibre
channel switch products in the near future. It is also possible that customers
could develop and introduce products competitive with the Company's product
offerings. The Company believes the competitive factors in this market segment
include product performance and features, product reliability, price, ability to
meet delivery schedules, customer service and technical support.
Some of the Company's current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than it has. As a result, these competitors may have
greater credibility with the Company's 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 the
Company can to its, which may allow them to respond more quickly to new or
emerging technologies and changes in customer requirements. In addition, some of
the Company's current and potential competitors have already established
supplier or joint development relationships with divisions of its current or
potential customers. These competitors may be able to leverage their existing
relationships to discourage customers from purchasing products from the Company
or to persuade customers to replace the Company's products with its competitors'
products. Such increased competition may result in price reductions, lower gross
margins and loss of market share. There can be no assurance that the Company
will have the financial resources, technical expertise or marketing,
manufacturing, distribution and support capabilities to compete successfully
against current or future competitors. There can also be no assurance that
competitive pressures will not materially harm the Company's business.
Intellectual property
The Company's success will depend in part on its ability to protect its
proprietary rights and to operate without infringing on the proprietary rights
of third parties. To establish and protect its intellectual property rights, the
Company relies on a combination of patent, copyright, trademark
14
<PAGE>
and trade secret laws and restrictions on disclosure. The Company also enters
into confidentiality or license agreements with its consultants, customers and
corporate partners. The Company cannot be certain that the steps it takes to
protect its intellectual property will adequately protect its proprietary
rights, that others will not independently develop or otherwise acquire
equivalent or superior technology or that the Company can maintain such
technology as trade secrets. In addition, the laws of some of the countries in
which the Company's products are or may be sold may not protect the Company's
proprietary rights as fully as the laws of the United States.
The Company currently holds one U.S. patent covering certain aspects of one of
its fibre channel switches. This patent will expire February 6, 2007. The
Company has also filed three additional patent applications, and it may receive
additional patents in the future. In addition to patent protection, the source
code for the software contained in its products is protected by copyright law.
The Company has registered its logo in the United States and Germany, France,
Great Britain and Korea. The Company also has several other registered and
pending marks in the U.S. as well as the European Community, Japan and Korea.
United States trademark rights are acquired by use rather than by registration,
and there can be no assurance that other companies do not have conflicting or
superior rights to the Company's unregistered trademarks.
Although to date the Company has not been involved in any intellectual property
litigation, it may be in the future, either to protect its intellectual property
or as a result of an alleged infringement of others' intellectual property. Any
intellectual property litigation or disputes, regardless of their success, would
likely result in substantial costs and be time-consuming. An adverse
determination could subject the Company to significant liabilities to third
parties, or require it to either license the challenged intellectual property or
stop selling its products that incorporate it.
Employees
As of February 29, 2000, the Company had 133 full-time employees and two
part-time employees. None of the Company's employees is represented by a labor
union or subject to any collective bargaining agreement. The Company has never
experienced work stoppages, and it believes its employee relations are good.
15
<PAGE>
Item 2. Properties
The Company's offices are located in Eden Prairie, Minnesota, where it leases
approximately 47,000 square feet of space under a lease that expires in
September 2005. The annual rent is approximately $525,000. The Company also
leases space for sales and marketing in San Jose, California and Nashua, New
Hampshire. The current facilities, in the opinion of management, are adequately
covered by insurance.
Item 3. Legal Proceedings
The Company is a defendant in a lawsuit brought by Hoyt Properties, Inc.
("Hoyt") venued in Hennepin County District Court in the State of Minnesota.
Hoyt claims that the Company breached an agreement which provided that Hoyt
would build and lease to the Company an office building to be located in Eden
Prairie, Minnesota, and asserts damages in excess of $2,500,000. The Company
asserts there was no binding agreement. The Company denies all liability, and
alleges that Hoyt refused to provide improvements desirable and necessary to the
Company's occupancy of the proposed leased space, and multiple contingencies,
conditions, and agreements did not occur. Certain discovery is pending, and the
case has been set for trial in April 2000. The Company is vigorously defending
the case. However, there is no assurance that any judgment, order or decree
against the Company arising out of this action will not have a material adverse
effect on the Company or its business. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
16
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's common stock has been quoted on the Nasdaq National Market since
July 1999. Prior to that time the Company's common stock was traded on the
Nasdaq SmallCap Market. The Company's common stock is also traded on the Pacific
Exchange, Inc., although the Company has applied to have its common stock
delisted from the Pacific Exchange. The following table sets forth the high and
low sale prices of the Company's common stock for each full quarterly period
within the two most recent fiscal years, as reported by the Nasdaq National
Market or the Nasdaq SmallCap Market, as appropriate.
Quarterly Stock Prices
Sale Price
---------------------------
High Low
Quarter of 1998: --------- -----------
First $ 9 1/8 $ 4 7/16
Second 7 5/16 2 1/2
Third 4 1
Fourth 4 7/16 1 1/16
Quarter of 1999:
First $ 9 1/8 $ 3 31/32
Second 32 3/4 4 3/4
Third 38 1/2 15 5/8
Fourth 94 1/8 21 3/4
Holders.
As of March 19, 2000, there were 225 holders of record of the Company's common
stock and the Company estimates there were approximately 19,000 beneficial
holders as of February 29, 2000. As of March 15, 2000, the last sale price of
the Company's common stock as reported by the Nasdaq National Market was
$46.813.
Dividends.
The Company has never paid cash dividends on its common stock and has no current
intentions to do so.
Recent Sales of Unregistered Securities.
On November 29, 1999, the Company sold 280,000 shares of common stock to Intel
Corporation for an aggregate purchase price of $14,840,000 in a private
placement exempt from the registration requirements of the Securities Act of
1933 pursuant to Section 4(2) thereof. No underwriting discounts or commissions
were paid.
17
<PAGE>
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
with the financial statements, related notes thereto and other financial
information included in this Report.
Statements of Operations Data: (in thousands, except per share data)
- ------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Gross sales ............................. $ 13,718 $ 4,393 $ 7,924 $ 6,258 $ 4,673
Sales discounts ......................... 767 0 0 0 0
-------- -------- -------- -------- --------
Net sales ............................... 12,951 $ 4,393 $ 7,924 $ 6,258 $ 4,673
Cost of sales ........................... 6,742 6,431 5,991 3,566 2,533
-------- -------- -------- -------- --------
Gross profit (loss) ................. 6,209 (2,038) 1,933 2,692 2,140
Operating expenses
Selling, general and administrative 8,961 7,195 7,685 4,944 2,785
Research and development ............ 7,458 5,451 4,271 3,198 2,542
-------- -------- -------- -------- --------
Total operating expenses ....... 16,419 12,646 11,956 8,142 5,327
-------- -------- -------- -------- --------
Operating loss .......................... (10,210) (14,684) (10,023) (5,450) (3,187)
Interest expense .................... (18) (34) (19) (64) (153)
Other income, primarily interest
income ......................... 1,495 220 219 224 71
Income taxes ........................ 0 0 0 0 0
-------- -------- -------- -------- --------
Net loss ................................ (8,733) (14,498) (9,823) (5,290) (3,269)
Accretion on convertible
preferred stock ..................... (12) (762) (345) (331) 0
-------- -------- -------- -------- --------
Net loss attributable to common
shareholders ........................ $ (8,745) $(15,260) $(10,168) $ (5,621) $ (3,269)
======== ======== ======== ======== ========
Basic and diluted net loss per share/1/.. $ (0.34) $ (1.04) $ (0.93) $ (0.60) $ (0.44)
======== ======== ======== ======== ========
Weighted average common
shares outstanding .................. 25,659 14,741 10,963 9,351 7,449
======== ======== ======== ======== ========
</TABLE>
Balance Sheet Data: (in thousands)
- -------------------
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Working capital ........................ $86,219 $ 5,598 $ 4,432 $ 6,384 $ 1,561
Total assets ........................... 96,467 12,738 10,164 12,262 5,773
Long-term debt net of current maturities 7 111 130 178 200
Shareholders' equity ................... 85,406 5,208 8,316 9,907 2,759
</TABLE>
- -------------
/1/ See Note 1 to financial statements.
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations - For the Years ended December 31, 1999, 1998 and 1997.
- ---------------------
The following table sets forth selected information derived from the Company's
Statements of Operations as a percentage of gross sales:
<TABLE>
<CAPTION>
For the Year
Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Sales discounts (5.6) 0.0 0.0
------ ------ ------
Net sales 94.4 100.0 100.0
Cost of sales 49.1 146.4 75.6
------ ----- ------
Gross profit (loss) 45.3 (46.4) 24.4
Operating expenses
Selling, general and administrative 65.3 163.8 97.0
Research and development 54.4 124.1 53.9
------ ----- ------
Total operating expenses 119.7 287.9 150.9
------ ----- -----
Operating loss (74.4) (334.3) (126.5)
Other income, net 10.7 4.3 2.5
------ ------- ------
Net loss (63.7)% (330.0)% (124.0)%
====== ======= ======
</TABLE>
Sales Sales for 1999, before discounts recorded to reflect the effect
of warrants issued to Sun Microsystems, Inc. ("Sun") as part of an original
equipment manufacturing ("OEM") sales agreement, increased by approximately $9.3
million (212%) from 1998 to approximately $13.7 million. The increase in sales
reflects (i) increases in the number of switches sold to an increasing customer
base of SAN OEMs; (ii) increases in license fee revenue from INRANGE
Technologies Corporation ("INRANGE"); and (iii) a large shipment of the
Company's Fibre Channel switches to Boeing who served as an integrator for a LAN
application. In 1999 sales from four customers accounted for 73% (see Note 5) of
total revenues. While the Company expects its customer base to increase,
concentration of sales among a limited number of customers is likely to
continue. Sales to Boeing are not expected to continue at the current level.
In June 1999, the Company entered into an OEM agreement with Sun. Under this
agreement, the Company expects to sell its Fibre Channel switches to Sun for
incorporation into Sun's SAN products. Together with Sun, the Company is in the
final stages of testing its new switch for use
19
<PAGE>
with Sun products. However, the Company cannot be certain that Sun will complete
the integration of the Company's switch with Sun's final SAN products and, like
other OEM agreements, the Company's agreement with Sun does not guarantee that
it will ultimately sell its products to Sun.
Sales for 1998 decreased by approximately $3,531,000 (45%) from 1997 to
approximately $4,393,000. The decrease in sales was attributed to: (i) decreased
sales to the Company's Japanese distributors; and (ii) the Company's shift in
emphasis to opportunities in the storage area network market resulting in
diminished sales to customers in the high-performance local area networking
market. Sales to the Company's Japanese distributors decreased 84% from
approximately $6,983,000 (88% of total sales) in 1997 to $1,141,000 (26% of
total sales) in 1998. The decline in net sales to the Company's Japanese
distributors was partially offset by net sales of approximately $2,193,000 to
Boeing and license fee revenue of approximately $312,000 from INRANGE generated
during the fourth quarter.
Sales Discounts As part of the OEM agreement with Sun, the Company
granted a warrant to Sun to purchase up to 1.5 million shares of the Company's
common stock at an exercise price of $7.30 per share. The warrant shares are
earned at the rate of one share for each $67.00 of revenue the Company receives
from Sun through September 30, 2002. In each period in which the warrant shares
are earned, a non-cash sales discount is recorded. The amount of the non-cash
sales discount is the fair value of the warrant shares which are earned in the
period. Fair value of the warrant shares is calculated by using the
Black-Scholes option pricing model. The value of the warrant shares, and the
corresponding sales discount, increases as the Company's stock price increases.
Conversely, the value of the warrant shares, and the corresponding sales
discount, decreases as the Company's stock price decreases. Based on the
Black-Scholes option pricing model, using the closing price of the Company's
common stock on December 31, 1999, of $67.875, the value per warrant was
$65.797. Non-cash sales discounts were correspondingly recorded in 1999 in the
amount of $766,875, which reflects the 11,655 warrant shares earned by Sun.
Since 1999 was the first year of the Sun OEM agreement, no such sales discounts
were recorded for prior years presented.
None of the warrant shares will vest until the Company has received a total of
$10,000,000 in revenue from Sun. During this vesting period, any warrant shares
earned in one quarter will be revalued in subsequent quarters using the
then-current Black-Scholes option pricing model, and an additional non-cash
sales discount will be recorded if the value of the warrant shares increases or
a non-cash sales credit will be recorded if the value of the warrant shares
decreases. In the quarter in which the Company achieves an aggregate of
$10,000,000 in revenues from Sun, the Company will perform a final Black-Scholes
calculation for the warrant shares earned through the end of that quarter, which
will result in a final adjustment to the non-cash sales discount. Thereafter,
warrant shares will vest as they are earned, and the Company will record a
non-cash discount quarterly based on the Black-Scholes calculation, as described
above. No subsequent revaluation will be recorded.
Gross Profit Gross profit in 1999 increased to approximately $6.2
million, or 45% of sales, from a loss of approximately $2.0 million, or negative
46% of sales in 1998. The significant increase in gross profit shows the effect
on gross profit in the previous year of special
20
<PAGE>
charges of approximately $4,428,000 which were recorded in the second quarter of
1998 (see below).
Gross profit is affected by sales volume and its direct cost and also by
indirect costs, such as normal scrap and overhead allocations, the percentage
impact of which is decreased as sales increase. Gross profit percentage is also
impacted by the mix of product sold within a period, as well as by the mix of
customers. Service and license fee revenues generally have higher margins than
switch revenue, and various switch types have different margins. The increase in
gross profit for 1999, excluding the effects of the previous year's special
charges, was due primarily to increased sales volume. The gross profit
percentage, excluding the effects of the previous year's special charges, was
negatively impacted because, although indirect costs remained relatively
constant; the mix of product sold during the period carried lesser margins than
that sold in the previous year.
Gross profit in 1998 decreased to a loss of approximately $2,038,000 or a
negative 46% of sales, from a profit of approximately $1,933,000, or 24% of
sales in 1997. The decrease in gross profit for 1998 from the prior year was
primarily attributable to special charges of approximately $4,428,000 recorded
in the cost of sales for the second quarter. These charges included: (i) a
$4,015,000 provision for excess or obsolete inventory, (ii) a $243,000 provision
for future commitments to purchase excess or obsolete inventory, and (iii) a
$170,000 fee for canceling an order for excess or obsolete inventory. The
Company made these provisions because its shift in focus from local area
networks to storage area networks and lack of demand in Japan caused it to
believe its inventory of certain product exceeded current and future market
demands. Gross profit for 1998 excluding the effects of the special charges was
$2,389,786 (54%). A similar lesser provision was recorded in 1997. The 1998
gross margin percentage was positively impacted because the mix of product sold
during the period carried greater margins than that sold in the comparable
periods in 1997. However, due to the significantly lower sales volume, the
indirect costs caused the overall gross profit percentage to decrease over 1997.
Selling General and Administrative Expenses The Company's selling,
general and administrative expenses for 1999 were approximately $9.0 million, or
65% of sales, compared to approximately $7.2 million, or 164% of sales, in 1998.
The increase in selling, general and administrative expenses was primarily
attributable to additions to staff and expenses necessary to support expanded
operations, particularly sales and customer account management positions, which
increased personnel related expenses by approximately $1.6 million in 1999, as
compared with 1998.
Selling, general and administrative expenses for 1998 were approximately $7.2
million, or 164% of net sales, compared to approximately $7.7 million, or 97% of
net sales, in 1997. The decrease was primarily due to a change in the process of
allocation of depreciation and a decrease in indirect marketing efforts, offset
by increases in the cost for personnel. Although the Company did not change its
methods of depreciation, it changed its process for allocating total
depreciation to reflect the usage of the related assets, such that approximately
$586,000 of depreciation expense was reclassified in 1998 from selling, general
and administrative to research and development when compared to 1997.
Additionally, the Company changed its marketing tactics, employing direct
contact with potential OEMs through increased sales staff and less indirect
contact through seminar presentations and advertising. Thus, indirect marketing
expenses
21
<PAGE>
decreased approximately $528,000 in 1998 compared to 1997. However,
reorganization and a 14% growth in personnel, particularly in sales and
marketing senior management positions, resulted in personnel and related
expenses increasing approximately $558,000 in 1998 as compared with 1997.
Research and Development Expenses The Company's research and
development expenses for 1999 were approximately $7.5 million, or 54% of sales,
compared to approximately $5.5 million, or 124% of net sales, in 1998. Increase
in employee and contractor headcount caused research and development labor costs
to increase by approximately $1.4 million in 1999, compared to the prior year.
Additionally, expenses related to product development and enhancement increased
by approximately $1.0 million during 1999, as compared to 1998. These expenses
were offset by an allocation to construction-in-progress of expenses related to
a contract for INRANGE, whereby the Company performs certain research and
development activities on behalf of INRANGE. The allocation amount was
approximately $700,000 for 1999. The cost and related revenue of the contract
will be recognized under the completed contract method.
Research and development expenses for 1998 were approximately $5.5 million, or
124% of sales, compared to approximately $4.3 million or 54% of sales, in 1997.
In addition to the $586,000 depreciation allocation described above, the
Company's ongoing commitment to product development and enhancements, including
the cost of additional engineering personnel, caused an increase in development
expenses of approximately $536,000 in 1998 as compared with 1997.
Other Income (Expense) Other income of approximately $1.5 million,
$220,000 and $218,000 in 1999, 1998 and 1997, respectively, was primarily
interest income earned from the investment of available cash balances. The
interest income in 1999 was primarily earned from the investment of the net
proceeds received from (i) the public offering of the Company's common stock
that occurred in August 1999; and (ii) the sale of common stock to Intel
Corporation ("Intel") in November 1999. The interest income in 1998 and 1997 was
earned from the investment of the net proceeds of the preferred stock offerings
occurring in the first quarter of each year. Interest expense decreased to
approximately $19,000 in 1999 from approximately $34,000 in 1998 as the Company
completed its obligations on certain capitalized leases. Interest expense in
1998 increased from approximately $19,000 in 1997 as a result of the Company's
payments on an increased level of capitalized lease obligations.
Liquidity and Capital Resources
- -------------------------------
The Company's principal liquidity at December 31, 1999 was cash, cash
equivalents and short term investments of approximately $86.3 million. This
compares to approximately $7.4 million at year end 1998, and to approximately
$2.0 million at year end 1997. Cash flows used in 1999 operating activities
totaled approximately $6.2 million, due primarily to the operating loss, an
increase in end-of-period receivables and an increase in inventory purchases
made in anticipation of OEM sales. These cash flow usages were offset by (i) an
increase in end of period payables corresponding to the increase in inventories;
(ii) an increase in accrued liabilities, primarily bonus and unused vacation
accruals; and (iii) the third and final $3.0 million installment received
22
<PAGE>
under the technology licensing agreement with INRANGE which will be performed
over the next five years. Cash flows used in 1999 investing activities totaled
approximately $51.0 million primarily as a result of the purchase of short-term
investments with available cash balances.
Net cash used in operating activities of approximately $4.4 million in 1998
decreased from approximately $6.1 million in 1997. The primary reason for the
decrease in 1998 was the receipt of approximately $6 million by the Company as
part of the technology license agreement the Company signed with INRANGE. This
was offset by the operating loss and excess and obsolete inventory purchase
commitments incurred. Cash flow used in investing activities totaled
approximately $1.6 million in 1998, as compared with approximately $527,000 in
1997. Increases in investing activities was a result primarily of purchases of
short-term investments using a portion of the Company's private placement
proceeds.
On August 24, 1999, the Company completed a secondary offering of 2,500,000
shares of its common stock at $27 5/8 per share which resulted in net proceeds
of approximately $64.9 million. Additionally, on November 29, 1999, the Company
issued and sold to Intel 280,000 shares of its common stock (the "Intel Shares")
which resulted in net proceeds of approximately $14.8 million pursuant to a
Stock Purchase Agreement, dated November 29, 1999 (the "Closing Date"), between
Intel and the Company (the "Purchase Agreement"). The Intel Shares were issued
and sold in reliance on an exemption from registration under Rule 506 of
Regulation D of the Securities Act of 1933. Pursuant to the Purchase Agreement,
Intel may not dispose of any or all of the shares for a period of six months
from the Closing Date.
In connection with the Purchase Agreement, the Company also granted registration
rights to Intel pursuant to a Registration Rights Agreement, dated November 29,
1999, between the Company and Intel (the "Registration Rights Agreement").
Pursuant to the Registration Rights Agreement, the Company granted Intel demand
registration rights and short-form registration rights on Form S-3, exercisable
by Intel at any time after six months has elapsed from the Closing Date. In
addition, Intel was granted piggyback registration rights, exercisable at any
time after the Closing Date, subject to the six month restriction on disposal of
shares provided in the Purchase Agreement.
On November 24, 1999, the Company and Intel entered into a Collaboration
Agreement to develop and market switches based on the new InfiniBand
architecture. The InfiniBand architecture is a widely supported interconnect
specification that will bring new levels of reliability and performance to
Intel-based server solutions beginning in 2001. The Company will work with Intel
and other members of the InfiniBand Trade Association to define optimal ways of
building InfiniBand architecture interconnects and complete relevant standards.
The Company will also work to bring some of the first InfiniBand
architecture-based switches to market in 2001. InfiniBand is a service mark and
a trademark of the InfiniBand Trade Association.
The Company believes that the proceeds it received from the offering and from
the sale of the Intel Shares, together with interest earned, and anticipated
revenues from operations, will provide adequate liquidity to fund its growth,
operations, and capital expenditures at least through the next 12 months. Future
capital requirements of the Company beyond that will depend upon many factors
including rate of revenue growth, timing and level of expenditures needed to
support sales and marketing expansion and product development, and market
acceptance of the
23
<PAGE>
Company's products. The Company may need to secure additional financing. There
can be no assurance, however, 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.
Litigation. The Company is a defendant in a lawsuit brought by Hoyt Properties,
Inc. ("Hoyt") venued in Hennepin County District Court in the State of
Minnesota. Hoyt claims that the Company breached an agreement which provided
that Hoyt would build and lease to the Company an office building to be located
in Eden Prairie, Minnesota, and asserts damages in excess of $2,500,000. The
Company asserts there was no binding agreement. The Company denies all
liability, and alleges that Hoyt refused to provide improvements desirable and
necessary to the Company's occupancy of the proposed leased space, and multiple
contingencies, conditions, and agreements did not occur. Certain discovery is
pending, and the case has been set for trial in April 2000. The Company is
vigorously defending the case. However, there is no assurance that any judgment,
order or decree against the Company arising out of this action will not have a
material adverse effect on the Company or its business. 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.
Year 2000 Compliance
- --------------------
Year 2000 issues exist when computer systems and applications fail to recognize
date information correctly when the year changes to 2000. If those computer
programs are not corrected, many computer systems could fail or create erroneous
results. To date, the Company has experienced no year 2000 issues with any of
its internal systems, its products or its key suppliers or its customers, and it
does not expect to experience any. Year 2000 compliance with regard to the
Company's internal systems were significantly achieved through normal system
upgrades. Expenditures incurred as a result of dedicated remediation efforts
totalled $23,300.
New Accounting Pronouncements
- -----------------------------
In June 1998, the FASB issued (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instrments, including certain derivative
instruments embedded in other contracts and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for the
Company in fiscal 2001. The Company is currently evaluating SFAS No. 133, but
does not expect that it will have a material effect on its financial statements.
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, expected revenue from
24
<PAGE>
the SAN market and the timing of purchases by Sun, 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 Exhibit 99 - "Risk
Factors" to this 10-K and include: the level of market acceptance of Fibre
Channel technology and the Company's products and the timing of such acceptance;
the ability of the Company to successfully market and sell its products to OEMs
and others; the Company's ability to compete with others providing Fibre Channel
technology; the timing of customer orders, including whether customers will
purchase products from the Company at the rates and times projected by those
customers; the success of the products incorporating the Company's products
and/or technology marketed by the Company's customers; the ability of the
Company to develop enhancements to its products and technology and keep pace
with technological developments; 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.
Retention of $2.0 million of prepaid royalties from INRANGE is contingent upon
the Company's completion of certain deliverables defined in the Company's
technology license agreement with INRANGE.
Item 7A. Quantitative and Qualitative Disclosures about Market Risks
The Company has no history of, and does not anticipate in the future,
investing in derivative financial instruments, derivative commodity instruments
or other such financial instruments. Contracts with international customers are
entered into in US dollars, precluding the need for foreign currency hedges.
Additionally, the Company invests in money market funds, in U.S. government
obligations and other investment grade securities which experience minimal
volatility. Thus, the exposure to market risk is not significant.
25
<PAGE>
Item 8. Financial Statements and Supplementary Data
The following financial statements are included as a separate section following
the signature page to this Form 10-K:
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports....................................... F-2
Balance Sheets as of December 31, 1999 and 1998..................... F-4
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................... F-5
Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997.............................. F-6
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................... F-8
Notes to Financial Statements....................................... F-9
Schedule II - Valuation and Qualifying Accounts..................... F-20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
26
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
The information set forth under the heading "ELECTION OF DIRECTORS," "EXECUTIVE
OFFICERS" and "SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission on or before April 29,
2000 (the "Proxy Statement") is hereby incorporated by reference.
Item 11. Executive Compensation
The information set forth under the heading "EXECUTIVE COMPENSATION" in the
Proxy Statement referred to in Item 10 above is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading "PRINCIPAL SHAREHOLDERS" in the
Proxy Statement referred to in Item 10 above is hereby incorporated by
reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the heading "CERTAIN TRANSACTIONS" in the Proxy
Statement referred to in Item 10 above is hereby incorporated by reference.
27
<PAGE>
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a.) The following documents are filed as part of this Annual Report on
Form 10-K
1. Financial Statements: The financial statements filed as part of
this report are listed in the "Index to Financial Statements" on
Page F-1 hereof.
2. Financial Statement Schedules. The financial statement schedule
filed as part of this report is listed in the "Index to Financial
Statements" on Page F-1 hereof.
3. Exhibits
3.1/a/ Second Amended and Restated Articles of Incorporation of
the Company.
3.2/a/ Amended Bylaws of the Company.
3.3/h/ Amendment to Second Amended and Restated Articles of
Incorporation of the Company relating to an increase of
the number of authorized shares.
3.4/j/ Amendment to Bylaws adopted October 21, 1998.
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.
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/d/ Form of Warrant issued to Purchasers of the Company's
Series B Preferred Stock.
28
<PAGE>
4.6/f/ Certificate of Designation of Series C Preferred Stock.
4.7/g/ Form of Warrant issued to Dunwoody Brokerage Services,
Inc. on February 19, 1998.
4.8/i/ Form of Warrant issued to Inrange Technologies, Inc. on
September 24, 1998.
4.9/k/ Warrant issued to Sun Microsystems, Inc. on June 2, 1999.
*10.1/a/ Ancor Communications, Incorporated 1990 Stock Option
Plan.
*10.2/a/ Ancor Communications, Incorporated 1994 Long-Term
Incentive and Stock Option Plan.
10.3/a/ Sublease, dated March 29, 1988, by and between Anderson
Cornelius and Unisys Corporation, formerly known as
Burroughs Corporation.
10.4/a/ Sublease, Amendment Agreement, dated March 8, 1989, by and
between Anderson Cornelius and Unisys Corporation,
formerly known as Burroughs Corporation.
10.5/a/ Sublease, Amendment Agreement, dated August 31, 1992, by
and between the Company and Unisys Corporation, formerly
known as Burroughs Corporation.
*10.6/c/ Ancor Communications, Inc. 1995 Employee Stock Purchase
Plan.
*10.7/j/ Amendment to Ancor Communications, Inc., 1995 Employee
Stock Purchase Plan, effective September 1, 1998.
*10.8/c/ Ancor Communications, Inc. Non-Employee Director Stock
Option Plan.
10.9/d/ Form of Subscription Agreement between the Company and
Purchasers of the Company's Series B Preferred Stock
(March 1997).
10.10/d/ Registration Rights Agreement dated March 24, 1997
between the Company, Swartz Investments, Inc. and
Purchasers of the Company's Series B Preferred Stock.
*10.11/e/ Letter Employment Agreement with Kenneth E. Hendrickson
dated July 25, 1997.
29
<PAGE>
*10.12/e/ Letter Employment Agreement with Steven E. Snyder dated
September 23, 1997.
10.13/f/ Form of Subscription Agreement, dated as of February 19,
1998, between Ancor Communications, Incorporated and each
purchaser of Series C Preferred Stock.
10.14/f/ Registration Rights Agreement, dated as of February 19,
1998, by and between Ancor Communications, Incorporated,
the placement agent and each purchaser of Series C
Preferred Stock.
*10.15/g/ Termination of Employment Agreement dated August 29,
1997, between the Company and Dale C. Showers.
10.16/g/ Sublease, Amendment Agreement, dated February 11, 1998,
by and between the Company and Unisys Corporation,
formerly known as Burroughs Corporation.
*10.17/g/ Separation and General Release Agreement between the
Company and Lee B. Lewis.
*10.18/g/ Amendments to Ancor Communications, Inc. Non-Employee
Director Stock Option Plan filed as exhibit 10.18.
10.19/l/ Underwriting Agreement dated August 19, 1999 between the
Company and the Representatives of the Underwriters named
therein.
10.20/m/ Lease, dated October 1, 1999, 1999, by and between the
Company and Liberty Property Limited.
10.21/m/ First Amendment to Lease, dated October 29 1999, by and
between the Company and Liberty Property Limited.
10.22/n/ Stock Purchase Agreement, dated as of November 29, 1999,
by and between Ancor Communications, Incorporated, and
each purchaser of Intel Corporation.
10.23/n/ Registration Rights Agreement, dated as of November 29,
1999, by and between Ancor Communications, Incorporated,
and each purchaser of Intel Corporation.
23.1/n/ Consent of KPMG LLP.
30
<PAGE>
23.2/n/ Consent of McGladrey & Pullen, LLP.
27.1/n/ Financial Data Schedule.
99/n/ Risk Factors
- -----------------
* Indicates management contract or compensatory plan or agreement.
/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.
/c/ Incorporated by reference to the Company's form 10-QSB filed for the
quarterly period ended September 30, 1995.
/d/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended March 31, 1997.
/e/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended September 30, 1997.
/f/ Incorporated by reference to the Company's form 8-K filed February 23,
1998.
/g/ Incorporated by reference to the Company's Form 10-K filed for the fiscal
year ended December 31, 1997.
/h/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended June 30, 1998.
/i/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended September 30, 1998.
/j/ Incorporated by reference to the Company's Form 10-K filed for the fiscal
year ended December 31, 1998.
/k/ Incorporated by reference to the Company's Form 8-K filed June 11. 1999.
31
<PAGE>
/l/ Incorporated by reference to Exhibit 1.1 to Amendment No. 1 to the
Registration Statement on Form S-3 (SEC File No. 333-82947) filed July 26,
1999.
/m/ Incorporated by reference to the Company's form 10-Q filed for the
quarterly period ended September 30, 1999.
/n/ Included herewith.
(b.) Reports on Form 8-K
Current report on Form 8-K filed December 8, 1999, investment in Company by
Intel Corporation and execution of a collaboration agreement.
(c.) See subitem (a.) above.
(d.) See subitem (a.) above.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ANCOR COMMUNICATIONS, INCORPORATED
By /s/ Kenneth E. Hendrickson
-------------------------------
Kenneth E. Hendrickson
Chairman of the Board & CEO
Dated: March 24, 2000
--------------
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Kenneth E. Hendrickson Chairman, Director and CEO March 24, 2000
- --------------------------- (principal executive officer)
Kenneth E. Hendrickson
/s/ Steven E. Snyder Chief Financial Officer March 24, 2000
- --------------------------- (principal financial officer)
Steven E. Snyder
/s/ Amyl Ahola Director March 24, 2000
- ---------------------------
Amyl Ahola
/s/ Gerald M. Bestler Director March 24, 2000
- ---------------------------
Gerald M. Bestler
/s/ John F. Carlson Director March 24, 2000
- ---------------------------
John F. Carlson
/s/ Thomas F. Hunt, Jr. Director March 24, 2000
- ---------------------------
Thomas F. Hunt, Jr.
/s/ Michael Huntley Director March 24, 2000
- ---------------------------
Michael Huntley
/s/ Paul Lidsky Director March 24, 2000
- ---------------------------
Paul Lidsky
</TABLE>
33
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Reports..................................... F-2
Balance Sheets as of December 31, 1999 and 1998................... F-4
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................. F-5
Statements of Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997............................ F-6
Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................. F-8
Notes to Financial Statements..................................... F-9
Schedule II - Valuation and Qualifying Accounts................... F-20
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS--ANCOR COMMUNICATIONS, INCORPORATED:
We have audited the accompanying balance sheets of Ancor Communications,
Incorporated, as of December 31, 1999 and 1998, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ancor Communications,
Incorporated, as of December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
KPMG LLP
Minneapolis, Minnesota
January 28, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Ancor Communications, Incorporated
Eden Prairie, Minnesota
We have audited the accompanying statements of operations, shareholders' equity
and cash flows of Ancor Communications, Incorporated for the year ended December
31, 1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements of Ancor Communications, Incorporated
referred to above present fairly, in all material respects, the results of its
operations and its cash flows for the year ended December 31, 1997, in
conformity with generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 19, 1998
F-3
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------------------
1999 1998
-------------------------------------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $37,139,418 $ 6,458,204
Short-term investments 49,188,332 989,169
Accounts receivable, less allowances of $64,492 and
$39,492, respectively 1,973,064 442,600
Inventories 2,894,348 1,288,868
Prepaid expenses and other current assets 663,821 110,398
-------------------------------------------
Total current assets 91,858,983 9,289,239
Equipment, at cost 7,755,684 5,865,404
Less accumulated depreciation 3,582,427 2,744,786
-------------------------------------------
4,173,257 3,120,618
Other long-term assets,
net of accumulated amortization of $943,678 and
$703,501, respectively 434,591 328,236
-------------------------------------------
TOTAL ASSETS $96,466,831 $12,738,093
===========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 39,524 $ 139,791
Accounts payable 1,688,045 448,383
Accrued compensation and benefits 1,250,202 577,206
Other accrued liabilities 633,450 378,470
Unearned revenue, current 2,028,714 2,146,936
-------------------------------------------
Total current liabilities 5,639,935 3,690,786
Long-term unearned revenue, less current 5,414,386 3,727,919
Long-term debt, less current maturities 6,988 110,997
Commitments and Contingencies
Shareholders' Equity
Preferred stock, par value $.01 per share,
authorized 5,000,000 shares; issued and outstanding
Series C, 0 shares in 1999 and 229 shares in 1998 - 2
Common stock, par value $.01 per share,
authorized 40,000,000 shares; issued and outstanding
28,506,172 shares in 1999 and 23,265,819 shares in 1998 285,062 232,658
Additional paid-in capital 135,444,539 46,566,386
Accumulated deficit (50,324,079) (41,590,655)
-------------------------------------------
Total shareholders' equity 85,405,522 5,208,391
-------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $96,466,831 $12,738,093
===========================================
</TABLE>
See notes to Financial Statements
F-4
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Gross sales $ 13,717,768 $ 4,393,197 $ 7,924,001
Sales discounts (766,875) - -
-------------------- ------------------- --------------------
Net sales 12,950,893 4,393,197 7,924,001
Cost of goods sold 6,741,399 6,431,411 5,990,661
-------------------- ------------------- --------------------
Gross profit (loss) 6,209,494 (2,038,214) 1,933,340
Operating expenses:
Selling, general and administrative 8,960,904 7,195,294 7,684,638
Research and development 7,458,430 5,450,942 4,271,393
-------------------- ------------------- --------------------
Total operating expenses 16,419,334 12,646,236 11,956,031
-------------------- ------------------- --------------------
Operating loss (10,209,840) (14,684,450) (10,022,691)
Nonoperating income (expense):
Interest expense (18,606) (33,532) (18,717)
Other, primarily interest income 1,495,022 219,529 218,408
-------------------- ------------------- --------------------
Net loss (8,733,424) (14,498,453) (9,823,000)
Accretion on convertible preferred stock (12,011) (761,704) (344,939)
-------------------- ------------------- --------------------
Net loss attributable to common shareholders $ (8,745,435) $ (15,260,157) $ (10,167,939)
==================== =================== ====================
Basic and diluted net loss per common share $ (0.34) $ (1.04) $ (0.93)
==================== =================== ====================
Weighted average common shares outstanding 25,658,947 14,741,431 10,963,416
==================== =================== ====================
</TABLE>
See notes to Financial Statements
F-5
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED STATEMENTS OF SHAREHOLDERS' EQUITY Years
Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Preferred Stock
-----------------------------------------------------------------------
Series A Series B
-----------------------------------------------------------------------
Shares Amount Shares Amount
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 174 $ 2 - $ -
Sales of Series B Preferred Stock (net of
issuance costs of $602,253) - - 855 8
Conversions of Series A Preferred Stock (132) (1) - -
Conversions of Series B Preferred Stock - - (415) (4)
Exercise of stock options and warrants - - - -
Employee stock purchases - - - -
Net loss - - - -
-----------------------------------------------------------------------
Balance, December 31, 1997 42 1 440 4
Sales of Series C Preferred Stock (net of
issuance costs of $791,814) - - - -
Warrants issued in connection with license - - - -
agreement
Conversions of Series A Preferred Stock (42) (1) - -
Conversions of Series B Preferred Stock - - (440) (4)
Conversions of Series C Preferred Stock - - - -
Exercise of stock options and warrants - - - -
Employee stock purchases - - - -
Net loss - - - -
-----------------------------------------------------------------------
Balance, December 31, 1998 - - - -
Sale of Common Stock in secondary
offering (net of issuance costs
of $4,173,962) - - - -
Sales of Common Stock - - - -
Warrants issued in connection with product
sales and for services rendered - - - -
Conversions of Series C Preferred Stock - - - -
Exercise of stock options and warrants - - - -
Employee stock purchases - - - -
Net loss - - - -
-----------------------------------------------------------------------
Balance, December 31, 1999 - $ - - $ -
=================-=====================================================
</TABLE>
See notes to Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
Series C Common Stock Additional
- -------------------------------------------------------------------- Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- $ - 10,407,687 $ 104,077 $ 27,071,820 $ (17,269,202) $ 9,906,697
- - - - 7,947,739 - 7,947,747
- - 407,444 4,074 (4,073) - -
- - 876,383 8,764 (8,760) - -
- - 74,775 748 222,925 - 223,673
- - 11,717 117 61,112 - 61,229
- - - - - (9,823,000) (9,823,000)
- -----------------------------------------------------------------------------------------------------------------------------------
- - 11,778,006 117,780 35,290,763 (27,092,202) 8,316,346
1,100 11 - - 10,208,175 - 10,208,186
- - - - 768,064 - 768,064
- - 134,268 1,343 (1,342) - -
- - 3,999,976 40,000 (39,996) - -
(871) (9) 7,196,487 71,965 (71,956) - -
- - 58,020 580 215,301 - 215,881
- - 99,062 990 197,377 - 198,367
- - - - (14,498,453) (14,498,453)
- -----------------------------------------------------------------------------------------------------------------------------------
229 2 23,265,819 232,658 46,566,386 (41,590,655) 5,208,391
- - 2,500,000 25,000 64,863,538 - 64,888,538
- - 280,000 2,800 14,816,600 - 14,819,400
- - - - 798,133 - 798,133
(229) (2) 827,245 8,272 (8,270) - -
- - 1,592,771 15,928 8,088,975 - 8,104,903
- - 40,337 404 319,177 - 319,581
- - - - (8,733,424) (8,733,424)
- -----------------------------------------------------------------------------------------------------------------------------------
- $ - 28,506,172 $ 285,062 $135,444,539 $ (50,324,079) $85,405,522
===================================================================================================================================
</TABLE>
See notes to Financial Statements
F-7
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,733,424) $ (14,498,453) $ (9,823,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provisions for non-cash sales discounts and
consulting services 798,133 - -
Provisions for receivables allowances 25,000 - 1,028,000
Provision for obsolete inventories 270,000 4,262,000 1,045,000
Writedown of equipment - 100,538 248,953
Depreciation and amortization 1,647,885 1,342,653 1,077,796
Changes in current assets and liabilities:
Accounts receivable (1,555,464) 1,057,034 1,491,366
Inventories (1,875,480) (2,814,146) (842,761)
Prepaid expenses and other (553,423) 44,585 181,751
Accounts payable 1,239,662 (514,938) (788,937)
Accrued liabilities 927,976 24,686 323,926
Unearned revenue 1,568,245 6,641,919 1,000
-------------------------------------------------------------------
Net cash used in operating activities (6,240,890) (4,354,122) (6,056,906)
-------------------- ------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (2,450,982) (606,533) (1,334,183)
Purchases of short-term investments (563,253,894) (14,413,168) (9,469,670)
Sales of short-term investments 515,054,731 13,423,999 10,473,200
Capitalized software development costs - - (125,035)
Other, net (346,532) (49,078) (70,934)
-------------------- ------------------- --------------------
Net cash used in investing activities (50,996,677) (1,644,780) (526,622)
-------------------- ------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of common and preferred stock 79,707,938 10,208,186 7,947,747
Net proceeds from exercise of stock warrants,
exercise of stock options, and employee stock
purchases 8,424,484 414,248 284,902
Principal payments on long-term debt (213,641) (166,732) (154,758)
-------------------- ------------------- --------------------
Net cash provided by financing activities 87,918,781 10,455,702 8,077,891
-------------------- ------------------- --------------------
Net increase in cash 30,681,214 4,456,800 1,494,363
Cash, beginning of year 6,458,204 2,001,404 507,041
-------------------- ------------------- --------------------
Cash, end of year $ 37,139,418 $ 6,458,204 $ 2,001,404
==================== =================== ====================
Supplemental Cash Flow Disclosures
Cash payments for interest $ 18,606 $ 33,532 $ 18,717
==================== =================== ====================
Supplemental Schedule of Noncash Investing and
Financing Activities:
Equipment acquired under capital lease $ 9,365 $ 222,673 $ 110,300
==================== =================== ====================
Warrants issued under sales, consulting
and license agreements $ 798,133 $ 768,064 $ -
==================== =================== ====================
</TABLE>
See notes to Financial Statements
F-8
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Ancor Communications, Incorporated (the Company) operates in
one business segment, the development and marketing of switching products for
data center networks. Currently, the Company's products are used primarily in
deploying storage area networks. Sales are made to customers throughout the
United States, Japan, and certain other foreign countries. Credit, including
foreign credit, is determined on an individual customer basis.
Accounting estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications: Certain prior year amounts have been reclassified to conform
with current year presentation.
Revenue recognition: Revenue on firm customer orders is generally recognized at
the time product is shipped or services are provided. Product shipped for
customer evaluation is recorded as consigned inventory. The Company provides an
allowance for product returns based on management's periodic assessment of the
need for such an allowance. License revenue is recognized when all of the
following criteria have been met: there is an executed license agreement; the
product has been shipped to the customer; no significant vendor obligations
remain; the license fee is fixed and payable within twelve months and collection
is deemed probable.
Sales discounts: The fair value of warrants issued in conjunction with a sales
agreement is determined by using the Black-Scholes option pricing model.
Cash and cash equivalents: For purposes of reporting cash flows, the Company
considers all unrestricted cash and any U.S. Treasury bills, commercial paper,
and money market funds with an original maturity of three months or less to be
cash equivalents. The Company maintains its cash in bank deposit and money
market accounts, which, at times, exceed federally insured limits. The Company
has not experienced any losses in such accounts.
Short-term investments: Short-term investments consisted primarily of
investments in money market funds, U.S. government obligations and investment
grade securities. Short-term investments are recorded at amortized cost which
approximates market.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company has recorded a reserve for potential obsolete
inventory based primarily on management's estimate of future sales levels of
products and related components in inventory.
Depreciation and amortization: Equipment purchases are stated at cost.
Depreciation is computed by the straight-line method over estimated useful lives
of three to five years. Intangible assets consist
F-9
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
principally of patents, prepaid royalties, and cost in excess of net assets
acquired. Amortization is computed by the straight-line method over estimated
useful lives ranging from 5 to 15 years.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. In connection with such a review,
during 1998 and 1997 management wrote down certain assets resulting in a loss of
$100,538 and $248,953, respectively.
Fair value of financial instruments: The financial statements include the
following financial instruments: cash and cash equivalents, short-term
investments, and long-term debt. No separate comparison of fair values versus
carrying values is presented for the aforementioned financial instruments since
their fair values are not significantly different than their balance sheet
carrying amounts.
Income taxes: Deferred taxes are provided on an asset and liability method
whereby deferred tax assets are recognized for deductible temporary differences
and operating loss or tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the amounts of assets and liabilities recorded for income
tax and financial reporting purposes. Deferred tax assets are reduced by a
valuation allowance when management determines that it is more likely than not
that some portion or all of the deferred tax assets and liabilities will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment. Income tax expense or
benefit would be the tax payable or refundable for the year plus or minus the
change in deferred tax assets and liabilities during the year.
Capitalized software development costs: The Company capitalizes software
development costs incurred after the establishment of technological feasibility.
These costs are amortized to cost of goods sold at the greater of (i) the amount
computed using the ratio of current gross revenues for the product to the total
of current and anticipated future gross revenues, or (ii) the straight-line
method over the remaining estimated economic life of the product. An original
estimated economic life ranging from one to five years is assigned to
capitalized software development costs. It is reasonably possible that those
estimates of anticipated future gross revenues, the remaining estimated economic
life of the product, or both, could be reduced as a result of the rapid
technological changes occurring in the markets in which the Company sells its
products.
Research and development: Research and development costs applicable to both
present and future products are charged to operations as incurred.
Employee options: The Company has adopted the disclosure only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation
cost has been recognized for the Company's employee stock option plan.
F-10
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Net loss per share: Basic net loss per common share has been computed based upon
the weighted average number of common shares outstanding during the year.
Diluted net loss per common share amounts assume the conversion, exercise, or
issuance of all potential common stock instruments unless the effect is
anti-dilutive, thereby reducing the loss or increasing the income per common
share. Potential common shares, consisting of options, warrants and convertible
preferred stock for all periods, were not included in the computation as their
effect was anti-dilutive. Basic and diluted loss per-share amounts are the same
in each period presented. In calculating the basic loss per share, the premium
earned by the preferred shareholders ($12,011 in 1999, $761,704 in 1998 and
$344,939 in 1997) was added to the net loss in all years presented.
New Accounting Pronouncements: In June 1998, the FASB issued (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instrments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by SFAS No. 137, is effective for the Company in fiscal 2001. The Company is
currently evaluating SFAS No. 133, but does not expect that it will have a
material effect on its financial statements.
Note 2. Sales Discounts
As part of the agreement with Sun Microsystems, Inc. ("Sun"), the Company
granted a warrant to Sun to purchase up to 1.5 million shares of the Company's
common stock at an exercise price of $7.30 per share. The warrant shares are
earned at the rate of one share for each $67.00 of revenue the Company receives
from Sun through September 30, 2002. In each period in which the warrant shares
are earned, a non-cash sales discount is recorded. The amount of the non-cash
sales discount is the fair value of the warrant shares which are earned in the
period. Fair value of the warrant shares is calculated by using the
Black-Scholes option pricing model. None of the warrant shares vest until the
Company has received a total of $10,000,000 in revenue from Sun.
In addition to the closing price of the Company's common stock on December 31,
1999, of $67.875, the following weighted-average assumptions were used to
calculate the value per warrant:
Expected stock price volatility 140%
Risk-free interest rate 6.50%
Expected life of options (years) 4.5
Based on the Black-Scholes option pricing model, the value per warrant at
December 31, 1999, was $65.797. Sales discounts were correspondingly recorded in
1999 in the amount of $766,875.
F-11
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Note 3. Inventories
Inventories at December 31, 1999 and 1998, consisted of:
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 1,946,092 $ 3,979,080
Work in process 764,625 52,466
Finished goods consigned to customers and others 740,250 779,054
Finished goods 949,318 1,289,577
Reserve for obsolescence (1,505,937) (4,811,309)
------------------------------------------
$ 2,894,348 $ 1,288,868
==========================================
</TABLE>
During 1998 the Company recorded the following special charges relating to
excess and obsolete inventory: (i) $4,015,000 provision for excess or obsolete
inventory, (ii) $243,000 provision for future commitments to purchase excess or
obsolete inventory, and (iii) $170,000 fee for canceling an order for excess or
obsolete inventory. The Company made these charges due to its shift in focus
from local area networks to storage area networks, along with a lack of demand
in Japan for this old technology, causing the Company to believe its inventory
of certain products was in excess of market demands.
Note 4. Notes Payable and Long-term Debt
Long-term debt consists of the following at December 31, 1999 and 1998:
1999 1998
- --------------------------------------------------------------------------
Note payable to shareholder (1) $ 0 $ 81,946
Capital lease obligations (2) 46,512 168,842
-------------------------------------
46,512 250,788
Less current maturities 39,524 139,791
-------------------------------------
$ 6,988 $ 110,997
=====================================
(1) Payments were made to the note holder in an amount equal to 0.94 percent of
Company sales in excess of $4,000,000 in any calendar year.
(2) The Company has capitalized certain equipment held under capital leases
with a capitalized cost of $136,816 and $396,855 and accumulated
depreciation of $65,922 and $133,752 at December 31, 1999 and 1998,
respectively. The related obligations are recorded in the accompanying
financial statements based on the present value of the future minimum lease
payments based on an implicit interest rate of 10 percent.
F-12
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Approximate aggregate annual maturities of long-term debt, including capital
lease obligations, at December 31, 1999, are as follows:
Years ending December 31:
2000 $ 34,000
2001 12,000
2002 1,000
---------------------
$ 47,000
=====================
Note 5. Major Customers and Concentration of Credit Risk
Major customers: A summary of major customers follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- --------------------------- ----------------------------
Percent Percent Percent
Customer Sales to Total Sales to Total Sales to Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer A $ 2,984,000 22% - - - -
Customer B 2,448,000 18 - - - -
Customer C 2,291,000 17 $2,193,000 50% $679,000 9%
Customer D 2,200,000 16 - - - -
Customer E 282,000 2 967,000 22 - -
Customer F 13,000 - 174,000 4 6,983,000 88
</TABLE>
Accounts receivable from major customers totaled approximately $1,545,000 and
$537,000 at December 31, 1999 and 1998, respectively.
Export net sales totaled approximately $1,166,000, $1,159,000, and $7,340,000 in
1999, 1998, and 1997, respectively. The Company's Japanese distributors
comprised 25, 98, and 95 percent of export net sales in 1999, 1998, and 1997,
respectively.
Note 6. Income Taxes
The Company has incurred significant net operating losses. The Company has not
reflected any benefit of such net operating loss carryforwards in the
accompanying financial statements.
The income tax benefit differed from the statutory federal rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Statutory rate applied to loss before taxes $ (2,969,000) $ (4,929,000) $ (3,438,000)
Current period tax benefits not utilized 2,969,000 4,929,000 3,438,000
-------------------- -------------------- --------------------
$ - $ - $ -
==================== ==================== ====================
</TABLE>
F-13
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred tax assets consist of the following components as of December 31, 1999
and 1998:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------------------------ -------------------- --------------------
<S> <C> <C>
Loss carryforwards $ 25,618,000 $ 14,711,000
Tax credit carryforwards 1,301,000 1,042,000
Accrued expenses 223,000 188,000
Allowances for obsolete inventory, product returns, and doubtful accounts 587,000 2,317,000
Property, plant and equipment (16,000) (440,000)
-------------------- --------------------
27,713,000 17,818,000
Less valuation allowance $ (27,713,000) $(17,818,000)
-------------------- --------------------
$ - $ -
==================== ====================
</TABLE>
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible.
Based on the level of historical taxable income and projections of future
taxable income over the periods in which the deferred tax assets are deductible,
management does not believe that it is more likely than not the Company will
realize the benefits of these deductible differences. Accordingly, the Company
has provided a valuation allowance against the gross deferred tax assets as of
December 31, 1999 and 1998.
At December 31, 1999, the Company has net operating loss, research and
development credit, and investment tax credit carryforwards (under existing
federal tax laws) as follows:
Carryforward Net Tax
Expiration Operating Loss Credits
- --------------------- -------------------- --------------------
2000 $ 900,000 $ -
2006 1,100,000 82,000
2007 3,100,000 117,000
2008 2,100,000 126,000
2009 3,000,000 138,000
2010 3,400,000 82,000
2011 5,200,000 104,000
2012 7,400,000 278,000
2018 11,400,000 224,000
2019 31,900,000 150,000
-------------------- --------------------
$ 69,500,000 $ 1,301,000
==================== ====================
Federal tax laws impose significant restrictions on the utilization of net
operating loss carryforwards in the event of a change in ownership of the
Company which constitutes an "ownership change," as defined by the Internal
Revenue Code, Section 382. Because of the changes in ownership that have
occurred in
F-14
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
connection with the company's initial public offering (IPO) in 1994, as well as
the sales of securities that have occurred subsequent to the IPO, the Company's
future use of its net operating loss and tax credit carryforwards are subject to
certain annual limitations.
Note 7. Shareholders' Equity
Preferred stock: The Company has authorized 5,000,000 shares of preferred stock
at December 31, 1999. There is no preferred stock outstanding at December 31,
1999.
Series C: On February 19, 1998, the Company completed a private placement
transaction by selling 1,100 shares of Series C Preferred Stock , that accreted
at the rate of 8 percent per year which provided proceeds of $10,208,186, net of
issuance costs of $791,814. In conjunction with this transaction, the placement
agent was granted a five-year warrant to purchase 90,644 shares of common stock
at $7.28 per share.
The Series C Preferred Stock was convertible into Common Stock of the Company,
subject to certain restrictions, at a variable conversion rate equal to the
lower of (i) the Maximum Conversion Price (as defined below) or (ii) the average
of the three lowest closing bid prices of the Common Stock during the applicable
Pricing Period (as defined below). The Maximum Conversion Price for the first
year was $11.00. After the first year, the Maximum Conversion Price was equal to
the lesser of $11 per share and the average closing bid price of the five
Wednesdays immediately preceding the first anniversary of the date the Series C
Preferred Stock was issued ($7.575). The applicable Pricing Period was a number
of consecutive trading days immediately preceding the date of conversion of the
Series C Preferred Stock initially equal to twelve and increased by one
additional consecutive trading day for each full calendar month which elapsed
since February 19, 1998. The Series C Preferred Stock was junior to the Series A
and B Preferred Stock. During 1999 and 1998, all shares of Series C Preferred
Stock were converted into 8,023,732 shares of common stock.
Shareholder Rights Plan: The Company declared a dividend of one right for each
common share outstanding on November 10, 1998. As amended on July 21, 1999, each
right entitles a shareholder to buy a fraction of a share of a newly authorized
series of preferred stock at an exercise price of $200 per share. The rights
become exercisable in the event that a person or group acquires 15% or more of
the Company's common shares or a tender offer is commenced that would result in
ownership by a person or group of 15% or more of the Company's common shares
(subject to certain exceptions).
If a potential acquiror purchases at least 15% of the Company's outstanding
Common Stock, shareholders other than the acquiror would be able to exercise the
rights issued under the plan to purchase shares of the Company's Common Stock,
or in some cases cash, property or other securities of the Company or shares of
the acquiror's common stock, at a 50% discount from the market price. In
addition, the Board may elect to exchange the rights for the Company's Common
Stock.
The Company's Board of Directors is entitled to redeem the rights at $.01 per
right at any time prior to an acquiror purchasing 15% or more of the Company's
Common Stock.
F-15
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The new purchase rights were distributed as a non-taxable dividend and will
trade with the Company's Common Stock. The rights expire on November 3, 2008.
Options and warrants: The Company's 1994 Long-Term Incentive and Stock Option
plan provides for the granting of stock options, stock appreciation rights,
restricted stock awards, and performance awards to officers, directors,
employees, and independent contractors of the Company. The options may be
granted at an exercise price of not less than the fair market value of common
stock at the date of grant (110 percent for more than 10 percent shareholders).
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the stock option plan. Had compensation cost for the
Company's stock option plan been determined based on the fair value at the grant
date for awards in 1999, 1998 and 1997 consistent with the provisions of SFAS
No. 123, the Company's net loss and basic and diluted net loss per share would
have been increased to the pro forma amounts indicated as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Net loss, as reported $(8,733,424) $(14,498,453) $(9,823,000)
Net loss, pro forma (13,651,756) (16,750,953) (11,241,000)
Basic and diluted net loss per share, as
reported (0.34) (1.04) (0.93)
Basic and diluted net loss per share, pro forma (0.53) (1.19) (1.06)
</TABLE>
The above pro forma effects on net loss and net loss per share are not likely to
be representative of the effects on reported net income (loss) for future years
because options vest over several years and additional awards generally are made
each year.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Expected stock price volatility 140% 131% 124%
Risk-free interest rate 6.41% 5.11% 6.30%
Expected life of options (years) 3.5 3.5 3
</TABLE>
The weighted-average fair value, as determined using the Black-Scholes option
pricing model, of options granted during 1999, 1998 and 1997 was $22.71, $1.76
and $4.53, respectively.
On June 2, 1999, the Company issued a warrant to purchase 1,500,000 shares of
common stock (the "Warrant") to Sun Microsystems, Inc. ("Sun") in connection
with a product purchase agreement entered into between the Company and Sun on
such date. The Warrant is exercisable for a period of five years at
F-16
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
an exercise price of $7.30. Upon Sun purchasing $10,000,000 of the Company's
product, the warrant will vest with respect to 149,253 shares of common stock.
Subsequent purchases of the Company's product will vest quarterly at a rate of
one warrant for each $67 of purchases through September 30, 2002.
Transactions involving stock options and warrants during the three years ended
December 31, 1999, are summarized as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price Per
Warrants Stock Options Share
- --------------------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Balance, December 31, 1996 90,832 840,433 $ 7.31
Granted 105,556 746,500 6.77
Exercised (25,182) (60,808) 4.08
Expired - (102,459) 8.71
-------------------- -------------------- --------------------
Balance, December 31, 1997 171,206 1,423,666 7.15
Granted 1,021,704 2,392,591 2.44
Exercised - (58,020) 3.28
Expired - (261,063) 7.05
-------------------- -------------------- --------------------
Balance, December 31, 1998 1,192,910 3,497,174 2.50
Granted 1,512,000 880,101 15.76
Exercised (1,135,805) (456,966) 5.21
Expired (6,992) (62,669) 4.70
-------------------- -------------------- --------------------
Balance, December 31, 1999 1,562,113 3,857,640 $ 8.28
==================== ==================== ====================
Currently exercisable 62,113 1,565,111 $ 2.21
Not currently exercisable 1,500,000 2,292,529 10.80
-------------------- -------------------- --------------------
1,562,113 3,857,640 $ 8.28
==================== ==================== ====================
</TABLE>
The following tables summarize information about stock options and warrants
outstanding as of December 31, 1999:
F-17
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------------- ----------------------------------
Weighted
Average
Number of Remaining Weighted Weighted
Units Contractual Average Number of Units Average
Range of Exercise Price Outstanding Life (in Years) Exercise Price Exercisable Exercise Price
- ------------------------------------ ---------------- ----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.68 - 10.25 4,670,253 6.34 $ 4.12 1,627,224 $ 2.21
$20.00 - 28.375 555,000 9.80 27.77 - -
$29.75 - 79.625 194,500 9.81 52.46 - -
---------------- ---------------- ----------------- ----------------
5,419,753 $ 8.28 1,627,224 $ 2.21
================ ================ ================= ================
</TABLE>
Note 8. Commitments
Operating leases: The Company leases its office facility and certain equipment
under operating leases. The total minimum annual future rentals under these
noncancelable operating leases are as follows:
Years ending December 31:
2000 $ 559,896
2001 529,665
2002 524,925
2003 524,925
2004 524,925
2005 393,693
--------------------
$ 3,058,029
====================
The office facility lease requires the Company to pay real estate taxes,
insurance and maintenance costs. Total rent expense under the operating
lease-arrangements for 1999, 1998 and 1997, was approximately $437,000,
$361,000, and $391,000, respectively.
Profit sharing plan: The Company has a profit sharing/401(k) plan which provides
that an annual contribution, up to the maximum amount allowed as a deduction by
the Internal Revenue Code, may be contributed by the Company to the plan.
Company contributions to the plan are discretionary as determined by the Board
of Directors. No contributions were made by the Company during 1999, 1998, and
1997.
Major supplier: The Company outsources the manufacturing of its products with a
contract manufacturer. Purchases of contracted product were approximately
$5,501,000, $4,071,000, and $6,480,000 in 1999, 1998, and 1997, respectively.
Management believes that alternative contract manufacturers are available.
F-18
<PAGE>
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 9. Lawsuits
The Company is a defendant in a lawsuit brought by Hoyt Properties, Inc.
("Hoyt") venued in Hennepin County District Court in the State of Minnesota.
Hoyt claims that the Company breached an agreement which provided that Hoyt
would build and lease to the Company an office building to be located in Eden
Prairie, Minnesota, and asserts damages in excess of $2,500,000. The Company
asserts there was no binding agreement. The Company denies all liability, and
alleges that Hoyt refused to provide improvements desirable and necessary to the
Company's occupancy of the proposed leased space, and multiple contingencies,
conditions, and agreements did not occur. Certain discovery is pending, and the
case has been set for trial in April 2000. The Company is vigorously defending
the case. However, there is no assurance that any judgment, order or decree
against the Company arising out of this action will not have a material adverse
effect on the Company or its business. 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.
Note 10. 1997 Fourth-Quarter Adjustments
After experiencing further difficulties with the collections from certain of its
customers, most notably the value added resellers, the Company increased its
allowances for both future product returns and bad debts by a total of $543,000
during the quarter ended December 31, 1997. In addition, in connection with a
revision to its business plan to not actively promote certain of its products
which have been replaced by more technologically advanced versions, the Company
increased its allowance for obsolescence by approximately $482,000. These
adjustments had the effect of reducing fourth-quarter sales by approximately
$530,000 and increasing the fourth-quarter net loss and net loss per common
share by approximately $1,025,000 and $0.09 per share, respectively.
F-19
<PAGE>
SCHEDULE II
ANCOR COMMUNICATIONS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Charged to
Cost and
Balance at Expenses Balance
Beginning Or Against at End
Description of Year Net Sales Deductions of Year
----------- ------- --------- ---------- -------
<S> <C> <C> <C> <C>
Deducted in the balance sheet from the
assets to which it applies:
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 39,492 $ 25,000 $ 64,492
$ -
Inventory valuation reserve:
Year ended December 31, 1999 4,811,309 270,000 3,575,372 1,505,937
</TABLE>
F-20
<PAGE>
Exhibit 10.22
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement (the "Agreement") is entered into as of
November 29, 1999 by and between INTEL CORPORATION, a Delaware corporation
(together with its successors and permitted assigns, "Investor"), and ANCOR
COMMUNICATIONS, INCORPORATED, a Minnesota corporation (together with its
successors and permitted assigns, "Issuer"). Capitalized terms used but not
otherwise defined herein shall have the meanings set forth in Section 1.1.
WHEREAS, subject to the terms and conditions of this Agreement, Investor
desires to purchase, and Issuer desires to issue and sell to Investor, shares of
Issuer's common stock, par value $.01 per share (the "Common Stock").
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms. As used herein the following terms shall have the
following meanings:
"Affiliate" shall have the meaning ascribed to it in Rule 12b2 of the
General Rules and Regulations under the Exchange Act, as in effect on the date
hereof.
"Articles of Incorporation" means Issuer's Articles of Incorporation, as
the same may be or have been supplemented, amended or restated from time to
time.
"Bylaws" means Issuer's Restated Bylaws, as the same may be or have been
supplemented, amended or restated from time to time.
"Contract" means any indenture, lease, sublease, loan agreement, mortgage,
note, restriction, commitment, obligation or other contract, agreement or
instrument.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"GAAP" means generally accepted accounting principles in effect in the
United States of America from time to time.
"Governmental Authority" means any nation or government, any state or other
political subdivision thereof, and any entity or official exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement, any lease in the nature
<PAGE>
thereof, and the filing of or agreement to give a financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction in connection with
such mortgage, pledge, security interest, encumbrance, lien or charge).
"Material Adverse Change (or Effect)" means a change (or effect), in the
condition (financial or otherwise), properties, assets, liabilities, rights,
obligations, operations, business or prospects which change (or effect)
individually or in the aggregate with other such changes (or effects) is
materially adverse to such condition, properties, assets, liabilities, rights,
obligations, operations, business or prospects.
"Person" means an individual, partnership, corporation, limited liability
company, business trust, joint stock company, estate, trust, unincorporated
association, joint venture, Governmental Authority or other entity, of whatever
nature.
"Requirement of Law" means as to any Person, the articles of incorporation,
bylaws or other organizational or governing documents of such person, and any
domestic or foreign and federal, state or local law, rule, regulation, statute
or ordinance or determination of any arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or any of its
properties or to which such Person or any of its property is subject.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
ARTICLE II
ISSUANCE AND PURCHASE OF COMMON STOCK
2.1 Issuance and Purchase of Common Stock. Subject to the terms and
conditions of this Agreement, Issuer will issue and sell to Investor, and
Investor will purchase from Issuer, a number of shares (the "Shares") of Common
Stock equal to the aggregate purchase price hereunder divided by the per share
purchase price, each as set forth herein, rounded up to the next whole number of
shares. The aggregate purchase price shall be $14,840,000. The per share
purchase price shall be equal to $53.00 (the "Purchase Price").
2.2 Legend. Any certificate or certificates representing the Shares shall
bear the following legend:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR UNDER ANY APPLICABLE
STATE SECURITIES LAW AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED
OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE ACT OR AN OPINION
OF COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER OR UNDER APPLICABLE STATE
SECURITIES LAWS.
2
<PAGE>
ARTICLE III
CLOSING
3.1 Closing. The closing of the transactions contemplated herein (the
"Closing") shall take place as promptly as practicable after satisfaction or
waiver of the conditions set forth in Article VIII at the offices of Dorsey &
Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota 55402. At the
Closing, (i) Investor shall pay to Issuer, by wire transfer of immediately
available funds to an account designated in writing by Issuer, the Purchase
Price; (ii) Issuer shall issue to Investor the Shares, and deliver to Investor
certificates for the Shares duly registered in the name of Investor; and (iii)
all other agreements and other documents referred to in this Agreement shall be
executed and delivered (if not done prior to the Closing). "Closing Date" means
the date on which the Closing occurs.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ISSUER
As a material inducement to Investor entering into this Agreement and
purchasing the Shares, Issuer represents and warrants to Investor as follows:
4.1 Corporate Status. Issuer is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Minnesota. Issuer
has all requisite corporate power and authority to own or lease, as the case may
be, its properties and to carry on its business as now conducted. Except as set
forth in Section 4.1 of the Disclosure Schedule attached hereto (the "Disclosure
Schedule"), the Issuer is qualified or licensed to conduct business and is in
good standing in all jurisdictions where its ownership or lease of property and
the conduct of its business requires such qualification or licensing, except to
the extent that failure to so qualify or be licensed would not have a Material
Adverse Effect on Issuer. There is no pending or threatened proceeding for the
dissolution, liquidation, or insolvency of Issuer.
4.2 Corporate Power and Authority. Issuer has the corporate power and
authority to execute and deliver this Agreement and the other agreements,
instruments and documents contemplated hereby, and to perform its obligations
hereunder and to consummate the transactions contemplated hereby. Issuer has
taken all necessary corporate action to authorize the execution, delivery and
performance of this Agreement and the transactions contemplated hereby and the
authorization, issuance, reservation for issuance and delivery of all of the
Shares being sold under this Agreement have been or will be taken.
4.3 Execution, Delivery and Enforceability. This Agreement has been duly
executed and delivered by Issuer and constitutes a legal, valid and binding
obligation of Issuer, enforceable against Issuer in accordance with its terms,
except as the same may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
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creditors' rights generally and general equitable principles regardless of
whether such enforceability is considered in a proceeding at law or in equity.
4.4 No Violation. The execution and delivery by Issuer of this Agreement,
the consummation of the transactions contemplated hereby, and the compliance by
Issuer with the terms and provisions hereof (including, without limitation, the
issuance to Investor of the Shares), do not and will not result in a default
under (or give any other party the right, with the giving of notice or the
passage of time (or both), to declare a default or accelerate any obligation
under) or violate the Articles of Incorporation or Bylaws or any Contract to
which Issuer is a party or by which Issuer or its properties or assets are
bound, or any Requirement of Law applicable to Issuer, or result in the creation
or imposition of any Lien upon any of the capital stock, properties or assets of
Issuer.
4.5 Consents/Approvals. Except for any filing and approval under the
HartScottRodino Antitrust Improvements Act of 1976, as amended, and the rules
and regulations thereunder ("HSR Act"), (a) no consents of, filings with or
authorizations or other actions of any Governmental Authority are required for
Issuer's execution, delivery and performance of this Agreement and (b) no
consent, approval, waiver or other action by any Person under any Contract to
which Issuer is a party or by which Issuer or any of its properties or assets
are bound is required or necessary for the execution, delivery or performance by
Issuer of this Agreement and the consummation of the transactions contemplated
hereby and thereby, except where the failure to obtain such consents would not
have a Material Adverse Effect on Issuer or would not invalidate the purchase of
the Shares.
4.6 Capitalization. The authorized capital stock of Issuer consists of
40,000,000 shares of Common Stock, par value $.01 per share, and 5,000,000
shares of preferred stock, $.01 par value per share ("Preferred Stock"). As of
November 26, 1999, there are 28,045,520 shares of Common Stock and no shares of
Preferred Stock outstanding. All of the issued and outstanding securities of
Issuer have been duly authorized and validly issued and are fully paid and
nonassessable and are free of all liens, claims and encumbrances, other than
liens, claims or encumbrances create by, imposed upon or otherwise created by
the actions of the holders thereof. Issuer has no other equity securities or
securities containing any equity features authorized, issued or outstanding.
Except as set forth in Section 4.6 of the Disclosure Schedule, there are no
agreements or other rights or arrangements existing which provide for the sale
or issuance of capital stock by Issuer and there are no rights, subscriptions,
warrants, options, conversion rights or agreements of any kind outstanding to
purchase or otherwise acquire from Issuer any shares of capital stock or other
securities of Issuer of any kind. There are no agreements or other obligations
(contingent or otherwise) which may require Issuer to repurchase or otherwise
acquire any shares of its capital stock.
4.7 Valid Issuance of Stock.
(i) Valid Issuance. The Shares will be, upon payment therefor by the
Investor in accordance with this Agreement, duly authorized, validly
issued, fully paid and non-assessable.
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(ii) Compliance with Securities Laws. Assuming the correctness of the
representations made by the Investor in Section Article V hereof, the
Shares will be issued to the Investor in compliance with applicable
exemptions from (i) the registration and prospectus delivery requirements
of the Securities Act of 1933, as amended (the "Securities Act") and (ii)
the registration and qualification requirements of all applicable
securities laws of the states of the United States.
4.8 SEC Reports and Nasdaq Compliance. Set forth in Section 4.8 of the
Disclosure Schedule is a complete and correct list of all registration
statements, reports and proxy statements filed by the Issuer with the SEC on or
after December 31, 1998. Issuer has made all filings (the "SEC Reports")
required to be made by it under the Securities Act, the Exchange Act and the
securities laws of any state, and any rules and regulations promulgated
thereunder and pursuant to any Requirements of Law. The SEC Reports, when filed,
complied in all material respects with all applicable requirements of the
Securities Act, the Exchange Act and other Requirements of Law. None of the SEC
Reports, at the time of filing, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading in light of the
circumstances under which they were made. Issuer is not a party to any material
contract, agreement or other arrangement that was required to have been filed as
an exhibit to the SEC Reports that was not so filed. Issuer has taken all
necessary actions to ensure its continued inclusion in, and the continued
eligibility of the Common Stock for trading on the Nasdaq National Market under
all currently effective and currently proposed inclusion requirements.
4.9 Governing Documents. Issuer has delivered or made available to Investor
true, accurate and complete copies of its Articles of Incorporation and Bylaws
in effect as of the date hereof.
4.10 Subsidiaries. Issuer does not own, directly or indirectly, any
outstanding voting securities of or other interests in, and does not control,
any corporation, partnership, limited liability company, joint venture or other
business entity other than solely for investment purposes in connection with the
Company's current investment policy, nor does the Issuer own any outstanding
loan or advance to or from, any person or entity except as set forth in Section
4.10 of the Disclosure Schedule.
4.11 Financial Statements. The Issuer has provided the Investor with copies
of its audited financial statements for the fiscal year ended December 31, 1998,
and its unaudited financial statements for the nine-month period ended September
30, 1999, which financial statements are included in the SEC Reports. Each of
the balance sheets included in the SEC Reports (including any related notes and
schedules) fairly presents in all material respects the consolidated financial
position of Issuer as of its date, and each of the other financial statements
included in the SEC Reports (including any related notes and schedules) fairly
presents in all material respects the consolidated financial condition, results
of operations, cash flows, or other information therein of Issuer for the
periods or as of the dates therein set forth in accordance with GAAP
consistently applied during the periods involved (except that the interim
reports are subject to normal
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recurring adjustments which might be required as a result of year end audit and
except as otherwise stated therein).
4.12 Changes Since September 30, 1999. Except as set forth in the SEC
Reports, since September 30, 1999, there has been no Material Adverse Change in
Issuer. Except as set forth in the SEC Reports or in Section 4.11 of the
Disclosure Schedule hereto, (a) since September 30, 1999, there has not been (i)
any direct or indirect redemption, purchase or other acquisition by Issuer of
any shares of Issuer's capital stock or (ii) declaration, setting aside or
payment of any dividend or other distribution by Issuer in respect of its
capital stock, or (iii) issuance of any shares of capital stock of Issuer or any
granting to any person of any option to purchase or other right to acquire
shares of capital stock of Issuer, other than the exercise or grant of employee
stock options pursuant to the Issuer's stock option plans and purchases pursuant
to the Issuer's employee stock purchase plan in the ordinary course of business
or (iv) any damage, destruction or loss, whether or not covered by insurance,
except for such occurrences, individually and collectively, that are not
material to the Issuer, or (v) any waiver by the Issuer of a valuable right or
of a material debt owed to it, except for such waivers, individually and
collectively, that are not material or (vi) any material change or amendment to,
or any waiver of any material right under a material contract or arrangement by
which the Issuer or any of its assets or properties is bound or subject, except
for changes, amendments or waivers that are expressly provided for or disclosed
in this Agreement or (vii) any change by the Issuer in its accounting
principles, methods or practices or in the manner it keeps its accounting books
and records, except any such change required by a change in GAAP; and (b) none
of the officers or directors of Issuer (or any of their spouses or children) has
(i) any direct or indirect investment or equity interest in, or power to control
the business affairs of, any manufacturer, supplier, lender or provider of
services or goods to Issuer, except for their interest in Issuer, (ii) any
material contractual relationship with Issuer, and (iii) has any direct or
indirect interest in any material right, property or asset which is owned or
used by Issuer in the conduct of its business.
4.13 Environmental Matters. Except as set forth in the SEC Reports:
(a) Issuer is and has at all times been in compliance with all
Environmental Laws (as defined below) governing its business, operations,
properties and assets, including, without limitation, Environmental Laws
with respect to discharges into the ground water, surface water and soil,
emissions into the ambient air, and generation, accumulation, storage,
treatment, transportation, labeling or disposal of solid and hazardous
waste materials and substances or process byproducts, in each case, for
which failure to comply could have a Material Adverse Effect on Issuer.
Issuer is not currently liable for any penalties, fines or forfeitures for
failure to comply with any of the foregoing, which penalty, fine or
forfeiture could have a Material Adverse Effect on Issuer. Issuer is in
compliance with all notice, record keeping and reporting requirements of
all Environmental Laws, and has complied with all informational requests or
demands arising under the Environmental Laws, where failure to comply could
have a Material Adverse Effect on Issuer.
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(b) As used in this Agreement, "Environmental Laws" means all federal,
state or local laws, rules, regulations, orders or ordinances or judicial
or administrative interpretations thereof, any of which govern (or purport
to govern) or relate to air emissions, water discharges, hazardous or toxic
substances, solid or hazardous waste and occupational health and safety, as
any of these terms are or may be defined in such laws, rules, regulations,
orders, or ordinances, or judicial or administrative interpretations
thereof, including, without limitation, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, by the Superfund Amendments and Reauthorization
Act, the Hazardous Materials Transportation Act, the Toxic Substances
Control Act, the Clean Air Act, the Clean Water Act and the Occupational
Safety and Health Act.
4.14 No Commissions. Issuer has not incurred any obligation for any finder,
broker or agent's fees or commissions in connection with the transactions
contemplated.
4.15 Litigation. Except as set forth in Section 4.15 to the Disclosure
Schedule, there is no action, suit, proceeding, claim, arbitration or
investigation ("Action") pending or, to the best of the Issuer's knowledge,
threatened: (a) against the Issuer, its activities, properties or assets, or any
officer, director or employee of the Issuer in connection with such officer's,
director's or employee's relationship with, or actions taken on behalf of, the
Issuer, or (b) that seeks to prevent, enjoin, alter or delay the transactions
contemplated by this Agreement (including issuance of the Shares). The Issuer is
not a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality. No
Action by the Issuer is currently pending nor does the Issuer intend to initiate
any Action that is reasonably likely to be material to the Issuer.
4.16 Year 2000. To the best of Issuer's knowledge, all material computer
software and hardware used internally in the business of Issuer ("Business
Systems") will properly record, store, process, manage, specify and print four
digit dates (and data involving or based on four digit dates) falling on or
after January 1, 2000, in the same manner, and with the same functionality,
accuracy, data integrity and performance as such software and hardware record,
store, process, manage, specify and print calendar dates and date data (and data
utilizing or based on that data) falling on or before December 31, 1999. The
Business Systems will operate properly with other material software used
internally in the business of Issuer. All of the Issuer's material products
(including products currently under development) either (a) have no date
tracking or processing function, or (b) will record, store, process and
calculate and present calendar dates falling on and after December 31, 1999, and
will calculate any information dependent on or relating to such dates in the
same manner and with the same functionality, data integrity and performance as
the products record, store, process, calculate and present calendar dates on or
before December 31, 1999, or calculate any information dependent on or relating
to such dates (collectively, "Year 2000 Compliant"). All of the Issuer's
material products will lose no significant functionality with respect to the
introduction of records containing dates falling on or after December 31, 1999.
To the knowledge of the Issuer, all of the Issuer's material products and the
conduct of the Issuer's business with material customers and suppliers will not
be materially adversely affected by the advent of the year 2000, the advent of
the twenty-first
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century or the transition from the twentieth century through the year 2000 and
into the twenty-first century. To the knowledge of the Issuer, the Issuer is not
reasonably likely to incur material expenses arising from or relating to the
failure of any of its Business Systems or any material products (including all
material products sold on or prior to the date hereof) as a result of the advent
of the year 2000, the advent of the twenty-first century or the transition from
the twentieth century through the year 2000.
4.17 Compliance with Law and Charter Documents. The Issuer is not in
violation or default of any provisions of its Articles of Incorporation or
Bylaws, both as amended. The Issuer has complied in all material respects and is
in material compliance with all applicable statutes, laws, rules, regulations
and orders of the United States of America and all states thereof, foreign
countries and other governmental bodies and agencies having jurisdiction over
the Issuer's business or properties.
4.18 Invention Assignment and Confidentiality Agreement. Except as set
forth in Section 4.18 of the Disclosure Schedule, each employee and consultant
or independent contractor of the Issuer whose duties include the development of
products or Intellectual Property (as defined below), and each former employee
and consultant or independent contractor whose duties included the development
of products or Intellectual Property who was initially employed or engaged by
Issuer on or after January 1, 1995, has entered into and executed an invention
assignment and confidentiality agreement in customary form or an employment or
consulting agreement containing substantially similar terms.
4.19 Intellectual Property.
(i) Ownership or Right to Use. The Issuer has sole title to and owns,
or is licensed or otherwise possesses legally enforceable rights to use,
all patents or patent applications, software, know-how, registered or
unregistered trademarks and service marks and any applications therefor,
registered or unregistered copyrights, trade names, and any applications
therefor, trade secrets or other confidential or proprietary information
("Intellectual Property") necessary to enable the Issuer to carry on its
business as currently conducted, except where any deficiency, or group of
deficiencies, would not have a Material Adverse Effect.
(ii) Licenses; Other Agreements. The Issuer is not currently the
licensee of any material portion of the Intellectual Property of the
Issuer. Except as set forth in Section 4.19 to the Disclosure Schedule,
there are not outstanding any licenses or agreements of any kind relating
to any Intellectual Property owned by the Issuer, except for agreements
with customers of the Issuer entered into in the ordinary course of the
Issuer's business and other licenses and agreements that, collectively, are
not material. The Issuer is not obligated to pay any royalties or other
payments to third parties with respect to the marketing, sale,
distribution, manufacture, license or use of any Intellectual Property,
except as the Issuer may be so obligated in the ordinary course of its
business, as disclosed in the Issuer's SEC Documents or where the aggregate
amount of such
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payments over the three year period following the date of this Agreement
could not reasonably be expected to be material.
(iii) No Infringement. The Issuer has not violated or infringed in any
material respect, and is not currently violating or infringing in any
material respect, and the Issuer has not received any communications
alleging that the Issuer (or any of its employees or consultants) has
violated or infringed, any Intellectual Property of any other person or
entity.
(iv) Employees and Consultants. To the best of the Issuer's knowledge,
no employee of or consultant to the Issuer is in material default under any
term of any material employment contract, agreement or arrangement relating
to Intellectual Property of the Issuer or any material non-competition
arrangement, other contract or restrictive covenant relating to the
Intellectual Property of the Issuer. The Intellectual Property of the
Issuer (other than any Intellectual Property duly acquired or licensed from
third parties) was developed entirely by the employees of or consultants to
the Issuer during the time they were employed or retained by the Issuer,
and to the best knowledge of the Issuer, at no time during conception or
reduction to practice of such Intellectual Property of the Issuer were any
such employees or consultants operating under any grant from a government
entity or agency or subject to any employment agreement or invention
assignment or non-disclosure agreement or any other obligation with a third
party that would materially and adversely affect the Issuer's rights in the
Intellectual Property of the Issuer. Such Intellectual Property of the
Issuer does not, to the best knowledge of the Issuer, include any invention
or other intellectual property of such employees or consultants made prior
to the time such employees or consultants were employed or retained by the
Issuer nor any intellectual property of any previous employer of such
employees or consultants nor the intellectual property of any other person
or entity.
4.20 Registration Rights. Issuer is not currently subject to any agreement
providing any person or entity any rights (including piggyback registration
rights) to have any securities of the Issuer registered with the SEC or
registered or qualified with any other governmental authority other than under
agreements for which registration statements are currently effective, which do
not conflict with the registration rights granted to Investor pursuant to the
Registration Rights Agreement referenced in Section 6.4.
4.21 Title to Property and Assets. The non-leased properties and assets of
the Issuer are owned by the Issuer free and clear of all mortgages, deeds of
trust, liens, charges, encumbrances and security interests except for statutory
liens for the payment of current taxes that are not yet delinquent and liens,
encumbrances and security interests that are disclosed in the SEC Reports or
arise in the ordinary course of business and do not in any material respect
affect the properties and assets of the Issuer. With respect to the property and
assets it leases, the Issuer is in compliance with such leases in all material
respects.
4.22 Tax Matters. The Issuer has filed all material tax returns required to
be filed, which returns are true and correct in all material respects, and the
Issuer has paid in full all taxes that
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have become due on or prior to the date hereof (and will have paid when due all
taxes that become due after the date hereof and prior to the Closing), including
penalties and interest, assessments, fees and other charges, other than those
being contested in good faith and/or those for which adequate reserves have been
provided for.
4.23 Full Disclosure. The information contained in this Agreement and any
other documents executed in connection with this Agreement and the SEC Reports
with respect to the business, operations, assets, results of operations and
financial condition of the Issuer, and the transactions contemplated by this
Agreement, are true and complete in all material respects and do not omit to
state any material fact or facts necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF INVESTOR
As a material inducement to Issuer entering into this Agreement and issuing
the Shares, Investor represents and warrants to Issuer as follows:
5.1 Corporate Status; Power and Authority. Investor is a corporation duly
organized, validly existing, and in good standing under the laws of Delaware.
Investor has the corporate power and authority to execute and deliver and to
perform its obligations under this Agreement and consummate the transactions
contemplated hereby. Investor has taken all necessary corporate action to
authorize the execution, delivery and performance of this Agreement and the
transactions contemplated hereby.
5.2 No Violation. The execution and delivery by Investor of this Agreement,
the consummation of the transactions contemplated hereby, and the compliance by
Investor with the terms and provisions hereof, will not result in a default
under (or give any other party the right, with the giving of notice or the
passage of time (or both), to declare a default or accelerate any obligation
under) or violate the Certificate of Incorporation or Bylaws of Investor or any
Contract to which Investor is a party or by which it or its properties or assets
are bound, or violate any Requirement of Law applicable to Investor, other than
such violations, conflicts, defaults or breaches which, individually and in the
aggregate, do not and will not have a Material Adverse Effect on Investor.
5.3 Consents/Approvals. Except for any filing and approval under the HSR
Act, (a) no consents, filings, authorizations or actions of any Governmental
Authority are required for Investor's execution, delivery and performance of
this Agreement, and (b) no consent, approval, waiver or other actions by any
Person under any Contract to which Investor is a party or by which Investor or
any of his properties or assets are bound is required or necessary for the
execution, delivery and performance by Investor of this Agreement and the
consummation of the transactions contemplated hereby.
5.4 Enforceability. This Agreement has been duly executed and delivered by
Investor and constitutes a legal, valid and binding obligation of Investor,
enforceable against Investor in
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accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditor's rights generally and general equitable principles
regardless of whether enforceability is considered in a proceeding at law or in
equity.
5.5 Investment Intent. Investor is acquiring the Shares for its own account
and with no present intention of distributing or selling such Shares in
violation of the Securities Act or any applicable state securities law. Investor
agrees that it will not sell or otherwise dispose of any of the Shares unless
such sale or other disposition has been registered under the Securities Act or,
in the opinion of counsel to Investor satisfactory to Issuer, is exempt from
registration under the Securities Act and has been registered or qualified or,
in the opinion of such counsel, is exempt from registration or qualification
under applicable state securities laws. Investor understands that the sale of
the Shares has not been registered under the Securities Act by reason of their
contemplated issuance in transactions exempt from the registration and
prospectus delivery requirements of the Securities Act pursuant to Section 4(2)
thereof, and that the reliance of Issuer on such exemption from registration is
predicated in part on the representations and warranties of Investor. Investor
acknowledges that pursuant to Section 2.2 a restrictive legend consistent with
the foregoing will be placed on the certificates for the Shares.
5.6 Availability of Information; Ability to Evaluate Investment. Issuer has
made available to Investor the opportunity to ask questions and receive answers
concerning the business of Issuer and the terms and conditions of the purchase
of the Shares, including access to all reports and other filings made by Issuer
with the SEC and such other information as Investor deems necessary to evaluate
an investment in Issuer, and Investor as utilized such access and opportunity to
the extent believed by Investor to be necessary. Investor represents that it is
an accredited investor, as such term is defined in Regulation D promulgated
under the Securities Act, and has such knowledge and experience in financial and
business matters that Investor is able to evaluate the merits and risks of an
investment in Issuer.
5.7 No Commissions. Investor has not incurred any obligation for any
finder, broker, or agent's fees or commissions in connection with the
transactions contemplated hereby.
5.8 HSR Representations. Investor represents that it is acquiring the
Shares solely for purposes of investment. Without limiting the foregoing,
Investor specifically represents that it does not presently intend to (a)
nominate a candidate for election to the Board of Directors of Issuer, (b)
propose corporate action of Issuer requiring shareholder approval, (c) solicit
proxies with respect to any vote of the shareholders of Issuer or (d) have an
officer, director, or employee of Investor or any affiliate of Investor serve as
an officer or director of Issuer.
ARTICLE VI
COVENANTS
6.1 Filings. Each of Investor and Issuer shall make on a prompt and timely
basis all governmental or regulatory notifications and filings required to be
made by it for the consummation of the transactions contemplated hereby.
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6.2 Obligations Regarding Confidential Information. Confidential
Information (as defined below) shall not be disclosed by any party hereto to any
third party except in accordance with the provisions set forth below. For
purposes of this Agreement, the term "Confidential Information" refers to (i)
the existence of this Agreement and (ii) the terms and provisions of this
Agreement, provided, however, that Confidential Information shall not include
any information that was (i) publicly known and generally available in the
public domain prior to its disclosure by the Company, (ii) becomes publicly
known and generally available in the public domain through no action or inaction
on the part of the Company in violation of the terms of this Agreement or (iii)
becomes publicly known by written consent or other action of the Investor.
(a) Press Releases, Etc. Except as otherwise expressly permitted in
this Section 6.2, no announcement regarding the Confidential Information in
a press release, conference, advertisement, announcement, professional or
trade publication, mass marketing materials or otherwise may be made by a
party hereto without the prior written consent of the other party hereto.
(b) Permitted Disclosures. Notwithstanding the foregoing, (i) either
party may disclose any of the Confidential Information to its current or
bona fide prospective investors, employees, investment bankers, lenders,
accountants and attorneys, in each case only where such persons or entities
are under appropriate nondisclosure obligations (provided that the
disclosing party shall be responsible for any failure of any such person to
comply with the provisions of this Section 6.2); and (ii) Investor may
disclose its investment in Issuer and other Confidential Information to
third parties or to the public at its sole discretion and, if it does so,
Issuer shall have the right to disclose to third parties any such
information disclosed in a press release or other public announcement by
Investor.
(c) Legally Compelled Disclosure. Except to the extent required by law
or judicial or administrative order or except as provided herein, Issuer
shall not disclose any Confidential Information without Investor's prior
written approval; provided, however, that Issuer may disclose any
Confidential Information, to the extent required by law or judicial or
administrative order, provided that if such disclosure is pursuant to
judicial or administrative order, Issuer will notify Investor promptly
before such disclosure and will cooperate with Investor to seek
confidential treatment with respect to the disclosure if requested by
Investor and provided further that if such disclosure is required pursuant
to law or the rules and regulations of any federal, state or local
governmental authority or any regulatory body, if requested by Investor,
Issuer will seek confidential treatment to the maximum extent, in the
reasonable judgment of counsel of Issuer, possible under law.
Notwithstanding the foregoing provisions or any other provision to the
contrary, Issuer agrees that, except to the extent required by judicial or
administrative order, which Issuer shall use its best efforts to avoid to
the maximum extent possible under law, Issuer will not file this Agreement
with any governmental authority or any regulatory body; provided, however,
that to the extent required under the Securities Act, the Exchange Act or
any of the rules and regulations promulgated thereunder, including judicial
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interpretations thereof (the "Rules and Regulations"), upon the advice of
counsel, Issuer may (A) file this Agreement and the Registration Rights
Agreement as an exhibit to any filing required to be made by the Company
under the Securities Act or the Exchange Act and (B) in Issuer's filings
under the Securities Act or the Exchange Act, identify Investor as "Intel
Corporation" and describe the material terms of the Investor's investment.
Issuer agrees that it will provide Investor with drafts of any documents,
press releases or other filings (including the filing permitted by the
proviso of the immediately preceding sentence) in which Issuer desires to
disclose the terms of this Agreement, the transactions contemplated hereby
or any other Confidential Information at least three (3) business days
prior to the filing or disclosure thereof, and that it will cooperate with
Investor to make any changes to such materials as requested by Investor
unless advised by counsel that the Rules and Regulations require otherwise.
Unless permitted by the terms of this Section, Issuer will not disclose any
Confidential Information or file this Agreement if Investor has objected to
such disclosure or filing. Issuer will not, except as permitted above, file
this Agreement with any governmental authority or any regulatory body, or
disclose the identity of the Investor or any other Confidential Information
in any filing.
(d) Other Information. The provisions of this Section 6.2 shall be in
addition to, and not in substitution for, the provisions of any separate
nondisclosure agreement executed by any of the parties hereto with respect
to the transactions contemplated hereby. Additional disclosures and
exchange of confidential information between Issuer and Investor shall be
governed by the terms of the Corporate Non-Disclosure Agreement No.
2284356, dated August 24, 1998, executed by Issuer and Investor, and any
Confidential Information Transmittal Records (as defined in paragraph 1
therein) provided in connection therewith.
6.3 Confidential Information and Invention Assignment Agreement. Each of
Issuer's current key officers and employees have executed an Employee Disclosure
and Assignment Agreement as of the date hereof (the "Confidential Information
Agreement"). Issuer shall use its best efforts to cause all other of its current
employees who have not previously done so to execute a Confidential Information
Agreement.
6.4 Registration Rights Agreement. As a condition of closing, the parties
shall enter into a Registration Rights Agreement in the form attached hereto as
Exhibit A (the "Registration Rights Agreement").
6.5 Further Assurances. Each party shall execute and deliver such
additional instruments and other documents and shall take such further actions
as may be necessary or appropriate to effectuate, carry out and comply with all
of the terms of this Agreement and the transactions contemplated hereby.
6.6 Notification of Certain Matters. Each party hereto shall give prompt
notice to the other party hereto of the occurrence, or nonoccurrence, of any
event which would be likely to cause any representation or warranty herein to be
untrue or inaccurate, or any covenant, condition or agreement herein not to be
complied with or satisfied.
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6.7 HSR Act and Other Actions. In the event a filing is required under the
HSR Act, each of the parties hereto shall (i) make promptly its respective
filings, and thereafter make any other required submissions, under the HSR Act,
with respect to the transactions contemplated hereby, and (ii) use its
reasonable best efforts to take, or cause to be taken, all appropriate actions,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated herein. Investor shall make payment of the applicable
HSR Act filing fee. The parties also agree to use their reasonable best efforts
to defend all lawsuits or other legal proceedings challenging this Agreement or
the consummation of the transactions contemplated hereby and to lift or rescind
any injunction or restraining order or other order adversely affecting the
ability of the parties to consummate the transactions contemplated hereby.
6.8 Information Rights
(i) Financial Information. The Issuer covenants and agrees that,
commencing on the Closing and continuing for so long as the Investor holds
more than 50% of the Shares purchased hereunder, the Issuer shall:
(A) Annual Reports. Furnish to the Investor promptly following
the filing of such report with the SEC a copy of the Issuer's Annual
Report on Form 10-K for each fiscal year, which shall include a
consolidated balance sheet as of the end of such fiscal year, a
consolidated statement of income and a consolidated statement of cash
flows of the Issuer and its subsidiaries for such year, setting forth
in each case in comparative form the figures from the Issuer's
previous fiscal year, all prepared in accordance with generally
accepted accounting principles and practices and audited by nationally
recognized independent certified public accountants. In the event the
Issuer shall no longer be required to file Annual Reports on Form
10-K, the Issuer shall, within ninety (90) days following the end of
each respective fiscal year, deliver to the Investor a copy of such
balance sheets, statements of income and statements of cash flows.
(B) Quarterly Reports. Furnish to the Investor promptly following
the filing of such report with the SEC, a copy of each of the Issuer's
Quarterly Reports on Form 10-Q, which shall include a consolidated
balance sheet as of the end of the respective fiscal quarter,
consolidated statements of income and consolidated statements of cash
flows of the Issuer and its subsidiaries for the respective fiscal
quarter and for the year to-date, setting forth in each case in
comparative form the figures from the comparable periods in the
Issuer's immediately preceding fiscal year, all prepared in accordance
with generally accepted accounting principles and practices (except,
in the case of any Form 10-Q, as may otherwise be permitted by Form
10-Q), but all of which may be unaudited. In the event the Issuer
shall no longer be required to file Quarterly Reports on Form 10-Q,
the Issuer shall, within forty-five (45) days following the end of
each of the first three (3) fiscal quarters of each fiscal year,
deliver to the
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Investor a copy of such balance sheets, statements of income and
statements of cash flows.
(ii) SEC Filings. The Issuer shall deliver to the Investor copies of
each other document filed with the SEC on a non-confidential basis promptly
following the filing of such document with the SEC.
6.9 Restrictions on Transfer. Investor agrees not to sell, transfer,
assign, pledge or otherwise dispose of all or any portion of the Shares unless
and until (a) there is then in effect a registration statement under the
Securities Act and any applicable state securities laws covering such proposed
disposition and such disposition is made in accordance with such registration
statement; or (b) such disposition may lawfully be made without registration
under the securities Act or qualification under applicable state securities laws
exempt from the registration requirements of the Securities Act and any
applicable state securities laws covering such proposed disposition and, if
requested by Issuer, Investor shall provide Issuer with an opinion of counsel
reasonably satisfactory to Issuer to that effect prior to any such disposition.
Notwithstanding the foregoing, in no event shall Investor dispose of any or all
of the Shares for a period of six months from the date of this agreement.
ARTICLE VII
INDEMNIFICATION
7.1 Agreement to Indemnify.
(i) Company Indemnity. The Investor, its Affiliates and Associates,
and each officer, director, shareholder, employer, representative and agent
of any of the foregoing (collectively, the "Investor Indemnitees") shall
each be indemnified and held harmless to the extent set forth in this
Section 7 by the Issuer with respect to any and all Damages (as defined
below) incurred by any Investor Indemnitee as a proximate result of any
inaccuracy or misrepresentation in, or breach of, any representation,
warranty, covenant or agreement made by the Issuer in this Agreement
(including any exhibits and schedules hereto).
(ii) Investor Indemnity. The Issuer, its respective Affiliates and
Associates, and each officer, director, shareholder, employer,
representative and agent of any of the foregoing (collectively, the "Issuer
Indemnitees") shall each be indemnified and held harmless to the extent set
forth in this Section 7, by the Investor, in respect of any and all Damages
incurred by any Issuer Indemnitee as a proximate result of any inaccuracy
or misrepresentation in, or breach of, any representation, warranty,
covenant or agreement made by the Investor in this Agreement.
(iii) Equitable Relief. Nothing set forth in this Section 7 shall be
deemed to prohibit or limit any Investor Indemnitee's or Issuer
Indemnitee's right at any time before, on or after the Closing, to seek
injunctive or other equitable relief for the failure of any
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Indemnifying Party to perform or comply with any covenant or agreement
contained herein.
7.2 Survival. All representations and warranties of the Investor and the
Issuer contained herein and all claims of any Investor Indemnitee or Issuer
Indemnitee in respect of any inaccuracy or misrepresentation in or breach
hereof, shall survive the Closing until the third anniversary of the date of
this Agreement, regardless of whether the applicable statute of limitations,
including extensions thereof, may expire. All covenants and agreements of the
Investor and the Issuer contained in this Agreement shall survive the Closing in
perpetuity (except to the extent any such covenant or agreement shall expire by
its terms). All claims of any Investor Indemnitee or Issuer Indemnitee in
respect of any breach of such covenants or agreements shall survive the Closing
until the expiration of three years following the date on which such breach
occurs.
7.3 Claims for Indemnification. If any Investor Indemnitee or Issuer
Indemnitee (an "Indemnitee") shall believe that such Indemnitee is entitled to
indemnification pursuant to this Section 7 in respect of any Damages, such
Indemnitee shall give the appropriate Indemnifying Party (which for purposes
hereof, in the case of an Investor Indemnitee, means the Issuer, and in the case
of a Issuer Indemnitee, means the Investor) prompt written notice thereof. Any
such notice shall set forth in reasonable detail and to the extent then known
the basis for such claim for indemnification. The failure of such Indemnitee to
give notice of any claim for indemnification promptly shall not adversely affect
such Indemnitee's right to indemnity hereunder except to the extent that such
failure adversely affects the right of the Indemnifying Party to assert any
reasonable defense to such claim.
Each such claim for indemnity shall expressly state that the Indemnifying
Party shall have only the twenty (20) business day period referred to in the
next sentence to dispute or deny such claim. The Indemnifying Party shall have
twenty (20) business days following its receipt of such notice either (a) to
acquiesce in such claim by giving such Indemnitee written notice of such
acquiescence or (b) to object to the claim by giving such Indemnitee written
notice of the objection. If the Indemnifying party does not object thereto
within such twenty (20) business day period, such Indemnitee shall be entitled
to be indemnified for all Damages reasonably and proximately incurred by such
Indemnitee in respect of such claim. If the Indemnifying Party objects to such
claim in a timely manner, the senior management of the Issuer and the Investor
shall meet to attempt to resolve such dispute. If the dispute cannot be resolved
by the senior management, either party may make a written demand for formal
dispute resolution and specify therein the scope of the dispute. Within thirty
(30) days after such written notification, the parties agree to meet for one (1)
day with an impartial mediator and consider dispute resolution alternatives
other than litigation. If an alternative method of dispute resolution is not
agreed upon within thirty days after the one day mediation, either party may
begin litigation proceedings. Nothing in this section shall be deemed to require
arbitration.
7.4 Defense of Claims. In connection with any claim that may give rise to
indemnity under this Section 7 resulting from or arising out of any claim or
Proceeding against an Indemnitee by a person or entity that is not a party
hereto, the Indemnifying Party may (unless
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such Indemnitee elects not to seek indemnity hereunder for such claim) but shall
not be obligated to, upon written notice to the relevant Indemnitee, assume the
defense of any such claim or Proceeding if the Indemnifying Party with respect
to such claim or Proceeding acknowledges to the Indemnitee the Indemnitee's
right to indemnity pursuant hereto to the extent provided herein (as such claim
may have been modified through written agreement of the parties); provided,
however, that nothing set forth herein shall be deemed to require the
Indemnifying Party to waive any cross-claims or counterclaims the Indemnifying
Party may have against the Indemnified Party for damages. The Indemnified Party
shall be entitled to retain separate counsel, reasonably acceptable to the
Indemnifying Party, if the Indemnified Party shall determine, upon the written
advice of counsel, that an actual or potential conflict of interest exists
between the Indemnifying Party and the Indemnified Party in connection with such
Proceeding. The Indemnifying Party shall be obligated to pay the reasonable fees
and expenses of such separate counsel to the extent the Indemnified Party is
entitled to indemnification by the Indemnifying Party with respect to such claim
or Proceeding under this Section 7.4. If the Indemnifying Party assumes the
defense of any such claim or Proceeding, the Indemnifying Party shall select
counsel reasonably acceptable to such Indemnitee to conduct the defense of such
claim or Proceeding, shall take all steps necessary in the defense or settlement
thereof and shall at all times diligently and promptly pursue the resolution
thereof. If the Indemnifying Party shall have assumed the defense of any claim
or Proceeding in accordance with this Section 7.4, the Indemnifying Party shall
be authorized to consent to a settlement of, or the entry of any judgment
arising from, any such claim or Proceeding, with the prior written consent of
such Indemnitee, not to be unreasonably withheld; provided, however, that the
Indemnifying Party shall pay or cause to be paid all amounts arising out of such
settlement or judgment concurrently with the effectiveness thereof; provided
further, that the Indemnifying party shall not be authorized to encumber any of
the assets of any Indemnitee or to agree to any restriction that would apply to
any Indemnitee or to its conduct of business; and provided further, that a
condition to any such settlement shall be a complete release of such Indemnitee
and its Affiliates, directors, officers, employees and agents with respect to
such claim, including any reasonably foreseeable collateral consequences
thereof. Such Indemnitee shall be entitled to participate in (but not control)
the defense of any such action, with its own counsel and at its own expense.
Each Indemnitee shall, and shall cause each of its Affiliates, directors,
officers, employees and agents to, cooperate fully with the Indemnifying Party
in the defense of any claim or Proceeding being defended by the Indemnifying
Party pursuant to this Section 7.4. If the Indemnifying Party does not assume
the defense of any claim or Proceeding resulting therefrom in accordance with
the terms of this Section 7.4, such Indemnitee may defend against such claim or
Proceeding in such manner as it may deem appropriate, including settling such
claim or Proceeding, but only with the prior written consent of the Indemnifying
Party, which may not be unreasonably withheld, on such terms as such Indemnitee
may deem appropriate. If any Indemnifying Party seeks to question the manner in
which such Indemnitee defended such claim or Proceeding or the amount of or
nature of any such settlement, such Indemnifying Party shall have the burden to
prove by a preponderance of the evidence that such Indemnitee did not defend
such claim or Proceeding in a reasonably prudent manner.
7.5 Certain Definitions. As used in this Section 7, (a) "Affiliate" means,
with respect to any person or entity, any person or entity directly or
indirectly controlling, controlled by or under
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direct or indirect common control with such other person or entity; (b)
"Associate" means, when used to indicate a relationship with any person or
entity, (1) any other person or entity of which such first person or entity is
an officer, director or partner or is, directly or indirectly, the beneficial
owner of ten percent (10%) or more of any class of equity securities, membership
interests or other comparable ownership interests issued by such other person or
entity, (2) any trust or other estate in which such first person or entity has a
ten percent (10%) or more beneficial interest or as to which such first person
or entity serves as trustee or in a similar fiduciary capacity, and (3) any
relative or spouse of such first person or entity who has the same home as such
first person or entity or who is a director or officer of such first person or
entity; (c) "Damages" means all demands, claims, actions or causes of action,
assessments, losses, damages, costs, expenses, liabilities, judgments, awards,
fines, response costs, sanctions, taxes, penalties, charges and amounts paid in
settlement, including (1) interest on cash disbursements in respect of any of
the foregoing at the prime rate of Chase Manhattan Bank, as in effect from time
to time, compounded quarterly, from the date each such cash disbursement is made
until the date the party incurring such cash disbursement shall have been
indemnified in respect thereof, and (2) reasonable out-of-pocket costs, fees and
expenses (including reasonable costs, fees and expenses of attorneys,
accountants and other agents of, or other parties retained by, such party), and
(d) "Proceeding" means any action, suit, hearing, arbitration, audit, proceeding
(public or private) or investigation that is brought or initiated by or against
any federal, state, local or foreign governmental authority or any other person
or entity.
ARTICLE VIII
CONDITIONS TO CLOSING
8.1 Conditions to Obligation of Each Party to Effect the Closing. The
respective obligations of each party to effect the Closing shall be subject to
the fulfillment of the following conditions any and all of which may be waived,
in whole or in part, to the extent permitted by applicable law:
(a) No Order. No governmental authority or other agency or commission
or federal or state court of competent jurisdiction shall have enacted,
issued, promulgated, enforced or entered any statute, rule, regulation,
executive order, decree, injunction, or other order (whether temporary,
preliminary or permanent) which is in effect and which materially
restricts, prevents or prohibits consummation of the Closing or any
transaction contemplated by this Agreement; provided, however, that the
parties shall use their reasonable best efforts to cause any such decree,
judgment, injunction or other order to be vacated or lifted; and
(b) HartScottRodino Act. In the event a filing is required pursuant to
the HSR Act, any waiting period (and any extension thereof) applicable to
the consummation of the Closing under the HSR Act shall have expired or
been terminated.
(c) Collaboration Agreement. The parties shall have entered into the
Collaboration Agreement to be entered into between the parties on or prior
to the date hereof.
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8.2 Additional Conditions to the Obligations of Investor. The obligation of
Investor to proceed with the Closing is also subject to the following conditions
any and all of which may be waived, in whole or in part, to the extent permitted
by applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of Issuer contained in this Agreement shall be true and correct
as of the Closing as though made on and as of the Closing, except for
changes specifically permitted by this Agreement. Investor shall have
received a certificate of an officer of Issuer to such effect;
(b) Agreement and Covenants. Issuer shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Closing. Investor shall have received a certificate of an officer of Issuer
to such effect;
(c) Registration Rights Agreement. Issuer shall have executed the
Registration Rights Agreement.
(d) Opinion of Counsel. Counsel to the Issuer shall have delivered an
opinion of counsel, dated as of the Closing Date, in form and substance
agreed to by Investor.
(e) Securities Exemptions. The offer and sale of the Shares to the
Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act and the registration and/or
qualification requirements of all applicable state securities laws.
(f) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Investor, and the Investor shall have received all such
counterpart originals and certified or other copies of such documents as it
may reasonably request. Such documents shall include but not be limited to
the following:
(i) Certified Charter Documents. A copy of (i) the Articles of
Incorporation certified as of a recent date by the Secretary of State
of Minnesota as a complete and correct copy thereof, and (ii) the
Bylaws of the Issuer (as amended through the date of the Closing)
certified by the Secretary of the Issuer as a true and correct copy
thereof as of the Closing.
(ii) Board Resolutions. A copy, certified by the Secretary of the
Issuer, of the resolutions of the Board of Directors of the Issuer
providing for the approval of this Agreement and the issuance of the
Shares, and the other matters contemplated hereby and thereby.
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(iii) Registrar and Transfer Agent Certificate. A certificate,
executed by the Issuer's registrar and transfer agent certifying the
number of outstanding shares of Common Stock of the Issuer as of a
recent date reasonably acceptable to the Investor.
(g) Nasdaq Requirements. All requirement of the Nasdaq National Market
in connection with the transactions contemplated by this Agreement shall
have been complied with by the Issuer.
(h) Executive Committee Approval. The Investor shall have obtained the
approval from its Executive Committee (in its sole discretion) of the
purchase of the Shares and the consummation of the transactions
contemplated by this Agreement.
(i) Other Actions. The Issuer shall have executed such certificates,
agreements, instruments and other documents, and taken such other actions
as shall be customary or reasonably requested by the Investor in connection
with the transactions contemplated hereby.
8.3 Additional Conditions to the Obligations of Issuer. The obligation of
Issuer to proceed with the Closing is also subject to the following conditions
any and all of which may be waived, in whole or in part, to the extent permitted
by applicable law:
(a) Representations and Warranties. Each of the representations and
warranties of Investor contained in this Agreement shall be true and
correct as of the Closing Date as though made on and as of the Closing
Date, except (i) for changes specifically permitted by this Agreement, and
(ii) that those representations and warranties which address matters only
as of a particular date shall remain true and correct as of such date.
Issuer shall have received a certificate of an officer of Investor to such
effect;
(b) Agreement and Covenants. Investor shall have performed or complied
in all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Closing. Issuer shall have received a certificate of an officer of Investor
to such effect;
(c) Registration Rights Agreement. Investor shall have executed the
Registration Rights Agreement.
(d) Securities Exemptions. The offer and sale of the Shares to the
Investor pursuant to this Agreement shall be exempt from the registration
requirements of the Securities Act and the registration and/or
qualification requirements of all applicable state securities laws.
(e) Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all
documents incident thereto will be reasonably satisfactory in form and
substance to the Issuer and to the
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Issuer's legal counsel, and the Issuer will have received all such
counterpart originals and certified or other copies of such documents as it
may reasonably request.
(f) Nasdaq Requirements. All requirements of the Nasdaq National
Market in connection with the transactions contemplated by this Agreement
shall have been complied with.
ARTICLE IX
MISCELLANEOUS
9.1 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing, shall be effective when received,
and shall in any event be deemed received and effectively given upon: personal
delivery to the party to be notified or three (3) business days after mailing by
certified or registered mail (first class postage prepaid), or one (1) business
day after sent by guaranteed overnight delivery, or upon receipt of confirmation
of successful transmission if by facsimile, to the following addresses and
facsimile numbers (or to such other addresses or facsimile numbers which such
party shall designate in writing to the other party):
(a) if to Issuer to: Ancor Communications, Incorporated
6321 Bury Drive, Suite 13
Eden Prairie, Minnesota 55346
Attention: Chief Executive Officer
Fax: (612) 932-4037
Telephone: (612) 932-4000
with a copy to: Dorsey & Whitney, LLP
Pillsbury Center South
220 South Sixth Street
Minneapolis, Minnesota 554021498
Attention: Amy E. Ayotte, Esq.
Fax: (612) 3408738
Telephone:(612) 3402600
(b) if to Investor to: Intel Corporation
2200 Mission College Blvd.
Santa Clara, CA 95052
Attention: Portfolio Manager - Mail Stop RN6-46
Fax: 408-765-6038
Telephone: (408) 765-5636
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with a copy to: Intel Corporation
CBD Legal Maintenance (Joanne Field)
2200 Mission College Blvd., SC4-203
Santa Clara, CA 95052
Telephone: (408) 765-8080
Facsimile: (408) 653-7093
9.2 Entire Agreement. This Agreement and the Registration Rights Agreement
(including the Exhibits and Schedules attached hereto and thereto) and the
documents to be delivered at the Closing pursuant hereto, contain the entire
understanding of the parties in respect of its subject matter and supersede all
prior agreements and understandings between or among the parties with respect to
such subject matter. The Exhibits and Schedules hereto constitute a part hereof
as though set forth in full above.
9.3 Expenses; Taxes. Except as otherwise provided in this Agreement, the
parties shall pay their own fees and expenses, incurred in connection with this
Agreement or any transaction contemplated hereby; provided, however, that Issuer
shall, concurrently with the Closing, pay to Investor $15,000 for Investor's
expenses in connection with the transactions contemplated by this Agreement.
9.4 Amendment; Waiver. This Agreement may not be modified, amended,
supplemented, canceled or discharged, except by written instrument executed by
both parties. No failure to exercise, and no delay in exercising, any right,
power or privilege under this Agreement shall operate as a waiver, nor shall any
single or partial exercise of any right, power or privilege hereunder preclude
the exercise of any other right, power or privilege. No waiver of any breach of
any provision hereunder shall be deemed to be a waiver of any preceding or
succeeding breach of the same or any other provision, nor shall any waiver be
implied from any course of dealing between the parties. No extension of time for
performance of any obligations or other acts hereunder, or under any other
agreement shall be deemed to be an extension of the time for performance of any
other obligations or any other acts.
9.5 Binding Effect; Assignment. The rights and obligations of this
Agreement shall bind and inure to the benefit of the parties and their
respective successors and legal assigns. The rights and obligations of this
Agreement may not be assigned by any party without the prior written consent of
the other party.
9.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original but all of which together shall
constitute one and the same instrument.
9.7 Headings. The headings contained in this Agreement are for convenience
of reference only and are not to be given any legal effect and shall not affect
the meaning or interpretation of this Agreement. All references in this
Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise
provided, refer to sections and paragraphs hereof
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and exhibits and schedules attached hereto, all of which exhibits and schedules
are incorporated herein by this reference.
9.8 Governing Law; Interpretation. This Agreement shall be construed in
accordance with and governed for all purposes by the laws of the State of
Minnesota without reference to principles of conflict of laws or choice of laws.
9.9 Severability. The parties stipulate that the terms and provisions of
this Agreement are fair and reasonable as of the date hereof. However, if any
provision of this Agreement shall be determined by a court of competent
jurisdiction to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated. If,
moreover, any of those provisions shall for any reason be determined by a court
of competent jurisdiction to be unenforceable because excessively broad or vague
as to duration, geographical scope, activity or subject, it shall be construed
by limiting, reducing or defining it, so as to be enforceable.
9.10 No Finder's Fees. The Investor will indemnify and hold harmless the
Issuer from any liability for any commission or compensation in the nature of a
finders' or broker's fee for which the Investor or any of its officers,
partners, employees or consultants, or representatives is responsible. The
Issuer will indemnify and hold harmless the Investor from any liability for any
commission or compensation in the nature of a finder's or broker's fee for which
the Issuer or any of its officers, employees or consultants or representatives
is responsible.
9.11 Further Assurances. From and after the date of this Agreement upon the
request of the Issuer or the Investor, the Issuer and the Investor will execute
and deliver such instruments, documents or other writings, and take such other
actions, as may be reasonably necessary or desirable to confirm and carry out
and to effectuate fully the intent and purposes of this Agreement.
9.12 Competition. Nothing set forth herein shall be deemed to preclude,
limit or restrict the Issuer's or the Investor's ability to compete with the
other.
* * *
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IN WITNESS WHEREOF, the parties hereto have caused this Stock Purchase
Agreement to be duly executed and delivered as of the day and year first above
written.
Issuer:
ANCOR COMMUNICATIONS,
INCORPORATED
By: /s/ Steven E Snyder
-------------------------------------
Print Name: Steven E Snyder
----------------------------
Title: CFO
----------------------------------
Investor:
INTEL CORPORATION
By: /s/ Arvind Sodhani
-------------------------------------
Print Name: Arvind Sodhani
-----------------------------
Title: Vice President and Treasurer
----------------------------------
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Exhibit 10.23
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is entered into as of
November 29, 1999 by and between ANCOR COMMUNICATIONS, INCORPORATED, a Minnesota
corporation (the "Company"), and INTEL CORPORATION, a Delaware corporation
(together with its successors and permitted assigns, the "Purchaser").
WHEREAS, the Purchaser has agreed to purchase shares of the Company's
Common Stock, $.01 par value per share (the "Common Stock"), pursuant to that
certain Stock Purchase Agreement between the Company and the Purchaser dated as
of November 29, 1999 (the "Stock Purchase Agreement").
WHEREAS, in connection with such purchase, the Company and the Purchaser
desire to enter into certain arrangements with respect to the registration for
public sale under the Securities Act of 1933, as amended (the "Securities Act"),
of the Common Stock.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Purchaser
hereby agree as follows:
1. Definitions.
1.1 "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
1.2 "Company" shall mean Ancor Communications, Incorporated, a
Minnesota corporation.
1.3 "Common Shares" shall mean the shares of common stock, par value
$.01 per share, authorized by the Company's Articles of Incorporation and
any additional shares of common stock which may be authorized in the future
by the Company, and any stock into which such Common Shares may hereafter
be changed.
1.4 "Public Offering" shall mean any offering of Common Shares to the
public, either on behalf of the Company or any of its security holders,
pursuant to an effective registration statement under the Securities Act.
1.5 "Purchaser" shall mean Intel Corporation, a Delaware corporation,
together with its successors and permitted assigns.
1.6 "Registrable Securities" shall mean (a) the Common Stock and (b)
any additional securities issued with respect to the above-described
securities upon any stock split, stock dividend, recapitalization, or
similar event. A portion of Registrable Securities shall cease to be
Registrable Securities when (x) a registration statement with respect to
the sale of such
<PAGE>
portion of securities shall have been declared effective under the
Securities Act and such portion of securities shall have been disposed of
in accordance with such registration statement, (y) such portion of
securities shall be eligible to be distributed pursuant to Rule 144 under
the Securities Act in a single three-month period by the holder thereof or
(z) such portion of securities shall have ceased to be outstanding.
1.7 "Registration Expenses" shall mean the expenses described in
Section 6.
1.8 "Securities Act" shall mean the Securities Act of 1933, as
amended.
1.9 "Common Stock" shall mean the outstanding shares of common stock
of the Company, $.01 per share, purchased by Purchaser pursuant to the
Stock Purchase Agreement.
1.10 "Stock Purchase Agreement" shall meant that certain Stock
Purchase Agreement, dated as of November 29, 1999, by and between the
Company and the Purchaser relating to the purchase of Common Stock by the
Purchaser.
2. Demand Registration.
2.1 Subject to Sections 2.3, 2.4 and 2.5, if at any time after six
months has elapsed from the date of the closing of the transactions
contemplated by the Stock Purchase Agreement, the Company shall receive a
written request therefor from holder or holders of Registrable Securities,
the Company shall prepare and file a registration statement under the
Securities Act covering such number of Registrable Securities as are the
subject of such request, the minimum number of which shall not be less than
the equivalent of $1,000,000 of such securities' fair market value, and
shall use its best efforts to cause such registration statement to become
effective. Upon the receipt of a registration request meeting the
requirements of this Section 2.1, the Company shall promptly give written
notice to all other record holders of Registrable Securities that such
registration is to be effected. The Company shall include in such
registration statement such additional Registrable Securities as such other
record holders request in writing within thirty (30) days after the date of
the Company's written notice to them. If (a) the holders of a majority of
the Registrable Securities for which registration has been requested
pursuant to this Section 2.1 determines for any reason not to proceed with
the registration at any time before the related registration statement has
been declared effective by the Commission, (b) such registration statement,
if theretofore filed with the Commission, is withdrawn and (c) the holders
of the Registrable Securities subject to such registration statement agree
to bear their own Registration Expenses incurred in connection therewith
and to reimburse the Company for the Registration Expenses incurred by it
in such connection or if such registration statement, if theretofore filed
with the Commission, is withdrawn at the initiative of the Company, then
the holders of the Registrable Securities shall not be deemed to have
exercised their demand registration right pursuant to this Section 2.1.
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2.2 At the request of the holders of a majority of the Registrable
Securities to be registered, the method of disposition of all Registrable
Securities included in such registration shall be an underwritten Public
Offering. The managing underwriter of any such Public Offering shall be
selected by the Company. If in the good faith judgment of the managing
underwriter of such Public Offering, the inclusion of all of the
Registrable Securities the registration of which has been requested would
interfere with their successful marketing, the number of Registrable
Securities to be included in the underwritten Public Offering may be
reduced in the discretion of the managing underwriter pro rata, among the
requesting holders thereof in proportion to the number of Registrable
Securities included in their respective requests for registration,
provided, however, that the number of Shares of Registrable Securities
shall not be reduced unless and until the Shares to be offered by any other
holder of securities are first excluded from such registration. Registrable
Securities that are so excluded from such underwritten Public Offering
shall be withheld from sale by the holders thereof for such period, not
exceeding one hundred and twenty (120) days, as the managing underwriter
reasonably determines is necessary to effect such Public Offering.
2.3 The Company shall be obligated to prepare, file and cause to be
effective not more than two (2) registration statements pursuant to Section
2.1.
2.4 Notwithstanding the foregoing, in the event that prior to the
preparation and filing of any registration statement requested pursuant to
Section 2.1 or Section 4, there is (a) material non-public information
regarding the Company which the Board of Directors reasonably determines to
be in the best interests of the Company not to disclose or (b) a
significant business opportunity (including but not limited to the
acquisition or disposition of assets other than in the ordinary course of
business or any merger, consolidation, tender offer or other similar
transaction available to the Company which the Board of Directors
reasonably determines to be in the Company's best interests not to
disclose, the Company may delay initiating the preparation and filing of
such registration statement for a period not to exceed ninety (90) days
until such time as either of the events in clauses (a) or (b) no longer
exists; provided however, that the Company may not utilize this right under
this Section and Section 5.12 more than once in any twelve (12) month
period.
2.5 Notwithstanding anything to the contrary contained herein, at any
time within thirty (30) days after receiving a demand for registration
pursuant to Section 2.1 or Section 4, the Company may elect to effect an
underwritten primary registration in lieu of the requested registration. If
the Company so elects, the Company shall give prompt written notice to all
holders of Registrable Securities of its intention to effect such a
registration and shall afford such holders the rights contained in Section
3 with respect to "piggyback" registrations. In such event, the demand for
registration pursuant to Section 2.1 or Section 4 shall be deemed to have
been withdrawn.
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3. Piggyback Registration.
3.1 At any time from the date of the closing of the transactions
contemplated by the Stock Purchase Agreement, each time the Company shall
determine to proceed with the actual preparation and filing of a registration
statement under the Securities Act in connection with the proposed offer and
sale for money of any of its securities by it or any of its security holders
(other than a registration statement on Form S-8, Form S-4 or other limited
purpose form), the Company will give written notice of its determination to all
record holders of Registrable Securities. Upon the written request of a record
holder of any Registrable Securities given within 30 days after the date of any
such notice from the Company, the Company will, except as herein provided, cause
all Registrable Securities the registration of which is requested to be included
in such registration statement, all to the extent requisite to permit the sale
or other disposition by the prospective seller or sellers of the Registrable
Securities to be so registered; provided, however, that nothing herein shall
prevent the Company from, at any time, abandoning or delaying any registration;
and provided, further, that if the Company determines not to proceed with a
registration after the registration statement has been filed with the
Commission, and the Company's decision not to proceed is primarily based upon
the anticipated Public Offering price of the securities to be sold by the
Company, the Company shall promptly complete the registration for the benefit of
those selling security holders who wish to proceed with a Public Offering of
their Registrable Securities and who agree to bear all of the Registration
Expenses incurred by the Company as the result of such registration after the
Company has decided not to proceed. Notwithstanding the foregoing, in the
discretion of the holders of the Registrable Securities to be included in the
registration (provided that such holders are the record holders of at least 51%
of the Registrable Securities), such registration may count as a demand
registration under Section 2.1 (if it otherwise meets the requirements of
Section 2.1) for which the Company will pay all Registration Expenses.
3.2 If any registration pursuant to Section 3.1 is underwritten in whole or
in part, the Company may require that the Registrable Securities included in the
registration be included in the underwriting on the same terms and conditions as
the securities otherwise being sold through the underwriters. Notwithstanding
the foregoing, in connection with such underwriting the holders shall not be
required to provide representations and warranties regarding the Company or
indemnification of the underwriters for material misstatements or omissions in
the registrations statement or prospectus for such offering other than
misstatements and omissions based on information provided by the holders in
writing specifically for use in the preparation of the registration statement.
If, in the good faith judgment of the managing underwriter of the Public
Offering, the inclusion of all of the Registrable Securities originally covered
by requests for registration would reduce the number of shares to be offered by
the Company or interfere with the successful marketing of the shares offered by
the Company, the number of Registrable Securities to be included in the Public
Offering may be reduced pro rata among the holders of the Registrable Securities
requested to be included in the registration and the holders of other securities
proposed to be included in such registration (other than securities to be issued
by the Company), provided, however, that the remaining number of Registrable
Securities held by the holders thereof to be included in the Public Offering
shall not be less than
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15% of the aggregate number of Registrable Securities requested to be included
in such registration.
4. Short Form Registration. Subject to Sections 2.4 and 2.5, in addition to
the registration rights provided in Sections 2 and 3, if the Company qualifies
for the use of Form S-3 or any similar registration form then in force, at the
request of a majority of the holders of Registrable Securities then outstanding,
at any time after six months has elapsed from the date of the closing of the
transactions contemplated by the Stock Purchase Agreement, the Company shall at
its expense file a registration statement on such form covering Registrable
Securities on behalf of such holder or holders, provided, however, that the
Company shall not be required to effect any such registration pursuant to this
Section 4 if the holders of Registrable Securities propose to sell Registrable
Securities at an aggregate price to the public of less than $1,000,000. The
holders may also require that the Company offer the Registrable Securities on a
delayed and continuous offering basis on Form S-3 or any similar registration
form then in force subject to the terms of Section 5.2 below. The Company shall
give notice to all the holders of Registrable Securities who did not join in
such request and afford them a reasonable opportunity to participate in such
registration. There shall be no limit on the number of requests for registration
pursuant to this Section 4. Registration pursuant to this Section 4 shall not be
deemed to be a demand registration as described in Section 2.
5. Registration Procedures. If and whenever the Company is required by the
provisions of Section 2, Section 3 or Section 4 to effect a registration of
Registrable Securities under the Securities Act, the Company will use reasonable
efforts to effect the registration and sale of such Registrable Securities in
accordance with the intended methods of disposition specified by the holders
participating therein. Without limiting the foregoing, the Company in each such
case will, as expeditiously as possible:
5.1 In the case of a demand registration pursuant to Section 2.1 or
Section 4, prepare and file with the Commission the requisite registration
statement to effect such registration (including such audited financial
statements as may be required by the Securities Act or the rules and
regulations thereunder) and use reasonable efforts to cause such
registration statement to become effective; provided, however, that as far
in advance as practical before filing such registration statement or any
amendment thereto, the Company will furnish counsel for the requesting
holders of Registrable Securities with copies of reasonably complete drafts
of all such documents proposed to be filed, and any such holder shall have
the opportunity to object to any information pertaining solely to such
holder that is contained therein and the Company will make the corrections
reasonably requested by such holder with respect to such information prior
to filing such registration statement or amendment. Notwithstanding the
foregoing, in the event
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that the provisions of this Section 5.1 conflict with Section 6.2 of the
Stock Purchase Agreement, the terms of Section 6.2 the Stock Purchase
Agreement shall govern.
5.2 Prepare and file with the Commission such amendments and
supplements to such registration statement and any prospectus used in
connection therewith as may be necessary to maintain the effectiveness of
such registration statement and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable
Securities included in such registration statement, in accordance with the
intended methods of disposition thereof, until the earlier of (a) such time
as all of the Registrable Securities included in such registration
statement have been disposed of in accordance with the intended methods of
disposition by the holder or holders thereof as set forth in such
registration statement or (b) one hundred eighty (180) days after such
registration statement becomes effective (or one (1) year after such
registration statement becomes effective in the case of a registration
statement on Form S-3 or any similar registration form then in force).
5.3 Promptly notify each requesting holder and the underwriter or
underwriters, if any:
(a) when such registration statement or any prospectus used in
connection therewith, or any amendment or supplement thereto, has been
filed and, with respect to such registration statement or any
post-effective amendment thereto, when the same has become effective;
(b) of any written request by the Commission for amendments or
supplements to such registration statement or prospectus;
(c) of any notification received by the Company from the
Commission regarding the Commission's initiation of any proceeding
with respect to, or of the issuance by the Commission of, any stop
order suspending the effectiveness of such registration statement; and
(d) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any Registrable
Securities for sale under the applicable securities or blue sky laws
of any jurisdiction.
5.4 Furnish to each holder of Registrable Securities included in such
registration statement such number of conformed copies of such registration
statement and of each amendment and supplement thereto, and such number of
copies of the prospectus contained in such registration statement
(including each preliminary prospectus and any summary prospectus) and any
other prospectus filed under Rule 424 promulgated under the Securities Act
relating to such seller's Registrable Securities, and such other documents,
as such holder may reasonably request to facilitate the disposition of its
Registrable Securities.
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5.5 Use reasonable efforts to register or qualify all Registrable
Securities included in such registration statement under the securities or
"blue sky" laws of such states as each holder of Registrable Securities
shall reasonably request within thirty (30) days following the original
filing of such registration statement and to keep such registration or
qualification in effect for so long as such registration statement remains
in effect, and take any other action which may be reasonably necessary or
advisable to enable such holder to consummate the disposition in such
states of the Registrable Securities owned by such holder, except that the
Company shall not for any such purpose be required (a) to qualify generally
to do business as a foreign corporation in any jurisdiction wherein it
would not but for the requirements of this Section 5.5 be obligated to be
so qualified, (b) to consent to general service of process in any such
jurisdiction or (c) to subject itself to taxation in any such jurisdiction
by reason of such registration or qualification.
5.6 Use its best efforts to cause all Registrable Securities included
in such registration statement to be registered with or approved by such
other governmental agencies or authorities as may be necessary to enable
each holder thereof to consummate the disposition of such Registrable
Securities.
5.7 Notify each holder whose Registrable Securities are included in
such registration statement, at any time when a prospectus relating thereto
is required to be delivered under the Securities Act, of the happening of
any event as a result of which any prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and, subject to Section 5.12,
at the request of any such holder promptly prepare and furnish to such
holder a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchaser of such Registrable Securities, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
5.8 Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission.
5.9 Use reasonable efforts to cause all Registrable Securities
included in such registration statement to be listed, upon official notice
of issuance, on any securities exchange or quotation system on which any of
the securities of the same class as the Registrable Securities are then
listed.
5.10 Furnish, at the request of any holder requesting registration of
Registrable Securities, on the date that such Registrable Securities are
delivered to the underwriters for sale, if such securities are being sold
through underwriters, or, if such securities are not being sold through
underwriters, on the date that the registration statement with respect to
such securities becomes effective, (i) an opinion, dated as of such date,
of the counsel representing the Company for the purposes of such
registration, in form and substance as is customarily given to
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underwriters in an underwritten public offering and reasonably satisfactory
to the holders requesting registration, addressed to the underwriters, if
any, and to the holders requesting registration of Registrable Securities
and (ii) in the event that such securities are being sold through
underwriters, a "comfort" letter dated as of such date, from the
independent certified public accountants of the Company, in form and
substance as is customarily given by independent certified public
accountants to underwriters in an underwritten public offering and
reasonably satisfactory to a majority in interest of the holders requesting
registration, addressed to the underwriters and to the holders requesting
registration of Registrable Securities.
5.11 In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement in usual and
customary form (including customary indemnification of the underwriters by
the Company), with the managing underwriter(s) of such offering. Each
holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement; provided, however, that it shall
not be considered customary to require any of the holders to provide
representations and warranties regarding the Company or indemnification of
the underwriters for material misstatements or omissions in the
registration statement or prospectus for such offering other than
misstatements and omissions based on information provided by the holders in
writing specifically for use in the preparation of the registration
statement.
5.12 The Company may require each holder whose Registrable Securities
are being registered to, and each such holder, as a condition to including
Registrable Securities in such registration statement, shall, furnish the
Company and the underwriters with such information and affidavits regarding
such holder and the distribution of such Registrable Securities as the
Company and the underwriters may from time to time reasonably in connection
with such registration statement. At any time during the effectiveness of
any registration statement covering Registrable Securities offered by a
holder, if such holder becomes aware of any change materially affecting the
accuracy of the information contained in such registration statement or the
prospectus (as then amended or supplemented) relating to such holder, it
will immediately notify the Company of such change.
5.13 Upon receipt of any notice from the Company of the happening of
any event of the kind described in Section 5.7, each holder will forthwith
discontinue such holder's disposition of Registrable Securities pursuant to
the registration statement relating to such Registrable Securities until
such holder receives the copies of the supplemented or amended prospectus
contemplated by Section 5.7 and, if so directed by the Company, shall
deliver to the Company all copies, other than permanent file copies, then
in such holder's possession of the prospectus relating to such Registrable
Securities.
5.14 Notwithstanding anything contained herein to the contrary, in the
event that, during the period of time the Company is required to maintain
the effectiveness of the registration statement relating to the Registrable
Securities there is (a) material non-public information regarding the
Company which the Board of Directors reasonably determines to be in the
best interests of the Company not to disclose or (b) a significant business
opportunity
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(including but not limited to the acquisition or disposition of assets
other than in the ordinary course of business or any merger, consolidation,
tender offer or other similar transaction available to the Company which
the Board of Directors reasonably determines to be in the Company's best
interests not to disclose, the Company may suspend the effectiveness of
such registration statement for a period not to exceed ninety (90) days
until such time as either of the events in clauses (a) or (b) no longer
exists; provided however, that the Company may not utilize this right under
this Section and Section 2.4 more than once in any twelve (12) month
period.
6. Expenses. With respect to any registration requested pursuant to Section
2 (except as otherwise provided in such Section with respect to a registration
voluntarily terminated at the request of the requesting holders of Registrable
Securities), Section 3 (except as otherwise provided in such Section with
respect to a registration continued by holders of Registrable Securities who
wish to proceed with a Public Offering that is withdrawn by the Company) or
Section 4, the Company shall bear all of the expenses ("Registration Expenses")
incident to the Company's performance of or compliance with its obligations
under this Agreement in connection with such registration including, without
limitation, all registration, filing, securities exchange listing and NASD fees,
all registration, filing, qualification and other fees and expenses or complying
with state securities or "blue sky" laws, all word processing, duplicating and
printing expenses, messenger and delivery expenses, the fees and disbursements
of counsel for the Company and of its independent public accountants, including
the expenses of any special audits or "cold comfort" letters required by or
incident to such performance and compliance, premiums and other costs of any
policies of insurance against liabilities arising out of the Public Offering of
the Registrable Securities being registered obtained by the Company (it being
understood that the Company shall have no obligation to obtain such insurance)
and any fees and disbursements of underwriters customarily paid by issuers or
sellers of securities; but excluding underwriting discounts and commissions and
transfer taxes, if any, in respect of Registrable Securities and any fees and
disbursements of counsel and accountants to the holders of the Registrable
Securities, which discounts, commissions, transfer taxes, fees and disbursements
shall in any registration be payable by the holders of the Registrable
Securities being registered, pro rata in proportion to the number of Registrable
Securities being sold by them.
7. Indemnification.
7.1 The Company will, to the full extent permitted by law, indemnify
and hold harmless each holder of Registrable Securities which are included
in a registration statement pursuant to the provisions of this Agreement,
and its directors, officers, shareholders, employees, representatives and
partners and each other person, if any, who controls such holder within the
meaning of the Securities Act (collectively the "Related Entities"), from
and against any and all losses, claims, damages, expenses or liabilities,
joint or several (collectively, "Losses") to which such holder and its
Related Entities may become subject under the Securities Act or otherwise,
insofar as such Losses (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in a
registration statement prepared and filed hereunder, any preliminary,
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final or summary prospectus contained therein or any amendment or
supplement thereto or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein (in the case of a prospectus, in the light of the
circumstances under which they were made) not misleading or any violation
or alleged violation by the Company of the Securities Act, the Exchange
Act, any federal or state securities law or any rule or regulation
promulgated under the Securities Act, the Exchange Act or any federal or
state securities law in connection with the offering covered by such
registration statement, and the Company will reimburse the holder and any
of its Related Entities for any legal or other expenses reasonably incurred
by them in connection with investigating or defending against any such
Losses (or action or proceeding in respect thereof); provided, however,
that the Company will not be liable in any such case to the extent that any
such Losses arise out of or are based upon (a) an untrue statement or
alleged untrue statement or omission or alleged omission made in conformity
with written information furnished by such holder specifically for use in
the preparation of the registration statement or (b) such holder's failure
to send or give a copy of the final prospectus to the persons asserting an
untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Securities to such person if such statement or omission was corrected in
such final prospectus. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such holder or any
of its Related Entities and shall survive the transfer of such securities
by such holder.
7.2 Each holder of Registrable Securities which are included in a
registration pursuant to the provisions of this Agreement will, to the full
extent permitted by law, indemnify and hold harmless the Company and its
Related Entities from and against any and all Losses to which the Company
and its Related Entities may become subject under the Securities Act or
otherwise, insofar as such Losses (or actions or proceedings, whether
commenced or threatened, in respect thereof) arise out of or are based upon
any untrue or alleged untrue statement of any material fact contained in a
registration statement prepared and filed hereunder, any preliminary, final
or summary prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a prospectus, in
the light of the circumstances under which they were made) not misleading,
or arise out of or are based upon any violation or alleged violation by the
holder of the Securities Act, the Exchange Act, any federal or state
securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any federal or state securities law in connection
with the offering covered by such registration statement, in each case to
the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission or violation was so made
in reliance upon and in strict conformity with written information
furnished by such holder specifically for use in the preparation of such
registration statement. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Company
or any of its Related Entities. The holder of Registrable Securities
included in a registration statement shall also indemnify each other person
who participates (including as an underwriter) in the offering or sale of
Registrable Securities, their officers and directors, and partners, and
each other person, if any, who controls any such participating person
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within the meaning of the Securities Act to the same extent as provided
above with respect to the Company. The total amounts payable in indemnity
by a holder under this subsection shall not exceed in the aggregate the net
proceeds received by such holder in the registered offering which triggered
this indemnification unless such claim for indemnification is based upon
fraud committed by such holder.
7.3 Promptly after receipt by a party indemnified pursuant to the
provisions of Section 7.1 or Section 7.2 of notice of the commencement of
any action involving the subject matter of the foregoing indemnity
provisions, such indemnified party will, if a claim thereof is to be made
against the indemnifying party pursuant to the provisions of Section 7.1 or
Section 7.2, promptly notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not
relieve the indemnifying party from any liability which it may have to any
indemnified party except to the extent that the indemnifying party is
actually prejudiced by such failure to give notice. In case any such action
is brought against any indemnified party, the indemnifying party shall have
the right to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any action include both the indemnified
party and the indemnifying party and the indemnified party reasonably
concludes that there is a conflict of interest that would prevent counsel
for the indemnifying party from also representing the indemnified party,
the indemnified party shall have the right to select separate counsel to
participate in the defense of such action on behalf of the indemnified
party or parties with the fees and expenses of such separate counsel to be
paid by the indemnifying party. After notice from the indemnifying party to
such indemnified party of its election so to assume the defense thereof,
the indemnifying party will not be liable to such indemnified party
pursuant to the provisions of Section 7.1 or Section 7.2 for any legal or
other expense subsequently incurred by such indemnified party in connection
with the defense thereof unless (a) the indemnified party shall have
employed counsel in accordance with the proviso of the preceding sentence,
(b) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after the notice of the commencement of the action
or (c) the indemnifying party has authorized the employment of counsel for
the indemnified party at the expense of the indemnifying party. If the
indemnifying party is not entitled to, or elects not to, assume the defense
of a claim, it will not be obligated to pay the fees and expenses of more
than one counsel for the indemnified parties with respect to such claim. No
indemnifying party shall consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release
from all liability in respect to such claim or litigation without the
consent of the indemnified party. No indemnifying party shall be subject to
any liability for any settlement made without its consent. An indemnified
party may at any time elect to participate in the defense of any claim or
proceeding at its own expense.
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7.4 The foregoing indemnity agreements of the Company and holders are
subject to the condition that, insofar as they relate to any violation
(indemnifiable under this Section 7) made in a preliminary prospectus but
eliminated or remedied in the amended prospectus on file with the SEC at
the time the registration statement in question becomes effective or the
amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the
"Final Prospectus"), such indemnity agreement shall not inure to the
benefit of any person if a copy of the Final Prospectus was timely
furnished to the indemnified party and was not furnished to the person
asserting the loss, liability, claim or damage at or prior to the time such
action is required by the Securities Act.
7.5 The obligations of the Company and holders under this Section 7
shall survive until the fifth anniversary of the completion of any offering
of Registrable Securities in a registration statement, regardless of the
expiration of any statutes of limitation or extensions of such statutes
8. Covenants Relating to Rule 144. If at any time the Company is required
to filed reports in compliance with either Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended, (the "Exchange Act") the Company
will (a) file reports in compliance with the Exchange Act and (b) comply with
all rules and regulations of the Commission applicable to the use of Rule 144.
9. Underwritten Offerings. If a distribution of Registrable Securities
pursuant to a registration statement is to be underwritten, the holders whose
Registrable Securities are to be distributed by such underwriters shall be
parties to such underwriting agreement. No requesting holder may participate in
such underwritten offering unless such holder agrees to sell its Registrable
Securities on the basis provided in such underwriting agreement and completes
and executes all questionnaires, powers of attorney, indemnities and other
documents reasonably required under the terms of such underwriting agreement.
Notwithstanding the foregoing, in connection with such underwriting the holders
shall not be required to provide representations and warranties regarding the
Company or indemnification of the underwriters for material misstatements or
omissions in the registrations statement or prospectus for such offering other
than misstatements and omissions based on information provided by the holders in
writing specifically for use in the preparation of the registration statement.
If any requesting holder disapproves of the terms of an underwriting, such
holder may elect to withdraw therefrom and from such registration by notice to
the Company and the managing underwriter, and each of the remaining requesting
holders shall be entitled to increase the number of Registrable Securities being
registered to the extent of the Registrable Securities so withdrawn in the
proportion which the number of Registrable Securities being registered by such
remaining requesting holder bears to the total number of Registrable Securities
being registered by all such remaining requesting holders.
12
<PAGE>
10. Amendment. This Agreement may be amended with the written consent of
the Company and the holders of more than 50% of the Registrable Securities.
Without the prior written consent of the Purchaser, the Company covenants and
agrees that it shall not grant, or cause or permit to be created, for the
benefit of any person or entity any registration rights of any kind (whether
similar to the demand, "piggyback" or Form S-3 registration rights described in
this Section 7, or otherwise) relating to shares of the Company's Common Stock
or any other securities of the Company that are pari passu or superior to the
rights granted under this Agreement.
11. Termination. This Agreement, and all of the Company's obligations
hereunder (other than its obligations pursuant to Section 7, which obligations
shall survive such termination), shall terminate upon the earlier to occur of
(a) the date on which there are no Registrable Securities outstanding; or (b)
three (3) years after the closing of the transactions contemplated by the Stock
Purchase Agreement.
12. Assignment of Registration Rights. The rights to cause the Company to
register Registrable Securities pursuant hereto may be assigned, in whole or in
part (but only with all related obligations), by a holder of Registrable
Securities to a transferee or assignee of such securities provided such
transferee agrees in writing to be bound by and subject to the terms and
conditions hereof.
* * *
13
<PAGE>
Company:
ANCOR COMMUNICATIONS,
INCORPORATED
By: /s/ Steven E Snyder
-------------------------------------
Print Name: Steven E Snyder
----------------------------
Title: CFO
----------------------------------
Purchaser:
INTEL CORPORATION
By: /s/ Arvind Sodhani
-------------------------------------
Print Name: Arvind Sodhani
-----------------------------
Title: Vice President and Treasurer
----------------------------------
14
<PAGE>
Exhibit 23.1
Independent Auditors' Report and Consent
The Board of Director and Shareholders
Ancor Communications, Incorporated (Ancor):
The audits referred to in our report dated January 28, 2000, included the
related financial statement schedule as of December 31, 1999, and for each of
the years in the two-year period ended December 31, 1999, included in item
14(a). This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such a financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
We consent to incorporation by reference in registration statement No.'s
333-95197, 333-93791, 333-70539, 33-82976 and 33-95138 on Form S-8 and
registration statement No.'s 333-05379, 333-27841, 333-47793, 333-62969 and
333-75681 on Form S-3, of our reports dated January 28, 2000 relating to the
balance sheets of Ancor as of December 31, 1999 and 1998 and the related
statements of operations, shareholders' equity, and cash flows for each of the
years in the two-year period ended December 31, 1999 and the related schedule,
which reports appear in or are incorporated by reference in the December 31,
1999 annual report on Form 10-K of Ancor.
KPMG LLP
Minneapolis, Minnesota
March 28, 2000
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANT
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (file nos. 333-05379, 333-27841, 333-47793, 333-62969 and
333-75681) and in the Registration Statements on Form S-8 (file nos. 333-70539,
33-82976, 33-95138, 333-93791 and 333-95197) of our report, dated February 19,
1998, with respect to the 1997 financial statements of Ancor Communications,
Incorporated included in this Annual Report on Form 10-K.
McGladrey & Pullen, LLP
Minneapolis, Minnesota
March 29, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 37,139,418
<SECURITIES> 49,188,332
<RECEIVABLES> 2,037,556
<ALLOWANCES> (64,492)
<INVENTORY> 2,894,348
<CURRENT-ASSETS> 91,858,983
<PP&E> 7,755,684
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<COMMON> 285,062
<OTHER-SE> 85,120,460
<TOTAL-LIABILITY-AND-EQUITY> 96,466,831
<SALES> 13,717,768
<TOTAL-REVENUES> 12,950,893
<CGS> 6,741,399
<TOTAL-COSTS> 6,741,399
<OTHER-EXPENSES> 16,419,334
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,606
<INCOME-PRETAX> (8,733,424)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,733,424)
<DISCONTINUED> 0
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<PAGE>
Exhibit 99
RISK FACTORS
Because we expect to incur significant product development, sales, marketing and
administrative expenses, we may not become profitable.
We have incurred significant losses since inception and expect to incur losses
in the future. We expect to incur significant product development, sales and
marketing and administrative expenses and, as a result, we will need to generate
substantially more revenue than we have to date to achieve and maintain
profitability. There is a risk that we will not be able to realize sufficient
revenues to achieve profitability in the future.
If a significant market for SANs and SAN switching products does not develop,
our business may fail.
Our growth will be limited if storage area network, or SAN, technology and
solutions do not become widely accepted. Our product development and marketing
efforts are focused on the SAN market, which has only recently begun to develop.
The markets for new technology frequently develop more slowly than the
technology targeted to those markets. Organizations often implement SANs in
connection with their deployment of new storage systems and servers and, as a
result, we are partly dependent on the storage systems and server markets.
Potential end-user customers who have invested substantial resources in their
existing data storage and management systems may be reluctant or slow to adopt a
new approach, like SANs. We cannot be sure that SANs will ever achieve
widespread market acceptance or that the market will develop as quickly as
anticipated.
Our success also depends in part upon market acceptance of our SAN switching
solutions as an alternative to the use of hubs or other interconnect devices in
SANs. In general, hubs are priced lower than switches. We currently expect that
substantially all of our future revenue will be derived from sales of our fibre
channel switches. Because this market is new, it is difficult to predict its
potential size or future growth rate. If the market does not accept the use of
SAN switches, our business could be adversely affected.
If our relationship with Sun Microsystems fails, our business would be
materially harmed.
In June 1999, we announced an original equipment manufacturing agreement with
Sun Microsystems. Under this agreement, we expect to sell fibre channel switches
to Sun for incorporation into Sun's SAN products. However, like other original
equipment manufacturer agreements, our agreement with Sun does not provide us
with any assurance that we will ultimately sell our products to Sun. The
agreement does not require Sun to purchase any volume of products from us, and
Sun could incorporate a competitor's fibre channel switch into its products. In
addition, there are risks that Sun may decide to incorporate technology other
than fibre channel switches into its products, or may experience problems
integrating our fibre channel switches with other components of its products
either of which would result in Sun failing to purchase products from us.
Together with Sun, we are currently in the final stages of testing our new
switch for use with the SAN products that Sun is developing. We cannot assure
you that Sun will be able to complete the integration of our switch with its
final SAN products, nor can we assure you that Sun will not find any material
deficiencies during this final testing
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stage. If Sun is unable to integrate our switch into its SAN products, if Sun
finds material deficiencies with our switch or if other unanticipated events
occur, our business will be adversely affected, and the price of our common
stock may decline.
In addition to the revenue we expect to generate by selling our products to Sun,
this agreement is extremely important to our business because it is viewed by
the market as a validation of our technology, our products and our ability to
service a significant original equipment manufacturer. If our relationship with
Sun were harmed in any way, it would significantly negatively impact the
market's perception of us and our products, and our revenues could be
significantly reduced.
As is generally the case with original equipment manufacturer agreements, our
agreement with Sun contains precise manufacturing quality specifications. The
agreement further contemplates that we will lower the price of our products to
Sun during the term of the agreement. If we cannot satisfy these quality and
price reduction provisions, Sun may seek an alternative supplier or could gain
access to our technology to remedy problems that we cannot correct.
If we fail to develop and maintain relationships with successful original
equipment manufacturers, we may be unable to become profitable.
To succeed in the SAN market, we will need to sell our products directly to
original equipment manufacturers. We have limited experience selling or products
to original equipment manufacturers We cannot be certain that our original
equipment manufacturer customers will continue to develop, market and sell
products that incorporate our technology, nor can we control their ability or
willingness to do so. We sell our products through original equipment
manufacturers who compete in highly competitive markets, and our success will
depend on the success of these customers. If we fail to develop and manage
relationships with original equipment manufacturers or if our customers fail to
sell our products, we may be unable to achieve profitability.
Original equipment manufacturers typically conduct significant evaluation,
testing, implementation and acceptance procedures before they begin to market
and sell products incorporating new components. This evaluation process can be
lengthy and may range from several months to over a year. In addition, the
process is complex, and we may be required to incur significant sales, marketing
and management expenses to support it. The process is becoming more complex as
we simultaneously qualify our products with multiple customers. As a result, we
may expend significant sales, marketing and managerial resources to develop
customer relationships without success or before we recognize any revenue from
these relationships. In addition, even if we are selected by an original
equipment manufacturer as a supplier, there is typically no purchase commitment
made. Thus, we cannot assure you that we will sell specified or minimum amounts
of product to any current or future original equipment manufacturer customers.
Competition in the SAN market may lead to reduced sales of our products, reduced
profits and reduced market share.
Because of the intense competition to provide components to the SAN market, our
business may not develop as significantly as we expect or we may lose current or
potential customers. Alternatively, our profitability could be impaired by
pricing pressure from intense competition.
2
<PAGE>
Our primary competitor in the fibre channel switch market, Brocade
Communications, currently sells more switches than we do, and its perception by
some as an early leader in the SAN market may adversely affect our ability to
develop new customer relationships. Other companies are also providing fibre
channel switches and other products to the SAN market, including Gadzoox, McData
and Vixel, and their products could become more widely accepted than ours. In
addition, a number of companies, including Emulex, Interphase, JNI and QLogic
are developing, or have developed, fibre channel products other than switches,
such as adapters or hubs, that compete with our products in some applications.
We anticipate that these and other companies may introduce additional fibre
channel products, including switches, in the near future. To the extent that
these companies have current supplier relationships with our potential
customers, it will be more difficult for us to win business from these potential
customers. If fibre channel technology gains wider market acceptance, it is
likely that an increasing number of competitors will begin developing and
marketing fibre channel products. Some of the companies that produce or may
produce competitive fibre channel products have substantially greater resources,
greater name recognition and access to larger customer bases than we do. As a
result, our competitors may succeed in adapting more rapidly and effectively to
changes in technology or the market. If we fail to compete effectively, it would
prevent us from generating sufficient sales to allow us to attain profitable
operations.
Our revenue will be materially reduced as a result of the warrant we granted to
Sun Microsystems.
As part of our agreement with Sun, we granted a warrant to Sun to purchase up to
1.5 million shares of our common stock at an exercise price of $7.30 per share.
In order for the warrant shares to vest, Sun must purchase products from us. The
warrant shares are earned at the rate of one share for each $67.00 of revenue we
receive from Sun through September 30, 2002. In each period in which the warrant
shares are earned, a non-cash sales discount will be recorded. The amount of the
non-cash sales discount will be the fair value of the warrant shares which are
earned in the period. Fair value of the warrant shares will be calculated by
using the Black-Scholes option pricing model. The primary component in the
Black-Scholes calculation is the value of our common stock at that time. The
value of the warrant shares, and the corresponding sales discount, increases as
our stock price increases. Conversely, the value of the warrant shares, and the
corresponding sales discount, decreases as our stock price decreases. Since the
price of our stock cannot be estimated, it is not possible to estimate the
amount of the non-cash sales discount that could be recorded, but it could be
significant. For example, on December 31, 1999, the closing price of our stock
was $67.875. The value of a warrant share was $65.80 based on the Black-Scholes
option pricing model. This means that for each $67.00 in gross revenue to Sun,
we would record a non-cash sales discount of $65.80. Depending on our stock
price, this sales discount could cause us to report a negative gross margin on
sales to Sun.
None of the warrant shares will vest until we have received a total of
$10,000,000 in revenue from Sun. During this period, any warrant shares earned
in one quarter will be revalued in subsequent quarters using the then-current
Black-Scholes option pricing model, and an additional non-cash sales discount
will be recorded if the value of the warrant shares increases or a non-cash
sales credit will be recorded if the value of the warrant shares decreases. In
the quarter in which we achieve an aggregate of $10,000,000 in revenues from
Sun, we will perform a final Black-Scholes calculation for the warrant shares
earned through the end of that quarter, which will result in a final adjustment
to the non-cash sales discount. Thereafter, warrant shares will
3
<PAGE>
vest as they are earned, and we will record a non-cash discount quarterly based
on the Black-Scholes calculation, as described above. No subsequent revaluations
will be recorded.
The market for SANs and for our products may be impaired if sufficient
interoperability is not achieved and maintained.
Given that organizations want products that they purchase from different vendors
to work together, the ability of the various components that comprise a SAN,
such as adapter cards, hubs and switches, to interoperate is an important factor
in the development of the SAN market. Currently, manufacturers of these various
components have not established a complete interoperability standard and may
never do so. If manufacturers of fibre channel SAN products do not manufacture
products that interoperate with the products of other manufacturers, the
development of the SAN market may be limited. In addition, if interoperability
standards are not agreed upon, our products could fail to achieve the desired
level of market acceptance because potential customers may believe that a
competitor's products represent the standard that will more likely prevail.
In addition, our products are designed to conform to the fibre channel
interconnect protocol and other industry standards. There is a risk that fibre
channel, or the other standards we have employed, may not be widely adopted, and
competing standards may emerge that will be preferred by original equipment
manufacturers or end-users. If end-users and original equipment manufacturers do
not adopt the standards we have adopted for our products, our growth may be
limited.
Since we have entered the SAN business recently, we cannot reliably predict our
operating requirements.
Our inability to accurately anticipate our future operating results could cause
us to incur unnecessary expenses or to forego opportunities because we may not
take sufficient steps to support growth. Moreover, most of our expenses are
fixed in the short-term or incurred in advance of receipt of corresponding
revenue. As a result, we may not be able to decrease our spending to offset any
unexpected shortfall in our revenues. We have only recently begun marketing our
products to the SAN market and do not have meaningful historical results upon
which to base our forecasts. If we are unable to forecast our operating
requirements, our results of operations could be negatively impacted.
If we are unable to develop new and enhanced products that meet customer needs
and achieve widespread market acceptance, our results of operations could be
negatively impacted.
The data storage markets are subject to rapid technological change, including
changes in customer requirements, frequent new product introductions and
enhancements and progressing industry standards. Our success depends in part on
our ability to keep pace with technological developments and emerging industry
standards. We must also respond to developing customer requirements by enhancing
our current products and developing and introducing new products. There is a
risk that if we fail to anticipate or respond rapidly to advances in technology
by adapting our products appropriately, our products could become obsolete. If
this occurs, our business could be adversely affected. As we introduce new or
enhanced products, we will also
4
<PAGE>
need to manage successfully the transition from older products to minimize
disruption in our customers' ordering patterns, to avoid excessive levels of
older product inventories and to ensure that enough supplies of new products can
be delivered to meet our customers' demands. If we fail to develop and introduce
successfully new products and product enhancements, our revenue would be
reduced, or we could incur substantial charges.
Since our business is dependent on a small number of customers, the loss of any
one of them will materially reduce our revenues.
We expect to derive a substantial portion of our revenue from original equipment
manufacturers. To date, we have agreements with only eleven original equipment
manufacturers, and anticipate that a small number of customers will account for
a significant portion of our future revenues. In 1998 sales from two customers
accounted for 72% of total revenues. In 1999 sales from four customers accounted
for 73% of total revenues. Our agreements with original equipment manufacturers
do not provide any assurance of future sales to these customers. Original
equipment manufacturers can stop purchasing and marketing our products at any
time and our agreements are not exclusive and do not require any minimum
purchases. If we lose any significant customers or if a significant customer
materially reduces its purchases of our products, our revenues might decline.
New products we develop may contain undetected hardware and software errors,
which could require significant expenditures of time and money to correct, harm
our relationships with existing customers, and negatively impact our reputation
in the industry.
Like other products as complex as ours, our SAN switches may contain undetected
hardware or software errors when we first introduce new products or release new
versions of existing products. Despite our testing and quality control efforts,
we anticipate that errors may be found from time to time in our new or enhanced
products after commercial introduction. In addition, our products are combined
with products from other vendors. As a result, when problems occur, it may be
difficult to identify the source of the problem. If we are unable to rapidly
correct any errors, it could result in the following consequences, among others:
. delay or loss of market acceptance of our products;
. significant warranty or other liability claims;
. diversion of engineering and other resources from product development
efforts;
. significant customer relations problems;
. loss of credibility in the market; and
. inability to sell our products until any errors are corrected.
Moreover, the occurrence of hardware and software errors, whether caused by our
products or another vendor's SAN products, could delay or prevent the
development of the SAN market. Our growth depends on our SAN products and if any
of the above events occur, our business could be seriously harmed.
5
<PAGE>
If our subcontractors do not meet our manufacturing needs, we may not be able to
produce and sell our products.
We subcontract a majority of our production activities, including the
manufacture, assembly and testing of our products. We currently depend upon LSI
Logic for the manufacture of our application specific integrated circuits, or
ASICs, and Pemstar for the manufacture and assembly of our switch products. We
depend on these and other subcontractors to deliver high-quality products in a
timely manner, but we cannot assure you that they will. We currently do not have
a long-term supply contract with any of our subcontractors. Our subcontractors
are not obligated to supply products to us for any specific period, or in any
specific quantity, except as may be provided in a particular purchase order. We
generally place orders with our subcontractors between one and three months
before scheduled delivery of products to our customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from our subcontractors to meet our customers'
delivery requirements, or we may accumulate excess inventories. Poor performance
by one of our subcontractors would have a material adverse effect on our
business until we find an alternate subcontractor. We cannot assure you that we
would be able to find an alternate subcontractor to deliver quality products at
an acceptable price. If we experience problems with one of our subcontractors,
our business could be materially adversely affected.
In addition, future growth may cause us to increase the orders to our
subcontractors. If this happens, we may not be able to accurately forecast our
needs or manage our relationship with our subcontractors during the transition.
Significant increases in the volume of product we order will also place
increased demands on our subcontractors, including the need to secure adequate
supplies of the components needed for our products and to successfully begin
large scale production of a new line of products. Frequently, manufacturers
encounter delays or difficulties in beginning volume production of new product
lines. If we or our subcontractors are not able to effectively manage the
anticipated increase in production volumes, our business could suffer.
Our dependence on a limited number of suppliers and the possible unavailability
of some key components may prevent us from being able to produce our products.
Some of the components we use in our products are available only from a single
supplier, or from a limited number of suppliers. For example, we purchase ASICs
and microprocessors from single sources, and power supplies and other specific
electronic components used in our products from limited sources. Other
components may occasionally be in short supply or temporarily be available from
only a single supplier. The following factors could each have a material adverse
effect on our ability to obtain components for our products:
. scarce quantities of components;
. a reduction or interruption in component supply;
. a disruption of existing supplier relationships;
. an inability to develop alternative sources; and
6
<PAGE>
. a significant increase in the price of components.
If we are unable to buy components on a timely basis, we will not be able to
produce our products.
If our business grows, it will place increased demands on our management,
operational and production capabilities that we may not be able to adequately
address. If we are unable to meet these increased demands, our business will be
harmed.
Unless we manage our growth effectively, we may make mistakes in operating our
business, such as inaccurate sales forecasting and material planning. Future
growth of our operations may place significant demands on our management,
operational and production resources. In order to manage growth effectively, we
must implement and improve our operational systems, procedures and controls on a
timely basis. If we cannot manage growth effectively, our business could suffer.
If we fail to comply with evolving regulatory approvals or government
regulations or the emerging fibre channel standard, we may be unable to sell our
products.
If we fail to comply with evolving regulatory approvals or government
regulations, we may be unable to sell our products. Similarly, if we fail to
comply with the emerging fibre channel standard, we may be unable to sell our
products. Our products must comply with various regulations and standards
defined by the Federal Communications Commission and Underwriters Laboratories
in the United States. Internationally, products that we develop will also be
required to comply with standards established by authorities in various
countries.
We expect our quarterly revenues and operating results to fluctuate for a number
of reasons, which could cause our stock price to fluctuate.
Our quarterly revenues and operating results have varied significantly in the
past and are likely to vary significantly in the future due to several factors.
The primary factors that may affect our quarterly results include the following:
. the effect of the warrant granted to Sun Microsystems;
. timing, size and terms of customer orders;
. changes in customer buying patterns;
. uncertainties associated with the introduction of any new product or
product enhancement;
. the timing of the announcement and introduction of new products by us or
our competitors;
. the mix of our products sold and the mix of distribution channels through
which our products are sold;
. deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors;
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<PAGE>
. technological developments affecting the data communication network
market; and
. the overall strength of the economy.
As a result of the variability in our operating results, our stock price has
fluctuated and may continue to fluctuate in the future. It is likely that in
some future period our operating results will be below your expectations or
those of public market analysts. If our operating results are lower than
expected, our stock price could decline.
The market price of our stock may be volatile.
Like other technology companies, our stock price may be volatile and could drop
substantially. In addition to changes in our stock price resulting from
operating results, our stock price may fluctuate due to the following factors:
. changes in financial estimates by securities analysts;
. changes in market valuations of other technology companies;
. gain or loss of significant original equipment manufacturer customers;
. short-selling of our common stock;
. announcements of business developments by us or our competitors;
. public perception regarding fibre channel's market status;
. developments or disputes concerning proprietary rights;
. technological innovations or newly introduced products;
. general conditions in the data communications network industry and the
economy; and
. comments about us or our markets posted on the internet.
Loss of key personnel or the inability to hire additional qualified personnel
would negatively impact our business.
The loss of the services of any of our key management employees, our inability
to attract and retain qualified personnel or delays in hiring required
personnel, particularly engineers and sales personnel, could delay the
development and introduction of, and negatively impact our ability to sell, our
products. In addition to our key management personnel, our success depends on
our ability to attract and retain highly skilled managerial, engineering, sales
and marketing and other personnel. Competition for these personnel is intense.
In recent years, there has been great demand for qualified skilled and unskilled
employees in the Minneapolis area, where our main operations are located, and in
other areas where we operate. There is a risk that we will be unsuccessful in
attracting and retaining the personnel we need for our business.
8
<PAGE>
Our business is dependent on our intellectual property, and our inability to
protect our intellectual property could negatively affect our ability to
compete.
Our success will depend on our ability to protect our intellectual property
rights. To establish and protect our intellectual property rights, we rely on a
combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure. We also enter into confidentiality or license
agreements with our consultants, customers and corporate partners. We cannot be
certain that the steps we take to protect our intellectual property will
adequately protect our proprietary rights, or that others will not independently
develop or otherwise acquire equivalent or superior technology. In addition, the
laws of some of the countries in which our products are or may be sold may not
protect our proprietary rights as fully as the laws of the United States.
We may be a party to intellectual property litigation, which may result in
significant costs and be time consuming.
In the future, we may be a party to intellectual property litigation, either to
protect our intellectual property or as a result of an alleged infringement of
others' intellectual property. Any litigation or dispute, regardless of its
success, would likely result in substantial costs and be time consuming. An
adverse determination could:
. subject us to significant liabilities to third parties;
. invalidate our proprietary rights;
. require us to seek licenses from or pay royalties to third parties;
. require us to develop appropriate alternative technology; or
. require us to stop using the challenged intellectual property or stop
selling our products that incorporate it.
Any of these events could have a material adverse effect on our business,
financial condition and results of operations.
Because of competitive pricing pressures, the average price of our products may
decline, resulting in a decrease in our revenues and gross margins.
We anticipate that the average price of our products will decrease in the future
in response to competitive pricing pressures and changes in product mix or other
factors. If we are unable to offset these decreases by increasing our sales
volumes, our revenues will decline. In addition, to maintain our gross margins,
we must develop and introduce new products and product enhancements, and we must
continue to reduce the manufacturing cost of our products. If we fail to do
this, our business could suffer.
9
<PAGE>
We may not be successful in our international sales activities, which could
adversely affect our growth.
Our international sales will be limited if we are unable to establish and
maintain relationships with international distributors and original equipment
manufacturers. Even if we increase our international sales efforts, we cannot be
certain that we will increase demand for our products in these markets. Our
international operations are subject to a number of risks, including:
. longer sales cycles;
. difficulty in collecting accounts receivable;
. political and economic instability;
. reduced protection of intellectual property rights;
. protectionist laws and business practices that favor local competition; and
. dependence on local vendors.
To date, none of our international revenues and costs has been denominated in
foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore less competitive in foreign markets. A portion of our international
revenues may be denominated in foreign currencies in the future, which would
subject us to risks associated with fluctuations in those foreign currencies.
Our shareholder rights plan, articles of incorporation and Minnesota law could
make it more difficult for a third party to acquire us and may prevent our
shareholders from recognizing a premium on our stock.
10
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Our shareholder rights plan and provisions of our articles of incorporation and
of the Minnesota Business Corporation Act may make it more difficult for a third
party to acquire us, even if doing so would allow our shareholders to receive a
premium over the prevailing market price of our shares. Our shareholder rights
plan and those provisions of our articles of incorporation and Minnesota law are
intended to encourage potential acquirers to negotiate with us and allow our
board of directors the opportunity to consider alternative proposals in the
interest of maximizing shareholder value. In addition, our stock option
agreements provide for acceleration of vesting of stock options granted to our
officers and employees upon a change of control of Ancor. To the extent that a
potential acquiror is interested in us because of our human capital, this
acceleration of vesting will make us less attractive because key employees may
not be motivated to remain with the new entity following a change of control.
However, such provisions may also discourage acquisition proposals or delay or
prevent a change in control, which could harm our stock price.
We may not meet our future capital needs, limiting our ability to grow.
We may require additional capital to support our operations in the future.
Additional capital may be unavailable, or available only on unfavorable terms.
Any additional equity financings may be dilutive to purchasers in this offering.
Any debt financing may involve restrictive covenants that could limit how we
conduct our business or limit our ability to pay dividends. Failure to secure
additional financing if and when needed could adversely affect our operations.
If we are unable to raise additional capital, we would be required to delay,
scale back, or eliminate market expansion activities and research and
development on existing or new products, or cease operations entirely.
We have a legal proceeding pending which, if decided against us, could require a
substantial cash payment.
We have been sued in Hennepin County district court in the State of Minnesota by
an entity with which we were negotiating a lease. We intend to defend this suit
vigorously. However, the litigation process is inherently uncertain and we may
not prevail. Our defense of this litigation, regardless of its outcome, has and
will continue to consume management and financial resources. If we do not
prevail, we could be subject to material financial liabilities.
Our business may be harmed by class action litigation due to the volatility of
our stock price.
In the past, parties have brought securities class action litigation against a
company after periods of volatility in the market price of the company's
securities. We were a defendant in a consolidated class action captioned In re
Ancor Communications, Inc. Securities Litigation, Case No. 97-CV-1696 (D. Minn.)
which alleged that we violated the federal securities laws. We settled the
lawsuit in November 1998 and the district court dismissed it in February 1999.
Under the terms of the settlement, a fund was created in the amount of
$1,650,000. We paid $250,000 of the total settlement and our insurer paid the
remaining $1,400,000. We may be the target of similar litigation in the future.
Additional securities litigation could result in substantial costs and divert
our management's attention and resources.
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Future sales of our common stock could adversely affect our stock price.
Future sales of substantial amounts of our common stock in the public market, or
the perception that these sales could occur, could adversely affect the market
price of our common stock. As of December 31, 1999, we had outstanding
28,506,172 shares of common stock, plus 3,857,650 shares of common stock
reserved for issuance upon exercise of outstanding options, 1,565,111 of which
are currently exercisable, and 1,562,113 shares of common stock reserved for
issuance upon exercise of outstanding warrants, 62,113 of which are currently
exercisable. All of the outstanding shares of our common stock are either freely
saleable or saleable under currently effective registration statements.
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