| The competition in the data access and SAN, MAN, and WAN market for our products, software and solutions has grown and will continue to become more competitive with (a) the recent introduction of competitive products (b) alternative competitive technologies offered by other network companies that can effectively network storage data, and (c) pricing pressures resulting from this increased competition |
| As a result of these market changes, we anticipate continued lengthened sales cycles and price erosion in an environment where storage OEM certification of our products may still be required for end-user customer acceptance |
| Given that a majority of our revenues are derived from our direct-assist sales model with distribution through our channel partners, we are still highly dependent upon our channel partners’ relationships with end-user customers to promote the value of our products |
| If our channel partners do not promote the value of our products or competitors begin to control end-user customer preference, we may lose sales in key enterprise accounts that would materially adversely affect our revenues |
| While our recent acquisition of CNT allows us to offer SAN extension products, third party products and services directly to end-user customers, and such offerings are generally not in conflict with our channel partners, we are nonetheless cautious in our sales model to properly manage and leverage the existing channel relationships we have |
| We may not be able to successfully compete against existing or potential SAN competitors |
| The market for our SAN switching products, software and solutions is highly competitive, especially with the entrance of Cisco into the market in 2002 |
| For a detailed description of the competition we face, please refer to the caption entitled “Competition” under Item 1, Business |
| Some of our competitors and potential competitors have longer operating histories, greater name recognition, access to larger customer bases, more established distribution channels and substantially greater financial, research and development and managerial resources than McDATA Given the highly competitive market, we anticipate continued lengthened sales cycles and continued downward pricing pressures |
| To be competitive, we acquired CNT to expand our Global Enterprise Data Infrastructure (GEDI) strategy, which is to enable customers to consolidate their data assets in storage networks and to extend the boundary of those networks through network connectivity and distance products (ie, SAN extension products previously offered by CNT) |
| These products and services are sold through channels partners and on occasion, direct |
| Continued or increased competition could result in pricing pressures, reduced sales, reduced margins, reduced profits, reduced market share, further elongating of sales cycles, or the failure of our products to achieve or maintain market acceptance |
| We incurred a substantial loss for the fiscal years ended January 31, 2006, January 31, 2005, and January 31, 2004, and may not be profitable in the future |
| We incurred losses of dlra30dtta6 million, dlra20dtta9 million and dlra43dtta1 million, respectively, for the fiscal years ended January 31, 2006, January 31, 2005, and January 31, 2004 |
| Our future operating results will depend on many factors, including the growth of the SAN market, market acceptance of new products we introduce, demand for our products, levels of product and price competition and our reaching and maintaining targeted costs for our products |
| In addition, we expect to incur continued significant product development, sales and marketing, and general and administrative expenses |
| We cannot provide assurance that we will generate sufficient revenue to achieve or sustain profitability |
| The prices and gross margins of our products may decline, which would reduce our revenues and profitability |
| In response to changes in product mix, competitive pricing pressures, introductions of new competitive products, product enhancements by our competitors, increases in manufacturing or labor costs or other operating expenses, we may experience declines in the prices, gross margins and profitability |
| To maintain our gross margins we must maintain or increase current shipment volumes, develop and introduce new products and product enhancements and reduce the costs to produce our products |
| Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenue |
| If this occurs, we could incur losses, and our revenue, gross margins and operating results may be below our expectations and those of investors and stock market analysts |
| 15 ______________________________________________________________________ [40]Table of Contents We depend on large distribution and end-user customer relationships |
| We depend on EMC, IBM and HDS, for a significant portion of our total revenue |
| Sales to EMC, IBM and HDS represented approximately 31prca, 26prca and 9prca, respectively, of our revenue for the twelve months ended January 31, 2006 |
| The percentage related to IBM includes amounts sold to IBM Global Services for internal use and its outsourcing business |
| We anticipate that our future operating results will continue to depend heavily on sales to EMC, IBM and HDS EMC, IBM and HDS resell products offered by our competitors, and nothing restricts EMC, IBM and HDS from expanding those relationships in a manner that could be adverse to us |
| Therefore, the loss of EMC, IBM or HDS as a channel customer, or a significant reduction in sales to EMC, IBM or HDS could significantly reduce our revenue |
| While we are aware that Dell sources some of our switch products through EMC, it is unclear whether this mitigates our dependency on EMC Our product sales agreements with sales partners do not provide for the purchase of a guaranteed minimum amount of product |
| With our acquisition of CNT, a significant portion of our total revenue is also dependent on large sale transactions with Fortune 500 customers in the financial services, telecommunications, information outsourcing and retail market segments |
| Failure to close a large SAN extension or solutions sale with a single end-user customer may adversely affect our revenue in any particular fiscal quarter |
| We currently have limited product offerings and must successfully introduce new products (such as the Intrepid 10000) and product enhancements that respond to rapid technological changes and evolving industry standards |
| We derive a substantial portion of our revenue from a limited number of products |
| As a result, we could have a significant decrease in revenue if one of our products lines becomes obsolete, does not obtain and maintain market acceptance or if there is a decrease in demand for our products for any other reason |
| For the twelve months ended January 31, 2006, we derived a significant portion of our revenue from sales of our Intrepid director products |
| We expect that revenue from our director-class Intrepid products will continue to account for a substantial portion of our revenue for the foreseeable future |
| Factors such as performance, market positioning, the availability and price of competing products, the introduction of new technologies and the success of our OEM, reseller and systems integrator customers will affect the market acceptance of our products |
| Therefore, continued market acceptance of these products and their successor products, along with our Intrepid 10000 Director, are critical to our future success |
| In addition, our future success depends upon our ability to address the changing needs of customers and to transition to new technologies and industry standards |
| The introduction of competing products embodying new technologies or the emergence of new industry standards could render our products non-competitive, obsolete or unmarketable and seriously harm our market share, revenue and gross margin |
| Risks inherent in transitions to new technology, industry standards and new protocols include the inability to expand production capacity to meet demand for new products, write-downs of our existing inventory due to obsolescence, the impact of customer demand for new products or products being replaced, and delays in the introduction or initial shipment of new products |
| There can be no assurance that we will successfully manage these transitions |
| We are currently developing products that contain untested devices and subassemblies |
| In particular, in conjunction with the transition of our products from fibre channel to multi-protocol, 2 Gb/s to 4 Gb/s to 8 Gb/s to 10 Gb/s transmission speed technology, higher port densities, and advanced management capabilities, we have introduced products with new features and functionality, such as our next generation director-class product, the Intrepid 10000 Director and our next generation switches, such as the Sphereon 4400 and Sphereon 4700 |
| We face risks relating to this product transition, including risks relating to getting storage and system OEMs to qualify such products, forecasting of demand, as well as possible product and software defects and a potentially different sales and support environment due to the complexity of these new systems |
| Finally, if we fail to timely introduce new products, or to add new features and functions to existing products to compete against new entrants in the market, or if there is no demand for these or our current products, our business could be seriously harmed |
| Unforeseen environmental costs could impact our future net earnings |
| Some of our operations use substances regulated under various federal, state and international laws governing the environment, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes and the cleanup of contaminated sites |
| Certain of our products are subject to various federal, state and international laws governing chemical substances in electronic products |
| We could incur costs, fines and civil or criminal sanctions, loss of revenue, third-party property damage or personal injury claims if we were to violate or become liable under environmental laws |
| The ultimate costs under environmental laws and the timing of these costs are difficult to predict |
| 16 ______________________________________________________________________ [41]Table of Contents The European Union has finalized the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods financially responsible for specified collection, recycling, treatment and disposal of past and future covered products |
| This directive is being enacted and implemented by individual European Union governments (such legislation together with the directive, the “WEEE Legislation”), and certain producers are to be financially responsible under the WEEE Legislation beginning in August 2005 |
| In addition, the European Parliament has enacted a requirement for the elimination or reduction of hazardous substances (RoHS) |
| This legislation governs the recovery of such substances as mercury, lead, cadmium, and hexavalent chromium |
| We are currently redesigning our products and transitioning our component purchasing and manufacturing operations to meet the July 1, 2006 deadline to provide RoHS compliant products to the European Union |
| In some instances, our OEM partners have earlier RoHS compliance deadlines and will not accept delivery of noncompliant products, no matter where the final end-user is located |
| Failure to deliver RoHS compliant products prior to the respective deadlines could adversely affect our revenues |
| Moreover, a failure to manage our component supply chain and our ultimate level of noncompliant finished goods could result in write-downs of non-RoHS compliant inventory and components |
| Because our component suppliers are also changing their product design and manufacturing processes, we could face shortages of RoHS compliant components if they are unable to produce adequate volumes to satisfy our and our industry’s demand |
| This may impact our ability to produce our products and lead to lost or deferred revenue |
| We may not successfully integrate or realize the benefits of the acquisition of Computer Network Technology Corporation |
| On June 1, 2005, we acquired CNT While management believes that such acquisitions may continue to be part of our long-term strategy, there are risks and uncertainties related to acquiring companies |
| The integration of CNT is a complex, time-consuming and expensive process that, without proper planning and implementation, could significantly disrupt our business, controls and procedures |
| We may not successfully integrate CNT and the failure to meet the challenges involved in integrating the operations of McDATA and CNT successfully or otherwise to realize any of the anticipated benefits of the merger could seriously harm our business |
| The challenges involved in this integration include, but are not limited to, the following: • successfully combining product and service offerings; • integrating and coordinating sales and marketing activities; • realizing the financial, operational and headcount synergies to improve the overall business model of the company; • employment litigation costs related to eliminating positions in Europe to facilitate restructuring efforts; • integrating and coordinating research and development activities to enhance existing or introduce new products and services; • preserving customer, distribution, reseller, OEM, manufacturing, supplier and other important relationships of both McDATA and CNT and resolving potential conflicts that may arise; • minimizing the diversion of management attention from other strategic opportunities and operational matters; • integrating the diverse financial systems of both McDATA and CNT, including maintaining adequate internal controls during the integration process; • addressing differences in the business cultures of McDATA and CNT, maintaining employee morale and retaining key employees; and • coordinating and combining overseas operations, relationships and facilities, which may be subject to additional constraints imposed by geographic distance, local laws and regulations |
| The anticipated benefits of the merger are based on projections and assumptions, including successful integration, not actual experience |
| In addition to the integration risks discussed above, our ability to realize these benefits could be adversely affected by practical or legal constraints on our ability to combine operations |
| Finally, if our stock price decreases significantly, this may result in a reassessment of our goodwill (which includes significant goodwill related to the acquisition of CNT) to determine if an impairment is necessary |
| 17 ______________________________________________________________________ [42]Table of Contents Our business is subject to risks from global operations |
| We conduct significant sales and customer support operations in countries outside of the United States and also depend on non-US operations of our contract manufacturers, and our distribution partners |
| Further, we utilize an India-based firm, HCL Technologies, to provide certain software engineering services, and our virtualization chip supplier, Aarohi Communications, is also reliant on offshore engineering |
| We derived approximately 42prca of our revenue for the twelve months ended January 31, 2006, from customers located outside of the United States |
| We believe that our continued growth and profitability will require us to continue to expand marketing and selling efforts internationally |
| We have limited experience in marketing, distributing and supporting our products internationally and may not be able to maintain or increase international market demand for our products |
| In addition, our international operations are generally subject to inherent risks and challenges that could harm our operating results, including: • expenses associated with developing and customizing our products for foreign countries and different languages; • difficulties in staffing and managing international operations, including recruiting qualified personnel in foreign markets and reliance on third parties to manage certain aspects of our foreign operations, including hub inventory locations; • unusually high expenses and timeliness associated with the hiring and termination of employees in foreign countries; • multiple, conflicting and changing governmental laws and regulations, including difficulty in enforcing our legal rights in foreign jurisdictions; • tariffs, quotas and other import or export restrictions, trade protection measures and other regulatory requirements on computer peripheral equipment; • longer sales cycles for our products; • differences in business practices which might affect our recognition of revenue or increase the time it takes us to collect receivables; • reduced or limited protections of intellectual property rights; • adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries and customers; • compliance with international standards that differ from domestic standards; • risks surrounding any product and software outsourcing activities in foreign countries; and • political, social and economic instability in a specific country or region |
| Any negative effects on our international business could harm our business, operating results and financial condition as a whole |
| To date, a large percentage of our international revenue has been denominated in US dollars |
| As a result, an increase in the value of the US dollar relative to foreign currencies could make our products more expensive and thus less competitive in foreign markets |
| A portion of our international revenue may be denominated in foreign currencies in the future, which will subject us to risks associated with fluctuations in those foreign currencies |
| Increased international political instability may decrease customer purchases, increase our costs and disrupt our business |
| Increased international political instability as demonstrated by the September 11, 2001 terrorist attacks, disruption in air transportation and enhanced security measures as a result of the terrorist attacks and increasing tension in the Middle East, may hinder our ability to do business and may increase our costs |
| Additionally, this increased instability may, for example, negatively impact the capital markets and the reliability and cost of transportation and adversely affect our ability to obtain adequate insurance at reasonable rates or require us to incur costs for extra security precautions for our operations |
| In addition, to the extent that air transportation is delayed or disrupted, the operations of our contract manufacturers and 18 ______________________________________________________________________ [43]Table of Contents suppliers may be disrupted, particularly if shipments of components and raw materials are delayed |
| If this international political instability continues or increases, our business and results of operations could be seriously harmed and we may not be able to obtain financing in the capital markets |
| If we are unable to adequately protect our intellectual property, we may not be able to compete effectively |
| We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights |
| We also enter into confidentiality and/or license agreements with our employees, consultants and corporate partners |
| Despite our efforts to protect our proprietary rights, unauthorized parties may copy or otherwise obtain and use our products or technology |
| Monitoring unauthorized use of our products is difficult and we may not be aware that someone is using our rights without our authorization |
| In addition, the steps we have taken, and those we may take in the future, may not prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States |
| We may be a party to intellectual property litigation in the future, either to protect our intellectual property or as a result of alleged infringements of others’ intellectual property |
| These or other claims and any resulting litigation or arbitration could subject us to significant costs, liability for damages or could cause our proprietary rights to be invalidated or deemed unenforceable, which could allow third parties to use our rights without reservation |
| Litigation or arbitration, regardless of the merits of the claim or outcome, would likely be time consuming and expensive to resolve and would divert management time and attention |
| Any potential intellectual property litigation filed against us could also force us to do one or more of the following: • stop using the challenged intellectual property or selling our products or services that incorporate it; • obtain a license to use the challenged intellectual property or to sell products or services that incorporate it, which license may not be available on reasonable terms, or at all; and • redesign those products or services that are based on or incorporate the challenged intellectual property |
| If we are forced to take any of these actions, we may be unable to manufacture and sell our products, our customer relationships would be seriously harmed and our revenue would be reduced |
| If we fail to optimize our distribution channels and manage our distribution relationships, our revenue or operating results could be significantly reduced |
| Our competitors may sell their products directly to end-user customers |
| Our success will depend on our continuing ability to develop and manage relationships with significant OEMs, resellers and systems integrators, as well as our direct sales efforts with customers |
| We cannot provide assurance that we will be able to expand our distribution channels or manage our distribution relationships successfully or that our channel partners will market our products effectively |
| Our failure to expand our distribution channels or manage successfully our distribution relationships or the failure of our OEM and reseller partners to sell our products could reduce our revenue and operating results |
| We may also experience conflict with our distribution channels as we continue to sell some of our products directly to end users |
| We are dependent on a single or limited number of suppliers for certain key components of our products, and the failure of any of those suppliers to meet our production needs could seriously harm our ability to manufacture our products, result in delays in the delivery of our products and harm our revenue |
| We currently purchase several key components from single or limited sources including IBM, LSI Logic and eSilicon |
| We purchase application specific integrated circuits (ASICs), special purpose processors and power supplies from single sources, and gigabit interface converters and optic transceivers from limited sources |
| Additional sole or limited sourced components may be incorporated into our products in the future |
| Delays in the delivery of components for our products could result in delays or the inability to meet our customers’ demands and result in decreased revenue |
| We do not have any long-term supply contracts to ensure sources of supply of components |
| In addition, our suppliers may enter into exclusive arrangements with our competitors, stop selling their products or components to us at commercially reasonable prices or refuse to sell their products or components to us at any price, which could harm our operating results |
| Further, we have purchased components from our suppliers from time to time that have been subsequently found not to meet the supplier’s published specifications |
| If our suppliers are unable to provide (or we are unable otherwise to obtain) components for our products on the schedule and in the quantities and quality we require, we will be unable to manufacture our products |
| We have experienced and may continue to experience production delays and quality control problems with certain of our suppliers, 19 ______________________________________________________________________ [44]Table of Contents which, if not effectively managed, could prevent us from satisfying our production requirements |
| If we fail to effectively manage our relationships with these key suppliers, or if our suppliers experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, our ability to manufacture and ship products to our customers could be delayed, and our competitive position, reputation, business, financial condition and results of operations could be seriously harmed |
| The loss of our contract manufacturers, or the failure to forecast demand accurately for our products or to manage our relationship with our contract manufacturers successfully, would negatively impact our ability to manufacture and sell our products |
| We rely on Sanmina SCI, Inc |
| (SSCI) and Solectron Corporation, together our contract manufacturers, to manufacture our products |
| Our contract manufacturers 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 |
| In addition, our contract manufacturers do not guarantee that adequate capacity will be available to us within the time required to meet additional demand for our products |
| We generally place forecasts for products with our contract manufacturers approximately four to five months prior to the anticipated delivery date, with order volumes based on forecasts of demand for our products |
| We generally place purchase orders sixty calendar days in advance of delivery |
| If we fail to forecast demand for our products accurately, we may be unable to obtain adequate manufacturing capacity from our contract manufacturers to meet our customers’ delivery requirements or unexpected increases in customer purchase orders |
| As a result, we may not be able to benefit from any incremental demand and could lose customers |
| If we over-estimate demand for our product, we may accumulate excess inventories and obligations to our contract manufacturers under binding purchase orders in excess of our needs |
| At January 31, 2006, the Company’s commitment with our Contract Manufacturers for purchases over the next 60 days totaled dlra75dtta3 million, and dlra18dtta6 million for commitments beyond 60 days |
| In addition, we coordinate our efforts with those of our component suppliers and contract manufacturers in order to rapidly achieve volume production |
| We have experienced and may continue to experience production delays and quality control problems and supply constraints (eg, optics, etc) with certain of our suppliers and with our contract manufacturers, which, if not effectively managed, could prevent us from satisfying our production requirements on a timely basis and could harm our customer relationships |
| If we should fail to manage effectively our relationships with our component suppliers or contract manufacturers, or if any of our suppliers or our manufacturers experience delays, disruptions, capacity constraints or quality control problems in their manufacturing operations, our ability to ship products to our customers could be delayed, and our competitive position and reputation could be harmed |
| Qualifying a new contract manufacturer and commencing volume production can be expensive and time consuming |
| If we are required to change or choose to change contract manufacturers, we may lose significant revenue and seriously damage our customer relationships |
| Failure to manage expansion effectively could seriously harm our business, financial condition and prospects |
| Our ability to successfully implement our business plan, develop and offer products, and manage expansion in a rapidly evolving market requires a comprehensive and effective planning and management process |
| We continue to increase the scope of our operations domestically and internationally |
| In addition, in September 2003, we acquired Sanera and Nishan and in June 2005, we acquired CNT, which significantly increased the size of our operations |
| Our growth in business and relationships with customers and other third parties has placed, and will continue to place, a significant strain on management systems, resources, intercompany communication and coordination |
| As we grow, our failure to maintain and to continue to improve upon our operational, managerial and financial controls, reporting systems, processes and procedures, and/or our failure to continue to expand, train, and manage our work force worldwide, could seriously harm our business and financial results |
| If we fail to successfully develop the McDATA brand, our revenue may not grow |
| Our name is not widely recognized as a brand in the marketplace given our historical indirect sales model |
| We believe that establishing and maintaining the McDATA brand is a critical component in maintaining and developing strategic OEM, reseller and systems integrator relationships, and the importance of brand recognition will increase as the number of vendors of competitive products increases |
| Our failure to successfully develop our brand may prevent us from expanding our business and growing our revenue |
| Similarly, if we incur excessive expenses in an attempt to promote and maintain the McDATA brand, our business, financial condition and results of operations could be seriously harmed |
| 20 ______________________________________________________________________ [45]Table of Contents Undetected software or hardware defects in our products could result in loss of or delay in market acceptance of our products and could increase our costs or reduce our revenue |
| Our products may contain undetected software or hardware errors when first introduced or when new versions are released |
| Our products are complex, and we have from time to time detected errors in existing products |
| In addition, our products are combined with products from other vendors |
| As a result, should problems occur, it might be difficult to identify the source of the problem |
| These errors could result in a loss of or delay in market acceptance of our products, cause delays in delivering our products or meeting customer demands and would increase our costs, reduce our revenue and cause significant customer relations problems |
| Errors could also result in the need for us to upgrade existing products at customer locations, which would increase our costs or cause significant customer relations problems |
| We have an uneven sales pattern |
| Our quarterly operating results may vary due to the following factors: • the size, timing, terms and fluctuations of customer orders, which are often grouped toward the end of a calendar quarter, particularly large orders from EMC, IBM or HDS; • pricing discussions late in a quarter and a limited capability to ramp shipments near the end of that quarter; • sales mix among our storage network products and services; • fluctuations in our direct sales to customers; • our ability to attain and maintain market acceptance of our existing product and new products; • seasonal fluctuations in customer buying patterns; • the timing of the introduction of, or enhancement to, products by us, our significant OEM or reseller customers or our competitors (eg, transition to higher speed, higher port density and multi-protocol products); • our ability to obtain sufficient supplies of third party products or single- or limited-source components for our own products; and • increased operating expenses, particularly in connection with our strategies to increase customer touch and purchase preference for our products or to invest in research and development |
| Our uneven sales pattern makes it difficult for our management to predict near-term demand and adjust manufacturing capacity |
| Accordingly, if orders for our products vary substantially from the predicted demand, our ability to assemble, test and ship orders received in the last weeks and days of each quarter may be limited, which could seriously harm quarterly revenue or earnings |
| Moreover, an unexpected decline in revenue without a corresponding and timely reduction in expenses could intensify the impact of these factors on our business, financial condition and results of operations |
| The sales cycle for our products is long, and we may incur substantial non-recoverable expenses and devote significant resources to prospects that do not produce revenues in the foreseeable future or at all |
| Our OEMs, reseller and systems integrator customers typically conduct significant evaluation, testing, implementation and quality acceptance procedures before they begin to market and sell new solutions that include our products |
| This evaluation process is lengthy and may extend up to one year or more |
| This process is complex and may require significant sales, marketing and management efforts on our part |
| This process becomes more complex as we simultaneously qualify our products with multiple customers |
| As a result, we may expend significant resources to develop customer relationships before we recognize revenue, if any, from these relationships |
| Products that are not qualified by storage and system OEMs and resellers may not gain market acceptance |
| 21 ______________________________________________________________________ [46]Table of Contents We may engage in future acquisitions that dilute our stockholders’ ownership and cause us to use cash, incur debt or assume contingent liabilities |
| As part of our strategy, from time to time we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities |
| We may buy businesses, products or technologies in the future |
| In the event of any future purchases, we could: • issue stock that would dilute our current stockholders’ percentage ownership; • use cash, which may result in a reduction of our liquidity; • incur debt; or • assume liabilities |
| These purchases also involve numerous risks, including: • problems combining and integrating the purchased operations, technologies, personnel and products; • unanticipated costs; • diversion of management’s attention from our core business; • adverse effects on existing business relationships with suppliers and customers; • risks associated with entering markets in which we have no or limited prior experience; and • potential loss of key employees of acquired organizations |
| We may not be able to successfully integrate any businesses, products, technologies or personnel that we might acquire in the future |
| In addition, acquisitions of companies could result in one-time charges related to acquisition costs, severance costs, employee retention costs and in-process research and development |
| We may require, or could elect, to seek additional funding |
| Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support development of new products and expansion of sales and marketing, the timing of new product introductions and enhancements to existing products, any acquisitions of businesses, and market acceptance of our products |
| With changes in operating and industry expectations, we could require, or could elect, to seek additional funding including accessing the equity and debt markets |
| Moreover, we may have difficulty obtaining additional financing and our ability to obtain financing will be dependent on our operating performance |
| McDATA has guaranteed the payment of principal and interest on approximately dlra124dtta4 million principal amount of CNT’s 3dtta00 % convertible subordinated notes due February 2007 |
| Unless the price of our common stock increases significantly so that the holders of the convertible notes find it economically advantageous to exercise the conversion feature and receive common stock in lieu of a cash payment of the principal amount and any accrued interest, we may have to repay the debt in cash |
| At present, we have sufficient resources to satisfy these obligations as they mature |
| However, in the future, we may lack the resources to satisfy these obligations as they mature, and there can be no assurance that we will possess the resources or be able to secure the resources to satisfy these obligations on commercially reasonable terms, if at all |
| Any failure by us to satisfy these obligations when due would have a material adverse effect on our business |
| If we become subject to unfair hiring claims, we could incur substantial costs in defending ourselves |
| Companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices or that employees have misappropriated confidential information or trade secrets |
| Because we often seek to hire individuals with relevant experience in our industry, we may be subject to claims of this kind or other claims relating to our employees in the future |
| We could incur substantial costs in defending ourselves or our employees against such claims, regardless of their merits |
| In addition, defending ourselves or our employees from such claims could divert the attention of our management away from our operations |
| 22 ______________________________________________________________________ [47]Table of Contents Our products must comply with governmental regulation |
| In the United States, our products comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories |
| Internationally, products that we develop will be required to comply with standards established by authorities in various countries |
| In the last several years, the European Union (EU) has adopted a number of initiatives (WEEE, RoHS, etc) related to equipment emissions, electronic waste, privacy of information and expanded consumer warranties |
| Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could seriously harm our business |
| Providing telecommunications services to our customers subjects us to new risks |
| Our provision of telecommunications and bandwidth for data transmission (not voice) to our customers subjects us to various risks |
| First, telecommunications networks and circuits can fail which would make it difficult for us to attract and retain clients |
| In addition, we may experience difficulty in obtaining or developing circuits to provide to our clients |
| The telecommunications industry is heavily regulated by state and federal governments, and changes in these regulations could make it difficult for us to compete |
| In addition, the regulatory framework under which we operate and new regulatory requirements or new interpretations of existing regulatory requirements could require substantial time and resources for compliance, which could make it difficult for us to operate our business |
| Such regulation could also impede our ability to enter into change-of-control transactions |
| Provisions in our charter documents, our rights agreement and Delaware law could prevent or delay a change in control of McDATA and may reduce the market price of our common stock |
| Provisions of our certificate of incorporation, by-laws and rights agreement may discourage, delay or prevent a merger, acquisition or other business combination that a stockholder may consider favorable |
| These provisions include: • authorizing the issuance of preferred stock without stockholder approval; • providing for a classified board of directors with staggered three year terms; • limiting the persons who may call special meetings of stockholders; • requiring super-majority voting for stockholder action by written consent; • establishing advance notice requirements for nominations for election to the board of directors and for proposing other matters that can be acted on by stockholders at stockholder meetings; • prohibiting cumulative voting for the election of directors; • requiring super-majority voting to effect certain amendments to our certificate of incorporation and by-laws; and • requiring parties to request board approval prior to acquiring 15prca or more of the voting power of our common stock to avoid economic and voting dilution of their stock holdings |
| We are incorporated in Delaware and certain provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline |
| The market price of our common stock has been volatile |
| Because we are a technology company, the market price of our common stock is usually subject to similar volatility and fluctuations that occur in our sector and to our competitors |
| This volatility is often unrelated or disproportionate to the operating performance of our company and, as a result, the price of our common stock could fall regardless of our performance |
| 23 ______________________________________________________________________ [48]Table of Contents Risks Related to Our Relationship with EMC We have entered into agreements with EMC that, due to our prior parent-subsidiary relationship, may contain terms less beneficial to us than if they had been negotiated with unaffiliated third parties |
| In October 1997, and in connection with the reorganization of our business, we entered into certain agreements with EMC relating to our business relationship with EMC In addition, we have entered into agreements with EMC relating to our relationship with EMC after the completion of our initial public offering in August 2000 and the distribution by EMC of our Class A common stock in February 2001 |
| We have also entered into an OEM Purchase and License Agreement with EMC that governs EMC’s purchases of our products and grants EMC rights to use, support and distribute software for use in connection with these products |
| The agreement does not provide for the purchase of a guaranteed minimum amount of product |
| These agreements were negotiated and made in the context of our prior parent-subsidiary relationship |
| As a result, some of these agreements may have terms and conditions, including the terms of pricing, that are less beneficial to us than agreements negotiated with unaffiliated third parties |
| Sales and services revenue pursuant to these agreements with EMC represented approximately 31prca of our revenue for the twelve months ended January 31, 2006 |
| In addition, in some instances, our ability to terminate these agreements is limited, which may prevent us from being able to negotiate more favorable terms with EMC or from entering into similar agreements with third parties |
| Provisions of our agreements with EMC relating to our relationship with EMC after the distribution of our Class A common stock to EMC’s stockholders may prevent a change in control of our company |
| Under the terms of the May 2000 Master Confidential Disclosure and License Agreement between EMC and us, EMC has granted us a license to then existing EMC patents and we granted to EMC a license to then existing McDATA patents |
| If we are acquired, our acquirer will retain this license as long as our acquirer grants to EMC a license under all of the acquirer’s patents for all products licensed under the agreement under the same terms as the license we have granted to EMC under the agreement |
| The potential loss of the license from EMC under this agreement could decrease our attractiveness as an acquisition target |