Regulation D Subscription Agreement

ANCOR COMMUNICATIONS, INCORPORATED


REGULATION D SUBSCRIPTION AGREEMENT


THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE FEDERAL
AND STATE SECURITIES LAWS.


THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES
CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.


AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE
ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT E.


SEE ADDITIONAL LEGENDS AT SECTIONS 3.7 and 9.


THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is made as of the 19th day of February, 1998, by and between Ancor Communications, Incorporated, a corporation duly incorporated and existing under the laws of the State of Minnesota (the "Company"), and the undersigned subscriber executing this Agreement ("Subscriber").


THE PARTIES HEREBY AGREE AS FOLLOWS:


This Agreement is executed by Subscriber in connection with the offer by the Company and the purchase by Subscriber of Series C Preferred Stock, $.01 par value (the "Preferred Stock"), of the Company. The Preferred Stock is being offered at a purchase price of Ten Thousand Dollars ($10,000), U.S., per share, in minimum subscription amounts of at least ten (4) shares ($40,000), and increments of one (1) share ($10,000) in excess thereof, with a minimum aggregate offering amount of Eight Hundred (800) shares of Preferred Stock, or Eight


Million Dollars ($8,000,000) (the "Minimum Amount"), and up to a maximum aggregate amount of Eleven Hundred (1,100) shares of Preferred Stock, or Eleven Million Dollars ($11,000,000) (the "Maximum Amount") (collectively, the "Offering"). The terms of the Preferred Stock, including the terms on which the Preferred Stock may be converted into common stock, $.01 par value, of the Company (the "Common Stock"), are set forth in the Certificate of Designation of Series C Preferred Stock (the "Certificate of Designation"), in the form attached hereto as Exhibit A. The solicitation of this subscription and, if
--------- accepted by the Company, the offer and sale of the Preferred Stock are being made in reliance upon the provisions of Regulation D ("Regulation D") promulgated under the Securities Act of 1933, as amended ("the Act"). The Preferred Stock and the Common Stock issuable upon conversion thereof (the "Conversion Shares") are sometimes referred to herein singularly as "Security" and collectively as the "Securities."


It is agreed as follows:


1. Offering


1.1 Offer to Subscribe; Purchase Price and Closing; and Placement
-------------------------------------------------------------
Fees.
----


Subject to satisfaction of the conditions to closing set forth in Section 1.2 below, Subscriber hereby agrees to subscribe for and purchase Preferred Stock for the aggregate purchase price in the amount set forth in Section 10 of this Agreement, in accordance with the terms and conditions of this Agreement. The closing of a sale and purchase of Preferred Stock as to each Subscriber (the "Closing") shall be deemed to occur when this Agreement has been executed by both Subscriber and the Company, full payment for the Preferred Stock subscribed for shall have been made by Subscriber, and the conditions to Subscriber's obligations set forth in Section 1.2 have been satisfied.


The parties hereto acknowledge that Dunwoody Brokerage Services, Inc. is acting as placement agent (the "Placement Agent") for this Offering and will be compensated by the Company in cash and warrants to purchase Common Stock of the Company pursuant to the terms of a Placement Agent Agreement between the Company and the Placement Agent (the "Placement Agent Agreement"). The Placement Agent has acted solely as placement agent in connection with the Offering by the Company of the Preferred Stock pursuant to this Agreement. The information and data contained in the Disclosure Documents (as defined in Section 2.2.4) have not been subjected to independent verification by the Placement Agent, and no representation or warranty is made by the Placement Agent as to the accuracy or completeness of the information contained in the Disclosure Documents.


1.2 Conditions to Subscriber's Obligations. Subscriber's obligations
-------------------------------------- hereunder are conditioned upon all of the following:


(a) the following documents shall have been received by the
Subscriber: (i) the Registration Rights Agreement, in the form
attached hereto as Exhibit B (the "Registration Rights
---------
Agreement") (executed by the Company), (ii)


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an opinion of counsel, substantially in the form attached hereto
as Exhibit C (the "Opinion of Counsel") (signed by the Company's
---------
counsel), (iii) [intentionally omitted], (iv) the Certificate of
Designation, in the form attached hereto as Exhibit A (together
---------
with evidence that it has been filed with the Secretary of State
of Minnesota); (v) certificates representing the Preferred Stock
for which the Subscriber has subscribed issued in the name of the
Subscriber; and (vi) a secretary's certificate, as to (A) the
resolutions of the Company's board of directors authorizing this
transaction, (B) the Company's Articles of Incorporation, and (C)
the Company's Bylaws;


(b) the Company's Common Stock shall be listed for and actively
trading on the Nasdaq Small Cap Market;


(c) other than as described in the Disclosure Documents (as
described in Section 2.2.4), as of the Closing there have been no
material adverse changes in the Company's business, prospects or
financial condition since the date of the last balance sheet
included in the Disclosure Documents (defined in Section 2.2.4),
including but not limited to incurring material liabilities;


(d) the representations and warranties of the Company are true
and correct at the Closing as if made on such date and the
conditions to Subscriber's obligations set forth in this Section
1.2 are satisfied as of the Closing, and the Company shall
deliver a certificate, signed by an officer of the Company, to
such effect to the Subscriber;


(e) [intentionally omitted]


(f) the Company shall have reserved for issuance a sufficient
number of shares of Common Stock to effect conversions of the
Preferred Stock, which number of shares shall initially be equal
to Two Million Six Hundred Fifty Thousand (2,650,000) shares.


2. Representations, Warranties and Covenants of Subscriber. Subscriber hereby represents and warrants to and agrees with the Company as follows:


2.1 Accredited Investor. Subscriber is an accredited investor, as
------------------- defined in Rule 501 of Regulation D, and has checked the applicable box set forth in Section 10 of this Agreement.


2.2 Investment Experience; Access to Information; Independent
---------------------------------------------------------
Investigation.
--------------


2.2.1 Access to Information. Subscriber or Subscriber's professional advisor has been granted the opportunity to ask questions of and receive answers from representatives of the Company, its officers, directors, employees and agents and to obtain any


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additional information which Subscriber or Subscriber's professional advisor deems necessary concerning the terms and conditions of this Offering, the Company and its business and prospects.


2.2.2 Reliance on Own Advisors. Subscriber has relied completely on the advice of, or has consulted with, Subscriber's own personal tax, investment, legal or other advisors and has not relied on the Company or any of its affiliates, officers, directors, attorneys, accountants or any affiliates of any thereof and each other person, if any, who controls any of the foregoing, within the meaning of Section 15 of the Acts for any tax or legal advice (other than reliance on information in the Disclosure Documents as defined in Section 2.2.4 and on the Opinion of Counsel).


2.2.3 Capability to Evaluate. Subscriber has such knowledge and experience in financial and business matters so as to enable such Subscriber to utilize the information made available to it in connection with the Offering in order to evaluate the merits and risks of the prospective investment, which are substantial, including without limitation those set forth in the Disclosure Documents (as defined in Section 2.2.4 below).


2.2.4 Disclosure Documents. Subscriber, in making Subscriber's investment decision to subscribe for the Securities hereunder, represents that (a) Subscriber has received and had an opportunity to review (i) the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (ii) the Company's quarterly reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 1997, (iii) the Risk Factors, attached as Exhibit E, (iv)
--------- the Capitalization Schedule, attached as Exhibit F, (the "Capitalization
--------- Schedule"), (v) the Use of Proceeds Schedule, attached as Exhibit G, (the "Use
--------- of Proceeds Schedule"), and (vi) the draft press release and related financial information with respect to the Company's 1997 fiscal year end earnings attached as Exhibit X (b) Subscriber has read, reviewed, and relied solely on the
--------- documents described in (a) above, the Company's representations and warranties and other information in this Agreement, including the exhibits, any other written information prepared by the Company which has been specifically provided to Subscriber in connection with this Offering and is designated in writing by the Company as a Disclosure Document (the documents described in Section 2.2.4 (a) and (b) are collectively referred to as the "Disclosure Documents"), and an independent investigation made by Subscriber and Subscriber's representatives, if any; (c) Subscriber has, prior to the date of this Agreement, been given an opportunity to review material contracts and documents of the Company which have been filed as exhibits to the Company's filings under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and has had an opportunity to ask questions of and receive answers from the Company's officers and directors; and (d) is not relying on any oral representation of the Company or any other person, nor any written representation or assurance from the Company other than those contained in the Disclosure Documents or incorporated herein or therein. Subscriber acknowledges and agrees that the Company has no responsibility for, does not ratify, and is under no responsibility whatsoever to comment upon or correct any reports, analyses or other comments made about the Company by any third parties, including, but not limited to, analysts' research reports or comments (collectively, "Third Party Reports"), and Subscriber has not relied upon any Third Party Reports, including any provided by the Placement Agent or Swartz Investments, LLC, in making the decision to invest.


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2.2.5 Investment Experience; Fend for Self. Subscriber has substantial experience in investing in securities and he, she or it has made investments in securities other than those of the Company. Subscriber acknowledges that Subscriber is able to fend for Subscriber's self in the transaction contemplated by this Agreement, that Subscriber has the ability to bear the economic risk of Subscriber's investment pursuant to this Agreement and that Subscriber is an "Accredited Investor" by virtue of the fact that Subscriber meets the investor qualification standards set forth in Section 2.1 above. Subscriber has not been organized for the purpose of investing in securities of the Company, although such investment is consistent with Subscriber's purposes.


2.3 Exempt Offering Under Regulation D.
-----------------------------------


2.3.1 Investment; No Distribution. Subscriber is acquiring the Securities to be issued and sold hereunder for his, her or its own account (or a trust account if such Subscriber is a trustee) for investment and not as a nominee and not with a present view to the distribution thereof. Subscriber is aware that there are legal limits on Subscriber's ability to sell or dispose of the Securities and, therefore, that Subscriber may be required to bear the economic risk of the investment for an indefinite period of time and has adequate means of providing for Subscriber's current needs and possible personal contingencies. Subscriber's commitment to illiquid investments is reasonable in relation to Subscriber's net worth. By making the representations in this Section 2.3.1, the Subscriber does not agree to hold the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption from registration under the Act, except as otherwise limited or required by Section 5(a) of the Certificate of Designation and Section 6 of the Registration Rights Agreement.


2.3.2 [Intentionally Omitted]


2.3.3 Restricted Securities. Subscriber understands that the Preferred Stock issued at Closing is, and the Conversion Shares will be, characterized as "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction exempt from the registration requirements of the federal securities laws and that under such laws and applicable regulations such securities may not be transferred or resold without registration under the Act or pursuant to an exemption therefrom. In this connection, Subscriber represents that Subscriber is familiar with Rule 144 under the Act, as presently in effect, and understands the resale limitations imposed thereby and by the Act.


2.3.4 Disposition. Without in any way limiting the representations set forth above, Subscriber further agrees not to sell, transfer, assign, pledge (except for any limited pledge in connection with a margin account of Subscriber to the extent that such pledge does not require registration under the Act or unless an exemption from such registration is available) and provided further that if such pledge is realized upon, any transfer to the pledgee shall comply


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with the requirements set forth herein), or otherwise dispose of all or any portion of the Securities unless and until:


(a) There is then in effect a registration statement under the
Act and any applicable state securities laws covering such proposed
disposition and such disposition is made in accordance with such
registration statement; or


(b) (i) Subscriber shall have notified the Company of the
proposed disposition and shall have furnished the Company with a
detailed statement of the circumstances surrounding the proposed
disposition, and (ii) if reasonably requested by the Company,
Subscriber shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such disposition
will not require registration of the Securities under the Act or state
securities laws. It is agreed that the Company will not require the
Subscriber to provide opinions of counsel for transactions made
pursuant to Rule 144 provided that Subscriber and Subscriber's broker,
if necessary, provide the Company with the necessary representations
for counsel to the Company to issue an opinion with respect to such
transaction.


2.4 Due Authorization.
-----------------


2.4.1 Authority. The person executing this Subscription Agreement, if executing this Agreement in a representative or fiduciary capacity, has full power and authority to execute and deliver this Agreement and each other document included herein for which a signature is required in such capacity and on behalf of the subscribing individual, partnership, trust, estate, corporation or other entity for whom or which Subscriber is executing this Agreement. Subscriber has reached the age of majority (if an individual) according to the laws of the state in which he or she resides.


2.4.2 Due Authorization. If Subscriber is a corporation, Subscriber is duly and validly organized, validly existing and in good corporate standing as a corporation under the laws of the jurisdiction of its incorporation with full power and authority to purchase the Securities to be purchased by Subscriber and to execute and deliver this Agreement.


2.4.3 [Intentionally Omitted]


2.4.4 Representatives. If Subscriber is purchasing in a representative or fiduciary capacity, the representations and warranties shall be deemed to have been made on behalf of the person or persons for whom Subscriber is so purchasing.


3. Acknowledgments Subscriber is aware that:


3.1 Risks of Investment. Subscriber recognizes that an investment in
------------------- the Company involves substantial risks, including the potential loss of Subscriber's entire investment herein. Subscriber recognizes that the Disclosure Documents, this Agreement and the exhibits


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hereto do not purport to contain all the information which would be contained in a registration statement under the Act;


3.2 No Government Approval. No federal or state agency has passed
---------------------- upon the Securities, recommended or endorsed the Offering, or made any finding or determination as to the fairness of this transaction;


3.3 No Registration. The Securities and any component thereof have
--------------- not been registered under the Act or any applicable state securities laws by reason of exemptions from the registration requirements of the Act and such laws, and may not be sold, pledged (except for any limited pledge in connection with a margin account of Subscriber to the extent that such pledge does not require registration under the Act or unless an exemption from such registration is available and provided further that if such pledge is realized upon, any transfer to the pledgee shall comply with the requirements set forth herein) assigned or otherwise disposed of in the absence of an effective registration of the Securities and any component thereof under the Act or unless an exemption from such registration is available;


3.4 [Intentionally Omitted].
-----------------------


3.5 No Assurances of Registration. There can be no assurance that
----------------------------- any registration statement will become effective at the scheduled time, or ever. Subscriber acknowledges that it may be required to bear the economic risk of Subscriber's investment for an indefinite period of time;


3.6 Exempt Transaction. Subscriber understands that the Securities
------------------ are being offered and sold in reliance on specific exemptions from the registration requirements of federal and state law and that the representations, warranties, agreements, acknowledgments and understandings set forth herein are being relied upon by the Company in determining the applicability of such exemptions and the suitability of Subscriber to acquire such Securities;


3.7 Legends. It is understood that the certificates evidencing the
------- Preferred Stock, and the Conversion Shares, subject to legend removal under the terms of Section 5.9 below, shall bear the following legend (the "Legend"):


"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or an exemption therefrom."


3.8 Missouri Representation. If a Missouri resident, I hereby
----------------------- represent that (i) I understand that the Securities are not registered under the Missouri Securities Act and may be disposed of only through a licensed broker- dealer and (ii) I have been advised that it is a felony to sell securities in violation of the Missouri Securities Act.


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4. Representations and Warranties of the Company . The Company hereby makes the following representations and warranties to Subscriber (which shall be true at the signing of this Agreement and as of Closing) and agrees with Subscriber that:


4.1 Organization, Good Standing, and Qualification. The Company is a
---------------------------------------------- corporation duly incorporated, validly existing and in good standing under the laws of the State of Minnesota, USA and has all requisite corporate power and authority to carry on its business as now conducted and as proposed to be conducted. The Company is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on the business or properties of the Company and its subsidiaries taken as a whole. The Company is not the subject of any pending, threatened or, to its knowledge, contemplated investigation or administrative or legal proceeding by the Internal Revenue Service, the taxing authorities of any state or local jurisdiction, the Securities and Exchange Commission ("SEC"), The National Association of Securities Dealers, Inc., The Nasdaq Stock Market, Inc. or any state securities commission, or any other governmental entity, which have not been disclosed in the Disclosure Documents. The Company does not have any subsidiaries.


4.2 Corporate Condition. The Company's condition is, in all material
------------------- respects, as described in the Disclosure Documents, except for changes in the ordinary course of business and normal year-end adjustments that are not, in the aggregate, materially adverse to the Compan ...