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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
________________________
TRICORD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 NORTHWEST BOULEVARD, PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 557-9005
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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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 the 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 February 28, 1997, 13,407,130 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
registrant as of that date (based on the closing price as reported by the Nasdaq
National Market System), excluding shares beneficially owned by directors and
executive officers, was approximately $9,897,319.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December
31, 1996 (the "Annual Report") are incorporated by reference into Parts II
and IV to the extent specific pages are referred to herein. Portions of the
proxy statement for the Annual Meeting of Stockholders to be held May 21,
1997 ("the Proxy Statement") are incorporated by reference into Part III, to
the extent specific captions are referred to herein.
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PART I
ITEM 1. BUSINESS
GENERAL
Historically, Tricord Systems, Inc. (the "Company") has been in the business of
designing, manufacturing, marketing and supporting enterprise servers for use in
mission critical applications running on industry standard network operating
systems, principally Novell NetWare and Microsoft Windows NT*. The Company's
products, which are sold under the name PowerFrame, are characterized by an open
system design with emphasis on system management, fault tolerance, high
performance, scalabilty and systems availability. PowerFrame enterprise servers
are designed to operate efficiently as servers for personal computer ("PC")
networks ranging from simple local area networks ("LANs") to large and complex
networks running mission critical applications and communications functions.
The Company's products are sold primarily to value added resellers ("VARs") and
system integrators, original equipment manufacturers ("OEMs") and international
distributors.
In recent years, the number, size and complexity of LANs have increased
dramatically. More sophisticated tasks, such as document and image processing
and multimedia imaging, that historically have been run on mainframes or
minicomputers are increasingly being implemented on LANs, and a number of
enterprises are also implementing mission critical applications on networks. As
organizations migrate toward enterprise networking, servers that perform more
complex and mission critical tasks are increasingly required, and these
"enterprise servers" need to offer the availability, scalability, upgradability
and level of support that are characteristic of mainframes and minicomputers.
The costs associated with developing the enterprise servers required to meet the
needs of these sophisticated networks and the costs of developing the
increasingly sophisticated distribution channels needed have, in the face of
increasing competition, become substantial. In September 1996, the Company
engaged Smith Barney Inc. to assist it in exploring various alternatives,
including the possibility of finding a strategic distribution partner or other
strategic alliance to help with the costs of server and channel development.
This effort was not successful. In February 1997, the Company determined that
the costs associated with bringing its next generation Pentium Pro server
product through final development to market and developing the appropriate
distribution channels exceeded the available resources of the Company.
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* "Tricord," "PowerFrame," "PowerBus," "AMS" and "IIP" are trademarks of the
Company. This Annual Report on Form 10-K also includes trademarks of
companies other than Tricord Systems, Inc.
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As a result, the Company announced in February 1997 that it had decided to focus
its resources on developing and marketing distributed data access and management
products for the Windows NT environment that will incorporate the Company's
distributed file system software technology and related input/output ("I/O")
technology. I/O technology is a core competency of the Company and was one of
the key differentiators of its enterprise server product line. Accordingly,
specialization in distributed data access and management products represents a
natural evolution for the Company and combines the Company's expertise in I/O
software technology with the distributed file system software technology that
the Company has been developing since its acquisition from Reliable Distributed
Information Corporation ("RDI") in August 1996.
This evolution in the Company's strategy necessitated a reduction in the
Company's workforce, affecting approximately 90 employees. The Company will
continue to manufacture and sell its existing Pentium-based enterprise servers
through 1997, and will honor warranty, service and support agreements. The
revenues associated with the server business on an on-going basis, however, are
expected to decline substantially and are anticipated to consist mainly of
service, spare parts and upgrades.
SERVER PRODUCTS
The current PowerFrame enterprise server product line, which the Company will
continue to manufacture and sell through 1997, consists of the PowerFrame ES/166
and ES/200. Each server offers a single enterprise server platform solution for
high growth environments with large storage capacity requirements. The servers
feature the Peripheral Component Interconnect ("PCI") Bridge Subsystem for high
performance network serving and symmetric multiprocessing. The standard base
configuration is an Intel Pentium 166 Mhz or 200 Mhz processor, a main memory
subsystem, an Intel 486-based Intelligent Storage Subsystem ("ISS"), an
Intelligent Management Subsystem and a Power and Cooling Subsystem. The servers
can be scaled up to eight processors, six four-channel ISS, up to three
gigabytes of main memory, and up to 201 Small Computer System Interface ("SCSI")
peripherals.
The Company also markets hardware and software supplied to it by third-party
suppliers to facilitate or accommodate the expansion of installed PowerFrame
systems. Available hardware includes disk drives with capacities ranging from
2.1 gigabytes to 9.0 gigabytes, digital linear tape, 8mm tape and digital audio
tape drives for backup, video monitors and various popular network interface
cards. The Company also provides Novell NetWare and Microsoft Windows NT
operating system software.
DISTRIBUTED DATA ACCESS AND MANAGEMENT PRODUCTS
BACKGROUND AND MARKETS.
Data storage is a critical part of the computing infrastructure for most
businesses. The Company believes that two major trends in data access and
management will necessitate
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dramatic changes in data storage architecture. The first is increasing user
demand for large amounts of data and the increasing complexity of
applications used to manipulate that data. The second is the advent of
clustered computing at the server, which makes possible storage architectures
that enable access to a virtually infinite amount of storage with increased
reliability and performance. Reflecting these trends, storage today accounts
for approximately 35 percent of total systems costs, compared with 20 to 30
percent a few years ago.
Storage needs are also increasingly being provided by third party storage
devices. Where at one time systems vendors controlled approximately 95 percent
of storage revenues, that position is rapidly eroding in favor of third party
storage devices. According to International Data Corporation ("IDC"), in 1996
approximately 60 percent of all storage revenues resulted from externally
attached disk arrays and this percentage is expected to reach approximately 70
percent by the year 2000. This growth is anticipated to occur largely in the
Windows NT operating system environment, which IDC predicts will experience
significant growth over the next four years.
A 1996 IDC study found that approximately 35 percent of mid-range sites have or
planned to purchase centralized storage. IDC now recommends that any site
having 1,000 or more servers purchase storage apart from server purchases.
There are four main reasons for this recommendation:
- Most attached storage products can be accessed from multiple hosts,
allowing users to share a common storage pool across servers having
similar or different operating system environments.
- Instead of adding storage to PCs and servers, users can place storage
on a centralized storage array which, because such arrays are
optimized for storage, provides higher performance.
- More disk and physical units designed for maximum fault resilience
provides better reliability.
- Attached storage has lower life cycle costs due to lower maintenance
and support costs, which can be as much as five times the initial
purchase cost.
TECHNOLOGY.
In a true distributed file system, all computers see the exact same image of all
of the files that make up the file system, regardless of the number of disks
used. All files can be accessed directly from any computer. Access requests
need not go through a controlling server - access control resides in the storage
device. A true distributed file system will enable data-intensive applications,
such as web servers, to support significantly more users than they do today and
will reduce the cost of shared storage for clusters of workstations and
application servers. Additional storage can be added to a computing environment
with minimal reconfiguration requirements, because server functions, such
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as an operating system, and other physical requirements, such as cooling
fans, are not needed on the storage nodes.
Today, the interface between the Windows NT file system and storage devices is a
disk block interface. Block I/O breaks files into many pieces of data, which
are transferred between a server and a storage device. In the file system
architecture being developed by the Company, the file system within the
operating system will issue file requests (requests for an entire file) rather
than block requests to a file intelligent controller. This file intelligent
controller will consist of a circuit board with a PCI compatible connector that
can plug into any PCI compatible server running Windows NT and will have an
embedded processor that runs the Company's distributed file system software.
The file intelligent controller then interfaces with "file aware" storage nodes,
which contain network interconnections and can make intelligent decisions
regarding how and where the underlying block I/O should be performed.
Under this approach, the file system functions are split between the host and
file aware storage nodes. This type of file intelligent I/O subsystem relieves
host CPUs of I/O processing, which allows the host to perform at optimal levels,
and handles much of the data congestion by balancing the processing load between
the host CPU and the I/O subsystem.
PRODUCTS UNDER DEVELOPMENT.
The Company currently intends to develop two products using this technology.
The first product being developed is a Windows NT File Accelerator. This
product will consist of a PCI adapter and high performance storage controller
combined with the Company's file system software. It will also be available
with a SCSI interface that can be used to attach a disk subsystem directly to
the controller.
The File Accelerator will be designed to enhance system performance by
implementing Windows NT file requests for data as file requests rather than as
block requests. When the Windows NT file system requires data that is not
stored in its cache, it will turn the request over to a Company-developed
Windows NT device driver that submits file-level requests to storage devices via
file intelligent controllers. Data can be stored on any disk on any storage
node attached to the server, as disk space is shared using the PCI bus.
Operating at the file level requires fewer disk accesses than would be the case
for a block I/O interface and enables redundant array of inexpensive disk
("RAID") technology to be implemented across controllers and disks, providing
for greater reliability.
The second product being developed is the Network Attached Storage Software,
which consists of a high performance controller, which the Company intends to
purchase from a third party, and the Company's file system software located on
remote storage devices that are interconnected to multiple servers and storage
devices via a system area network ("SAN"). This product extends the advantages
of the Company's file system software by providing a single system image over
multiple hosts and storage devices.
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In the Company's implementation of this product, a file system would be
distributed across multiple file aware storage units. File intelligent I/O
controllers would be connected by a network - preferably a dedicated SAN - to
the file aware network storage devices. These file intelligent controllers
would use their knowledge of how a file is distributed to send an access request
to the particular storage unit that has the data needed to process the request.
Performing file system actions in the storage nodes moves the processing load
for file access out of the host processor, which both decreases response time
for storage access and frees host CPU cycles for application processing. In
many cases, the required data processing could be done on several storage
devices in parallel, expediting further the response time. The Network Attached
Storage Software could be connected directly to an open systems network with an
SMB, NFS or HTTP interface (or combination of these) to provide file and web
services to any machine on the network.
Because disk operations take place at the file level, reliability can also be
implemented at the file level. RAID operations could then be implemented across
a logical unit rather than a single physical unit by striping across system
boundaries. This would result in a computing environment that is domain fault
tolerant in the sense that there would be no single point of failure across
hosts and storage nodes on the SAN.
The Network Attached Storage Software is being designed to support up to 70
gigabytes of disk capacity on a single controller. Expanding storage means
plugging in another disk or storage node with the Network Attached Storage
Software. The new unit's storage capacity would transparently and automatically
be merged in with the storage capacity of the existing storage nodes with no
configuration, backup or recovery needed. Since the underlying file system is
distributed, the users on the network are presented with a single storage pool
regardless of the number of storage nodes that are deployed.
The Company's products are being designed to be differentiated from other
attached storage solutions in the following ways:
- HIGH FUNCTION - To perform file level operations and provide
distributed file system functionality across machines.
- MULTI-HOST - To be enabled for both SANs and LANs and to be accessed
by all machines on those networks.
- LOW PRICE/HIGH PERFORMANCE RATIO - To provide high performance access
to storage, while having a low price due to a storage architecture that
requires no general purpose computing.
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- HIGHLY SCALEABLE - To provide storage that can be accessed by any host
and that is limited by network bandwidth rather than by the size of a
storage unit.
RESEARCH AND DEVELOPMENT
The Company performs all of its research and development activities at its
headquarters in Plymouth, Minnesota. During 1996, 1995 and 1994, research and
development expenses totaled approximately $7,264,000, $8,621,000 and
$7,291,000, respectively, and related primarily to the design and development of
the Company's enterprise servers. Of the research and development expenditures
incurred during 1996, approximately $1,500,000 related to the I/O software
technology and the distributed file system software technology that will be
incorporated into the Company's distributed data access and management products.
Given the Company's decision to discontinue research and development efforts
with respect to enterprise servers, it is anticipated that future research and
development expenditures will decrease significantly, with approximately 20
employees engaged in research and development activities.
SALES AND DISTRIBUTION
SERVER PRODUCTS.
The Company distributes its enterprise servers worldwide through a select group
of network-oriented resellers, including VARs and system integrators, OEMs and
international distributors. These resellers provide system integration and
software support for customers with needs varying from those of a small
department-wide LAN to those of an enterprise-wide networking solution.
The Company assists its resellers in providing support in a variety of ways. In
the United States, the Company's resellers are supported by regional sales
offices located throughout the country. These sales offices are also
responsible for recruiting and training resellers and assisting in the sales
process. The Company provides additional support at its headquarters consisting
of training, marketing and technical support. Because of the Company's decision
in February 1997 to discontinue the development and marketing of enterprise
servers, these regional sales offices will be closed during the second quarter
of 1997, and all support will be provided by the Company's headquarters in
Minneapolis.
Internationally, the Company had subsidiaries in Canada, France, Germany, Japan,
The Netherlands and The United Kingdom that were used to distribute, support and
market the Company's PowerFrame enterprise servers in these countries and other
countries through resellers with characteristics similar to its domestic
resellers. In the third quarter of 1996, the Company decided to close its
subsidiaries in Japan and Mexico and to consolidate its European sales offices.
Because of the Company's decision in February 1997 to discontinue the
development and marketing of enterprise servers, it is anticipated that the
Company will close and consolidate its remaining subsidiaries and sales offices
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in 1997. Support will be provided from the Company's headquarters.
International sales for 1996, 1995 and 1994, including export sales from the
United States to unaffiliated customers, were approximately 27.8%, 27.2% and
24.7% of revenues, respectively. OEM sales to Memorex Telex Corporation
("Memorex Telex") and to Sequent Computer Systems, Inc. ("Sequent") in 1996,
1995 and 1994 were all recorded as domestic sales for reporting purposes,
although some of these systems were installed internationally. Memorex Telex
filed for bankruptcy under Chapter 11 in October 1996.
The majority of the Company's enterprise servers sold through resellers are
warranted against defects in materials and workmanship for three years (five
years with respect to the disk drives). Enterprise servers sold under the
Company's OEM agreement with Toshiba are warranted for a period of 90 days from
date of installation.
DISTRIBUTED DATA ACCESS AND MANAGEMENT PRODUCTS.
The Company currently intends to market its File Accelerator through OEMs.
Initially, these products would be sold as a software license with per unit
royalties from OEMs that wish to market the product as either a stand-alone
product or as part of server or storage products. The software would include
file system software and a Windows NT device driver that would interface with
the file system running in the Windows NT operating system. These OEMs would
incorporate this software into adapters or storage devices and sell a
hardware/software storage solution to their customers. The Company is also
exploring the potential for engaging manufacturing partners that would build
controllers for OEMs that do not wish to manufacture the product.
The Company currently intends to market its Network Attached Storage Software
with one or more OEM partners, many of whom also represent potential competitors
for the Company's products. The most likely OEM partners would be software
storage suppliers, computer system vendors, storage node vendors, disk drive
manufacturers and disk controller vendors. Pursuant to these arrangements, the
Company would license software components and/or its controller design. If the
Company's products and its approach to distributed file systems gain market
acceptance, the Company believes that its products could eventually be marketed
using existing PC distribution networks, such as VAR channels.
COMPETITION
SERVER PRODUCTS.
In the enterprise server business, the Company faces substantial competition
from the manufacturers of several different types of products used as network
servers. With respect to more fully configured enterprise servers for larger
and more complex LANs and more sophisticated or mission critical applications,
the Company competes indirectly with manufacturers of mainframes and
minicomputers. In addition, certain manufacturers promote their mainframes and
minicomputers as being appropriate for use as network
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servers. Competitors offering products in this market include International
Business Machines Corporation, Digital Equipment Corporation, Hewlett-Packard
Company and Sequent. The Company also competes in the market for complex LANs
with other manufacturers of enterprise servers, including NetFRAME Systems
Incorporated and Auspex Systems, Inc.
DISTRIBUTED DATA ACCESS AND MANAGEMENT PRODUCTS.
With respect to the distributed data access and management products that the
Company is currently developing, competitors include many of the same types of
companies that represent potential OEM partners. In particular, potential
competitors include current disk controller vendors such as Adaptec, Inc., Mylex
Corporation, and ECCS, Inc. and network attached storage vendors such as Auspex
Systems, Inc., Network Appliance, Inc. and EMC Corporation. The Company's
ability to introduce and market its products could be adversely affected if one
or more of these competitors elects to develop and market their own file
intelligent I/O software or network attached storage controllers. Most of the
Company's competitors are more established, benefit from greater market
recognition and have greater financial, technological, production and marketing
resources than the Company. Attaining a competitive position will require
timely development of its products and continued investment by the Company in
research and development and marketing. There can be no assurance that the
Company will have sufficient resources to make such investments or that the
Company will be able to make the necessary technological advances.
MANUFACTURING
SERVER PRODUCTS.
The Company subcontracts the manufacture, assembly and test of printed circuit
boards, and the metal fabrication of cabinets for its enterprise servers, which
will be discontinued during 1997. The Company has established a comprehensive
testing and qualification program with the goal of ensuring that all
subassemblies meet the Company's specifications and standards before final
assembly and testing.
Substantially all of the steps in the manufacturing process other than final
assembly and test are performed by the Company's subcontractors before receipt
of a unit by the Company. Diagnostic tests, final assembly, burn-in, final
configuration and final quality assurance tests currently are completed at the
Company's manufacturing facility. The Company also provides and installs
software if requested by its customers. The Company has implemented quality
control policies that are reviewed and accepted by the Company's major suppliers
and subcontractors. The Company believes that this procedure helps ensure a
high-quality product. In October 1994, the Company became ISO 9001 certified
and during 1996 had two standard compliance audits to maintain ISO 9001
certification.
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The Company currently uses a subcontractor, SCI Corporation ("SCI"), to
manufacture, assemble and test printed circuit boards for its enterprise
servers. The Company also uses two metal fabrication subcontractors to
manufacture the cabinets. These manufacturing arrangements are conducted on a
purchase order basis. SCI purchases all parts and components necessary for the
manufacture of the printed circuit boards and delivers complete tested boards to
the Company. The metal fabrication subcontractors purchase all parts necessary
for the manufacture of the metal cabinets and deliver the completed cabinets to
the Company. The Company then performs final assembly, configuration and test
before shipment to resellers and OEMs.
DISTRIBUTED DATA ACCESS AND MANAGEMENT PRODUCTS.
The Company currently anticipates that it will license the manufacturing of its
distributed data access and management products to OEMs or use a subcontractor
to manufacture the distributed data access and management products for sale to
those OEMs who do not want to manufacture the Company's products under a
manufacturing license agreement.
BACKLOG
The Company's backlog as of December 31, 1996 and 1995 was approximately
$1,885,000 and $9,341,000, respectively. Backlog includes those units for which
a customer has specified delivery within six months. Because of the Company's
decision to discontinue the development and marketing of enterprise servers, it
is anticipated that backlog will decrease significantly in 1997.
INTELLECTUAL PROPERTY
Although the Company does not currently hold any patents, it has several patent
applications pending with respect to its enterprise server products and I/O
technology. The Company also relies on a combination of trade secret and other
intellectual property law, nondisclosure agreements and other protective
measures to establish and protect its proprietary rights in its products. The
Company believes that, because of the rapid pace of technological change in the
networking industry, legal protection of its proprietary information is less
significant to the Company's competitive position than factors such as the
Company's strategy; the knowledge, ability and experience of the Company's
personnel; new product development; market recognition; and ongoing product
maintenance and support. Without legal protection, however, it may be possible
for unauthorized third parties to copy aspects of the Company's products or
technology or to obtain and use information that the Company regards as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights in products and technology to the same extent as do the laws
of the United States. Although the Company continues to implement protective
measures and intends to defend its proprietary rights vigorously, there can be
no assurance that these efforts will be successful, and the failure or inability
of the Company to effectively protect its proprietary information could have an
adverse effect on the Company's business.
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There can also be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Although no litigation
related to any such matter is currently pending against the Company, there can
be no assurance that none will be initiated, that the Company would prevail in
any such litigation seeking damages or an injunction against the sale of the
Company's products, or that the Company would be able to obtain any necessary
licenses on reasonable terms or at all. The Company is currently in discussions
with a third party concerning the potential infringement by the Company of such
third party's patents. The Company believes, however, that the results of these
discussions will not have a material impact on its results of operations.
TEAM MEMBERS
As of December 31, 1996, the Company had 156 full-time team members, including
64 in marketing, sales and support services, 36 in research and development, 29
in manufacturing and operations, and 27 in corporate operations.
On February 12, 1997, the Company announced that its decision to discontinue
the development and marketing of enterprise servers would result in
substantial lay-offs. The Company anticipates that these lay-offs will
effect approximately 90 employees. The Company's future success depends to a
significant extent upon the performance of its executive officers and other
key personnel. The future success of the Company will also depend in large
part upon its ability to continue to attract and retain highly skilled and
qualified personnel. None of the Company's team members are represented by a
labor union. The Company has experienced no work stoppages and believes that
its relations with its team members are good.
CERTAIN IMPORTANT FACTORS
In addition to the factors identified above, set forth below are several
important factors that could cause the Company's actual results to materially
differ from those anticipated by the Company or which are reflected in any
forward-looking statements of the Company. For this purpose, any statements
that are not statements of historical fact may be deemed to be forward-looking
statements. In addition to statements specifically identified as such, words
such as "may," "will," "expect," "believe," "anticipate," "estimate," or
"continue," or comparable terminology, are intended to identify forward-looking
statements.
- - The market for distributed file system products for the Windows NT
environment is new and developing and currently comprises only a small
portion of the storage market. The Company believes that its future success
will depend upon the continued growth and acceptance of the Windows NT
operating system and the growth in demand for attached storage. In addition
the Company's success is dependent upon its ability to develop, test and
release products for this market on a timely basis.
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- - The market for storage products currently is characterized by rapid
technological change and evolving industry standards and is expected to be
highly competitive with respect to timing of product innovation. The
introduction of products embodying new technology and the emergence of new
industry standards can render products, either existing or under
development, obsolete and unmarketable. The Company's success is dependent
in part upon its ability to anticipate changes in technology and industry
standards and to successfully develop and introduce new and enhanced
products on a timely basis. If the Company is unable for technological or
other reasons to develop products in a timely manner in response to changes
in the industry, or if products or product enhancements that the Company
develops do not achieve market acceptance, the Company's business will be
materially and adversely affected.
- - The Company's success is dependent on its ability to generate adequate cash
to fund operations in 1997, which in turn will depend on its ability to sell
its remaining enterprise server inventory and control its operating
expenses. The Company's cash requirements could also be affected adversely
to the extent that the Company is required to return payments made by
Memorex Telex to the Company prior to the Chapter 11 bankruptcy filing of
Memorex Telex.
- - The Company currently intends to market its distributed access and
management products through one or more OEM relationships, and the failure
to establish such relationships on acceptable terms could adversely
affect the Company's ability to introduce and market such products
successfully.
- - Many of the Company's competitors in the market for Windows NT storage
products are the same companies that represent potential OEM partners.
The Company's ability to introduce and market its products could be
adversely affected if one or more of these competitors elects to develop
and market their own products.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing and research and
development activities are performed in its 167,000 square foot headquarters
facility in Plymouth, Minnesota. The Company first occupied this facility in
December 1994. The lease for this facility expires in December 2004 with an
option to renew for five years. Because of the Company's decision in February
1997 to discontinue the development and marketing of enterprise servers, the
Company is currently working with its landlord to sub-lease all or a portion of
this facility. The Company expects that its future facility needs will be
approximately 25,000 square feet.
In addition to its Plymouth, Minnesota facilities, the Company has 13 offices in
key U.S. metropolitan areas and offices in Japan and The United Kingdom, which
provide technical support to its resellers. The U.S. offices are located in
California, Colorado, Florida, Georgia, Illinois, Massachusetts, Michigan,
Missouri, Pennsylvania, Virginia and Texas. Lease commitments for these U.S.
offices are short-term (six to twelve months). By the end of the second quarter
of 1997, the Company expects to have terminated all of these domestic and
international facility leases.
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The Company's subsidiary, Tricord Systems Europe PLC, leases office space in
Reading, England. The lease for this 1,200 square foot facility expires in
December 1998.
ITEM 3. LEGAL PROCEEDINGS
In July 1994, the Company received notice that class action complaints had been
filed against the Company and certain of its directors and officers in U. S.
District Court in Minnesota. The complaints were filed following the Company's
announcement that second quarter 1994 results would be below analysts'
expectations. The complaints were consolidated into one class action lawsuit
which alleged that the Company and the individual defendants violated federal
securities statutes by fraudulently inflating the price of the Company's stock.
The Company does maintain director and officer insurance coverage for claims of
this nature. The Company included a $250,000, or $0.02 per share, charge in the
fourth quarter of 1995 as the Company's estimate of its share of the cost for
the eventual resolution or settlement of the outstanding class action matter.
In July 1996, one of the insurance carriers assumed complete defense of this
matter for the Company and the individual defendants and agreed to hold all
defendants harmless against any further liability with respect to the matter in
exchange for the Company's deposit of $400,000 into an escrow account and making
available warrants to purchase 100,000 shares of the Company's common stock at
an exercise price of $6.00 per share. Included in the 1996 loss is a $400,000,
or $0.03 per share charge, consisting of the additional $150,000 charge and a
$250,000 charge relating to the estimated fair value of the warrants.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of February 28, 1997 are
as follows:
NAME AGE POSITION
---- --- --------
John J. Mitcham 55 President and Chief Executive Officer
and Director
Gregory T. Barnum 42 Senior Vice President of Finance and
Administration, Chief Financial Officer and
Secretary
Dr. Charles C. Devor 48 Vice President, General Manager, Server Unit
12
<PAGE>
David S. Huyink 48 Vice President, Chief Quality Officer
Joan M. Wrabetz 36 Vice President, General Manager, Storage
Products
Mr. Mitcham has served as President and Chief Executive Officer and as a
director of the Company since joining the Company in May 1995. From 1989 to
1995, Mr. Mitcham was President and Chief Executive Officer of AT&T Paradyne
Corporation. Prior to 1989, Mr. Mitcham was President of Paradyne Corporation
and served in executive positions with IBM Corporation, Rolm Corporation,
Memorex Telex Corporation and Texas Instruments Corporation.
Mr. Barnum has served as the Company's Senior Vice President of Finance and
Administration, Chief Financial Officer and Secretary since September 1992.
From July 1989 to September 1992, Mr. Barnum served as Executive Vice President
of Finance, Chief Financial Officer, Secretary and Treasurer of Cray Computer
Corporation, a supercomputer manufacturer.
Mr. Devor has served as the Company's Vice President, General Manager, Server
Unit, since January 1997 and as Vice President of Systems Development from July
1995 to January 1997. Since September 1993, Mr. Devor had served as President
of The Active Mind, a retail business that specializes in computer hardware and
software classes and personal electronics. From September 1991 to September
1993, Mr. Devor served as Vice President of Enterprise Re-engineering Business
Unit at Integris Systems Integration. From October 1978 to September 1991, Mr.
Devor was employed by Bull HN Information Services, Inc. in various management
positions.
Mr. Huyink has served as the Company's Vice President, Chief Quality Officer
since October 1995. From March 1993 to October 1995, Mr. Huyink served as
Quality System Director of Network Systems Corporation, a computer networking
company. From June 1992 to March 1993, Mr. Huyink was employed by AT&T Global
Information Solutions ("AT&T GIS") as Quality Assurance Director. From 1983 to
June 1992, Mr. Huyink was employed by AT&T GIS and NCR Corporation in various
quality-related management positions.
Ms. Wrabetz has served as the Company's Vice President, General Manager, Storage
Products, since January 1997, and as Vice President of Marketing from August
1996 to January 1997 and as Vice President, Business Development from December
1995 to August 1996. From January 1990 to December 1995, Ms. Wrabetz served as
President and Chief Executive Officer of Aggregate Computing, Inc., a software
development company.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
information under the caption "Investor Information" on page 35 of the Annual
Report. During the fourth quarter of 1996, there were no unregistered sales by
the Company of its equity securities.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to the
information under the caption "Historical Financial Summary" on page 7 of the
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information required by this Item is incorporated by reference to the
information under the caption "Management's Discussion and Analysis of Results
of Operations and Financial Condition" on pages 8 through 16 of the Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto and the report
of its independent accountants are incorporated by reference to pages 18 through
34 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
Information regarding the Company's executive officers is included in Part I
hereof under the caption "Item 4A. Executive Officers of the Company" and is
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) DOCUMENTS FILED WITH REPORT
1. Financial Statements
The following Financial Statements and Report of Independent
Accountants are incorporated by reference to pages 18 through 34 of
the Annual Report.
Report of Independent Accountants
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994.
Consolidated Balance Sheets - December 31, 1996 and 1995.
Consolidated Statements of Cash Flows - Years Ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following financial statement schedule and report of independent
accountants thereon should be read in conjunction with the
consolidated financial statements and the notes thereto referred to
above.
PAGE
-----
Report of Independent Accountants 19
Schedule II - Valuation and Qualifying Accounts 20
16
<PAGE>
3. Exhibits
The Exhibits to this Report are listed in the Exhibit Index on pages
22 to 24 below.
A copy of any of the exhibits will be furnished at a reasonable cost
to any shareholder of the Company, upon receipt from any such
shareholder of a written request for any such exhibit. Such request
should be sent to Tricord Systems, Inc., 2800 Northwest Blvd.,
Plymouth Minnesota 55441; Attention: Investor Relations.
The following is a list of each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this Annual
Report on Form 10-K pursuant to Item 14(c):
1. 1992 Stock Incentive Plan, as amended effective February 2,
1994. (c)
2. 1987 Omnibus Stock Option Plan. (a)
3. 1992 Non-Employee Director Stock Option Plan, as amended
effective October 26, 1995. (f)
4. Employment Agreement, dated October 19, 1993, between
the Company and James D. Edwards. (c)
5. 1994 Employee Stock Purchase Plan. (b)
6. 1995 Stock Incentive Plan. (d)
7. Employment Agreement, dated May 2, 1995, between the
Company and John J. Mitcham. (e)
8. Change in Control Agreements, dated September 13,
1996, between the Company and Certain Officers of the Company (g)
9. Severance Agreement, dated February 8, 1997, between the
Company and Gregory T. Barnum (g)
10. Severance Agreement, dated February 8, 1997, between the
Company and Charles C. Devor (g)
- ------------------------
(a) Incorporated by reference from the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-48733).
(b) Incorporated by reference from the exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-76532).
(c) Incorporated by reference from the exhibits to the Company's
Annual Report on Form 10-K For the Year Ended December
31, 1993.
(d) Incorporated by reference from the exhibits to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
(e) Incorporated by reference from the exhibits to the Company's
Quarterly Report on Form 10-Q For the Quarter Ended
17
<PAGE>
March 31, 1995 (File No. 0-21366).
(f) Incorporated by reference from the exhibits to the Company's
Annual Report on Form 10-K for the year ended December
31, 1995.
(g) Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1996.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Tricord Systems, Inc.
Our report on the consolidated financial statements of Tricord Systems, Inc. has
been incorporated by reference in this Form 10-K from page 18 of the 1996
Annual Report to Stockholders of Tricord Systems, Inc. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed in the index on page 16 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
As discussed in Note 2 to the consolidated financial statements, in February
1997, the Company announced a change in its future business focus.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 18, 1997
19
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
Balance at Additions Deductions Balance
Beginning of Charged to from at End of
Description Period Expense Allowance Period
- ----------- ------------ ----------- ---------- ---------
Year ended December 31, 1996
Allowance for doubtful accounts
(deducted from accounts
receivable) $ 1,576 2,028 (760)(1) 2,844
Inventory obsolescence
reserve (deducted from
inventory) 9,684 994 (3,348)(2) 7,330
Year ended December 31, 1995
Allowance for doubtful accounts
(deducted from accounts
receivable) 573 1,521(3) (518) 1,576
Inventory obsolescence reserve
(deducted from inventory) 900 15,942(4) (7,158) 9,684
Year ended December 31, 1994
Allowance for doubtful accounts
(deducted from accounts receivable) 472 382 (281) 573
Inventory obsolescence reserve
(deducted from inventory) 1,431 677 (1,208) 900
Notes:
(1) Includes a credit of $366 included in restructure and related charges
(credits).
(2) Includes a credit of $1,173 included in restructure and related charges
(credits).
(3) Includes a charge of $903 included in restructure and related charges
(4) Includes a charge of $14,488 included in restructure and related charges
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 28, 1997.
TRICORD SYSTEMS, INC.
By /S/ JOHN J. MITCHAM
---------------------------
John J. Mitcham
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on March 28, 1997.
SIGNATURES TITLE
---------- ------
/S/ John J. Mitcham President and Chief Executive Officer
- -------------------- (Principal Executive Officer) and Director
John J. Mitcham
Senior Vice President of Finance and
/S/ Gregory T. Barnum Administration, Chief Financial Officer and
- ---------------------
Gregory T. Barnum Secretary (Principal Financial Officer)
/S/ Marvin E. Dee Vice President of Finance and Treasurer
- --------------------- (Principal Accounting Officer)
Marvin E. Dee
/S/ Yuval Almog Chairman of the Board
- ---------------------
Yuval Almog
/S/ Jeffrey O. Henley Director
- ----------------------
Jeffrey O. Henley
/S/ Donald L. Lucas Director
- ----------------------
Donald L. Lucas
21
<PAGE>
TRICORD SYSTEMS, INC.
_____________________
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
______________________
ITEM PAGE
NUMBER ITEM NUMBER
- --------- ----- -------
3.1 Certificate of Incorporation (a)
3.2 Bylaws (a)
4.1 Rights Agreement (g)
10.1 1992 Stock Incentive Plan, as amended effective
February 2, 1994 (c)
10.2 1987 Omnibus Stock Option Plan (a)
10.3 1992 Non-Employee Director Stock Option Plan, as
amended effective October 26, 1995 (g)
10.4 1994 Employee Stock Purchase Plan (b)
10.5 Supply Agreement, dated February 19, 1992, between
the Company and Memorex Telex Distribution N. V. (a)
10.10 Product License Agreement, dated April 25, 1991,
between the Company and Kubota (a)
10.11 Manufacturing Agreement, dated April 25, 1991,
between the Company and Kubota (a)
10.12 Servicing Agreement, dated April 1, 1990, as amended,
between the Company and General Electric Company (a)
10.13 Servicing Contract, dated August 5, 1991, between the
Company and Digital Service Corporation (a)
10.14 Loan Agreement, dated April 1, 1992, between Tricord
KK and Sumitomo Bank KK (a)
10.15 Revolving Credit Agreement, dated December 6, 1991,
between the Company, Silicon Valley Bank and NED
Delaware Co., Limited (a)
10.16 Employment Agreement, dated October 19, 1993, between
the Company and James D. Edwards (c)
10.17 OEM Agreement, dated December 17, 1992, as amended,
between the Company and Sequent Computer Systems, Inc. (a)
10.18 Warrants of the Company, dated December 18, 1992,
issued to Sequent Computer Systems, Inc. (a)
10.19 Form of Indemnification Agreement (a)
10.20 Servicing Contract, dated February 26, 1993, between the
Company and Bull HN Information Systems, Inc. (a)
10.21 Lease Agreement, dated May 4, 1994, between the
Company and Meridian Properties Real Estate
Development Limited Partnership (d)
22
<PAGE>
ITEM PAGE
NUMBER ITEM NUMBER
- --------- ----- -------
10.22 Credit Agreement, dated November 21, 1994, between
the Company and Norwest Bank Minnesota, National
Association (d)
10.23 1995 Stock Incentive Plan (e)
10.24 Employment Agreement, dated May 2, 1995, between
the Company and John J. Mitcham (f)
10.25 Loan and Security Agreement, dated August 9, 1996,
between the Company and Silicon Valley Bank (h)
10.26 Change of Control Agreements, dated September 13, 1996,
between the Company and Certain Officers of the Company (i)
10.27 Severance Agreement, dated February 8, 1997, between the
Company and Gregory T. Barnum (i)
10.28 Severance Agreement, dated February 8, 1997, between the
Company and Charles C. Devor (i)
10.29 Defense and Indemnification Agreement, dated July 8, 1996,
between and among the Company, James D. Edwards,
Gregory T. Barnum, John H. Crawford and John P. Guider,
The Home Insurance Company of Illinois, Progressive
Casualty Insurance Company, Underwriters at Lloyd's, London,
and the General Reinsurance Corporation (i)
13.1 Annual Report to Stockholders for the year ended
December 31, 1996 (to be deemed filed only to the
extent required by the instructions to exhibits for reports
on Form 10-K) (i)
21.1 Subsidiaries of the Company (i)
23.1 Consent of Independent Accountants (i)
27.1 Financial Data Schedule (i)
____________________________________________________________________
(a) Incorporated by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-48733).
(b) Incorporated by reference to the exhibits to the Company's
Registration
Statement on Form S-8 (File No. 33-76532).
(c) Incorporated by reference to the exhibits to the Company's
Annual Report on Form 10-K For the Year Ended
December 31, 1993 (File No. 0-21366).
(d) Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q For the Quarter Ended June
30, 1994 (File No. 0-21366).
(e) Filed in connection with Annual Report on Form 10-K for the
year ended December 31, 1994.
(f) Incorporated by reference to the exhibits to the Company's
Quarterly
Report on Form 10-Q For the Quarter Ended March 31, 1995
(File No.
23
<PAGE>
0-21366).
(g) Filed in connection with Annual Report on Form 10-K for the
year ended December 31, 1995.
(h) Incorporated by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q For the Quarter Ended
June 30, 1966 (File No. 0-21366).
(i) Filed herewith.
24
<PAGE>
September 13, 1996
The Board considers the establishment and maintenance of a sound and vital
management to be essential to protecting and enhancing the best interests of the
Company and its stockholders. In this connection, the Board recognizes that the
possibility of a Change in Control may arise and that such possibility and the
uncertainty and questions which it may raise among management may result in the
departure or distraction of management personnel to the detriment of the Company
and its stockholders.
Accordingly, the Board has determined that appropriate steps should be
taken to minimize the risk that Company management will depart prior to a Change
in Control, thereby leaving the Company without adequate management personnel
during such a critical period, and to reinforce and encourage the continued
attention and dedication of members of the Company's management to their
assigned duties without distraction in circumstances arising from the
possibility of a Change in Control. In particular, the Board believes it
important, should the Company or its stockholders receive a proposal for
transfer of control, that you be able to continue your management
responsibilities without being influenced by the uncertainties of your own
personal situation.
The Board recognizes that continuance of your position with the Company
involves a substantial commitment to the Company in terms of your personal life
and professional career and the possibility of foregoing present and future
career opportunities, for which the Company receives substantial benefits.
Therefore, to induce you to remain in the employ of the Company, this Agreement,
which has been approved by the Board, sets forth the benefits which the Company
agrees will be provided to you in the event your employment with the Company is
terminated in connection with a Change in Control under the circumstances
described below.
1. DEFINITIONS. The following terms will have the meaning set forth below
unless the context clearly requires otherwise. Terms defined elsewhere in this
Agreement will have the same meaning throughout this Agreement.
(a) "AFFILIATE" means (i) any corporation at least a majority of whose
outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Parent Corporation or (ii)
any other form of business entity in which the Parent Corporation, by
virtue of a direct or indirect ownership interest, has the right to elect a
majority of the members of such entity's governing body.
(b) "AGREEMENT" means this letter agreement as amended, extended or
renewed from time to time in accordance with its terms.
(c) "BASE PAY" means your annual base salary from the Company at the rate
in effect immediately prior to a Change in Control or at the time Notice of
Termination is given,
<PAGE>
September 13, 1996
Page 2
whichever is greater. Base Pay includes only regular cash salary and is
determined before any reduction for deferrals pursuant to any nonqualified
deferred compensation plan or arrangement, qualified cash or deferred
arrangement or cafeteria plan.
(d) "BENEFIT PLAN" means any
(i) employee benefit plan as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended,
(ii) cafeteria plan described in Code Section 125,
(iii) plan, policy or practice providing for paid vacation, other
paid time off or short- or long-term profit sharing, bonus or
incentive payments, or
(iv) stock option, stock purchase, restricted stock, phantom stock,
stock appreciation right or other equity-based compensation plan that
is sponsored, maintained or contributed to by the Company for the
benefit of employees (and/or their families and dependents) generally
or you (and/or your family and dependents) in particular.
(e) "BOARD" means the board of directors of the Parent Corporation duly
qualified and acting at the time in question. On and after the date of a
Change in Control, any duty of the Board in connection with this Agreement
is nondelegable and any attempt by the Board to delegate any such duty is
ineffective.
(f) "CAUSE" means: (i) your gross misconduct; (ii) your willful and
continued failure to perform substantially your duties with the Company
(other than a failure resulting from your incapacity due to bodily injury
or physical or mental illness) after a demand for substantial performance
is delivered to you by the chair of the Board which specifically identifies
the manner in which you have not substantially performed your duties and
provides for a reasonable period of time within which you may take
corrective measures; or (iii) your conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony
or gross misdemeanor under federal or state law which is materially and
demonstrably injurious to the Company or which impairs your ability to
perform substantially your duties for the Company. An act or failure to
act will be considered "gross" or "willful" for this purpose only if done,
or omitted to be done, by you in bad faith and without reasonable belief
that it was in, or not opposed to, the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Company's board of directors (or a committee thereof)
or based upon the advice of counsel for the Company will be conclusively
presumed to be done, or omitted to be done, by you in good faith and in the
best interests of the Company. Notwithstanding the foregoing, you may not
be terminated for Cause unless and until there has been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
a majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the
Board), finding that in the good faith opinion of the Board you were guilty
of the conduct set forth above in clauses (i), (ii) or (iii) of this
definition and specifying the particulars thereof in detail.
<PAGE>
September 13, 1996
Page 3
(g) "CHANGE IN CONTROL" means any of the following: (i) the sale, lease,
exchange or other transfer, directly or indirectly, of all or substantially
all of the assets of the Parent Corporation, in one transaction or in a
series of related transactions, to any Person; (ii) the approval by the
stockholders of the Parent Corporation of any plan or proposal for the
liquidation or dissolution of the Parent Corporation; (iii) any Person,
other than a "bona fide underwriter," is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly,
of (a) 20 percent or more, but not more than 50 percent, of the combined
voting power of the Parent Corporation's outstanding securities ordinarily
having the right to vote at elections of directors, unless the transaction
resulting in such ownership has been approved in advance by the "continuity
directors" or (b) more than 50 percent of the combined voting power of the
Parent Corporation's outstanding securities ordinarily having the right to
vote at elections of directors (regardless of any approval by the
continuity directors); (iv) a merger or consolidation to which the Parent
Corporation is a party if the stockholders of the Parent Corporation
immediately prior to the effective date of such merger or consolidation
have, solely on account of ownership of securities of the Parent
Corporation at such time, "beneficial ownership" (as defined in Rule 13d-3
under the Exchange Act) immediately following the effective date of such
merger or consolidation of securities of the surviving company representing
(a) 50 percent or more, but less than 80 percent, of the combined voting
power of the surviving corporation's then outstanding securities ordinarily
having the right to vote at elections of directors, unless such merger or
consolidation has been approved in advance by the continuity directors, or
(b) less than 50 percent of the combined voting power of the surviving
corporation's then outstanding securities ordinarily having the right to
vote at elections of directors (regardless of any approval by the
continuity directors); (v) the continuity directors cease for any reason to
constitute at least a majority the Board; or (vi) a change in control of a
nature that is determined by outside legal counsel to the Parent
Corporation, in a written opinion specifically referencing this provision
of the Agreement, to be required to be reported (assuming such event has
not been "previously reported") pursuant to Section 13 or 15(d) of the
Exchange Act, whether or not the Parent Corporation is then subject to such
reporting requirement, as of the effective date of such change in control.
For purposes of this Section 1(g), a "continuity director" means any
individual who is a member of the Board on June 30, 1996, while he or she
is a member of the Board, and any individual who subsequently becomes a
member of the Board whose election or nomination for election by the Parent
Corporation's stockholders was approved by a vote of at least a majority of
the directors who are continuity directors (either by a specific vote or by
approval of the proxy statement of the Parent Corporation in which such
individual is named as a nominee for director without objection to such
nomination). For purposes of this Section 1(g), a "bona fide underwriter"
means a Person engaged in business as an underwriter of securities that
acquires securities of the Parent Corporation through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of 40 days after the date of such acquisition.
(h) "CODE" means the Internal Revenue Code of 1986, as amended. Any
reference to a specific provision of the Code includes a reference to such
provision as it may be amended from time to time and to any successor
provision.
(i) "COMPANY" means the Parent Corporation, any Successor and any
Affiliate.
<PAGE>
September 13, 1996
Page 4
(j) "DATE OF TERMINATION" following a Change in Control (or prior to a
Change in Control if your termination was either a condition of the Change
in Control or was at the request or insistence of any Person related to the
Change in Control) means: (i) if your employment is to be terminated by you
for Good Reason, the date specified in the Notice of Termination which in
no event may be a date more than 15 days after the date on which Notice of
Termination is given unless the Company agrees in writing to a later date;
(ii) if your employment is to be terminated by the Company for Cause, the
date specified in the Notice of Termination; (iii) if your employment is
terminated by reason of your death, the date of your death; or (iv) if your
employment is to be terminated by the Company for any reason other than
Cause or your death, the date specified in the Notice of Termination, which
in no event may be a date earlier than 15 days after the date on which a
Notice of Termination is given, unless you expressly agree in writing to an
earlier date. In the case of termination by the Company of your employment
for Cause, if you have not previously expressly agreed in writing to the
termination, then within the 30-day period after your receipt of the Notice
of Termination, you may notify the Company that a dispute exists concerning
the termination, in which event the Date of Termination will be the date
set either by mutual written agreement of the parties or by the judge or
arbitrators in a proceeding as provided in Section 11 of this Agreement.
During the pendency of any such dispute, you will continue to make yourself
available to provide services to the Company and the Company will continue
to pay you your full compensation and benefits in effect immediately prior
to the date on which the Notice of Termination is given (without regard to
any changes to such compensation or benefits which constitute Good Reason)
and until the dispute is resolved in accordance with Section 11 of this
Agreement. You will be entitled to retain the full amount of any such
compensation and benefits without regard to the resolution of the dispute
unless the judge or arbitrators decide(s) that your claim of a dispute was
frivolous or advanced by you in bad faith.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
Any reference to a specific provision of the Exchange Act or to any rule or
regulation thereunder includes a reference to such provision as it may be
amended from time to time and to any successor provision.
(l) "GOOD REASON" means:
(i) a change in your status, position(s), duties or responsibilities
as an executive of the Company as in effect immediately prior to the
Change in Control which, in your reasonable judgment, is adverse
(other than, if applicable, any such change directly attributable to
the fact that the Parent Corporation is no longer publicly owned);
provided, however, that Good Reason does not include a change in your
status, position(s), duties or responsibilities caused by an
insubstantial and inadvertent action that is remedied by the Company
promptly after receipt of notice of such change is given by you;
(ii) a reduction by the Company in your Base Pay, or an adverse change
in the form or timing of the payment thereof, as in effect immediately
prior to the Change in Control or as thereafter increased;
(iii) the failure by the Company to cover you under Benefit Plans
that, in the aggregate, provide substantially similar benefits to you
and/or your family and
<PAGE>
September 13, 1996
Page 5
dependents at a substantially similar total cost to you (e.g.,
premiums, deductibles, co-pays, out of pocket maximums, required
contributions and the like) relative to the benefits and total
costs under the Benefit Plans in which you (and/or your family
or dependents) were participating at any time during the
90-day period immediately preceding the Change in Control;
(iv) the Company's requiring you to be based more than 30 miles from
where your office is located immediately prior to the Change in
Control, except for required travel on the Company's business, and
then only to the extent substantially consistent with the business
travel obligations which you undertook on behalf of the Company during
the 90-day period immediately preceding the Change in Control (without
regard to travel related to or in anticipation of the Change in
Control);
(v) the failure by the Company to obtain from any Successor the
assent to this Agreement contemplated by Section 5 of this Agreement;
(vi) any purported termination by the Company of your employment which
is not properly effected pursuant to a Notice of Termination and
pursuant to any other requirements of this Agreement, and, for
purposes of this Agreement, no such purported termination will be
effective; or
(vii) any refusal by the Company to continue to allow you to
attend to matters or engage in activities not directly related to the
business of the Company which, at any time prior to the Change in
Control, you were not expressly prohibited in writing by the Board
from attending to or engaging in.
Your continued employment does not constitute consent to, or waiver of
any rights arising in connection with, any circumstances constituting Good
Reason. Your termination of employment for Good Reason as defined in this
Section 1(m) will constitute Good Reason for all purposes of this Agreement
notwithstanding that you may also thereby be deemed to have retired under
any applicable retirement programs of the Company.
(m) "NOTICE OF TERMINATION" means a written notice given on or after the
date of a Change in Control (unless your termination before the date of the
Change in Control was either a condition of the Change in Control or was at
the request or insistence of any Person related to the Change in Control)
which indicates the specific termination provision in this Agreement
pursuant to which the notice is given. Any purported termination by the
Company or by you for Good Reason on or after the date of a Change in
Control (or before the date of a Change in Control if your termination was
either a condition of the Change in Control or was at the request or
insistence of any Person related to the Change in Control) must be
communicated by written Notice of Termination to be effective; provided,
that your failure to provide Notice of Termination will not limit any of
your rights under this Agreement except to the extent the Company
demonstrates that it suffered material actual damages by reason of such
failure.
(n) "PARENT CORPORATION" means Tricord Systems, Inc. and any Successor.
(o) "PERSON" means any individual, corporation, partnership, group,
association or other "person," as such term is used in Section 14(d) of the
Exchange Act, other than the Parent
<PAGE>
September 13, 1996
Page 6
Corporation, any Affiliate or any benefit plan(s) sponsored by the Parent
Corporation or an Affiliate.
(p) "SUCCESSOR" means any Person that succeeds to, or has the practical
ability to control (either immediately or solely with the passage of time),
the Parent Corporation's business directly, by merger, consolidation or
other form of business combination, or indirectly, by purchase of the
Parent Corporation's outstanding securities ordinarily having the right to
vote at the election of directors or all or substantially all of its assets
or otherwise.
(q) "TARGET INCENTIVE COMPENSATION" means your targeted incentive
compensation from the Company at the rate in effect immediately prior to a
Change in Control or at the time Notice of Termination is given, whichever
is greater. Target Incentive Compensation is determined before any
reduction for deferrals pursuant to any nonqualified deferred compensation
plan or arrangement, qualified cash or deferred arrangement or cafeteria
plan.
2. TERM OF AGREEMENT. This Agreement is effective immediately and will
continue in effect until January 1, 1998; provided, however, that commencing on
January 1, 1998 and each January 1 thereafter, the term of this Agreement will
automatically be extended for 12 additional months beyond the expiration date
otherwise then in effect, unless at least 90 calendar days prior to any such
January 1, the Company or you has given notice that this Agreement will not be
extended; and, provided, further, that if a Change in Control has occurred
during the term of this Agreement, this Agreement will continue in effect beyond
the termination date then in effect for a period of 12 months following the
month during which the Change in Control occurs or, if later, until the date on
which the Company's obligations to you arising under or in connection with this
Agreement have been satisfied in full.
3. BENEFITS UPON A CHANGE IN CONTROL TERMINATION. You will become entitled to
the benefits described in this Section 3 if and only if (a) the Company
terminates your employment for any reason other than your death or Cause, or you
terminate your employment with the Company for Good Reason and (b) the
termination occurs either within the period beginning on the date of a Change in
Control and ending on the last day of the 12th month that begins after the month
during which the Change in Control occurs or prior to a Change in Control if
your termination was either a condition of the Change in Control or was at the
request or insistence of a Person related to the Change in Control.
(a) CASH PAYMENT. Within 10 business days following the Date of
Termination, or, if later, within 10 business days following the date of
the Change in Control, the Company will make a lump-sum cash payment to you
in an amount equal to the sum of (i) one and one-half times your Base Pay
plus (ii) one and one-half times your Target Incentive Compensation for the
fiscal year during which the Date of Termination occurs.
(b) GROUP HEALTH PLANS. During the continuation period, the Company will
maintain a group health plan(s) which by its terms covers you (and your
family members and dependents who were eligible to be covered at any time
during the 90-day period immediately prior to the date of a Change in
Control for the period after the Change in Control in which such family
members and dependents would otherwise continue to be covered under the
terms of the plan in effect immediately prior to the Change in Control)
under the same terms and at the same cost to you and your family members
and dependents as similarly situated individuals who continue to be
employed by the Company (without regard to any reduction in such benefits
that constitutes Good Reason). The continuation period under applicable
federal and state continuation laws will
<PAGE>
September 13, 1996
Page 7
begin to run from the date on which coverage pursuant to this Section 3(b)
ends. The "continuation period" is the period beginning on your Date of
Termination and ending on the earlier of (i) the last day of the 12th
month that begins after your Date of Termination or (ii) the date after
your Date of Termination on which you first become eligible to participate
as an employee in a plan of another employer providing group health
benefits to you and your eligible family members and dependents which
plan does not contain any exclusion or limitation with respect to any
pre-existing condition of you or any eligible family member or dependent
who would otherwise be covered under the Company's plan but for this
clause (ii). To the extent you incur a tax liability (including federal,
state and local taxes and any interest and penalties with respect thereto)
in connection with a benefit provided pursuant to this Section 3(b) which
you would not have incurred had you been an active employee of the
Company participating in the Company's group health plan, the Company
will make a payment to you in an amount equal to such tax liability plus
an additional amount sufficient to permit you to retain a net amount
after all taxes (including penalties and interest) equal to the initial
tax liability in connection with the benefit. For purposes of applying
the foregoing, your tax rate will be deemed to be the highest statutory
marginal state and federal tax rate (on a combined basis) then in effect.
The payment pursuant to this Section 3(b) will be made within 10 days
after your remittal of a written request therefor accompanied by a
statement indicating the basis for and amount of the liability.
(c) GROSS-UP PAYMENTS. Following a Change in Control, the Company will
cause its independent auditors promptly to review, at the Company's sole
expense, the applicability of Code Section 4999 to any payment or
distribution of any type by the Company to or for your benefit, whether
paid or payable or distributed or distributable pursuant to the terms of
this Agreement, any Benefit Plan or otherwise (the "Total Payments"). If
the auditor determines that the Total Payments result in an excise tax
imposed by Code Section 4999 or any comparable state or local law, or any
interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are collectively referred to
as the "Excise Tax"), the Company will make an additional cash payment (a
"Gross-Up Payment") to you within 10 days after such determination equal to
an amount such that after payment by you of all taxes (including any
interest or penalties imposed with respect to such taxes), including any
Excise Tax, imposed upon the Gross-Up Payment, you would retain an amount
of the Gross-Up Payment equal to the Excise Tax imposed upon the Total
Payments. For purposes of the foregoing determination, your tax rate will
be deemed to be the highest statutory marginal state and federal tax rate
(on a combined basis) then in effect. If no determination by the Company's
auditors is made prior to the time you are required to file a tax return
reflecting the Total Payments, you will be entitled to receive from the
Company a Gross-Up Payment calculated on the basis of the Excise Tax you
reported in such tax return, within 10 days after the later of the date on
which you file such tax return or the date on which you provide a copy
thereof to the Company. In all events, if any tax authority determines
that a greater Excise Tax should be imposed upon the Total Payments than is
determined by the Company's independent auditors or reflected in your tax
return pursuant to this Section 3(c), you will be entitled to receive from
the Company the full Gross-Up Payment calculated on the basis of the amount
of Excise Tax determined to be payable by such tax authority within 10 days
after you notify the Company of such determination.
(d) OUT PLACEMENT ASSISTANCE. The Company will pay up to five percent of
your Base Pay for out placement counseling to you. Such payments will be
made either directly to the
<PAGE>
September 13, 1996
Page 8
counselor or to you within 10 days after presentation of an invoice for
services rendered or to be rendered.
If, on or after the date of a Change in Control, an Affiliate is sold,
merged, transferred or in any other manner or for any other reason ceases to be
an Affiliate or all or any portion of the business or assets of an Affiliate are
sold, transferred or otherwise disposed of and the acquiror is not the Parent
Corporation or an Affiliate (a "Disposition"), and you remain or become employed
by the acquiror or an affiliate of the acquiror (as defined in this Agreement
but substituting "acquiror" for "Parent Corporation") in connection with the
Disposition, you will be deemed to have terminated employment on the effective
date of the Disposition for purposes of this Section 3 unless (x) the acquiror
and its affiliates jointly and severally expressly assume and agree, in a manner
that is enforceable by you, to perform the obligations of this Agreement to the
same extent that the Company would be required to perform if the Disposition had
not occurred and (y) the Successor guarantees, in a manner that is enforceable
by you, payment and performance by the acquiror.
4. INDEMNIFICATION. Following a Change in Control, the Company will indemnify
and advance expenses to you to the full extent permitted by law for damages,
costs and expenses (including, without limitation, judgments, fines, penalties,
settlements and reasonable fees and expenses of your counsel) incurred in
connection with all matters, events and transactions relating to your service to
or status with the Company or any other corporation, employee benefit plan or
other entity with whom you served at the request of the Company.
5. SUCCESSORS. The Parent Corporation will seek to have any Successor, by
agreement in form and substance satisfactory to you, assent to the fulfillment
by the Company of the Company's obligations under this Agreement. Failure of the
Parent Corporation to obtain such assent at least three business days prior to
the time a Person becomes a Successor (or where the Parent Corporation does not
have at least three business days' advance notice that a Person may become a
Successor, within one business day after having notice that such Person may
become or has become a Successor) will constitute Good Reason for termination by
you of your employment. The date on which any such succession becomes effective
will be deemed the Date of Termination, and Notice of Termination will be deemed
to have been given on that date. A Successor has no rights, authority or power
with respect to this Agreement prior to a Change in Control.
6. BINDING AGREEMENT. This Agreement inures to the benefit of, and is
enforceable by, you, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
die while any amount would still be payable to you under this Agreement if you
had continued to live, all such amounts, unless otherwise provided in this
Agreement, will be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
7. NO MITIGATION. You will not be required to mitigate the amount of any
benefits the Company becomes obligated to provide to you in connection with this
Agreement by seeking other employment or otherwise. The benefits to be provided
to you in connection with this Agreement may not be reduced, offset or subject
to recovery by the Company by any benefits you may receive from other employment
or otherwise.
8. NO SETOFF. The Company has no right to setoff benefits owed to you under
this Agreement against amounts owed or claimed to be owed by you to the Company
under this Agreement or otherwise.
<PAGE>
September 13, 1996
Page 9
9. TAXES. All benefits to be provided to you in connection with this
Agreement will be subject to required withholding of federal, state and local
income, excise and employment-related taxes.
9. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in, or required under, this Agreement must be in
writing and will be deemed to have been duly given when personally delivered or
when mailed by United States registered or certified mail, return receipt
requested, postage prepaid and addressed to each party's respective address set
forth on the first page of this Agreement (provided that all notices to the
Company must be directed to the attention of the chair of the Board), or to such
other address as either party may have furnished to the other in writing in
accordance with these provisions, except that notice of change of address will
be effective only upon receipt.
11. DISPUTES. If you so elect, any dispute, controversy or claim arising under
or in connection with this Agreement will be settled exclusively by binding
arbitration administered by the American Arbitration Association in Minneapolis,
Minnesota in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that you may seek
specific performance of your right to receive benefits until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. If any dispute, controversy or claim for
damages arising under or in connection with this Agreement is settled by
arbitration, the Company will pay, or if elected by you, reimburse, all fees,
costs and expenses incurred by you related to such arbitration. If you do not
elect arbitration, you may pursue all available legal remedies. The Company
will pay, or if elected by you, reimburse you for, all fees, costs and expenses
incurred by you in connection with any actual, threatened or contemplated
litigation relating to this Agreement to which you are or reasonably expect to
become a party, whether or not initiated by you, if you are successful in
recovering any benefit under this Agreement as a result of such action. The
parties agree that any litigation arising under or in connection with this
Agreement must be brought in a court of competent jurisdiction in the State of
Minnesota, and hereby consent to the exclusive jurisdiction of said courts for
this purpose and agree not to assert that such courts are an inconvenient forum.
The Company will not assert in any dispute or controversy with you arising under
or in connection with this Agreement your failure to exhaust administrative
remedies.
12. RELATED AGREEMENTS. To the extent that any provision of any other Benefit
Plan or agreement between the Company and you limits, qualifies or is
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while such other Benefit Plan or agreement remains in force, the
provision of this Agreement will control and such provision of such other
Benefit Plan or agreement will be deemed to have been superseded, and to be of
no force or effect, as if such other agreement had been formally amended to the
extent necessary to accomplish such purpose. Nothing in this Agreement prevents
or limits your continuing or future participation in any Benefit Plan provided
by the Company and for which you may qualify, and nothing in this Agreement
limits or otherwise affects the rights you may have under any Benefit Plans or
other agreements with the Company. Amounts which are vested benefits or which
you are otherwise entitled to receive under any Benefit Plan or other agreement
with the Company at or subsequent to the Date of Termination will be payable in
accordance with such Benefit Plan or other agreement.
13. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement is intended
to provide you with any right to continue in the employ of the Company for any
period of specific duration or interfere with or otherwise restrict in any way
your rights or the rights of the Company, which rights are hereby
<PAGE>
September 13, 1996
Page 10
expressly reserved by each, to terminate your employment at any time for any
reason or no reason whatsoever, with or without cause.
14. CHANGE OF AFFILIATE STATUS. This Agreement will become null and void if,
prior to a Change in Control: (a) an Affiliate is sold, merged, transferred or
in any other manner or for any other reason ceases to be an Affiliate or all or
any portion of the business or assets of an Affiliate or sold, transferred or
otherwise disposed of and no Change in Control occurs in connection therewith;
(b) your primary employment duties are with the Affiliate at the time of the
occurrence of such event; and (c) you do not, in conjunction therewith, transfer
employment directly to the Company.
15. FUNDING AND PAYMENT. Benefits payable under this Agreement will be paid
only from the general assets of the Company. No person has any right to or
interest in any specific assets of the Company by reason of this Agreement. To
the extent benefits under this Agreement are not paid when due to any
individual, he or she is a general unsecured creditor of the Company with
respect to any amounts due.
The Company with whom you were employed immediately before your Date of
Termination has primary responsibility for benefits to which you or any other
person are entitled pursuant to this Agreement but to the extent such Company is
unable or unwilling to provide such benefits, the Parent Corporation and each
other Affiliate are jointly and severally responsible therefor to the extent
permitted by applicable law. If you were simultaneously employed by more than
one Company immediately before your Date of Termination, each such Company has
primary responsibility for a portion of the benefits to which you or any other
person are entitled pursuant to this Agreement that bears the same ratio to the
total benefits to which you or such other person are entitled pursuant to this
Agreement as your Base Pay from the Company immediately before your Date of
Termination bears to your aggregate Base Pay from all such Companies.
16. SURVIVAL. The respective obligations of, and benefits afforded to, the
Company and you which by their express terms or clear intent survive termination
of your employment with the Company or termination of this Agreement, as the
case may be, will survive termination of your employment with the Company or
termination of this Agreement, as the case may be, and will remain in full force
and effect according to their terms.
17. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such modification, waiver or discharge is agreed to in a
writing signed by you and the chair of the Board. No waiver by any party to this
Agreement at any time of any breach by another party to this Agreement of, or of
compliance with, any condition or provision of this Agreement to be performed by
such party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter to this Agreement have been made by any party which are not
expressly set forth in this Agreement. This Agreement and the legal relations
among the parties as to all matters, including, without limitation, matters of
validity, interpretation, construction, performance and remedies, will be
governed by and construed exclusively in accordance with the internal laws of
the State of Minnesota (without regard to the conflict of laws principles of any
jurisdiction). Headings are for purposes of convenience only and do not
constitute a part of this Agreement. The parties to this Agreement agree to
perform, or cause to be performed, such further acts and deeds and to execute
and deliver or cause to be executed and delivered, such additional or
supplemental documents or instruments as may be reasonably required by the other
party to carry into effect the intent and purpose of this Agreement. The
invalidity or unenforceability of all or any part of any provision of this
Agreement will not affect the validity or
<PAGE>
September 13, 1996
Page 11
enforceability of the remainder of such provision or of any other provision
of this Agreement, which will remain in full force and effect. This
Agreement may be executed in several counterparts, each of which will be
deemed to be an original, but all of which together will constitute one and
the same instrument.
If this letter correctly sets forth our agreement on the subject matter
discussed above, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
TRICORD SYSTEMS, INC.
By: /s/ John J. Mitcham
------------------------------------------
John J. Mitcham
President and Chief Executive Officer
Agreed to as of this ____th day of ____________,
1996.
----------------------------------------------
List of Parties with Change in Control Agreements:
Gregory T. Barnum Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Cory Devor Vice President, General Manager, Server Unit
David Huyink Vice President, Chief Technical Officer
Joan Wrabetz Vice President, General Manager, Storage Products
<PAGE>
February 8, 1997
Gregory T. Barnum
Tricord Systems, Inc.
2800 Northwest Blvd.
Plymouth, MN 55441
Dear Greg:
The Board recognizes that continuance of your position with the Company
involves a substantial commitment to the Company in terms of your personal life
and professional career and the possibility of foregoing present and future
career opportunities, for which the Company receives substantial benefits.
Therefore, to induce you to remain in the employ of the Company, this Agreement,
which has been approved by the Board, sets forth the benefits which the Company
agrees will be provided to you in the event your employment with the Company is
terminated under the circumstances described below.
1. DEFINITIONS. The following terms will have the meaning set forth below
unless the context clearly requires otherwise. Terms defined elsewhere in this
Agreement will have the same meaning throughout this Agreement.
(a) "AFFILIATE" means (i) any corporation at least a majority of whose
outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Parent Corporation or (ii)
any other form of business entity in which the Parent Corporation, by
virtue of a direct or indirect ownership interest, has the right to elect a
majority of the members of such entity's governing body.
(b) "AGREEMENT" means this letter agreement as amended, extended or
renewed from time to time in accordance with its terms.
(c) "BASE PAY" means your annual base salary from the Company at the rate
in effect immediately prior to a Triggering Termination or at the time
Notice of Termination is given, whichever is greater. Base Pay includes
only regular cash salary and is determined before any reduction for
deferrals pursuant to any nonqualified deferred compensation plan or
arrangement, qualified cash or deferred arrangement or cafeteria plan.
(d) "BOARD" means the board of directors of the Parent Corporation duly
qualified and acting at the time in question.
(e) "CAUSE" means: (i) your gross misconduct; (ii) your willful and
continued failure to perform substantially your duties with the Company
(other than a failure resulting from your incapacity due to bodily injury
or physical or mental illness) after a demand for substantial
<PAGE>
Gregory T. Barnum
February 8, 1997
Page 2
performance is delivered to you by the chair of the Board which specifically
identifies the manner in which you have not substantially performed your
duties and provides for a reasonable period of time within which you may
take corrective measures; or (iii) your conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony
or gross misdemeanor under federal or state law which is materially and
demonstrably injurious to the Company or which impairs your ability to
perform substantially your duties for the Company. An act or failure to
act will be considered "gross" or "willful" for this purpose only if done,
or omitted to be done, by you in bad faith and without reasonable belief
that it was in, or not opposed to, the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Company's board of directors (or a committee thereof)
or based upon the advice of counsel for the Company will be conclusively
presumed to be done, or omitted to be done, by you in good faith and in the
best interests of the Company. Notwithstanding the foregoing, you may not
be terminated for Cause unless and until there has been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
a majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the
Board), finding that in the good faith opinion of the Board you were guilty
of the conduct set forth above in clauses (i), (ii) or (iii) of this
definition and specifying the particulars thereof in detail.
(f) "CHANGE IN CONTROL AGREEMENT" means that certain letter agreement
between the Parent Corporation and you, dated September 13, 1996, relating
to the payment of benefits in connection with certain change in control
events of the Parent Corporation.
(g) "COMPANY" means the Parent Corporation, any Successor and any
Affiliate.
(h) "DATE OF TERMINATION" means: (i) if your employment is to be
terminated by you for Good Reason, the date specified in a notice of
termination which in no event may be a date more than 15 days after the
date on which such notice of termination is given unless the Company agrees
in writing to a later date; (ii) if your employment is to be terminated by
the Company for Cause, the date specified in the notice of termination;
(iii) if your employment is terminated by reason of your death, the date of
your death; or (iv) if your employment is to be terminated by the Company
for any reason other than Cause or your death, the date specified in the
notice of termination, which in no event may be a date earlier than 15 days
after the date on which a notice of termination is given, unless you
expressly agree in writing to an earlier date.
(i) "GOOD REASON" means:
(i) a change in your status, position(s), duties or responsibilities
as an executive of the Company as in effect immediately prior to the
date of this Agreement which is adverse (other than, if applicable,
any such change directly attributable to the fact that the Parent
Corporation is no longer publicly owned); provided, however, that Good
Reason does not include a change in your status, position(s), duties
or responsibilities caused by an insubstantial and inadvertent action
that is remedied by the Company promptly after receipt of notice of
such change is given by you;
<PAGE>
Gregory T. Barnum
February 8, 1997
Page 3
(ii) a reduction by the Company in your Base Pay, or an adverse change
in the form or timing of the payment thereof, as in effect immediately
prior to the date of this Agreement or as thereafter increased;
(iii) the Company's requiring you to be based more than 30 miles from
where your office is located immediately prior to the date of this
Agreement, except for required travel on the Company's business;
(iv) the failure by the Company to obtain from any Successor the
assent to this Agreement; or
(v) any purported termination by the Company of your employment which
is not properly effected pursuant to a Notice of Termination and
pursuant to any other requirements of this Agreement.
(j) "PARENT CORPORATION" means Tricord Systems, Inc. and any Successor.
(k) "SUCCESSOR" means any person that succeeds to, or has the practical
ability to control (either immediately or solely with the passage of time),
the Parent Corporation's business directly, by merger, consolidation or
other form of business combination, or indirectly, by purchase of the
Parent Corporation's outstanding securities ordinarily having the right to
vote at the election of directors or all or substantially all of its assets
or otherwise.
(l) "TRIGGERING TERMINATION" means termination by the Company of your
employment for any reason other than your death or Cause, or termination by
you of your employment with the Company for Good Reason, so long as such
termination of employment by the Company or you would not cause you to
become entitled to receive benefits pursuant to the Change in Control
Agreement.
2. TERM OF AGREEMENT. This Agreement is effective immediately and will
continue in effect until February 8, 1999; provided, however, that commencing on
January 1, 1999 and each January 1 thereafter, the term of this Agreement will
automatically be extended for 12 additional months beyond the expiration date
otherwise then in effect, unless at least 90 calendar days prior to any such
January 1, the Company or you has given notice that this Agreement will not be
extended; and, provided, further, that if a Triggering Termination has occurred
during the term of this Agreement, this Agreement will continue in effect beyond
the termination date then in effect until the date on which the Company's
obligations to you arising under or in connection with this Agreement have been
satisfied in full.
3. BENEFITS UPON A TRIGGERING TERMINATION. You will become entitled to the
following benefits if a Triggering Termination occurs during the term of this
Agreement.
(a) CASH PAYMENT. Within 10 business days following the Date of
Termination, the Company will make a lump-sum cash payment to you in an
amount equal to one times your Base Pay.
(b) GROUP HEALTH PLANS. During the continuation period, the Company will
maintain a group health plan(s) which by its terms covers you (and your
family members and dependents who were eligible to be covered at any time
during the 90-day period immediately prior to the Date of
<PAGE>
Gregory T. Barnum
February 8, 1997
Page 4
Termination for the period after the Date of Termination in which such
family members and dependents would otherwise continue to be covered under
the terms of the plan in effect immediately prior to the Date of
Termination) under the same terms and at the same cost to you and your
family members and dependents as similarly situated individuals who continue
to be employed by the Company (without regard to any reduction in such
benefits that constitutes Good Reason). The "continuation period" is the
period beginning on your Date of Termination and ending on the earlier of
(i) the last day of the 12th month that begins after your Date of
Termination or (ii) the date after your Date of Termination on which you
first become eligible to participate as an employee in a plan of another
employer providing group health benefits to you and your eligible family
members and dependents which plan does not contain any exclusion or
limitation with respect to any pre-existing condition of you or any eligible
family member or dependent who would otherwise be covered under the
Company's plan but for this clause (ii). To the extent you incur a tax
liability (including federal, state and local taxes and any interest and
penalties with respect thereto) in connection with a benefit provided
pursuant to this Section 3(b) which you would not have incurred had you been
an active employee of the Company participating in the Company's group
health plan, the Company will make a payment to you in an amount
equal to such tax liability plus an additional amount sufficient to
permit you to retain a net amount after all taxes (including penalties
and interest) equal to the initial tax liability in connection
with the benefit. For purposes of applying the foregoing, your tax rate
will be deemed to be the highest statutory marginal state and federal tax
rate (on a combined basis) then in effect. The payment pursuant to this
Section 3(b) will be made within 10 days after your remittal of a written
request therefor accompanied by a statement indicating the basis for and
amount of the liability. The continuation period under applicable federal
and state continuation laws will begin to run from the Date of Termination
and will run concurrently during the time that coverage pursuant to this
Section 3(b) is provided.
4. BINDING AGREEMENT. This Agreement inures to the benefit of, and is
enforceable by, you, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
die while any amount would still be payable to you under this Agreement if you
had continued to live, all such amounts, unless otherwise provided in this
Agreement, will be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
5. NO MITIGATION. You will not be required to mitigate the amount of any
benefits the Company becomes obligated to provide to you in connection with this
Agreement by seeking other employment or otherwise. The benefits to be provided
to you in connection with this Agreement may not be reduced, offset or subject
to recovery by the Company by any benefits you may receive from other employment
or otherwise.
6. NO SETOFF. The Company has no right to setoff benefits owed to you under
this Agreement against amounts owed or claimed to be owed by you to the Company
under this Agreement or otherwise.
7. TAXES. All benefits to be provided to you in connection with this
Agreement will be subject to required withholding of federal, state and local
income, excise and employment-related taxes.
8. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in, or required under, this Agreement must be in
writing and will be deemed to have been duly given when personally delivered or
when mailed by United States registered or certified mail, return receipt
<PAGE>
Gregory T. Barnum
February 8, 1997
Page 5
requested, postage prepaid and addressed to each party's respective address set
forth on the first page of this Agreement (provided that all notices to the
Company must be directed to the attention of the chair of the Board), or to such
other address as either party may have furnished to the other in writing in
accordance with these provisions, except that notice of change of address will
be effective only upon receipt.
9. DISPUTES. If you so elect, any dispute, controversy or claim arising under
or in connection with this Agreement will be settled exclusively by binding
arbitration administered by the American Arbitration Association in Minneapolis,
Minnesota in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that you may seek
specific performance of your right to receive benefits until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. If any dispute, controversy or claim for
damages arising under or in connection with this Agreement is settled by
arbitration, each party will pay its own costs, provided that the costs of the
arbitration will be shared equally by the parties. If you do not elect
arbitration, you may pursue all available legal remedies.
10. RELATED AGREEMENTS. To the extent that any provision of any other benefit
plan or agreement between the Company and you limits, qualifies or is
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while such other benefit plan or agreement remains in force, the
provision of this Agreement will control and such provision of such other
benefit plan or agreement will be deemed to have been superseded, and to be of
no force or effect, as if such other agreement had been formally amended to the
extent necessary to accomplish such purpose. Notwithstanding the foregoing, in
determining whether you are, and in the event that you become, entitled to
receive benefits pursuant to the Change in Control Agreement, the terms and
conditions of the Change in Control Agreement will control and supersede the
terms and conditions of this Agreement. Nothing in this Agreement prevents or
limits your continuing or future participation in any benefit plan provided by
the Company and for which you may qualify, and nothing in this Agreement limits
or otherwise affects the rights you may have under any benefit plans or other
agreements with the Company. Amounts which are vested benefits or which you are
otherwise entitled to receive under any benefit plan or other agreement with the
Company at or subsequent to the Date of Termination will be payable in
accordance with such benefit plan or other agreement.
11. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement is intended
to provide you with any right to continue in the employ of the Company for any
period of specific duration or interfere with or otherwise restrict in any way
your rights or the rights of the Company, which rights are hereby expressly
reserved by each, to terminate your employment at any time for any reason or no
reason whatsoever, with or without cause.
12. FUNDING AND PAYMENT. Benefits payable under this Agreement will be paid
only from the general assets of the Company. No person has any right to or
interest in any specific assets of the Company by reason of this Agreement. To
the extent benefits under this Agreement are not paid when due to any
individual, he or she is a general unsecured creditor of the Company with
respect to any amounts due.
13. SURVIVAL. The respective obligations of, and benefits afforded to, the
Company and you which by their express terms or clear intent survive termination
of your employment with the Company or termination of this Agreement, as the
case may be, will survive termination of your employment with the
<PAGE>
Gregory T. Barnum
February 8, 1997
Page 6
Company or termination of this Agreement, as the case may be, and will remain
in full force and effect according to their terms.
14. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such modification, waiver or discharge is agreed to in a
writing signed by you and the chair of the Board. No waiver by any party to this
Agreement at any time of any breach by another party to this Agreement of, or of
compliance with, any condition or provision of this Agreement to be performed by
such party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter to this Agreement have been made by any party which are not
expressly set forth in this Agreement. This Agreement and the legal relations
among the parties as to all matters will be governed by and construed
exclusively in accordance with the internal laws of the State of Minnesota
(without regard to the conflict of laws principles of any jurisdiction), and the
parties agree that any litigation arising under or in connection with this
Agreement must be brought in a court of competent jurisdiction in the State of
Minnesota and hereby consent to the exclusive jurisdiction of said courts for
this purpose. The invalidity or unenforceability of all or any part of any
provision of this Agreement will not affect the validity or enforceability of
the remainder of such provision or of any other provision of this Agreement,
which will remain in full force and effect. This Agreement may be executed in
several counterparts, each of which will be deemed to be an original, but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject matter
discussed above, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
TRICORD SYSTEMS, INC.
By: /s/ John J. Mitcham
------------------------------
John J. Mitcham
President and Chief Executive Officer
Agreed to as of this 8th day of February, 1997.
/s/ Gregory T. Barnum
---------------------------------
Gregory T. Barnum
<PAGE>
February 8, 1997
Charles C. Devor
Tricord Systems, Inc.
2800 Northwest Blvd.
Plymouth, MN 55441
Dear Charles:
The Board recognizes that continuance of your position with the Company
involves a substantial commitment to the Company in terms of your personal life
and professional career and the possibility of foregoing present and future
career opportunities, for which the Company receives substantial benefits.
Therefore, to induce you to remain in the employ of the Company, this Agreement,
which has been approved by the Board, sets forth the benefits which the Company
agrees will be provided to you in the event your employment with the Company is
terminated under the circumstances described below.
1. DEFINITIONS. The following terms will have the meaning set forth below
unless the context clearly requires otherwise. Terms defined elsewhere in this
Agreement will have the same meaning throughout this Agreement.
(a) "AFFILIATE" means (i) any corporation at least a majority of whose
outstanding securities ordinarily having the right to vote at elections of
directors is owned directly or indirectly by the Parent Corporation or (ii)
any other form of business entity in which the Parent Corporation, by
virtue of a direct or indirect ownership interest, has the right to elect a
majority of the members of such entity's governing body.
(b) "AGREEMENT" means this letter agreement as amended, extended or
renewed from time to time in accordance with its terms.
(c) "BASE PAY" means your annual base salary from the Company at the rate
in effect immediately prior to a Triggering Termination or at the time
Notice of Termination is given, whichever is greater. Base Pay includes
only regular cash salary and is determined before any reduction for
deferrals pursuant to any nonqualified deferred compensation plan or
arrangement, qualified cash or deferred arrangement or cafeteria plan.
(d) "BOARD" means the board of directors of the Parent Corporation duly
qualified and acting at the time in question.
(e) "CAUSE" means: (i) your gross misconduct; (ii) your willful and
continued failure to perform substantially your duties with the Company
(other than a failure resulting from your incapacity due to bodily injury
or physical or mental illness) after a demand for substantial
<PAGE>
Charles C. Devor
February 8, 1997
Page 2
performance is delivered to you by the chair of the Board which specifically
identifies the manner in which you have not substantially performed your
duties and provides for a reasonable period of time within which you may
take corrective measures; or (iii) your conviction (including a plea of nolo
contendere) of willfully engaging in illegal conduct constituting a felony
or gross misdemeanor under federal or state law which is materially and
demonstrably injurious to the Company or which impairs your ability to
perform substantially your duties for the Company. An act or failure to
act will be considered "gross" or "willful" for this purpose only if done,
or omitted to be done, by you in bad faith and without reasonable belief
that it was in, or not opposed to, the best interests of the Company. Any
act, or failure to act, based upon authority given pursuant to a resolution
duly adopted by the Company's board of directors (or a committee thereof)
or based upon the advice of counsel for the Company will be conclusively
presumed to be done, or omitted to be done, by you in good faith and in the
best interests of the Company. Notwithstanding the foregoing, you may not
be terminated for Cause unless and until there has been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
a majority of the entire membership of the Board at a meeting of the Board
called and held for the purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the
Board), finding that in the good faith opinion of the Board you were guilty
of the conduct set forth above in clauses (i), (ii) or (iii) of this
definition and specifying the particulars thereof in detail.
(f) "CHANGE IN CONTROL AGREEMENT" means that certain letter agreement
between the Parent Corporation and you, dated September 13, 1996, relating
to the payment of benefits in connection with certain change in control
events of the Parent Corporation.
(g) "COMPANY" means the Parent Corporation, any Successor and any
Affiliate.
(h) "DATE OF TERMINATION" means: (i) if your employment is to be
terminated by you for Good Reason, the date specified in a notice of
termination which in no event may be a date more than 15 days after the
date on which such notice of termination is given unless the Company agrees
in writing to a later date; (ii) if your employment is to be terminated by
the Company for Cause, the date specified in the notice of termination;
(iii) if your employment is terminated by reason of your death, the date of
your death; or (iv) if your employment is to be terminated by the Company
for any reason other than Cause or your death, the date specified in the
notice of termination, which in no event may be a date earlier than 15 days
after the date on which a notice of termination is given, unless you
expressly agree in writing to an earlier date.
(i) "GOOD REASON" means:
(i) a change in your status, position(s), duties or responsibilities
as an executive of the Company as in effect immediately prior to the
date of this Agreement which is adverse (other than, if applicable,
any such change directly attributable to the fact that the Parent
Corporation is no longer publicly owned); provided, however, that Good
Reason does not include a change in your status, position(s), duties
or responsibilities caused by an insubstantial and inadvertent action
that is remedied by the Company promptly after receipt of notice of
such change is given by you;
<PAGE>
Charles C. Devor
February 8, 1997
Page 3
(ii) a reduction by the Company in your Base Pay, or an adverse change
in the form or timing of the payment thereof, as in effect immediately
prior to the date of this Agreement or as thereafter increased;
(iii) the Company's requiring you to be based more than 30 miles from
where your office is located immediately prior to the date of this
Agreement, except for required travel on the Company's business;
(iv) the failure by the Company to obtain from any Successor the
assent to this Agreement; or
(v) any purported termination by the Company of your employment which
is not properly effected pursuant to a Notice of Termination and
pursuant to any other requirements of this Agreement.
(j) "PARENT CORPORATION" means Tricord Systems, Inc. and any Successor.
(k) "SUCCESSOR" means any person that succeeds to, or has the practical
ability to control (either immediately or solely with the passage of time),
the Parent Corporation's business directly, by merger, consolidation or
other form of business combination, or indirectly, by purchase of the
Parent Corporation's outstanding securities ordinarily having the right to
vote at the election of directors or all or substantially all of its assets
or otherwise.
(l) "TRIGGERING TERMINATION" means termination by the Company of your
employment for any reason other than your death or Cause, or termination by
you of your employment with the Company for Good Reason, so long as such
termination of employment by the Company or you would not cause you to
become entitled to receive benefits pursuant to the Change in Control
Agreement.
2. TERM OF AGREEMENT. This Agreement is effective immediately and will
continue in effect until February 8, 1999; provided, however, that commencing on
January 1, 1999 and each January 1 thereafter, the term of this Agreement will
automatically be extended for 12 additional months beyond the expiration date
otherwise then in effect, unless at least 90 calendar days prior to any such
January 1, the Company or you has given notice that this Agreement will not be
extended; and, provided, further, that if a Triggering Termination has occurred
during the term of this Agreement, this Agreement will continue in effect beyond
the termination date then in effect until the date on which the Company's
obligations to you arising under or in connection with this Agreement have been
satisfied in full.
3. BENEFITS UPON A TRIGGERING TERMINATION. You will become entitled to the
following benefits if a Triggering Termination occurs during the term of this
Agreement.
(a) CASH PAYMENT. Within 10 business days following the Date of
Termination, the Company will make a lump-sum cash payment to you in an
amount equal to one times your Base Pay.
(b) GROUP HEALTH PLANS. During the continuation period, the Company will
maintain a group health plan(s) which by its terms covers you (and your
family members and dependents who were eligible to be covered at any time
during the 90-day period immediately prior to the Date of Termination for
the period after the Date of
<PAGE>
Charles C. Devor
February 8, 1997
Page 4
Termination in which such family members and dependents would otherwise
continue to be covered under the terms of the plan in effect immediately
prior to the Date of Termination) under the same terms and at the same cost
to you and your family members and dependents as similarly situated
individuals who continue to be employed by the Company (without regard to
any reduction in such benefits that constitutes Good Reason). The
"continuation period" is the period beginning on your Date of Termination
and ending on the earlier of (i) the last day of the 12th month that
begins after your Date of Termination or (ii) the date after your Date
of Termination on which you first become eligible to participate as an
employee in a plan of another employer providing group health benefits to
you and your eligible family members and dependents which plan does not
contain any exclusion or limitation with respect to any pre-existing
condition of you or any eligible family member or dependent who would
otherwise be covered under the Company's plan but for this clause (ii). To
the extent you incur a tax liability (including federal, state and local
taxes and any interest and penalties with respect thereto) in connection
with a benefit provided pursuant to this Section 3(b) which you would not
have incurred had you been an active employee of the Company participating
in the Company's group health plan, the Company will make a payment to you
in an amount equal to such tax liability plus an additional amount
sufficient to permit you to retain a net amount after all taxes (including
penalties and interest) equal to the initial tax liability in connection
with the benefit. For purposes of applying the foregoing, your tax rate
will be deemed to be the highest statutory marginal state and federal tax
rate (on a combined basis) then in effect. The payment pursuant to this
Section 3(b) will be made within 10 days after your remittal of a written
request therefor accompanied by a statement indicating the basis for and
amount of the liability. The continuation period under applicable federal
and state continuation laws will begin to run from the Date of Termination
and will run concurrently during the time that coverage pursuant to this
Section 3(b) is provided.
4. BINDING AGREEMENT. This Agreement inures to the benefit of, and is
enforceable by, you, your personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
die while any amount would still be payable to you under this Agreement if you
had continued to live, all such amounts, unless otherwise provided in this
Agreement, will be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there be no such designee, to your
estate.
5. NO MITIGATION. You will not be required to mitigate the amount of any
benefits the Company becomes obligated to provide to you in connection with this
Agreement by seeking other employment or otherwise. The benefits to be provided
to you in connection with this Agreement may not be reduced, offset or subject
to recovery by the Company by any benefits you may receive from other employment
or otherwise.
6. NO SETOFF. The Company has no right to setoff benefits owed to you under
this Agreement against amounts owed or claimed to be owed by you to the Company
under this Agreement or otherwise.
7. TAXES. All benefits to be provided to you in connection with this
Agreement will be subject to required withholding of federal, state and local
income, excise and employment-related taxes.
8. NOTICES. For the purposes of this Agreement, notices and all other
communications provided for in, or required under, this Agreement must be in
writing and will be deemed to have been duly given when personally delivered or
when mailed by United States registered or certified mail, return receipt
<PAGE>
Charles C. Devor
February 8, 1997
Page 5
requested, postage prepaid and addressed to each party's respective address set
forth on the first page of this Agreement (provided that all notices to the
Company must be directed to the attention of the chair of the Board), or to such
other address as either party may have furnished to the other in writing in
accordance with these provisions, except that notice of change of address will
be effective only upon receipt.
9. DISPUTES. If you so elect, any dispute, controversy or claim arising under
or in connection with this Agreement will be settled exclusively by binding
arbitration administered by the American Arbitration Association in Minneapolis,
Minnesota in accordance with the Commercial Arbitration Rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, that you may seek
specific performance of your right to receive benefits until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement. If any dispute, controversy or claim for
damages arising under or in connection with this Agreement is settled by
arbitration, each party will pay its own costs, provided that the costs of the
arbitration will be shared equally by the parties. If you do not elect
arbitration, you may pursue all available legal remedies.
10. RELATED AGREEMENTS. To the extent that any provision of any other benefit
plan or agreement between the Company and you limits, qualifies or is
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while such other benefit plan or agreement remains in force, the
provision of this Agreement will control and such provision of such other
benefit plan or agreement will be deemed to have been superseded, and to be of
no force or effect, as if such other agreement had been formally amended to the
extent necessary to accomplish such purpose. Notwithstanding the foregoing, in
determining whether you are, and in the event that you become, entitled to
receive benefits pursuant to the Change in Control Agreement, the terms and
conditions of the Change in Control Agreement will control and supersede the
terms and conditions of this Agreement. Nothing in this Agreement prevents or
limits your continuing or future participation in any benefit plan provided by
the Company and for which you may qualify, and nothing in this Agreement limits
or otherwise affects the rights you may have under any benefit plans or other
agreements with the Company. Amounts which are vested benefits or which you are
otherwise entitled to receive under any benefit plan or other agreement with the
Company at or subsequent to the Date of Termination will be payable in
accordance with such benefit plan or other agreement.
11. NO EMPLOYMENT OR SERVICE CONTRACT. Nothing in this Agreement is intended
to provide you with any right to continue in the employ of the Company for any
period of specific duration or interfere with or otherwise restrict in any way
your rights or the rights of the Company, which rights are hereby expressly
reserved by each, to terminate your employment at any time for any reason or no
reason whatsoever, with or without cause.
12. FUNDING AND PAYMENT. Benefits payable under this Agreement will be paid
only from the general assets of the Company. No person has any right to or
interest in any specific assets of the Company by reason of this Agreement. To
the extent benefits under this Agreement are not paid when due to any
individual, he or she is a general unsecured creditor of the Company with
respect to any amounts due.
13. SURVIVAL. The respective obligations of, and benefits afforded to, the
Company and you which by their express terms or clear intent survive
termination of your employment with the Company or termination of this
Agreement, as the case may be, will survive termination of your employment
with the
<PAGE>
Charles C. Devor
February 8, 1997
Page 6
Company or termination of this Agreement, as the case may be, and will remain
in full force and effect according to their terms.
14. MISCELLANEOUS. No provision of this Agreement may be modified, waived or
discharged unless such modification, waiver or discharge is agreed to in a
writing signed by you and the chair of the Board. No waiver by any party to this
Agreement at any time of any breach by another party to this Agreement of, or of
compliance with, any condition or provision of this Agreement to be performed by
such party will be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter to this Agreement have been made by any party which are not
expressly set forth in this Agreement. This Agreement and the legal relations
among the parties as to all matters will be governed by and construed
exclusively in accordance with the internal laws of the State of Minnesota
(without regard to the conflict of laws principles of any jurisdiction), and the
parties agree that any litigation arising under or in connection with this
Agreement must be brought in a court of competent jurisdiction in the State of
Minnesota and hereby consent to the exclusive jurisdiction of said courts for
this purpose. The invalidity or unenforceability of all or any part of any
provision of this Agreement will not affect the validity or enforceability of
the remainder of such provision or of any other provision of this Agreement,
which will remain in full force and effect. This Agreement may be executed in
several counterparts, each of which will be deemed to be an original, but all of
which together will constitute one and the same instrument.
If this letter correctly sets forth our agreement on the subject matter
discussed above, kindly sign and return to the Company the enclosed copy of this
letter which will then constitute our agreement on this subject.
Sincerely,
TRICORD SYSTEMS, INC.
By: /s/ John J. Mitcham
----------------------------------------
John J. Mitcham
President and Chief Executive Officer
Agreed to as of this 8th day of February, 1997.
/s/ Charles C. Devor
----------------------------------------
Charles C. Devor
<PAGE>
DEFENSE AND INDEMNIFICATION AGREEMENT
This Defense and Indemnification Agreement ("Agreement") is made as of
this 8th day of July, 1996, between and among the following parties:
(1) Tricord Systems, Inc. ("Tricord"), a Delaware corporation;
(2) James D. Edwards, Gregory T. Barnum, John H. Crawford, and John
P. Guider ("Individual Insured(s)");
(3) The Home Insurance Company of Illinois ("The Home");
(4) Progressive Casualty Insurance Company ("Progressive"), an Ohio
corporation;
(5) Underwriters at Lloyd's, London ("Underwriters"); and
(6) the General Reinsurance Corporation ("General Re"), a Delaware
corporation
RECITALS
WHEREAS, The Home issued to Tricord the Directors and
Officers Liability and Company Reimbursement Insurance Policy No. PD0
F922315, effective for the policy period of March 19, 1994 through March 19,
1995, with a limit of liability of $2 million ("The Home Policy"); and
WHEREAS, Progressive issued to Tricord a first excess
Directors and Officers Liability and Company Reimbursement Insurance Policy
No. 04228871 (the "Progressive Policy"), effective for the policy period of
March 19, 1994 through March 19, 1995, with a limit of liability of $3
million in excess of The Home Policy; and
WHEREAS, Underwriters issued to Tricord a second excess
Directors and Officers Liability and Company Reimbursement Indemnity Policy
No. 542/94S00667 (the
<PAGE>
"Underwriters Policy"), effective for the policy period of March 19, 1994
through March 19, 1995, with a limit of liability of $1 million in excess of the
aggregate of The Home Policy and the Progressive Policy; and
WHEREAS, Progressive and General Re have represented to
each of the other undersigned parties that General Re (or one or more of its
operating units or subsidiaries) is responsible for all of Progressive's
financial obligations under the Progressive Policy; and
WHEREAS, on or about July 1, 1994 through July 14, 1994,
several class action lawsuits alleging violations of the federal securities
laws were brought on behalf of certain present and former Tricord
shareholders (collectively "Claimants") against Tricord and the Individual
Insureds in the United States District Court for the District of Minnesota,
Third Division, which lawsuits have been consolidated as In re: Tricord
Systems, Inc. Securities Litigation, Master File No. 3-94 Civil 746 (the
"Action"), and presently are pending; and
WHEREAS, Tricord and the Individual Insureds each have
made a claim for coverage under The Home Policy, the Progressive Policy, and
the Underwriters Policy, have been defending the Action with counsel of their
choosing, and have engaged in settlement negotiations with counsel for
Claimants; and
WHEREAS, at the time of execution of the Agreement, the
Claimants have outstanding a settlement demand for $4.6 million; and
2
<PAGE>
WHEREAS, The Home has been and presently is ready,
willing, and able to contribute The Home Policy's limits of liability toward
a settlement of the Action, upon request of the Individual Insureds; and
WHEREAS, Underwriters shall be liable under the
Underwriters Policy only after the aggregate limits of liability under both
The Home Policy and the Progressive Policy have been exhausted; and
WHEREAS, Progressive and General Re do not believe that
$4.6 million is an appropriate amount for which to settle the Action, based
upon the facts and law as alleged and as known by them to date; and
WHEREAS, General Re desires to assume control over the
defense of Tricord and the Individual Insureds in the Action, including
control over continued settlement negotiations with Claimants' counsel; and
WHEREAS, each of The Home, Progressive, and Underwriters
has advised Tricord and the Individual Insureds that it does not object to
General Re assuming control over the defense of Tricord and the Individual
Insureds in the Action, subject to the terms and conditions set forth herein;
and
WHEREAS, Tricord and the Individual Insureds are willing
to allow General Re to assume control over the defense of the Action, subject
to the terms and conditions set forth herein; and
3
<PAGE>
WHEREAS, Tricord and the Individual Insureds have
requested that The Home deposit its $2 million policy limits into an escrow
account to be available to be used by General Re in the defense and/or
settlement of the Action;
AGREEMENT
NOW, THEREFORE, in consideration for the mutual covenants set forth
herein, the receipt and sufficiency of which each undersigned party hereby
expressly acknowledges, each of the undersigned parties agrees as follows:
NATURE OF THE AGREEMENT
1. The Agreement supplements The Home Policy, the
Progressive Policy, and the Underwriters Policy (collectively the "Policies")
with respect to the Action and the claims now or hereafter being made by
Claimants in the Action. The Policies remain in full force and effect as
written, except to the extent specifically modified herein.
2. General Re's obligations under the Agreement are not
subject to any exclusions or defenses that might exist or be claimed to exist
under the Progressive Policy with respect to coverage of Tricord or the
Individual Insureds.
3. As a condition precedent to the duty of General Re
to pay any judgment or settlement in the Action in excess of the funds in the
Escrow Account described in Paragraphs 15, 16, and 17 herein, the obligation
of Tricord and/or the Individual Insureds to pay Claimants, if any such
obligation exists, shall first have been finally determined, either by final
adjudication or by written agreement between Tricord, the Individual
Insureds, Claimants, and General Re; provided, however, that this condition
precedent does not apply
4
<PAGE>
to General Re's obligation to pay Defense Costs as set forth in Paragraph 7
herein and to reimburse and compensate Tricord, the Individual Insureds, and
outside professionals as set forth in Paragraph 14 herein.
4. The undersigned parties agree that the first $3
million General Re pays in excess of the funds in the Escrow Account
described in Paragraphs 15, 16, and 17 herein is paid pursuant to General
Re's financial responsibilities for the Progressive Policy.
5. No person or organization shall have the right under
the Progressive Policy or the Agreement to join General Re as a party to the
Action or to any claim against Tricord or the Individual Insureds, nor shall
General Re be impleaded by any person or their legal representative in any
such Action or claim.
6. Tricord understands and agrees that the Agreement is
not intended to, and does not, impair or adversely affect whatever rights of
indemnification exist in favor of the Individual Insureds against Tricord
under or by reason of Delaware law, the Articles of Incorporation or Bylaws
of Tricord, any contractual obligations or undertakings, or otherwise.
ASSUMPTION OF DEFENSE
7. General Re shall assume the complete defense of
Tricord and the Individual Insureds in the Action, and does hereby undertake
a duty to defend Tricord and the Individual Insureds with respect to the
Action and the claims now or hereafter being made by the Claimants, until the
final resolution of the Action by settlement, final judgment, or otherwise.
The duty to defend shall include, but not be limited to, the duty to select
and
5
<PAGE>
retain defense counsel, to arrange for payment of all Defense Costs from the
Escrow Account until exhausted, to thereafter pay all Defense Costs directly,
to make decisions about the conduct of the Action, and to control and conduct
any settlement negotiations with Claimants' counsel. As used in the
Agreement, "Defense Costs" includes all attorneys' fees, costs, and expenses,
legal or otherwise, associated with the defense of the Action and the claims
now or hereafter being made by the Claimants.
8. General Re agrees that it will not resolve,
compromise, or settle the Action or the claims now or hereafter being made by
Claimants on any basis that involves an admission that Tricord and the
Individual Insureds, or any of them, have liability to the Claimants or
committed any wrongdoing of any kind whatsoever. Any settlement documents
must be in a form and content acceptable to Tricord and the Individual
Insureds, and each of them.
9. Tricord and the Individual Insureds agree that none
of them will admit liability, voluntarily make any payment, agree to any
settlement, or confess or otherwise consent to any judgment with respect to
the Action or the claims now or hereafter being made by Claimants, without
the written consent of General Re.
10. The Home, Progressive, and Underwriters consent to
allowing General Re to assume the defense of the Action as set forth in
Paragraph 7 herein, and hereby relinquish their right to consent to any
Defense Costs, or any settlement amount, incurred on behalf of Tricord and/or
the Individual Insureds in the Action.
6
<PAGE>
11. Underwriters hereby relinquishes its right to pursue
any claim for failure to effectuate a settlement of the Action below the
Claimants' current $4.6 million demand and without implication of the
Underwriters Policy layer, as well as the right to assure that such a
settlement occurs below Underwriters Policy layer through continued
involvement in the settlement negotiations.
12. Tricord and the Individual Insureds hereby
relinquish all rights, if any, to recover from The Home, Progressive,
Underwriters, and General Re any and all Defense Costs incurred up to and
through the date of execution of the Agreement. Tricord shall pay the
Defense Costs incurred by or on behalf of the Individual Insureds up to and
through the date of execution of the Agreement.
DUTY TO INFORM
13. General Re shall keep each other undersigned party
advised of all material developments in the Action on a timely basis, and
shall provide to each other undersigned party in a timely manner such
information relating to the Action as each such party may reasonably request,
including but not limited to information about all settlement discussions,
developments, and agreements, as well as the status and developments in the
Action.
COOPERATION
14. Tricord and the Individual Insureds shall cooperate
with General Re in the defense of the Action and shall provide General Re
with such information and assistance as it may reasonably request. General
Re shall promptly reimburse Tricord and/or the
7
<PAGE>
Individual Insureds for any and all out-of-pocket expenses that each or any
of them may incur as a result of his/its involvement as defendants or
witnesses in the Action. General Re also shall promptly compensate: (a) the
Individual Insureds, for the reasonable value of their time spent to provide
information and assistance to General Re with respect to the Action
(provided, however, that the Individual Insureds will not be compensated by
General Re for their testimony at deposition or trial in the Action); (b)
Tricord, for the reasonable value of the time spent and expenses incurred by
Tricord and Tricord's directors, officers, employees, agents, and outside
professionals (including but not limited to accountants and attorneys) to
provide information and assistance to General Re with respect to the Action
(provided, however, that no such person will be compensated by General Re for
his or her testimony at deposition or trial in the Action); and (c) outside
professionals for Tricord and the Individual Insureds (including but not
limited to accountants and attorneys) for the reasonable value of the time
spent and expenses incurred by such professionals to provide information and
assistance to General Re with respect to the Action, to the extent that such
time and expenses are billed directly to General Re.
ESCROW ACCOUNT
15. The Home shall deposit the sum of $2 million,
representing its full limit of liability under The Home Policy, into an
interest-bearing escrow account to be established by General Re (the "Escrow
Account") within thirty (30) days after the execution of the Agreement.
8
<PAGE>
16. Within thirty (30) days after the execution of the
Agreement, Tricord shall deposit the the sum of $400,000 into the Escrow
Account. Tricord shall make available to General Re for settlement purposes,
upon General Re's request, warrants to purchase 100,000 shares of Tricord
common stock at an exercise price of $6.00 per share for a period of five (5)
years from the date of the Agreement. The provisions for transfer and
disposition of such warrants shall be specified in a separate written
agreement between General Re and Tricord.
17. General Re acknowledges and hereby agrees that the
funds placed into the Escrow Account are to be used to pay all Defense Costs,
settlements, and/or judgments incurred in connection with the Action on or
after the date of execution of the Agreement, until the Escrow Account is
depleted or the Action is resolved, whichever comes first. Eighty-three
percent (83%) of all such Defense Costs, settlements, and/or judgments are
payable out of the funds to be deposited by The Home, and seventeen percent
(17%) of all such Defense Costs, settlements, and/or judgments are payable
out of the funds to be deposited by Tricord.
18. General Re will provide an accounting of all funds
withdrawn from the Escrow Account on a calendar quarterly basis to The Home
and to Tricord and, at the conclusion of the Action, any funds remaining in
the Escrow Account will revert back to the Home and to Tricord in proportion
to their respective cash contributions.
19. The interest earned on the deposited funds in the
Escrow Account will accrue solely for the benefit of The Home and Tricord,
and will be paid by General Re or the
9
<PAGE>
escrow agent to The Home and Tricord in proportion to their respective cash
contributions to the Escrow Account as such interest accrues.
CONDITIONAL RELEASE OF THE HOME
20. Effective upon payment by The Home pursuant to
Paragraph 15 herein, Tricord and the Individual Insureds, on their own behalf
and on behalf of their agents, representatives, attorneys, successors, heirs,
assigns and all other insureds under The Home Policy, hereby release and
forever discharge The Home, its agents, representatives, attorneys,
successors, owners, assigns, executors, administrators, principals,
directors, officers, employees, insurers and reinsurers, from any and all
actions, causes of action, suits, claims for sums of money, contracts,
controversies, agreements, costs, attorneys' fees, expenses, damages,
judgments and demands whatsoever in law or in equity, known or unknown, which
Tricord and/or the Individual Insureds have or may have against The Home
under The Home Policy, arising out of or related to the Action, including but
not limited to any action, proceeding, or claim arising from The Home's
investigation, evaluation, handling, or settlement of the Action or alleging
any "bad faith" or breach of any promise, oral or written, or breach of any
duty grounded in law or in contract relating thereto.
INDEMNIFICATION
21. To the fullest extent permitted by law, General Re
shall defend, protect, indemnify, and hold harmless Tricord, the Individual
Insureds, The Home, and Underwriters, any and all of them, and any and all of
their respective heirs, administrators, executors, representatives, and legal
successors, and their owners, principals, directors, officers,
10
<PAGE>
employees, agents, insurers, and reinsurers (collectively "Indemnitees"), of,
from and against any and all actions, liabilities, losses, damages, injuries,
controversies, costs, expenses, interest, attorneys' fees, settlements, or
judgments, of any kind or nature whatsoever, whether or not now known or
anticipated, that the Indemnitees, or any of them, may incur or become
subject to, arising from or out of, or in any way involving, the Action or
the claims now or hereafter being made by Claimants. General Re's
undertaking to defend, protect, indemnify, and hold harmless includes, but is
not limited to: (a) any established financial loss or injury that may be
caused to any Individual Insured, to his career, employment, or reputation,
or to his opportunity to serve as an officer or director of any corporation
or other entity, if the ultimate resolution of the Action is a verdict or
judgment adverse to such Individual Insured; (b) any action, proceeding, or
claim arising from or in any way involving any investigation, evaluation,
handling, or settlement of the Action by The Home or Underwriters, or
alleging any "bad faith" or breach of any promise, oral or written, or breach
of any duty grounded in law or in contract relating thereto; and (c) any
action, proceeding, or claim for the payment of any portion of The Home's or
Underwriters' policy limits. Payment by an Indemnitee shall not be a
precondition to General Re's obligations under this paragraph.
ATTORNEYS' FEES
22. Should it become necessary for the Indemnitees, or
any of them, to commence or pursue any proceeding, legal or otherwise
(including without limitation arbitration), against General Re for breach of
the Agreement, or to enforce any Indemnitee's rights under the Agreement,
then such Indemnitee(s) who prevails shall be entitled to recover
11
<PAGE>
from General Re the amount of attorneys' fees, costs, and expenses that he/it
incurs in connection with such proceeding.
ACKNOWLEDGMENTS, REPRESENTATIONS, WARRANTIES, AND AGREEMENTS
23. Progressive acknowledges that General Re (or one or
more of its operating units or subsidiaries) is the financially responsible
party under the Progressive Policy. Progressive further acknowledges that it
has no objection to General Re's entry into the Agreement, and in particular,
has no objection to General Re's undertaking of the duties set forth herein,
provided however that such acknowledgment shall not diminish or impair
Progressive's rights and responsibilities under its separate agreements with
General Re.
24. Each of the undersigned parties warrants and
represents that he/it has carefully read all of the terms of the Agreement,
and that he/it understands them and intends to be legally bound thereby.
Each of the undersigned parties further warrants and represents that he/it
has full authority to execute the Agreement, and that the execution and
performance of the Agreement has been duly authorized by all requisite
corporate action.
25. Except as stated in the final sentence of Paragraph
16 herein, the Agreement is the complete agreement of the undersigned parties
concerning the subject matter hereof. It supersedes all prior or
contemporaneous understandings, discussions, or agreements with respect to
the subjects contained herein. It also supersedes that certain Settlement
Agreement and Release entered into on or about June 10, 1996 between and
among Tricord, The Home, and Progressive.
12
<PAGE>
26. No breach of any provision of the Agreement by any
undersigned party can be waived by any other party hereto, unless expressly
done so in writing. Waiver of any one breach shall not be deemed to be a
waiver of any other breach of the same or any other provision hereof.
27. The Agreement may not be supplemented, changed, or
assigned by any party without the express written consent of all of the
undersigned parties.
28. Each of the undersigned parties acknowledges and
represents that he/it has been represented by competent legal counsel of
his/its own choosing in connection with his/its consideration and execution
of the Agreement. Each undersigned party acknowledges that he/it has had
adequate opportunity to investigate the factual and legal bases for the
Action and the claims being made by Claimants in the Action, and to form
his/its own independent judgment about the merit or lack of merit of the
Action, how the Action should be handled, and whether the Agreement should be
made and entered into. Each undersigned party further represents and
declares that in executing the Agreement, he/it has relied solely upon
his/its own judgment, belief and knowledge, and the advice and recommendation
of his/its own legal counsel, concerning the nature, extent and duration of
any rights, obligations and claims, and that he/it has not been influenced to
any extent whatsoever in executing the Agreement by any representations or
statements except those expressly contained or referred to herein.
29. Each undersigned party acknowledges and agrees that
if any fact or law now believed to be true is discovered hereafter to be
other than, or different from, that which
13
<PAGE>
he/it now believes, he/it expressly assumes the risk of such difference in
fact or law and agrees that the Agreement shall be and will remain effective
notwithstanding any such difference in fact or law. The Agreement is
intended to be final and binding between and among the undersigned parties,
regardless of any claims of fraud, misrepresentation, promise made without
intention of performance, concealment of fact, mistake of fact, mistake of
law, or any other circumstances whatsoever.
30. Each undersigned party acknowledges and agrees that
he/it will not take any action that would interfere with the performance of
the Agreement by any other undersigned party or that would adversely affect
any of the rights provided for in the Agreement.
GOVERNING LAW AND VENUE
31. The Agreement shall be construed in accordance with,
and be governed by, the law of the State of Minnesota. Any action brought to
enforce or interpret the Agreement shall be brought in the state or federal
courts for the State of Minnesota. Each undersigned party consents to the
exercise of personal jurisdiction over he/it by the state and federal courts
for the State of Minnesota in any action brought to enforce or interpret the
Agreement.
CONSTRUCTION AND INTERPRETATION
32. The terms of the Agreement are to be construed in an
evenhanded fashion as between and among the undersigned parties. Should it
be determined that there is ambiguity or a lack of clarity in any of the
language of the Agreement, the disputed issue
14
<PAGE>
shall be resolved in a manner most consistent with the relevant terms of the
Agreement and with the expressed intentions and goals of the Agreement,
without regard to authorship. The normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not
be used in the interpretation of the Agreement.
33. The headings, titles, and subtitles herein are used
solely for convenience, shall not be used in interpreting the Agreement, and
shall not be construed in any way to limit, modify, or affect the terms of
the Agreement.
COUNTERPARTS
34. The Agreement may be executed in counterparts, each
of which shall be deemed to be one and the same instrument. The undersigned
parties shall exchange among themselves original signed counterparts.
15
<PAGE>
GENERAL REINSURANCE CORPORATION
By
------------------------------
Its
-----------------------------
STATE OF CONNECTICUT)
) SS.
COUNTY OF __________)
On this ___ day of _______, 1996, before me a notary public of the
State of Connecticut, personally appeared __________________, to me
personally known and known to be an officer of General Reinsurance
Corporation, who represented that he was authorized to execute the foregoing
instrument on behalf of the corporation, who executed the foregoing
instrument on behalf of the corporation, and who acknowledged that he read
the same and executed it as his free act and deed.
-----------------------
Notary Public
* * *
16
<PAGE>
THE HOME INSURANCE COMPANY OF
ILLINOIS
By_______________________________________
Its_____________________________________
STATE OF _____________)
) SS.
COUNTY OF ____________)
On this ___ day of _______, 1996, before me a notary
public of the State of________________, personally appeared
__________________, to me personally known and known to be an officer of The
Home Insurance Company of Illinois, who represented that he was authorized to
execute the foregoing instrument on behalf of the corporation, who executed
the foregoing instrument on behalf of the corporation, and who acknowledged
that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
* * *
17
<PAGE>
PROGRESSIVE CASUALTY INSURANCE
COMPANY
By_______________________________________
Its_____________________________________
STATE OF _____________)
) SS.
COUNTY OF ____________)
On this ___ day of _______, 1996, before me a notary
public of the State of________________, personally appeared
__________________, to me personally known and known to be an officer of
Progressive Casualty Insurance Company, who represented that he was
authorized to execute the foregoing instrument on behalf of the corporation,
who executed the foregoing instrument on behalf of the corporation, and who
acknowledged that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
* * *
18
<PAGE>
UNDERWRITERS AT LLOYD'S, LONDON
By_______________________________________
Its_____________________________________
STATE OF _____________)
) SS.
COUNTY OF ____________)
On this ___ day of _______, 1996, before me a notary
public of the State of________________, personally appeared
__________________, to me personally known and known to be counsel for
Underwriters at Lloyd's, London, who represented that he was authorized to
execute the foregoing instrument on behalf of Underwriters at Lloyd's,
London, who executed the foregoing instrument on behalf of Underwriters at
Lloyd's, London, and who acknowledged that he read the same and executed it
as his free act and deed.
_____________________________________
Notary Public
* * *
19
<PAGE>
TRICORD SYSTEMS, INC.
By_______________________________________
Its_____________________________________
STATE OF MINNESOTA)
) SS.
COUNTY OF HENNEPIN)
On this ___ day of _______, 1996, before me a notary
public of the State of Minnesota, personally appeared __________________, to
me personally known and known to be an officer of Tricord Systems, Inc., who
represented that he was authorized to execute the foregoing instrument on
behalf of the corporation, who executed the foregoing instrument on behalf of
the corporation, and who acknowledged that he read the same and executed it
as his free act and deed.
_____________________________________
Notary Public
* * *
20
<PAGE>
_______________________________________
JAMES D. EDWARDS
STATE OF _____________)
) SS.
COUNTY OF ____________)
On this ___ day of _______, 1996, before me a notary
public of the State of___________________, personally appeared James D.
Edwards, personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to this instrument, and
acknowledged that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
* * *
21
<PAGE>
_______________________________________
GREGORY T. BARNUM
STATE OF MINNESOTA)
) SS.
COUNTY OF HENNEPIN)
On this ___ day of _______, 1996, before me a notary
public of the State of Minnesota, personally appeared Gregory T. Barnum,
personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to this instrument, and
acknowledged that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
* * *
22
<PAGE>
_______________________________________
JOHN H. CRAWFORD
STATE OF MASSACHUSETTS)
) SS.
COUNTY OF ____________)
On this ___ day of _______, 1996, before me a notary
public of the State of Massachusetts, personally appeared John H. Crawford,
personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to this instrument, and
acknowledged that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
* * *
23
<PAGE>
_______________________________________
JOHN P. GUIDER
STATE OF MINNESOTA)
) SS.
COUNTY OF HENNEPIN)
On this ___ day of _______, 1996, before me a notary
public of the State of Minnesota, personally appeared John P. Guider,
personally known to me (or proved to me on the basis of satisfactory
evidence) to be the person whose name is subscribed to this instrument, and
acknowledged that he read the same and executed it as his free act and deed.
_____________________________________
Notary Public
24
<PAGE>
HISTORICAL FINANCIAL SUMMARY
SELECTED FINANCIAL DATA:
The following table presents information regarding the financial condition and
results of operations of the Company for the past five years. The data as of
December 31, 1996 and 1995 and for each of the three years ended December 31,
1996 should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this annual report.
FOR THE YEARS ENDED DECEMBER 31,
SUMMARY OF OPERATIONS: --------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1996(a) 1995(b) 1994 1993 1992
- -------------------------------------------------------------------------------
Revenues $51,269 60,181 81,121 80,024 33,435
Cost of goods sold 35,416 60,483 50,862 50,405 21,898
------- ------ ------ ------ ------
15,853 (302) 30,259 29,619 11,537
------- ------ ------ ------ ------
Research and development 7,264 8,621 7,291 5,031 3,551
Sales and marketing 18,395 21,897 18,456 13,194 7,446
General and administrative 5,578 6,333 3,692 2,360 2,960
Other (income) expense, net (180) -- (1,017) (463) 873
------- ------ ------ ------ ------
31,057 36,851 28,422 20,122 14,830
------- ------ ------ ------ ------
Income (loss) before income taxes (15,204) (37,153) 1,837 9,497 (3,293)
Provision for income taxes -- -- (125) (498) --
------- ------ ------ ------ ------
Net income (loss) $(15,204) (37,153) 1,712 8,999 (3,293)
------- ------ ------ ------ ------
------- ------ ------ ------ ------
Net income (loss) per share $ (1.14) (2.81) 0.13 0.71 (2.64)
------- ------ ------ ------ ------
------- ------ ------ ------ ------
(a) Includes credits of $1,848, or $.14 per share, for the final adjustments
to the charges established in 1995 related to the disposal and write-down of
obsolete and excess inventory, an increase in the allowance for doubtful
accounts and severance. Also includes a charge of $1,700, or $.13 per share,
for an increase in the allowance for doubtful accounts relating to the
Chapter 11 bankruptcy filing by a large reseller.
(b) Includes charges totaling $18,696, or $1.42 per share, for the disposal and
write-down of obsolete inventory primarily due to changes in the Company's
business outlook and strategy, an increase in the allowance for doubtful
accounts and severance.
DECEMBER 31,
----------------------------------------
FINANCIAL POSITION (IN THOUSANDS): 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------
Working capital $8,140 20,020 51,872 56,556 7,815
Total assets 21,938 40,167 77,144 81,393 29,921
Long-term debt -- -- -- 51 2,646
Mandatory redeemable convertible
preferred stock -- -- -- -- 29,489
Stockholders' equity (deficiency) $14,175 28,754 64,454 63,840 (21,488)
DECEMBER 31,
------------------------------------------
GENERAL DATA AND RATIOS: 1996 1995 1994
- -------------------------------------------------------------------------------
Current ratio 2.0:1 2.8:1 5.7:1
Common shares outstanding (in thousands) 13,407 13,273 13,005
Book value per share 1.06 2.17 5.07
Number of employees 156 211 261
Average revenue per employee (in thousands) $ 291 290 336
Average sales price per system (in thousands) $ 58 53 51
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company has historically been engaged in the business of designing,
manufacturing, marketing and supporting high-performance enterprise servers for
use in mission critical applications principally running on Microsoft Windows NT
and Novell NetWare. The Company's enterprise servers are characterized by an
open system design emphasizing system management, high availability, high
performance and scalability.
In the second quarter of 1995, the Company engaged in an extensive analysis and
evaluation of the Company's business, including its marketing, operations,
assets and product lines, with emphasis on performance, strategies and focus.
As a result of this analysis, the Company decided to discontinue its low-end
DS1700 and DS2700 product lines and to focus on the enterprise server market.
As a result of this decision to focus on the enterprise server market and the
change in production methodology from build to inventory to build to order, the
Company took a charge of $18,066,000, or $1.37 per share, in the second quarter
of 1995. Of this charge, $14,488,000 was associated with the disposal and
write-down of obsolete and excess inventory primarily due to the changes in the
Company's business outlook for 1995, the discontinuance of the low-end DS1700
and DS2700 product lines and a reduction in the number of network operating
systems the Company would support within the enterprise server product lines.
The remaining components of the second quarter charge included: $1,925,000,
consisting primarily of the write-off of assets relating to the development of
the DS1700 and DS2700 product lines and loaners and demonstration equipment used
to support operating systems other than Novell NetWare and Microsoft Windows NT;
$750,000, consisting of severance costs resulting from a reduction in work
force; and $903,000, consisting of an increase in the allowance for doubtful
accounts, primarily due to problems with a receivable balance from a reseller in
Mexico. The breakdown of the $18,066,000 charge by line item in the statement
of operations for 1995 was as follows: cost of sales - $14,761,000; research
and development - $857,000; sales and marketing - $1,420,000; and general and
administrative - $1,028,000. An additional $630,000 charge for salary and
benefits was also taken in the second quarter of 1995 related to the employment
separation of the Company's former President and Chief Executive Officer. In
1995 and 1996, the Company disposed of approximately $6,917,000 and $2,486,000,
respectively, of excess and obsolete inventory related to the second quarter
1995 charge.
In the third quarter of 1996, the Company took a charge of $1,700,000, or $0.13
cents per share, by increasing its allowance for doubtful accounts due to the
October 1996 Chapter 11 bankruptcy filing of Memorex Telex Corporation ("Memorex
Telex"), one of its major OEM customers. This charge represented the entire
outstanding balance due from Memorex Telex as of September 30, 1996. The
Company determined that the full amount of the outstanding balance should be
charged to operations because of the significant obligations owed by Memorex
Telex to secured creditors and the fact that the Company was an unsecured
creditor. In addition, payments made by a Chapter 11 filer to a creditor such
as the Company during a certain period prior to such filing may be
8
<PAGE>
required to be returned if such payments are determined to be a "preference."
The Company has been informed that the trustee in bankruptcy for Memorex
Telex may take action to seek return of payments totaling up to approximately
$1,300,000. Although the Company intends to contest any such action, the
Company does not know what effect, if any, the possible return of certain
payments made to the Company by Memorex Telex will have on the Company's future
operations, cash flows and financial condition. Given the early stage of
this matter and considering that no claim has been made, no provision has
been made for this matter as of December 31, 1996.
In the fourth quarter of 1996, the Company completed its analysis of the
remaining reserves related to the second quarter 1995 charge. As a result of
this analysis, the Company reversed reserves totaling $1,848,000, or $0.14 per
share, consisting of $1,173,000 related to inventory reserves, $366,000 related
to the accounts receivable allowance and $309,000 related to severance and
purchase orders. The breakdown of the $1,848,000 credit by line item in the
statement of operations for 1996 is as follows: cost of sales - $(1,360,000);
research and development - $10,000; sales and marketing - $(130,000); and
general and administrative - $(368,000). The Company has approximately
$1,245,000 of remaining inventory reserves at December 31, 1996 related to the
second quarter 1995 charge, principally related to inventory at the Company's
Japanese subsidiary and inventory of its discontinued low-end DS product. The
Company estimates any recovery on the remaining inventory reserves related to
the second quarter 1995 charge will not be significant. As of December 31, 1996,
the Company has approximately $7,330,000 of total inventory reserves, which it
believes adequately provides for excess and obsolete inventory, loaner
inventory, spares and consigned spares inventory and warranty returns inventory.
In February 1997, the Company announced that its effort to explore strategic
alternatives, including the possibility of finding a strategic partner, to
strengthen the Company's probability of success in the server market was not
successful. The Company also announced that it would therefore not bring its
next generation server to market because the costs associated with bringing
future server products through final development to market exceeded the
available resources of the Company. Instead, the Company will focus its
resources on developing and marketing distributed data access and management
products for the Windows NT environment that will incorporate the Company's
distributed file system software technology and related input/output ("I/O")
technology. I/O technology is a core competency of the Company and was one of
the key differentiators of its enterprise server product line. Accordingly,
specialization in distributed data access and management products represents a
natural evolution for the Company and combines the Company's expertise in I/O
technology with the distributed file system technology that the Company has been
developing since its acquisition from Reliable Distributed Information
Corporation ("RDI") in August 1996. This evolution in the Company's strategy
necessitated a reduction in the Company's workforce, affecting approximately 90
employees. The Company intends to manufacture and sell its Pentium-based
enterprise server product line through 1997, and will honor its warranty,
service and support agreements. The Company does not expect any significant
charges in 1997 as a result of this action.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage increase (decrease) and the
percentage of revenues represented by certain line items in the Consolidated
Statements of Operations for the periods indicated:
INCREASE (DECREASE)
- -------------------
1996 1995 PERCENTAGE OF REVENUES
to to ----------------------
1995 1994 1996 1995 1994
- -------------------- ----------------------
(14.8)% (25.8) Revenues..............................100.0% 100.0 100.0
(41.4) 18.9 Cost of goods sold.................... 69.1 100.5 62.7
-----------------------
Gross margin........................ 30.9 (0.5) 37.3
-----------------------
Operating expenses:
(15.7) 18.2 Research and development............ 14.1 14.3 9.0
(16.0) 18.6 Sales and marketing................. 35.9 36.4 22.7
(11.9) 71.5 General and administrative.......... 10.9 10.5 4.6
-----------------------
60.9 61.2 36.3
-----------------------
Operating income (loss).............(30.0) (61.7) 1.0
Other income, net..................... 0.3 -- 1.3
-----------------------
Income (loss) before income taxes.....(29.7) (61.7) 2.3
Provision for income taxes............ -- -- (.2)
-----------------------
Net income (loss)...................(29.7)% (61.7) 2.1
-----------------------
-----------------------
REVENUES
During the last three years, the Company derived revenues primarily from the
sale of enterprise servers and associated software products, disk drives,
memory, expansion products and warranty service contracts. Revenues for 1996
decreased approximately 15% from 1995 compared to a decrease of 26% from 1994 to
1995. The decrease in product revenues from 1995 to 1996 related primarily to
lower revenues from the Company's low-end product lines, the DS series and Model
series servers. The DS series product line was discontinued in 1995 and the
Model series servers were at the end of their life cycle in 1995. Revenues from
the Company's high-end enterprise servers decreased approximately 1% in 1996
compared to 1995 and were $28,217,000 and $28,603,000 for 1996 and 1995,
respectively. Revenues from associated spares, expansion products and service
decreased approximately 5% in 1996 compared to 1995 from $20,938,000 for 1995 to
$19,820,000 for 1996. The decrease in revenues with respect to channels of
distribution occurred primarily in the OEM channel, specifically Memorex Telex.
Revenues from Memorex Telex were negatively impacted by the Chapter 11
bankruptcy filing by Memorex Telex in October 1996.
The decrease in product revenues from 1994 to 1995 related primarily to lower
revenues from low-end product lines, the delay in bringing the ES8000 to market,
the Company's decision to focus on the enterprise server market and the change
in production
10
<PAGE>
methodology from build to inventory to build to order. Also, in the fourth
quarter of 1995, the Company experienced delays in the receipt of components
and lower-than-expected production yields on assemblies used in the Company's
new enterprise server product line, which resulted in delayed shipments into
the first quarter of 1996. Backlog at the end of 1995 was $9,341,000
compared to $663,000 at the end of 1994, the increase resulted in large part
from the change in production methodology and fourth quarter delays in parts
receipts and production yields. The decrease in revenues from 1994 to 1995
with respect to channels of distribution occurred primarily in the
international reseller channels, with the greatest impact in Japan. OEM
sales to each of Memorex Telex and Sequent Computer Systems, Inc. ("Sequent")
also declined significantly, but sales to Toshiba Corporation ("Toshiba")
partially offset this decline.
Sales to Toshiba, which began purchasing the Company's products in 1995, were
14.9% of revenues in 1996 compared to 12.9% of revenues in 1995. Sales to
Memorex Telex were 14.5% of revenues in 1996 compared to 15.7% of revenues in
1995 and 15.8% of revenues in 1994. Sequent accounted for 2.2% of the Company's
revenues in 1996 compared to 3.4% of 1995 and 12.7% in 1994. Sales to Sequent
were lower in 1996 and 1995 due to the termination of Sequent's OEM agreement at
the end of 1994.
The Company currently anticipates that revenues will decrease significantly in
1997 as the Company shifts its strategy from sales of its enterprise servers and
instead focuses its resources on developing its distributed data access and
management products. The Company intends to manufacture its enterprise server
product line through 1997 as long as there is sufficient customer demand and
materials are available. In addition, the Company will sell spares and
expansion products as long as materials are available. The Company does not
anticipate any significant revenues in 1997 from the sale or license of its
distributed data access and management products, which have yet to be fully
developed. Actual 1997 revenues could materially differ from those expressed in
the foregoing forward-looking statements, depending on a number of factors,
including whether anticipated demand in 1997 for the Company's enterprise server
products differs from the Company's expectations and the ability of the Company
to purchase components to satisfy customer demand.
GROSS MARGIN
As a percent of revenues, gross margin increased to 30.9% in 1996 compared to
(0.5)% of revenue in 1995 and 37.3% of revenue in 1994. The increase in gross
margin percent from 1995 to 1996 and the decrease in gross margin from 1994 to
1995 was due primarily to the second quarter 1995 charge of $14,761,000 to cost
of sales associated with the disposal and write-down of obsolete and excess
inventory and severance costs relating to the reduction in workforce as
described above. In addition, gross margin was favorably impacted in 1996 by
the fourth quarter credit of $1,360,000 to cost of goods sold resulting from the
adjustment of the remaining reserves from the second quarter 1995 charge. Gross
margin, as a percent of revenue, increased to 28.3% in 1996, excluding the
$1,360,000 fourth quarter credit, from 24.0% in 1995, excluding the $14,761,000
second quarter 1995 charge. This gross margin improvement from 1995 to 1996 was
primarily due to a greater portion of sales of higher margin ES products sold in
1996 compared to
11
<PAGE>
1995, which had significantly more sales of the Company's lower margin DS and
Model series products. Excluding the second quarter 1995 charge, gross
margin, as a percent of revenue, decreased to 24.0% for 1995 compared to
37.3% for 1994. The gross margin in 1995 also decreased as a result of the
$1,200,000 product obsolescence reserve taken in the first quarter of 1995
for certain older product lines of the Company. Gross margins were also
negatively impacted during 1995 and 1996 by decreased revenues, which lowered
the amount over which fixed costs could be allocated.
Production planning for 1997 has been set at levels which the Company believes
it can attain and recover remaining assets. The Company currently anticipates
that gross margin will decline significantly in 1997 both in dollars and as a
percent of revenue because of the significant anticipated decrease in revenues
in 1997 (as discussed above) and the price reductions on the Company's
enterprise server products announced by the Company in the first quarter of
1997. Actual 1997 gross margin results could materially differ from those
expressed in the foregoing forward-looking statement, depending on a number of
factors, including the achievement of the Company's 1997 anticipated revenue
level and the ability of the Company to purchase quality components in order to
satisfy customer demand.
RESEARCH AND DEVELOPMENT
During the last three years, expenses for research and development consisted
primarily of personnel costs and depreciation on capital equipment used in
the research and development process. Research and development expenses
decreased to $7,264,000 in 1996 from $8,621,000 in 1995 and from $7,291,000
in 1994. The decrease from 1995 to 1996 was primarily due to the second
quarter 1995 charge of $857,000 for the write-off of assets relating to the
development of the low-end product lines, loaner equipment and severance.
Excluding the second quarter 1995 charge, research and development expenses
decreased 6.4% from 1995 to 1996 due to lower staffing levels and lower
depreciation on research and development equipment, which was partially
offset by higher consulting costs and research project expenses related to
the development of the Company's next generation enterprise server.
The increase from 1994 to 1995 was due to increased spending for personnel costs
and increased depreciation on capital equipment associated with the development
of new products and enhancement of existing products. In addition, the 1995
increase in research and development expenses also included the second quarter
1995 charge of $857,000. Excluding the second quarter 1995 charge, research and
development expenses increased 6.5% from 1994 to 1995.
In August 1996, the Company entered into an agreement to purchase certain assets
of RDI for $385,000 and entered into non-compete agreements totaling $100,000
with two of the principals of RDI. The asset purchase price of $385,000
included payment of $185,000 at closing, payment of $50,000 in January 1997 and
a contingent payment of $150,000 based on sales of product and continued
employment with the Company of one of the principals of RDI. The non-compete
agreements were paid in two installments, $50,000 at closing and $50,000 in
January 1997. In addition, the Company issued 24,000
12
<PAGE>
shares of unregistered and restricted stock. The restrictions with respect
to these shares will not lapse until and unless both of the following occur:
the Company ships 150 units of product which incorporate the code based on
the software acquired from RDI and two years elapse from the closing of the
agreement. Given the unproven status of this technology at the acquisition
date, the Company has included a $335,000 charge to research and development
expense for 1996 for the non-contingent portions of the asset purchase and
non-compete agreements. The technology purchased from RDI will be a
significant part of the development of the Company's distributed data access
and management products, which will be the focus of the Company's research
and development efforts in 1997.
The Company currently anticipates that research and development costs will be a
key expense during 1997 as the Company changes its focus from the development of
a next generation enterprise server to the development of distributed data
access and management products. The Company does not, however, anticipate that
research and development costs in 1997 will reach historical levels. Actual
1997 research and development expenses could materially differ from those
expressed in the foregoing forward-looking statements, depending on a number of
factors, including the ability of the Company to achieve its business plan and
obtain and commit the required resources to research and development and the
ability to hire and train quality research and development team members as well
as retain current research and development team members.
SALES AND MARKETING
During the last three years, sales and marketing expenses included compensation,
sales commissions, travel, trade shows and marketing materials, and facility
costs associated with domestic and international sales offices. Sales and
marketing expenses decreased to $18,395,000 in 1996 from $21,897,000 in 1995 and
from $18,456,000 in 1994. The decrease from 1995 to 1996 was partially due to
the second quarter 1995 charge of $1,420,000 for the write-off of assets and
severance costs, which was partially offset by costs related to the closing of
several foreign subsidiaries, principally in Japan and Europe. In the third
quarter of 1996, the Company decided to close its subsidiaries in Japan and
Mexico and to consolidate its European sales offices. The Company included
estimated costs of $658,000 for these actions in its results of operations for
1996. The Company is still in the process of closing and consolidating foreign
subsidiaries, and it is possible that expenses in excess of amounts currently
estimated may be incurred to complete this process.
The increase from 1994 to 1995 was due to the establishment of international
distribution channels, increases in market research and promotion activities,
regional sales offices and sales and agent commissions from direct sales. The
increase in sales and marketing also included the second quarter 1995 charge of
$1,420,000.
Sales and marketing expenses also decreased as a percentage of revenues to 35.9%
in 1996 from 36.4% in 1995 and increased in 1995 from 22.7% in 1994. Excluding
the
13
<PAGE>
second quarter charge of $1,420,000, sales and marketing expenses decreased
10.2% from 1995 to 1996, in line with the related revenue decrease.
The Company currently anticipates that sales and marketing expenses will
decrease significantly in 1997 as the Company changes its focus from the sale of
its enterprise servers to the development of distributed data access and
management products. Actual 1997 sales and marketing expenses could materially
differ from those expressed in the foregoing forward-looking statement,
depending on a number of factors, including the ability of the Company to
complete development and release commercially its distributed data access and
management products in accordance with its currently anticipated timetable.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $5,578,000 in 1996 from
$6,333,000 in 1995. General and administrative expenses increased to $6,333,000
in 1995 from $3,692,000 in 1994. The decrease from 1995 to 1996 was due to the
fourth quarter 1996 credit of $368,000 related to the final accounting of the
second quarter 1995 charge of $1,028,000 and a $630,000 charge in 1995 for
salary and benefits related to the employment separation of the former President
and Chief Executive Officer of the Company. Offsetting these items was an
increase to the allowance for doubtful accounts taken in the third quarter of
1996 related to the Chapter 11 bankruptcy filing of Memorex Telex.
The increase from 1994 to 1995 was primarily related to the second quarter 1995
charges of $1,028,000 and $630,000, as discussed above. In addition, a $250,000
charge was taken in the fourth quarter of 1995 related to anticipated costs
associated with the eventual resolution or settlement of an outstanding
securities class action matter (see Note 9 to the consolidated financial
statements). Excluding these charges, general and administrative expenses
increased 19.9% in 1995. The remaining increase from 1994 to 1995 was primarily
due to increases in legal fees associated with the class action lawsuit and
relocation expenses.
The Company currently anticipates that general and administrative expenses will
decrease significantly in 1997 due to the February 1997 workforce reduction and
the related support necessary for fewer team members.
INCOME TAXES
At December 31, 1996, for federal income tax purposes, the Company has domestic
net operating loss carryforwards of approximately $42,000,000. The Company did
not incur tax liabilities in 1996 and 1995 due to its net losses. The
effective tax rate of 6.8% for 1994 reflects the utilization of tax loss
carryforwards to offset domestic earnings.
LIQUIDITY AND CAPITAL RESOURCES
14
<PAGE>
Since its formation, the Company has primarily financed its operations and
capital equipment acquisitions through external sources of capital, including
public and private sales of equity and debt securities, leasing arrangements and
bank lines of credit. Cash used in operating activities was $4,774,000 in 1996.
Cash was primarily used in 1996 to fund the Company's net loss, and was offset
by a decrease in accounts receivable due to lower sales, stricter adherence to
the Company's credit policies and additional resources applied to collection
efforts, and a decrease in inventory due to lower sales and increased
forecasting accuracy related to procurement. Cash used in operating activities
was $58,000 in 1995. Cash was primarily used in 1995 to fund the Company's net
loss, and was offset by a decrease in accounts receivable due to lower sales,
stricter adherence to the Company's credit policies and additional resources
applied to collection efforts, as well as the primarily non-cash nature of
certain of the second quarter 1995 charges. Cash used in operating activities
in 1994 was $1,354,000, primarily for a reduction in payables and an increase in
inventory due to lower than planned revenues and the need to support the
Company's expanding product lines at that time.
Cash used in investing activities in 1996 was $1,346,000 and in 1995 was
$1,611,000, principally due to capital expenditures, which was partially offset
by proceeds from the maturity of investments. Cash provided by investing
activities in 1994 was $6,211,000, due to proceeds from the maturity of
investments, which was partially offset by capital expenditures.
As of December 31, 1996, accounts receivable and inventory were $4,636,000 and
$4,984,000, respectively, compared to $9,679,000 and $8,531,000, respectively,
as of December 31, 1995. The average days sales outstanding ("DSO") at December
31, 1996 and 1995, were 32 and 47 days, respectively. The decrease in DSO at
December 31, 1996 compared to 1995 was primarily due to continued strict
adherence to the Company's credit policies and additional resources applied to
collection efforts, and the inclusion of a full reserve for Memorex Telex as of
December 31, 1996. The December 31, 1996 DSO, adjusted to include Memorex
Telex, would have been 43 days. The Company turned inventory approximately 5.4
times in 1996 compared to 2.6 times in 1995, adjusted for the second quarter
1995 charge for the disposal and write-down of obsolete inventory.
Capital expenditures decreased slightly to $2,501,000 in 1996 from $2,819,000 in
1995. The Company currently anticipates capital expenditures of approximately
$500,000 in 1997, which will be used primarily for research and development.
The Company has no significant commitments for the purchase of capital
equipment.
As of December 31, 1996, the Company had approximately $5,711,000 in cash and
cash equivalents. Because of the Company's announcement in February 1997 that
it was discontinuing development of its next generation enterprise server and
would sell its current line of enterprise servers only through 1997, the Company
is currently evaluating its cash requirement needs. The revolving credit
facility, as described in Note 10 to the consolidated financial statements, is
based on eligible accounts receivable balances and therefore is not estimated to
be available to the Company as 1997 progresses. If the Company's operations
progress as currently anticipated, of which there can be no
15
<PAGE>
assurance, the Company believes that its existing cash and cash equivalents
will be sufficient to fund its operations for the next twelve months. Actual
cash requirements could materially differ from those expressed in the
foregoing forward-looking statement, depending on a number of factors,
including the ability of the Company to develop, test and release distributed
data access and management products in accordance with its currently
anticipated timetable, the development of the attached-storage market for
Windows NT computing environments in the manner anticipated by the Company,
the ability of the Company to achieve anticipated revenue levels from the
continued sale of enterprise servers and related components through the end
of 1997, and the ability of the Company to maintain its cost structure in
accordance with its operating plan. Actual cash requirements could also be
affected materially and adversely to the extent that the Company is required
to return payments made by Memorex Telex to the Company prior to the Chapter
11 bankruptcy filing of Memorex Telex. The company will adjust its plans as
necessary if it determines that additional cash will be required during 1997
The Company has also begun the process of seeking additional capital through
a number of different sources, including sales of assets and technology and
OEM or other strategic investments or alliances. There can be no assurance,
however, that additional capital will be available on acceptable terms or at
all.
NEW ACCOUNTING STANDARD
The Company plans to adopt the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share", in the fourth quarter of 1997. The
Company does not believe that the adoption of this new accounting standard will
have a significant impact on its financial statements.
16
<PAGE>
REPORT OF MANAGEMENT
To the Stockholders and
Board of Directors of
Tricord Systems, Inc.:
The management of Tricord Systems, Inc. is responsible for the preparation,
integrity and objectivity of the financial statements and all other financial
information included in this annual report. Management believes that the
financial statements have been prepared in accordance with generally accepted
accounting principles, and that any amounts included herein which are based on
estimates of the expected effects of events and transactions have been made with
sound judgment and approved by qualified personnel.
Tricord maintains a system of internal controls to provide reasonable assurance
that assets are safeguarded and that transactions and events are recorded
properly. The system of internal controls is regularly reviewed, evaluated, and
revised as necessary by management.
The financial statements in this report have been audited by the independent
accounting firm of Coopers & Lybrand L.L.P. Their audits were conducted in
accordance with generally accepted auditing standards and included an evaluation
of our internal control system, as they considered necessary, to determine the
extent of tests and audit procedures required for expressing an opinion on the
Company's financial statements.
The Audit Committee of the Board of Directors is composed of Mr. Donald L.
Lucas, Chairman, and Mr. Jeffrey O. Henley. The Audit Committee meets
periodically with the independent auditors and management to review accounting,
auditing, internal control and financial reporting matters. The external
auditors have full and free access to the Audit Committee and its individual
members at any time.
John J. Mitcham Gregory T. Barnum
President and Chief Sr. Vice President of Finance
Executive Officer and Chief Financial Officer
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Tricord Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Tricord Systems,
Inc. as of December 31, 1996 and 1995, and the related consolidated statements
of operations, cash flows and stockholders' equity for each of the three years
in the period ended December 31, 1996. 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 consolidated financial position of Tricord Systems,
Inc. as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, in February
1997, the Company announced a change in its future business focus.
COOPERS & LYBRAND L.L.P
Minneapolis, Minnesota
February 18, 1997
18
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31
---------------------------
(in thousands, except per share data) 1996 1995 1994
-------- ------- ------
Revenues $ 51,269 60,181 81,121
Cost of goods sold 35,416 60,483 50,862
-------- ------- ------
Gross margin 15,853 (302) 30,259
-------- ------- ------
Operating expenses:
Research and development 7,264 8,621 7,291
Sales and marketing 18,395 21,897 18,456
General and administrative 5,578 6,333 3,692
-------- ------- ------
31,237 36,851 29,439
-------- ------- ------
Operating income (loss) (15,384) (37,153) 820
-------- ------- ------
Other income (expense):
Interest income 387 654 794
Interest expense (2) (11) (61)
Other, net (205) (643) 284
-------- ------- ------
180 -- 1,017
-------- ------- ------
Income (loss) before provision for
income taxes (15,204) (37,153) 1,837
Provision for income taxes -- -- (125)
-------- ------- ------
Net income (loss) $(15,204) (37,153) 1,712
-------- ------- ------
-------- ------- ------
Net income (loss) per share $ (1.14) (2.81) 0.13
-------- ------- ------
-------- ------- ------
Weighted average common and
common equivalent shares
outstanding 13,357 13,212 13,593
-------- ------- ------
-------- ------- ------
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
At December 31,
----------------------
(In thousands, except per share data) 1996 1995
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 5,711 11,456
Short-term investments -- 1,000
Accounts receivable, net 4,636 9,679
Inventories, net 4,984 8,531
Other current assets 572 767
---------- ----------
Total current assets 15,903 31,433
Equipment and improvements, net 5,717 8,054
Other assets 318 680
---------- ----------
Total Assets $ 21,938 40,167
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,897 6,126
Accrued payroll, benefits and related taxes 1,275 1,486
Deferred revenue 1,045 1,203
Other accrued expenses 2,546 2,598
---------- ----------
Total current liabilities 7,763 11,413
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 27,000 shares
authorized, 13,407 and 13,273 shares
outstanding 134 133
Additional paid-in capital 77,522 76,830
Cumulative translation adjustments (256) (188)
Accumulated deficit (63,225) (48,021)
---------- ----------
Total stockholders' equity 14,175 28,754
---------- ----------
Total Liabilities and Stockholders'
Equity $21,938 40,167
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
20
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) Year Ended December 31,
--------------------------
1996 1995 1994
-------- ------- -----
Cash flows from operating activities:
Net income (loss) $(15,204) (37,153) 1,712
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Restructure and related charges (credits) (1,848) 18,066 --
Depreciation and amortization 4,485 4,942 4,572
Amortization of premium on investments -- 20 185
Loss on disposal of equipment 353 296 --
Provision for losses on accounts receivable 2,028 618 382
Provision for losses on inventories 994 1,454 677
Other 250 27 (217)
Changes in operating assets and liabilities:
Accounts receivable 3,381 13,098 617
Inventories 3,726 (925) (3,439)
Other current assets 195 101 68
Accounts payable (3,229) (597) (6,870)
Accrued payroll, benefits and related taxes (68) (703) 148
Other accrued expenses 163 698 811
-------- ------- -----
Net cash used in operating activities (4,774) (58) (1,354)
-------- ------- -----
Cash flows from investing activities:
Purchase of short-term investments -- -- (3,983)
Proceeds from maturity of investments 1,000 1,000 22,360
Purchase of long-term investments -- -- (1,000)
Capital expenditures (2,501) (2,819)(11,188)
Change in other assets 155 201 (43)
Other -- 7 65
-------- ------- -----
Net cash provided by (used in)
investing activities (1,346) (1,611) 6,211
-------- ------- -----
Cash flows from financing activities:
Proceeds from borrowings under revolving
credit agreement -- -- 1,500
Principal payments on notes payable -- -- (921)
Principal payments on revolving credit agreement -- -- (1,500)
Principal payments on capital lease obligations -- (50) (94)
Settlement of put warrants -- (656) --
Stock option transactions 443 535 468
-------- ------- -----
Net cash provided by (used in) financing
activities 443 (171) (547)
-------- ------- -----
Effect of exchange rate changes on cash (68) 55 (163)
-------- ------- -----
Net increase (decrease) in cash and cash equivalents (5,745) (1,785) 4,147
Cash and cash equivalents at beginning of year 11,456 13,241 9,094
-------- ------- -----
Cash and cash equivalents at end of year $ 5,711 11,456 13,241
-------- ------- -----
-------- ------- -----
The accompanying notes are an integral part of the consolidated financial
statements.
21
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except shares) Common Stock
----------------------------------
Additional Cummulative Total
Par Paid-In Translation Accumulated Stockholders'
Shares Value Capital Adjustments Deficit Equity
---------- ------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993 12,678,938 $ 127 76,489 (196) (12,580) 63,840
Stock options and warrants 326,161 3 395 -- -- 398
Issuance of put warrants -- -- (1,519) -- -- (1,519)
Tax benefits associated with stock options -- -- 70 -- -- 70
Foreign currency translation adjustments -- -- -- (47) -- (47)
Net income for the year -- -- -- -- 1,712 1,712
---------- ------ ----------- ----------- ----------- -------------
Balances, December 31, 1994 13,005,099 130 75,435 (243) (10,868) 64,454
Stock options and employee
stock purchase plan 267,461 3 532 -- -- 535
Settlement of put warrants -- -- 863 -- -- 863
Foreign currency translation adjustments -- -- -- 55 -- 55
Net loss for the year -- -- -- -- (37,153) (37,153)
---------- ------ ----------- ----------- ----------- -------------
Balances, December 31, 1995 13,272,560 133 76,830 (188) (48,021) 28,754
Stock options and employee
stock purchase plan 134,570 1 442 -- -- 443
Warrant issued in settlement of class action
matter -- -- 250 -- -- 250
Foreign currency translation adjustments -- -- -- (68) -- (68)
Net loss for the year -- -- -- -- (15,204) (15,204)
---------- ------ ----------- ----------- ----------- -------------
Balances, December 31, 1996 13,407,130 $ 134 77,522 (256) (63,225) 14,175
---------- ------ ----------- ----------- ----------- -------------
---------- ------ ----------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
22
<PAGE>
TRICORD SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Tricord Systems, Inc. (the "Company") has been engaged in the business of
designing, manufacturing, marketing and supporting high-performance enterprise
servers running on industry standard network systems, principally Microsoft
Windows NT and Novell NetWare, for use in mission-critical applications. The
Company's enterprise servers are sold, under the PowerFrame trade name,
primarily to value added resellers and system integrators, original equipment
manufacturers and international distributors in the computer industry. As
discussed in Note 2, the Company has changed its business focus for 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers investments with original maturities of three months or
less to be cash equivalents. Investments with original maturities in excess of
three months are classified as investments and are carried at amortized cost as
they are held to maturity. Cash and cash equivalents at December 31, 1996 are
concentrated in money market accounts and in commercial paper.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined using
standard costs, which approximate costs determined using the first-in, first-out
method. Appropriate consideration is given to deterioration, obsolescence and
other factors in the evaluation of net realizable value.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful asset
lives or lease terms of generally two to ten years. Expenditures for
maintenance and repairs that do not improve or extend the life of the respective
assets are expensed. The cost and related accumulated depreciation or
amortization of assets sold or disposed of are removed from the accounts and the
resulting gain or loss is included in the results of operations.
REVENUE RECOGNITION
Revenue on product sales is recognized upon shipment. The Company provides for
estimated warranty costs in the period sales are recognized. Revenue under
warranty
23
<PAGE>
service contracts is deferred and recognized on a straight-line basis
over the contract period.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred.
Software development costs are expensed as incurred. Such software development
costs are required to be expensed until the point that technological feasibility
and proven marketability of the product are established. Costs otherwise
capitalizable after such point also are expensed because they are insignificant.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recorded based on differences between
the tax bases of assets and liabilities and their carrying amounts for financial
reporting purposes. A valuation allowance is provided to reduce deferred tax
assets to the amount expected to be realized.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common and common equivalent shares outstanding
during each period. Common equivalent shares relate to common stock options and
warrants unless their effect is antidilutive.
USE OF ESTIMATES
The preparation of the Company's consolidated 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.
The most significant areas which require the use of management estimates relate
to the determination of the allowances for obsolete inventories, uncollectible
accounts receivables, accrued warranty costs and the assessment of any
impairment of long-lived assets.
2. CHANGE IN BUSINESS FOCUS
In February 1997, the Company announced that its effort to find strategic
alternatives, including the possibility of finding a strategic partner, to
strengthen the Company's probability of success in the server market was not
successful. The Company also announced that it would not bring its next
generation server to market because the costs associated with bringing future
server products through final development to market exceeded the available
resources of the Company. Instead, the Company will focus its resources on
developing and marketing distributed data access and management products for the
Windows NT environment that will incorporate the Company's distributed file
system software technology and related input/output ("I/O") technology.
Specialization in distributed data access and management products represents a
natural evolution for the Company and combines the Company's expertise in I/O
technology with the distributed
24
<PAGE>
file system technology that the Company has been developing since its
acquisition from Reliable Distributed Information Corporation in August 1996.
See Note 11 to the consolidated financial statements. This evolution in the
Company's strategy necessitated a reduction in the Company's workforce,
affecting approximately 90 employees. The Company intends to manufacture and
sell its Pentium-based enterprise server product line through 1997, and to
honor its warranty, service and support agreements. The Company does not
expect any significant charges in 1997 as a result of this action.
The Company estimates that research and development expenses for developing
distributed data access and management products were approximately $1,500 in
1996. The Company does not anticipate any significant revenues from the
development of products related to the distributed data access and management
products in 1997. The Company estimates that its general and administrative
overhead expenses are approximately $2,000 annually.
Because of the Company's announcement in February 1997 that it was
discontinuing development of its next generation enterprise server and would
sell its current line of enterprise servers only through 1997, the Company is
currently evaluating its cash requirement needs. If the Company's operations
progress as currently anticipated, of which there can be no assurance, the
Company believes that its existing cash and cash equivalents will be
sufficient to fund its operations for the next twelve months. The Company
has also begun the process of seeking additional capital through a number of
different sources, including sales of assets and technology and OEM or other
strategic investments or alliances.
3. MEMOREX TELEX CORPORATION
In the third quarter of 1996, the Company took a charge of $1,700, or $0.13
cents per share, by increasing its allowance for doubtful accounts due to the
October 1996 Chapter 11 bankruptcy filing of Memorex Telex Corporation ("Memorex
Telex"), one of its major OEM customers. This charge represented the entire
outstanding balance due from Memorex Telex as of September 30, 1996. The
Company determined that the full amount of the outstanding balance should be
charged to operations because of the significant obligations owed by Memorex
Telex to secured creditors and the fact that the Company was an unsecured
creditor. In addition, payments made by a Chapter 11 filer to a creditor such
as the Company during a certain period prior to such filing may be required to
be returned if such payments are determined to be a "preference." The Company
has been informed that the trustee in bankruptcy for Memorex Telex may take
action to seek return of payments totaling up to approximately $1,300. Although
the Company intends to contest any such action, the Company does not know what
effect, if any, the possible return of certain payments made to the Company by
Memorex Telex will have on the Company's future operations, cash flows and
financial condition. Given
25
<PAGE>
the early stage of this matter and considering that no claim has been made,
no provision has been made for this matter as of December 31, 1996.
4. SELECTED FINANCIAL STATEMENT INFORMATION
SUPPLEMENTAL BALANCE SHEET INFORMATION
DECEMBER 31,
--------------------------
1996 1995
------------ ----------
Accounts receivable:
Accounts receivable $ 7,480 11,255
Less allowance for doubtful accounts (2,844) (1,576)
------------ ----------
$ 4,636 9,679
------------ ----------
------------ ----------
Inventories:
Raw materials $ 3,658 5,546
Work-in-process 4,696 7,090
Finished goods 3,194 4,637
Evaluation units 11 172
Spare parts 755 770
Less inventory reserves (7,330) (9,684)
------------ ----------
$ 4,984 8,531
------------ ----------
------------ ----------
Equipment and improvements:
Office equipment and leasehold improvements $ 4,614 4,715
Engineering equipment 9,525 8,927
Production equipment 1,796 1,690
------------ ----------
15,935 15,332
Less accumulated depreciation and amortization (10,218) (7,278)
------------ ----------
$ 5,717 8,054
------------ ----------
------------ ----------
Accrued payroll, benefits and related taxes:
Salaries, commissions and bonus $ 762 727
Vacation 407 519
Medical benefits 106 240
------------ ----------
$ 1,275 1,486
------------ ----------
------------ ----------
Other accrued expenses:
Warranty $ 626 341
Other 1,920 2,257
------------ ----------
$ 2,546 2,598
------------ ----------
------------ ----------
SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION
In November 1996, the Company completed its analysis of the remaining reserves
related to the second quarter 1995 charge totaling $18,066 associated with the
disposal and write-
26
<PAGE>
down of obsolete and excess inventory due primarily to changes in the
Company's business outlook and strategy, an increase in the allowance for
doubtful accounts and severance. As a result of this analysis, the Company
reversed reserves totaling $1,848, or $0.14 per share, in the fourth quarter
of 1996 to adjust the remaining estimates for each of the items above. The
breakdown of the $1,848 credit by line item in the statement of operations is
as follows: cost of sales - $(1,360); research and development - $10; sales
and marketing - $(130); and general and administrative - $(368).
Other income includes foreign currency losses of approximately $202 and $183 in
1996 and 1995, respectively, and foreign currency gains of $218 in 1994.
SUPPLEMENTAL CASH FLOW INFORMATION
1996 1995 1994
---- ---- ----
Cash paid for interest $ 2 6 61
Cash paid for income taxes -- -- 463
GEOGRAPHICAL DATA AND MAJOR CUSTOMERS
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
1996
Sales to unaffiliated customers $ 43,626 7,643 51,269
Operating income (loss) (15,866) 482 (15,384)
Identifiable assets 19,758 2,180 21,938
1995
Sales to unaffiliated customers $ 53,754 6,427 60,181
Operating loss (33,316) (3,837) (37,153)
Identifiable assets 35,267 4,900 40,167
1994
Sales to unaffiliated customers $ 75,228 5,893 81,121
Operating income (loss) 2,217 (1,397) 820
Identifiable assets 67,815 9,329 77,144
International activity principally relates to activities of the Company's
Japanese subsidiary, Tricord K.K. The Company's other international
subsidiaries are sales and marketing channels. The Company exports its products
to unaffiliated customers located in these channels. Substantially all of the
Company's international sales are denominated in U.S. dollars, except Japan, in
which sales are negotiated, invoiced and paid in yen. The impact of foreign
currency exchange rate changes and transactions is not significant for any of
the periods presented.
United States sales to unaffiliated customers in 1996 includes export sales of
$3,982 to Europe and $2,653 to other foreign countries. Sales to Toshiba
Corporation ("Toshiba") and Memorex Telex accounted for 14.9% and 14.5%,
respectively, of the Company's
27
<PAGE>
revenues during 1996. Substantially all sales of Tricord K.K. are sales to
Toshiba. Connect Computer Systems, Inc. and STMS, Inc., two of the Company's
domestic resellers, comprised 21.5% and 13.7%, respectively, of the Company's
accounts receivable balance at December 31, 1996.
United States sales to unaffiliated customers in 1995 includes export sales of
$5,340 to Europe and $4,576 to other foreign countries. Sales to Memorex Telex
and Toshiba accounted for 15.7% and 12.9%, respectively, of the Company's
revenues during 1995. Memorex Telex comprised 21.8% and Toshiba 12.3% of the
Company's accounts receivable balance at December 31, 1995. Tricord K.K. makes
the sales to Toshiba.
United States sales to unaffiliated customers in 1994 includes export sales of
$8,534 to Europe and $5,605 to other foreign countries. Sales to Memorex Telex
accounted for 15.8% of revenues during 1994. Sales to Sequent Computer Systems,
Inc. accounted for 12.7% of revenues during 1994.
5. STOCKHOLDERS' EQUITY
STOCK OPTION PLANS
The Company's stock option plans provide for grants of incentive and
nonqualified stock options, stock appreciation rights, restricted stock
awards, performance unit awards and stock bonus awards to officers,
employees, non-employee consultants and independent contractors. The Company
has reserved 2,000,000 shares of common stock for issuance, plus any unissued
or shares that become cancelable under previous stock option plans, under the
1995 Stock Incentive Plan, which terminates in 2004. The Company had
previous stock option plans under which a total of 3,360,000 shares of common
stock have been reserved for issuance. These previous plans have been
terminated; however, any options outstanding upon termination of these plans
may continue to be exercised in accordance with their terms. Options may be
granted to purchase shares of the Company's common stock at not less than the
fair market value at the date of grant. Options generally become exercisable
over periods of up to four years from date of grant and expire within five
years from date of grant.
The Company's 1992 Non-Employee Director Stock Option Plan, as amended, provides
for the granting to all non-employee directors certain options to purchase
common stock at fair market value on the date of grant and generally become
exercisable for periods of up to three years and expire within five years.
These options include a one-time grant of 25,000 shares, an annual grant of
10,000 shares and a one-time grant of 10,000 shares for non-employee directors
serving on the Executive Committee of the Board of Directors. The number of
shares reserved for issuance under the Plan is 350,000 shares. As of December
31, 1996, 250,000 shares had been issued under the 1992 Non-Employee Director
Stock Option Plan, at exercise prices ranging from $3.00 to $25.00 per share.
At December 31, 1996, 149,152 of these options are exercisable, 18,070 have been
exercised, 80,000 have been canceled and none have expired. In addition, each
non-employee director is granted an annual stock award in lieu of any cash
retainer for services as a Director and each director will receive the number of
shares of common
28
<PAGE>
stock as equals the annual retainer divided by the fair market
value of one share of common stock at the annual award date.
Stock option transactions were as follows:
Shares 1996 1995 1994
- ----------------------------------------------------------------
Granted 1,962,000 2,428,500 1,197,575
Exercised (64,691) (218,584) (306,285)
Canceled (1,564,219) (866,721) (491,827)
--------- --------- ---------
December 31:
Outstanding 3,412,646 3,079,556 1,736,361
--------- --------- ---------
--------- --------- ---------
Exercisable 894,810 580,916 488,710
Average exercise price
Per share 1996 1995 1994
- ----------------------------------------------------------------
Granted $ 3.05 $ 4.06 $ 11.15
Exercised 3.19 1.52 1.04
Canceled 4.74 7.88 19.68
December 31:
Outstanding 4.33 5.34 7.93
Exercisable $ 6.08 $ 8.22 $ 7.30
Stock options outstanding at December 31, 1996 had a range of exercise prices of
$1.50 to $25.00 and an average contractual useful life of 3.7 years.
Approximately 56% of the options outstanding had an exercise price of less than
$4.00, of which approximately 10% of these options are exercisable.
Approximately 44% of the options outstanding had an exercise price of $4.00 to
$25.00, of which approximately 50% are exercisable. The weighted average
contractual life for each of these groups of options was 4.3 years and 2.9
years, respectively.
NEW ACCOUNTING STANDARD
In 1996, the Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, a new standard of accounting for
stock-based compensation plans. The Company has continued to measure
compensation cost for its stock incentive and option plans using the
intrinsic-value-based method of accounting it has historically used and,
therefore, the new standard has no effect on the Company's operating results.
29
<PAGE>
Had the Company used the fair-value-based method of accounting for its stock
option and incentive plans grants beginning in 1995 and charged the related
compensation cost to operations, over the vesting period, net loss and net loss
per share would have been increased to the following pro forma amounts:
1996 1995
- -------------------------------------------------------------------------
Net loss
As reported $ (15,204) $ (37,153)
Pro forma (16,845) (37,813)
Net loss per common share
As reported $ (1.14) $ (2.81)
Pro forma $ (1.26) (2.86)
The pro forma information above only includes stock options granted in 1995 and
1996. Compensation expense under the fair-value-based method of accounting may
increase over the next few years as additional stock option grants are
considered.
The weighted average grant-date fair value of the options granted in 1996 and
1995 was $1.89 and $2.83 per share, respectively. The fair value was computed
using the Black-Scholes option-pricing model. The assumptions used by the
Company to compute the estimated fair value of options at grant date were as
follows: the options were assumed to be exercised one year earlier than their
term of five years at date of grant; no dividends will be paid by the Company
during the term of the option granted; cumulative stock price volatility ranged
from approximately 76% to 95%; and the weighted average risk-free interest rate
was 6.67% for 1996 and 1995. In addition, average forfeitures were assumed to
be 23% and 20% for 1996 and 1995, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") has reserved
250,000 shares of common stock for future issuance. Under the Purchase Plan,
the Company's employees may purchase shares of the Company's common stock at a
price equal to 85% of the fair market value of the stock as of the first or last
day of the twelve month offering period, whichever is lower. The Company issued
approximately 46,000 and 49,000 shares in 1996 and 1995, respectively. No
shares were issued in 1994.
WARRANTS
During 1992, the Company issued warrants to purchase 760,000 shares of the
Company's common stock to certain original equipment manufacturers at prices
ranging from $1.50 to $10.00 per share. These warrants expire two to seven
years after issuance. At December 31, 1996, 700,000 of these warrants are
exercisable, 20,000 have been exercised, none have been canceled and 40,000 have
expired. The Company has other warrants outstanding. See Note 9 to the
consolidated financial statements.
SHAREHOLDERS' RIGHTS PLAN
30
<PAGE>
In October 1994, the Company adopted a shareholder rights plan, pursuant to
which the Company declared a dividend distribution of one Preferred Share
Purchase Right on each outstanding share of the Company's Common Stock. Each
Right will entitle stockholders to purchase one one-thousandth of a share of the
Company's Series A Junior Preferred Stock at an exercise price of $50.00,
subject to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated October 24, 1994, between the Company and Norwest Bank
Minnesota, N.A., as Rights Agent. The rights will expire in October 2004.
6. LEASES
The Company and its subsidiaries lease office and production facilities and
certain equipment under cancelable and noncancelable operating leases expiring
at various dates through 2004. The Company's primary facilities lease has a
ten-year term with an additional five-year term renewable at the Company's
option and includes a provision that the Company pay a pro rata share of the
lessor's operating costs. Under the equipment leases, the Company has the
option under a majority of the leases to extend the terms or has the option to
purchase the equipment at the end of the lease terms at its fair value. Rent
expense under all leases was $1,546, $1,881 and $1,117 for the years 1996, 1995
and 1994, respectively.
Future minimum lease payments, excluding operating costs, are as follows:
1997 . . . . . . . . . . . . . . . $ 841
1998 . . . . . . . . . . . . . . . 841
1999 . . . . . . . . . . . . . . . 813
2000 . . . . . . . . . . . . . . . 703
2001 . . . . . . . . . . . . . . . 673
Thereafter . . . . . . . . . . . . . . 1,855
------
$5,726
------
------
In connection with the Company's change in business strategy for 1997, the
Company is attempting to sublease a significant portion of its corporate
office and production facility lease. The Company believes based on current
market conditions that sublease income will exceed the rent payable.
7. INCOME TAXES
At December 31, 1996, the Company had generated domestic net operating loss
carryforwards of approximately $42,000 for tax reporting purposes that may be
offset against future taxable income through 2011. In addition, the Company
also had generated approximately $1,726 of research and experimentation tax
credit carryovers available to reduce future income taxes. These credits expire
from 2002 through 2011. Due to uncertainty as to the realizability of the loss
and tax credit carryforwards, full
31
<PAGE>
valuation allowances have been established for the benefit associated with
these carryforwards and for net deductible temporary differences related
primarily to accounts receivable and obsolete inventory allowances, and
depreciation and deferred revenue.
Domestic and foreign components of loss before provision for income taxes for
1996 are $11,817 and $3,387, respectively. For 1995, domestic and foreign
components of loss before provision for income taxes are $30,235 and $6,918,
respectively, while for 1994, the domestic and foreign components of income
(loss) before provision for income taxes are $4,829 and $(2,992), respectively
In 1994, the Company utilized approximately $3,199 of net operating loss
carryforwards. The Company's effective income tax rate in 1994 differs from
the federal statutory tax rate primarily because of the utilization of these net
operating loss carryforwards.
8. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit sharing plan covering all
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
Employee contributions are limited to 15% of their earnings, subject to yearly
limitations. At the discretion of the Board of Directors, the Company may make
profit sharing contributions, which are allocated to eligible employees based on
their salary without regard to whether they have made any contributions to the
plan, or matching contributions, which are allocated to eligible employees based
upon the amount of contributions made to the plan during the year. The Company
has proposed a matching contribution for 1996 of $114, subject to the Board of
Directors' approval. The Board of Directors approved $143 and $173 of matching
contributions for 1995 and 1994, respectively.
9. LEGAL PROCEEDINGS
In July 1994, the Company received notice that class action complaints had been
filed against the Company and certain of its directors and officers in U. S.
District Court in Minnesota. The complaints were filed following the Company's
announcement that second quarter 1994 results would be below analysts'
expectations. The complaints were consolidated into one class action lawsuit
which alleged that the Company and the individual defendants violated federal
securities statutes by fraudulently inflating the price of the Company's stock.
The Company does maintain director and officer insurance coverage for claims of
this nature. The Company included a $250, or $0.02 per share, charge in the
fourth quarter of 1995 as the Company's estimate of its share of the cost for
the eventual resolution or settlement of the outstanding class action matter.
In July 1996, one of the insurance carriers assumed complete defense of this
matter for the Company and the individual defendants and agreed to hold all
defendants harmless against any further liability with respect to the matter in
exchange for the Company's deposit of $400 into an escrow account and making
available warrants for settlement purposes to purchase 100,000 shares of the
Company's common stock at an exercise
32
<PAGE>
price of $6.00 per share, exercisable for a period of five years from the
date of the Defense and Indemnification Agreement, which is July 8, 1996.
Included in the 1996 loss is a $400, or $0.03 per share, charge, consisting
of the additional $150 charge and a $250 charge equal to the estimated fair
value of the warrants.
10. REVOLVING CREDIT FACILITY
In August 1996, the Company obtained a revolving credit facility with a bank to
finance 80% of eligible accounts receivable up to a maximum amount of $10,000.
Terms of the revolving credit facility include interest at 1.5% to 2.75% over
the prime rate, depending on the debt to tangible net worth ratio, a term of one
year renewable annually and a financial covenant to maintain not less than
$10,000 of tangible net worth. The revolving credit facility is collateralized
by all inventory, equipment, receivables and general intangibles of the Company.
The Company did not borrow under this arrangement in 1996.
11. ACQUISITION OF ASSETS OF RDI CORPORATION
In August 1996, the Company entered into an agreement to purchase certain assets
of Reliable Distributed Information Corporation ("RDI Corporation") for $385 and
entered into non-compete agreements totaling $100 with two of the principals of
RDI Corporation. The asset purchase price of $385 included payment of $185 by
closing of the agreement, payment of $50 in January 1997 and a contingent
payment of $150 based on sales of product and continued employment with the
Company of one of the principals of RDI Corporation. The non-compete agreements
are to be paid in two installments, $50 at closing and $50 in January 1997. In
addition, the Company issued 24,000 shares of unregistered and restricted stock.
The restrictions with respect to these shares will not lapse until and unless
both of the following occur: the Company ships 150 units of product which
incorporate the code based on the software acquired from RDI Corporation and two
years from the closing of the agreement. Given the unproven status of this
technology at the acquisition date, the Company has included a $335 charge to
research and development expense for the year ended December 31, 1996 for the
non-contingent portions of the asset purchase agreement and non-compete
agreements. The technology purchased from RDI Corporation will be a significant
part of the development of the Company's distributed data access and management
products, which will be the focus of the Company's research and development
efforts in 1997.
12. PUT WARRANTS
On July 11, 1995 and August 23, 1995, the Company paid $408 and $248,
respectively, to settle its put warrant obligations. The Company's additional
paid-in capital has been increased by the difference between the put warrant
cash settlement amount and the original repurchase obligation amount of $1,519.
In private transactions in June and September 1994, the Company had sold put
warrants that entitled the holder of each
33
<PAGE>
warrant to sell 100 shares of Common Stock to the Company. The put warrants
expired on June 26 and August 7, 1995, and had an exercise price of $10.75
and $4.84 per share, respectively, subject to an exercise price adjustment
under certain circumstances. The Company had the option to settle the
transaction in cash, which it exercised as noted above. The Company, with the
proceeds of the put warrants, had purchased corresponding call options. The
call options expired on June 26 and August 7, 1995.
13. CONTINGENCIES
In addition to matters disclosed elsewhere in the notes to the consolidated
financial statements, the Company is a defendant in various claims and disputes
arising in the ordinary course of business. While the outcome of these matters
cannot be predicted with certainty, management presently believes the
disposition of these matters will not have a material effect on the results of
operations, financial position or cash flows of the Company.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter(a) Quarter(b) Quarter(c)
-------- ---------- ---------- ---------
1996
Revenues $18,450 12,012 10,571 10,236
Gross margin 5,842 2,760 3,028 4,223
Net loss (1,923) (5,358) (6,316) (1,607)
Net loss per share (.14) (.40) (.47) (.12)
1995
Revenues $16,168 11,203 17,237 15,573
Gross margin 4,307 (12,681) 4,690 3,382
Net loss (3,254) (25,629) (3,088) (5,182)
Net loss per share (.25) (1.95) (.23) (.39)
(a) Includes charges totaling $18,696, or $1.42 per share, in the second quarter
of 1995 for the disposal and write-down of obsolete inventory primarily due
to changes in the Company's business outlook and strategy, an increase in
the allowance for doubtful accounts and severance.
(b) Includes a charge of $1,700, or $0.13 per share, in the third quarter of
1996 for an increase in the allowance for doubtful accounts relating to
the Chapter 11 bankruptcy filing by a large reseller.
(c) Includes credits of $1,848, or $0.14 per share, in the fourth quarter of
1996 for the final adjustments to the charges established in the second
quarter of 1995 related to the disposal and write-down of obsolete
and excess inventory, an increase in the allowance for doubtful accounts
and severance.
Quarterly calculations of net loss per share are made discretely for each
quarter during the fiscal year.
34
<PAGE>
INVESTOR INFORMATION
NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held at the Ramada Plaza Hotel in
Minnetonka, Minnesota, beginning at 10:00 a.m. local time, on Wednesday May 21,
1997. A formal notice of the meeting, together with proxy statement and proxy,
will be mailed on or about April 10, 1997 to stockholders of record on March 28,
1997.
STOCKHOLDERS' INQUIRIES
Communications concerning transfer requirements, change of address and lost
certificates should be directed to the Transfer Agent.
To meet the general information needs of stockholders and investors, Tricord
Systems, Inc. staffs an investor relations department at its corporate
headquarters. Inquiries are welcome by letter or telephone to: Investor
Relations Department, Tricord Systems, Inc., 2800 Northwest Boulevard, Plymouth,
Minnesota 55441; telephone (612) 557-9005.
SECURITIES LISTINGS
The Company's common stock is listed and traded on the National Association of
Securities Dealers Automated Quotation National Market System. The Nasdaq
trading symbol is TRCD.
FORM 10-K
The Company will provide a copy of its most recent Form 10-K Annual Report to
any shareholder requesting a copy. Inquiries should be directed to the Investor
Relations Department at the address above.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minnesota, N.A.
161 North Concord Exchange
P.O. Box 738
South St. Paul, Minnesota 55075-0738
COMMON STOCK PRICES
The following table sets forth, for the periods indicated, the high and low
closing sales prices per share for the Company's common stock as reported by
the Nasdaq. These prices do not include adjustments for retail markups,
mark-downs or commissions.
1996 1995
-------------- ---------------
HIGH LOW HIGH LOW
----- ----- ------ ------
First quarter $4.63 2.50 6.38 4.88
Second quarter 7.25 3.63 5.12 3.50
Third quarter 4.50 2.50 5.12 3.38
Fourth quarter 2.69 1.36 4.25 2.56
On February 28, 1997, the closing price for the Company's common stock was
$0.81.
35
<PAGE>
On February 28, 1997, there were approximately 367 stockholders of record of the
Company's common stock. The Company estimates that an additional 7,200
shareholders own stock held for their accounts at brokerage firms and financial
institutions.
DIVIDENDS
The Company has not declared any cash dividends with respect to its common
stock. The Company currently does not intend to declare or pay any cash
dividends on the Company's common stock and there can be no assurance that the
Company will ever declare or pay cash dividends on its common stock.
CORPORATE INFORMATION
DIRECTORS
Yuval Almog - President, CORAL Group, Inc.
Jeffrey O. Henley - Executive Vice President and CFO, Oracle Corporation
Donald L. Lucas - Private Investor
John J. Mitcham - President and Chief Executive Officer, Tricord Systems, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
FINANCE AND AUDIT COMMITTEE
Donald L. Lucas, Chairman
Jeffrey O. Henley
COMPENSATION COMMITTEE
Yuval Almog, Chairman
Donald L. Lucas
EXECUTIVE COMMITTEE
Yuval Almog
Donald L. Lucas
John J. Mitcham
EXECUTIVE OFFICERS
John J. Mitcham - President and Chief Executive Officer
Gregory T. Barnum - Senior Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Dr. Charles C. Devor - Vice President, General Manager, Server Unit
David S. Huyink - Vice President, Chief Quality Officer
Joan M. Wrabetz - Vice President, General Manager, Storage Products
CORPORATE HEADQUARTERS
Plymouth, Minnesota
36
<PAGE>
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly
Minneapolis, Minnesota
37
<PAGE>
EXHIBIT 21.1 - SUBSIDIARIES
Jurisdiction of % Owned by
Name of Subsidiary Incorporation Tricord Systems, Inc.
- ----------------------- -------------------- ---------------------
Nihon Tricord Systems, K.K. Japan 100%
TSC Tricord Servers Corp. Canada 100%
Tricord Systems Europe PLC United Kingdom 100%
Tricord Systems Europe S.A. France 100%
Tricord Server Systems AG Germany 100%
Tricord Systems Mexico, S.A. de C. V. Mexico 100%
Tricord Systems Europe B.V. The Netherlands 100%
<PAGE>
EXHIBIT 23.1 - CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Tricord Systems, Inc. on Form S-8 (File Nos. 33-65784, 33-76532 and 333-04701)
of our reports, which include an explanatory paragraph related to the Company's
change in business focus for 1997, dated February 18, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Tricord
Systems, Inc. as of December 31, 1996 and 1995, and for the years ended December
31, 1996, 1995, 1994, which reports are included or incorporated by reference in
this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 28, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 18 AND 19 OF THE COMPANY'S ANNUAL REPORT FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,711
<SECURITIES> 0
<RECEIVABLES> 4,636
<ALLOWANCES> (2,844)
<INVENTORY> 4,984
<CURRENT-ASSETS> 15,903
<PP&E> 15,935
<DEPRECIATION> (10,218)
<TOTAL-ASSETS> 21,938
<CURRENT-LIABILITIES> 7,763
<BONDS> 0
0
0
<COMMON> 134
<OTHER-SE> 15,929
<TOTAL-LIABILITY-AND-EQUITY> 21,938
<SALES> 51,269
<TOTAL-REVENUES> 51,269
<CGS> 35,416
<TOTAL-COSTS> 35,416
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 994
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (15,204)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,204)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,204)
<EPS-PRIMARY> (1.14)
<EPS-DILUTED> (1.14)
</TABLE>
