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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, 1997
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 O F (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2905 NORTHWEST BOULEVARD, SUITE 20, 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
----- -----
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 27, 1998, 14,228,718 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 in the closing price as reported by the Nasdaq
National Market System), excluding shares beneficially owned by directors and
executive officers, was approximately $13,381,313.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1997 (the "Annual Report") are incorporated by reference into Parts II and IV
to the extent specific captions or pages are referred to herein. Portions of
the proxy statement for the Annual Meeting of Stockholders to be held May 15,
1998 ("the Proxy Statement") are incorporated by reference in Part III, to
the extent specific captions are referred to herein.
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PART I
ITEM 1. BUSINESS
GENERAL
The Company historically 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-Registered Trademark- and Novell-Registered Trademark-
NetWare-Registered Trademark-*. All revenues generated through
December 31, 1997 related to the server line of business.
A combination of competitive pressures and a vision for a highly distributed
and scalable storage systems architecture led the Company in February 1997 to
redefine its corporate strategy to focus its development efforts exclusively
on storage system management software. The architecture includes an entirely
new generation of Distributed File System and File-Intelligent I/O technology
known as Tricord Storage Management Software ("TSMS"). No revenues have been
generated by TSMS through December 31, 1997. The Company does not anticipate
significant revenues from the development of TSMS-based products in 1998.
During the second quarter of 1997, the strategic shift in the Company's
business, as discussed above, necessitated a reduction in the Company's
workforce affecting approximately 90 employees.
The Company intends to sell its remaining enterprise server product inventory
as long as there is sufficient customer demand and materials are available.
The Company will honor its service agreements and enter into new agreements
as long as there is sufficient demand. The Company anticipates that its 1998
revenues from enterprise server products will decline significantly from 1997
levels and will continue to consist of spare parts, disk drives, memory and
expansion products, as well as new service contracts.
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* This Annual Report on Form 10-K includes trademarks of companies other than
Tricord Systems, Inc.
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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 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. Reflecting these
trends, storage today can account for 50%-70% of initial system cost, compared
with less than 30% a few years ago.
The second trend is the advent of clustered computing at the server, which
necessitates storage architectures that enable shared access to storage
solutions, that are available seven days a week, 24 hours per day and 365 days
per year ("7x24x365"), that scale to very large sizes without any down time,
that significantly reduce the cost of ownership through simplified management
and reduced administration and that provide protection of users investments in
previous generation disks.
Storage needs are also increasingly being provided by third party storage
devices. While at one time systems vendors controlled approximately 95% of
storage revenues, that position is rapidly eroding in favor of third party
storage devices. According to International Data Corporation, in 1996
approximately 60% of all storage revenues resulted from externally attached
disk arrays, and this percentage is expected to reach approximately 70% by
the year 2000, with this growth anticipated to occur largely in the Windows
NT operating system environment. BT Alex Brown projects that the total
amount of terabytes shipped for storage used for the Windows NT market will
grow at more than 120%, compounded annually, between 1996 and 2001, with a
market size of approximately $35 billion in 2001 for multi-level RAID
("Redundant Array of Independent Disks") storage systems.
The operational demands of businesses are not only increasing the complexity of
storage management but are also increasing the demand for availability of more
and more data, including web sites, email, production databases, data marts and
support information. This demand will become even stronger as more companies
move to Windows NT in the data center for mission critical applications. This
rapidly growing demand creates fundamental requirements which are not addressed
adequately by today's storage products.
The end user requirements that need to be addressed in future storage products
are as follows:
- - The ability to separate central processing from storage both in terms of
purchase decision and functionality.
- - The ability to share data across multiple hosts and storage subsystems with
the ultimate objective of having a single data image for all computers
accessing a storage network.
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- - The ability to provide scaleable storage capacity beyond a single storage
enclosure (pay as you grow) and to expand in large and small increments,
without reconfiguration or downtime.
- - The ability to provide 7x24x365 reliability and availability regardless of
the source of failure, whether disk, controller, storage subsystem or host.
The Company's response to these market requirements is an architecture that
externalizes the storage system interface with industry standards, and moves the
file system intelligence into the storage system. This software-based
architecture, Tricord Storage Management Software ("TSMS"), is comprised of
File-Intelligent I/O and Distributed File System technology.
TECHNOLOGY
In an intelligent distributed file system, all computers see the 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 system itself. An intelligent 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 hardware requirements, because server
functions, such 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
breaks files into many pieces of data, called blocks, which are transferred
between a server and a storage device. TSMS avoids the block I/O model by
using the processing power of new File-Intelligent I/O controllers to host
the Company's distributed file system, the Tricord File System ("TFS"). When
the storage is managed by TSMS, the Company believes the end user will
realize significant benefits, including:
- - Higher performance and throughput because the file system processing
overhead is moved to the controllers off the host.
- - Easier management of all attached storage because the TSMS manages all
storage as a single volume for the system administrator. Whenever new
storage is needed, it can be added on the fly with no system downtime.
- - Maximum scalability without replacing or upgrading storage systems
enclosures because TSMS manages all of the data as well as the file
system descriptor information.
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- - Reduced ownership costs by allowing old and new disk technology and
capacity to be used in the same storage system.
Three key steps that Tricord has completed that it believes will achieve these
end user benefits are:
- - Move TFS to the File-Intelligent I/O Controller and interface it to
Windows NT with no changes to use or application code.
- - Distribute TFS to create a shared file space across controllers and
storage systems.
- - Provide Domain Fault Tolerance by implementing redundancy of data within
that file space.
PRODUCTS UNDER DEVELOPMENT
The Company will incorporate TFS and file intelligent I/O technology into a
standard software product offering called Tricord Storage Management Software
("TSMS"). TSMS is based on the TFS and management interface software, user
configuration tools, initialization tools and other Original Equipment
Manufacturer ("OEM") specific software. TSMS will be offered to OEMs selling
storage systems into three distinct storage system environments -
HOST-attached storage, LAN-attached storage and Storage Area Network ("SAN")
attached storage. In each environment, TSMS runs on a storage controller.
The design and packaging of each controller will be customized to a specific
OEM's system.
Tricord has developed a controller prototype to support TSMS for development
purposes. The Distributed Storage Controller ("DSC") uses the Intel i960
processor. Within each class of TSMS products (HOST, LAN and SAN), the
Company's TFS software executes on intelligent I/O controllers. The
controllers for each family differ only in the network connection (HOST, LAN
or SAN) they use and the file system protocol (NT file system, SMB/CIFS) they
receive from the clients or hosts accessing the storage.
The software will be positioned to OEMs as follows:
- - HOST-ATTACHED STORAGE- premier high-end RAID controller for Windows NT
servers. Significant improvements in management, availability, expansion,
investment protection and performance over conventional Intelligent RAID
Controllers.
- - LAN-ATTACHED STORAGE- premier departmental and data center
multi-user shared data servers for Windows NT. Significant improvements in
management, expansion, investment protection and performance over market
leading LAN Attached Storage Solutions.
- - SAN-ATTACHED STORAGE- premier high-end multi-host clustered SAN
Storage Solution. Significant improvements in management, expansion,
investment protection, performance and data sharing over competitive SAN
Storage Solutions.
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The Company's products are being designed to be differentiated from other
attached storage solutions in the following ways:
- SIMPLIFIED STORAGE MANAGEMENT - TSMS manages all attached storage as
one logical volume. This provides significant life cycle cost and
cost of ownership advantages to users. TSMS automatically manages the
addition of new storage, the integration of different disk
capabilities, and the failure and replacement of disks and
controllers.
- MULTI-HOST AND MULTI-OPERATING SYSTEM SHARED DATA - TSMS, because it
is storage system resident, maintains the ownership and allocation of
all storage independent of the host or hosts accessing data. This is
the unique key to the Company's solution because this allows multiple
hosts to concurrently share data, not statistically partition disk
usage as competitors do. Additionally, the hosts sharing the data can
be running Windows NT and/or Unix.
- HIGH PERFORMANCE - TSMS distributes and stripes all file system data,
including metadata, across as many storage controllers as there are
present in the storage system. This gives TSMS dramatic opportunities
to utilize parallel processing and highly intelligent file access
algorithms to improve system level response times and throughput.
This architecture allows users to add controllers and storage at will
in order to achieve the performance levels desired independent of the
compute nodes involved.
- FAULT TOLERANCE - TSMS uses the most sophisticated RAID and fault
tolerance algorithms available to protect user data. TSMS RAIDS
data at the file level, not the block level, in order to provide
more efficient disk space utilization and user control. TSMS also
RAIDS all data across disks and controllers enabling domain fault
tolerance across controllers, something which the Company believes
no other competitor offers today.
RESEARCH AND DEVELOPMENT
The Company performs all of its research and development activities at its
headquarters in Plymouth, Minnesota. During 1997, 1996 and 1995, research and
development expenses totaled approximately $3,981,000, $7,264,000 and
$8,621,000, respectively, and in 1996 and 1995 related primarily to the
design and development of the Company's enterprise servers. In 1997 and
1996, approximately $1,774,000 and $1,500,000, respectively, of research and
development expenditures related to the File-Intelligent I/O software
technology and the distributed file system software technology that will be
incorporated into TSMS. The Company currently anticipates that research and
development costs will be a key expense during 1998 as the Company focuses on
the continued development of
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TSMS. The Company does not, however, anticipate that total research and
development costs in 1998 will reach the 1997 level.
The Company is seeking additional capital through OEM or other strategic
investments or alliances. These strategic investments and/or alliances may
provide equity, nonrecurring engineering fees or other licensing amounts
which may be used in support of research and development for TSMS.
SALES AND DISTRIBUTION
The Company currently intends to market TSMS through OEM partners. The most
likely OEM partners would be storage suppliers, computer system vendors, disk
drive manufacturers and disk controller vendors. Pursuant to any such
arrangements, the Company would license its software components and/or its
controller design, which these OEM partners would then incorporate into their
products in order to offer a storage solution to their end users.
The Company believes that these types of licensing arrangements will provide
a more rapid and cost-effective method for its products and technology to
gain visibility and penetrate the storage market. The Company is also taking
additional steps to increase the visibility of its products and technology.
In January 1998, a pre-beta version was demonstrated during the Server I/O '98
Conference.
COMPETITION
While the Company knows of no direct competition today for the Company's
File Intelligent I/O and the TSMS implementation using TFS, there are
competitors in the area of specialized file systems. In addition, many of the
same companies that represent potential OEM partners also represent potential
competitors in the event that one or more elect to develop and market their
own products.
The Company knows of three companies currently developing products in related
areas that compete indirectly with the Company's products. Adaptec, Inc.
announced a File Array product in the fourth quarter of 1997 that moves file
system processing to the storage system controller. Programmed Logic
Corporation sells an integrated set of realtime software products, including
an operating system and file system. Veritas Software Corporation
("Veritas") sells a set of installable file systems for Windows NT and Unix.
These products are widely used and highly regarded in the industry. The
Company also believes that Veritas is developing a clustered file system for
Windows NT. The Veritas products are host-based and the Company knows of no
plans by Veritas to move its products to a File-Intelligent I/O architecture.
The Company believes that none of the products discussed above are
distributed file systems and that significant time, investment and effort
would be needed to make these products distributed in order to provide the
comparable features of TSMS. The Company's competitors, however, are more
established, benefit from greater market recognition and have greater
financial, technological, production and marketing resources than the
Company. As a result, attaining a competitive position will require that the
Company develop its products on a timely basis and continue to invest 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 continue to make the necessary technological advances.
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MANUFACTURING
The Company currently has no manufacturing group for the enterprise server
products due to the February 1997 decision to discontinue the development and
marketing of enterprise servers. The Company believes that it has sufficient
inventory on hand for substantially all warranty or replacement parts
required.
Given the Company's intention to market TSMS through OEM partners by
licensing its software components and/or its controller design, the Company
anticipates that its manufacturing requirements will be minimal. The Company
currently anticipates that it will use a subcontractor to reproduce and
distribute its TSMS products. The Company currently has plans to support
TSMS-based products with the existing server technical expertise and
operational and process skills which extend into delivering and supporting
storage subsystems on an installed base of over 7,000 servers.
INTELLECTUAL PROPERTY
The Company currently has been allowed one patent related to its server
products and it has one patent application pending with respect to its TSMS
products. The Company intends to significantly broaden its TSMS patent
application pool in 1998. 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. Despite these precautions, 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.
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
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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.
TEAM MEMBERS
As of December 31, 1997, the Company had 38 full-time team members, including 6
in marketing, sales and support services, 11 in research and development, 15 in
operations, and 6 in corporate operations. In addition to the 38 full-time team
members, the Company also had contracted with 5 outside contractors who provide
research and development expertise and are considered by the Company to be
crucial to the success of TSMS development.
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. In
addition, the Company's success will also depend in large part on its ability to
retain key contract team members. 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.
YEAR 2000
The Company has begun the process of analyzing its business systems to
determine if a significant Year 2000 issue exists. The Company has reviewed
its main business system and has determined that a Year 2000 problem does not
exist in that system. However, the Company has other smaller supporting
business systems which it has not yet reviewed. The Company has also
reviewed its software related to its server business and is in the process of
completing a fix for the Year 2000 issue. The Company has not yet released
any TSMS-based products, but it intends to review and correct any Year 2000
issues, if necessary, prior to release to market of these products. The
Company does not currently anticipate significant costs to modify any
internal use software. The Company also does not anticipate significant
costs to modify its server business software or software related to TSMS.
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.
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- 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.
- 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 currently intends to market its TSMS through OEM or other
strategic relationships, and the failure to establish such
relationships on acceptable terms could adversely affect the Company's
ability to introduce and market TSMS-based products successfully.
- The Company's success is dependent on its ability to generate adequate
cash to fund operations in 1998, which in turn will depend on its
ability to sell its remaining enterprise server inventory and control
its operating expenses. In addition, the Company's ability to
generate additional capital could be adversely affected if the Company
is unable to remain on the NASDAQ National Stock Market.
- Many of the Company's potential 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 14,834 square foot headquarters
facility in Plymouth, Minnesota. The Company first occupied this facility in
August 1997. The lease for this facility expires in September 2000. The
Company's lease payments are approximately $6,000 monthly with an additional
approximately $5,000 monthly for the Company's pro rata share of the lessor's
operating costs, including real estate taxes.
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The Company has no other remaining leased facilities in the U.S. or any foreign
countries.
ITEM 3. LEGAL PROCEEDINGS
In June 1997, a federal jury in St. Paul, Minnesota absolved the Company of
any liability in a class action lawsuit alleging securities fraud. In
October 1997, the plaintiffs for the class action appealed the jury decision
to the U.S. Eighth District Court of Appeals. In December 1997, the
insurance company, which had assumed complete defense of this action, agreed
to pay for a portion of the legal costs incurred by the attorneys for the
class in return for dismissal of the appeal. This agreement was accepted by
the court, and the appeal by the plaintiffs was dismissed in February 1998.
There is currently a dispute between the Company and Novell, Inc. ("Novell")
regarding alleged royalties owed to Novell with respect to Novell's software
that the Company destroyed when such software could not be sold. The Company
had entered into an OEM agreement with Novell, pursuant to which it purchased
Novell's software that was to be installed on the Company's servers. The
Company paid Novell $100,000 in advance royalties pursuant to the OEM agreement.
The Company's sales of Novell's software did not result in royalties in excess
of this advance royalty payment, and the Company disposed of the remaining
Novell software. Novell has requested that the Company pay royalties on the
destroyed software, which would total approximately $800,000. The Company has
informed Novell that it does not owe royalties on the disposed software because
the OEM agreement only provides for the payment of royalties on the sale of the
software. The parties are currently attempting to resolve this dispute and the
Company does not believe that this dispute will have a material adverse effect
on the Company.
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 1997.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of February 27, 1998 are
as follows:
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<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John J. Mitcham 56 President, Chief Executive Officer
and Director
Dr. Charles C. Devor 49 Vice President, Business Development
Dr. Alexander H. Frey 64 Vice President, Architecture
Charles E. Pearsall 55 Vice President, Engineering
Jeff A. Stewart 46 Vice President and Controller, and Secretary
</TABLE>
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.
Dr. Devor has served as the Company's Vice President of Business Development
since July 1997, as Vice President, General Manager, Server Unit, from January
1997 to June 1997 and as Vice President of Systems Development from July 1995 to
January 1997. Since September 1993, Dr. Devor has 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, Dr.
Devor was employed by Bull HN Information Services, Inc. in various management
positions.
Dr. Frey has served as the Company's Vice President, Architecture since October
1996. From 1981 to 1996, Dr. Frey was CEO and Chief Technology officer of
Reliable Distributed Information Corporation in Pasadena, California, from which
the Company purchased certain assets in 1996. Prior to 1981, Dr. Frey served in
various technical and management positions with IBM Corporation.
Mr. Pearsall has served as the Company's Vice President of Engineering since
February 1998 and as Vice President, Customer Service from February 1996 to
January 1998. From 1995 to 1996, Mr. Pearsall was Senior Director of Program
Management and Field Services for Concurrent Computer Corporation. Prior to
1995, Mr. Pearsall held a wide range of technical and executive positions within
the Air Force.
Mr. Stewart has served as the Company's Vice President and Controller, and
Secretary since July 1997 and as Corporate Controller from October 1994 to June
1997. From 1978 to 1994, Mr. Stewart served in various accounting and financial
management positions for Micro Component Technology, Inc.
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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" of the Company's 1997
Annual Report to Stockholders ("the Annual Report") the Annual Report.
During the fourth quarter of 1997, 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" 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" of the Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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 14 through
33 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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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.
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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 15 through 33 of
the Annual Report.
Report of Independent Accountants.
Consolidated Statements of Operations - Years Ended December 31,
1997, 1996 and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995.
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.
<TABLE>
<CAPTION>
Page
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<S> <C>
Report of Independent Accountants. . . . . . . . . . . . . . 17
Schedule II - Valuation and Qualifying Accounts. . . . . . . 18
</TABLE>
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3. Exhibits
The Exhibits to this Report are listed in the Exhibit Index on pages
20 to 21 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., 2905 Northwest Blvd., Suite
20, 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 Non-Employee Director Stock Option Plan, as amended
effective October 26, 1995. (d)
2. 1994 Employee Stock Purchase Plan. (a)
3. 1995 Stock Incentive Plan. (b)
4. Employment Agreement, dated May 2, 1995, between the Company and
John J. Mitcham. (c)
5. Change in Control Agreement, dated September 13, 1996, between
the Company and Charles C. Devor of the Company. (e)
6. Severance Agreement, dated February 8, 1997, between the Company
and Charles C. Devor. (e)
7. Change in Control Agreement, dated September 13, 1996, between
the Company and Charles E. Pearsall. (f)
----------------------------------------
(a) Incorporated by reference from the exhibits to the Company's
Registration Statement on Form S-8 (File No. 33-76532).
(b) Incorporated by reference from the exhibits to the Company's
Annual Report on Form 10-K for the year ended December
31, 1994.
(c) Incorporated by reference from the exhibits to the Company's
Quarterly Report on Form 10-Q For the Quarter Ended March
31, 1995 (File No. 0-21366).
(d) Incorporated by reference from the exhibits to the Company's
Annual Report on Form 10-K for the year ended December
31, 1995.
(e) Incorporated by reference from the exhibits to the Company's
Annual Report on Form 10-K for the year ended December
31, 1996.
(f) Filed herewith.
15
<PAGE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of
the year ended December 31, 1997.
16
<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 Annual Report on Form 10-K from
page 15 of the 1997 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
14 of this Annual Report on 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.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 26, 1998
17
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning of Charged to from at End of
Description Period Expense Allowance Period
- ---------------------------------------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts
(deducted from accounts receivable) $ 2,844 (455)(1) (1,176) 1,213
Inventory obsolescence reserve
(deducted from inventory) 7,330 1,818 (3,130) 6,018
Year ended December 31, 1996
Allowance for doubtful accounts
(deducted from accounts receivable) 1,576 2,028 (760)(2) 2,844
Inventory obsolescence reserve
(deducted from inventory) 9,684 994 (3,348)(3) 7,330
Year ended December 31, 1995
Allowance for doubtful accounts
(deducted from accounts receivable) 573 1,521(4) (518) 1,576
Inventory obsolescence reserve
(deducted from inventory) 900 15,942(5) (7,158) 9,684
</TABLE>
Notes:
(1) Relates to a reduction in the allowance.
(2) Includes a credit of $366 included in restructure and related charges
(credits).
(3) Includes a credit of $1,173 included in restructure and related charges
(credits).
(4) Includes a charge of $903 included in restructure and related charges
(5) Includes a charge of $14,488 included in restructure and related charges
18
<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 30, 1998.
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 30, 1998.
Signatures Title
---------- -----
/s/ John J. Mitcham President and Chief Executive Officer
- -------------------------- (Principal Executive Officer and Principal
John J. Mitcham Financial Officer) and Director
/s/ Jeff A. Stewart Vice President and Controller and Secretary
- -------------------------- (Principal Accounting Officer)
Jeff A. Stewart
/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
19
<PAGE>
TRICORD SYSTEMS, INC.
---------------------
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
------ ---- ------
<S> <C> <C>
3.1 Certificate of Incorporation (a)
3.2 Bylaws (a)
4.1 Rights Agreement (e)
10.1 1992 Non-Employee Director Stock Option Plan, as
amended effective October 26, 1995 (e)
10.2 1994 Employee Stock Purchase Plan (b)
10.3 Servicing Contract, dated August 5, 1991, between the
Company and Digital Service Corporation (a)
10.4 Form of Indemnification Agreement (a)
10.5 Warrants of the Company, dated December 18, 1992,
issued to Sequent Computer Systems, Inc. (a)
10.6 Servicing Contract, dated February 26, 1993, between the
Company and Bull HN Information Systems, Inc. (a)
10.7 1995 Stock Incentive Plan (c)
10.8 Employment Agreement, dated May 2, 1995, between
the Company and John J. Mitcham (d)
10.9 Loan and Security Agreement, dated August 9, 1996, between
the Company and Silicon Valley Bank (f)
10.10 Change of Control Agreements, dated September 13, 1996,
between the Company and Charles C. Devor (g)
10.11 Severance Agreement, dated February 8, 1997, between the
Company and Charles C. Devor (g)
10.12 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 (g)
10.13 Lease Agreement, dated July 28, 1997, between the
Company and Liberty Property Limited Partnership (h)
10.14 Change of Control Agreement, dated September 13, 1996,
between the Company and Charles E. Pearsall (h)
13.1 Annual Report to Stockholders for the year ended
December 31, 1997 (to be deemed filed only to the
extent required by the instructions to exhibits for reports
on Form 10-K) (h)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
------ ---- ------
<S> <C> <C>
21.1 Subsidiaries of the Company (h)
23.1 Consent of Independent Accountants (h)
27.1 Financial Data Schedule (h)
</TABLE>
- --------------------------------------------------------------------
(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) Filed in connection with Annual Report on Form 10-K for the year ended
December 31, 1994.
(d) 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.
0-21366).
(e) Filed in connection with Annual Report on Form 10-K for the year ended
December 31, 1995.
(f) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q For the Quarter Ended June 30, 1996 (File No.
0-21366).
(g) Filed in connection with Annual Report on Form 10-K for the year ended
December 31, 1996.
(h) Filed herewith.
<PAGE>
LEASE AGREEMENT
(Multi-Tenant Industrial)
<TABLE>
<CAPTION>
INDEX
SECTION SECTION PAGE
- ------- ------- ----
<S> <C> <C>
1. Summary of Terms and Certain Definitions. . . . . . . . . . . . . . . . 1
2. Premises. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Acceptance of Premises. . . . . . . . . . . . . . . . . . . . . . . . . 2
4. Use; Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
6. Minimum Annual Rent . . . . . . . . . . . . . . . . . . . . . . . . . . 3
7. Operation of Property; Payment of Expenses. . . . . . . . . . . . . . . 3
8. Signs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
9. Alterations and Fixtures. . . . . . . . . . . . . . . . . . . . . . . . 5
10. Mechanics' Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
11. Landlord's Right of Entry . . . . . . . . . . . . . . . . . . . . . . . 5
12. Damage by Fire or Other Casualty. . . . . . . . . . . . . . . . . . . . 5
13. Condemnation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
14. Non-Abatement of Rent . . . . . . . . . . . . . . . . . . . . . . . . . 6
15. Indemnification of Landlord . . . . . . . . . . . . . . . . . . . . . . 6
16. Waiver of Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
17. Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
18. Assignment and Subletting . . . . . . . . . . . . . . . . . . . . . . . 6
19. Subordination; Mortgagee's Rights . . . . . . . . . . . . . . . . . . . 7
20. Recording; Tenant's Certificate . . . . . . . . . . . . . . . . . . . . 7
21. Surrender; Abandoned Property . . . . . . . . . . . . . . . . . . . . . 8
22. Curing Tenant's Defaults. . . . . . . . . . . . . . . . . . . . . . . . 8
23. Defaults - Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 8
24. Representations of Tenant . . . . . . . . . . . . . . . . . . . . . . . 9
25. Liability of Landlord . . . . . . . . . . . . . . . . . . . . . . . . . 9
26. Interpretation; Definitions . . . . . . . . . . . . . . . . . . . . . .10
27. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
28. Security Deposit. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
</TABLE>
<PAGE>
RIDER
<TABLE>
<CAPTION>
SECTION SECTION PAGE
- ------- ------- ----
<S> <C> <C>
29. Landlord's Work R-1
30. Commencement Date R-1
31. Environmental R-2
32. Operating Expenses R-2
33. HVAC R-2
34. Landlord's Right of Entry R-2
35. Award R-2
36. Net Lease R-2
37. Nondisturbance Agreement R-2
</TABLE>
<PAGE>
THIS LEASE AGREEMENT is made by and between LIBERTY PROPERTY LIMITED
PARTNERSHIP, a Pennsylvania limited partnership ("LANDLORD") with its address at
65 Valley Steam Parkway, Malvern, Pennsylvania and TRICORD SYSTEMS, INC., a
corporation organized under the laws of Delaware ("TENANT") with its address at
2905 Northwest Boulevard, Suite 20, Plymouth, MN 55441 and is dated as of the
date on which this lease has been fully executed by Landlord and Tenant.
1. SUMMARY OF TERMS AND CERTAIN DEFINITIONS.
(a) "PREMISES": Approximate rentable square feet: 14,831
(Section 2) Suite: 20
(b) "BUILDING": Approximate rentable square feet: 84,765
(Section 2) Address: 2905 Northwest Boulevard, Suite 20
Plymouth, Minnesota 55441
(c) "TERM": Thirty-six (36) months plus any partial month
(Section 5) from the Commencement Date until the first
day of the first full calendar month during
the Term
(i) "COMMENCEMENT DATE": On or before August 23, 1997 (See Rider,
Section 30)
(ii) "EXPIRATION DATE": See Section 5
(d) MINIMUM RENT (Section 6) & OPERATING EXPENSES (Section 7)
(i) "MINIMUM ANNUAL RENT": $70,150.63 (Seventy Thousand One Hundred
Fifty and 63/100 Dollars), payable in monthly installments of $5,845.89 (Five
Thousand Eight Hundred Forty-five and 89/100 Dollars), increased as follows:
<TABLE>
<CAPTION>
Lease Year Annual Monthly Lease Year Annual Monthly
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2 $72,671.90 $6,055.99 6 $ $
3 $75,193.17 $6,266.10 7
4 8
5 9
10
</TABLE>
(ii) ESTIMATED "ANNUAL OPERATING EXPENSES": $63,773.30 (Sixty-Three
Thousand Seven Hundred Seventy-Three and 30/100 Dollars), payable in
monthly installments of $5,314.44 (Five Thousand Three Hundred Fourteen
and 44/100 Dollars), subject to adjustment (Section 7(a))
(e) "PROPORTIONATE SHARE" (Section 7 (a)): 17.5% (Ratio of approximate
rentable square feet in the Premises to approximate rentable square
feet in the Building)
(f) "USE" (Section 4): general office and light assembly of electronic
equipment
(g) "SECURITY DEPOSIT" (Section 28): $11,160.00 (Eleven Thousand One
Hundred Sixty and 00/100 Dollars)
(h) CONTENTS: This lease consists of the Index, pages 1 through 11
containing Sections 1 through 28 and the following, all of
which are attached hereto and made a part of this lease:
Rider with Sections 29 through 37
Exhibits: "A" - Plan showing Premises
"B" - Commencement Certificate Form
"C" - Building Rules
"D" - Estoppel Certificate Form
"E" - Plans
"F" - Breakdown of Estimated Operating
Expenses
"G" - Leasehold Improvements Escrow
Agreement
<PAGE>
2. PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises as shown on attached Exhibit "A" within the Building (the
Building and the lot on which it is located, the "PROPERTY"), together with the
nonexclusive right with Landlord and other occupants of the Building to use all
areas and facilities provided by Landlord for the use of all tenants in the
Property including any driveways, sidewalks and parking, loading and landscaped
areas (the "COMMON AREAS")
3. ACCEPTANCE OF PREMISES. Tenant has examined and knows the condition of
the Property, the zoning, streets, sidewalks, parking areas, curbs and access
ways adjoining it, visible easements, any surface conditions and the present
uses, and Tenant accepts them in the condition in which they now are, without
relying on any representation, covenant or warranty by Landlord. Tenant and its
agents shall have the right, at Tenant's own risk, expense and responsibility,
at all reasonable times prior to the Commencement Date, to enter the Premises
for the purpose of taking measurements and installing its furnishings and
equipment; provided that the Premises are vacant and Tenant obtains Landlord's
prior written consent
4. USE; COMPLIANCE.
(a) PERMITTED USE. Tenant shall occupy and use the Premises for and
only for the Use specified in Section 1(f) above and in such a manner as is
lawful, reputable and will not create any nuisance or otherwise interfere with
any other tenant's normal operations or the management of the Building. Without
limiting the foregoing, such Use shall exclude any use that would cause the
Premises or the Property to be deemed a "place of public accommodation" under
the Americans with Disabilities Act (the "ADA") as further described in the
Building Rules (defined below). All Common Areas shall be subject to Landlord's
exclusive control and management at all times. Tenant shall not use or permit
the use of any portion of the Property for outdoor storage or installations
outside of the Premises nor for any use that would interfere with any other
person's use of any portion of the Property outside of the Premises.
(b) COMPLIANCE. Landlord represents that, as of the date of this
lease, there is no action required with respect to the Premises or Common
Areas under any laws (including Title III of the ADA), ordinances, notices,
orders, rules, regulations and requirements applicable to the Premises or to
the Common Areas. From and after the Commencement Date, Tenant shall comply
promptly, at its sole expense, (including making any alterations or
improvements) with all laws (including the ADA), ordinances, notices, orders,
rules, regulations and requirements regulating the Property during the Term
which impose any duty upon Landlord or Tenant with respect to Tenant's use,
occupancy or alteration of, or Tenant's installations in or upon, the
Property including the Premises, (as the same may be amended, the "LAWS AND
REQUIREMENTS") and the building rules attached as Exhibit "C", as amended by
Landlord from time to time (the "BUILDING RULES"). Provided, however, that
Tenant shall not be required to comply with the Laws and Requirements with
respect to the footings, foundations, structural steel columns and girders
forming a part of the Property unless the need for such compliance arises out
of Tenant's use, occupancy or alteration of the Property, or by any act or
omission of Tenant or any employees, agents, contractors, licensees or
invitees ("AGENTS") of Tenant. With respect to Tenant's obligations as to the
Property, other than the Premises, at Landlord's option and at Tenant's
expense, Landlord may comply with any repair, replacement or other
construction requirements of the Laws and Requirements and Tenant shall pay
to Landlord all costs thereof as additional rent.
(c) ENVIRONMENTAL. Tenant shall comply, at its sole expense, with all
Laws and Requirements as set forth above, all manufacturers' instructions and
all requirements of insurers relating to the treatment, production, storage,
handling, transfer, processing, transporting, use, disposal and release of
hazardous substances, hazardous mixtures, chemicals, pollutants, petroleum
products, toxic or radioactive matter (the "RESTRICTED ACTIVITIES"). Tenant
shall deliver to Landlord copies of all Material Safety Data Sheets or other
written information prepared by manufacturers, importers or suppliers of any
chemical and all notices, filings, permits and any other written communications
from or to Tenant and any entity regulating any Restricted Activities.
(d) NOTICE. If at any time during or after the Term, Tenant becomes
aware of any inquiry, investigation or proceeding regarding the Restricted
Activities or becomes aware of any claims, actions or investigations regarding
the ADA, Tenant shall give Landlord written notice, within 5 days after first
learning thereof, providing all available information and copies of any notices.
5. TERM. The Term of this lease shall commence on the Commencement Date
and shall end at 11:59 p.m. on the last day of the Term (the "EXPIRATION
DATE"), without the necessity for notice from either party, unless sooner
terminated in accordance with the terms hereof. At Landlord's request, Tenant
shall confirm the Commencement Date and Expiration Date by executing a lease
commencement certificate in the form attached as Exhibit "B".
6. MINIMUM ANNUAL RENT. Tenant agrees to pay to Landlord the Minimum Annual
Rent in equal monthly installments in the amount set forth in Section 1(d) (as
increased at the beginning of each lease year as set forth in Section l(d)), in
advance, on the first day of each calendar month during the Term, without
notice, demand or setoff, at Landlord's address designated at the beginning of
2
<PAGE>
this lease unless Landlord designates otherwise; provided that rent for the
first full month shall be paid at the signing of this lease. If the Commencement
Date falls on a day other than the first day of a calendar month, the rent shall
be apportioned pro rata on a per diem basis for the period from the Commencement
Date until the first day of the following calendar month and shall be paid on or
before the Commencement Date. As used in this lease, the term "lease year" means
the period from the Commencement Date through the succeeding 12 full calendar
months (including for the first lease year any partial month from the
Commencement Date until the first day of the first full calendar month) and each
successive 12 month period thereafter during the Term.
7. OPERATION OF PROPERTY; PAYMENT OF EXPENSES.
(a) PAYMENT OF OPERATING EXPENSES. Tenant shall pay to Landlord the
Annual Operating Expenses in equal monthly installments in the amount set
forth in Section l(d) (prorated for any partial month), from the Commencement
Date and continuing throughout the Term on the first day of each calendar
month during the Term, as additional rent, without notice, demand or set off,
provided that the monthly installment for the first full month shall be paid
at the signing of this lease. Landlord shall apply such payments to the
operating expenses owed to Landlord by Tenant pursuant to the following
Sections 7(b)-(f). The amount of the Annual Operating Expenses set forth in
Section 1(d) represents Tenant's Proportionate Share of the estimated
operating expenses during the first calendar year of the Term on an
annualized basis; from time to time Landlord may adjust such estimated amount
if the estimated operating expenses increase. By April 30th of each year (and
as soon as practical after the expiration or termination of this lease or at
any time in the event of a sale of the Property), Landlord shall provide
Tenant with a statement of the actual amount of such expenses for the
preceding calendar year or part thereof. Landlord or Tenant shall pay to the
other the amount of any deficiency or overpayment then due from one to the
other or, at Landlord's option, Landlord may credit Tenant's account for any
overpayment. Tenant's obligation to pay the Annual Operating Expenses
pursuant to this Section 7 shall survive the expiration or termination of
this lease.
(b) TAXES AND OTHER IMPOSITIONS. Tenant shall pay prior to delinquency
all levies, taxes (including sales taxes and gross receipt taxes), assessments,
liens, license and permit fees, which are applicable to the Term, and which are
imposed by any authority or under any law, ordinance or regulation thereof, or
pursuant to any recorded covenants or agreements, and the reasonable cost of
contesting any of the foregoing (the "IMPOSITIONS") upon or with respect to the
Premises, or any improvements thereto, or directly upon this lease or the Rent
(defined in Section 7(f)) or amounts payable by any SUBTENANTS or other
occupants of the Premises, or against Landlord because of Landlord's estate or
interest herein. Additionally, Tenant shall pay as aforesaid its Proportionate
Share of any Imposition which is not imposed upon the Premises as a separate
entity but which is imposed upon all or part of the Property or upon the leases
or rents relating to the Property.
(i) Nothing herein contained shall be interpreted as requiring
Tenant to pay any income, excess profits or corporate capital stock tax imposed
or assessed upon Landlord, unless such tax or any similar tax is levied or
assessed in lieu of all or any part of any Imposition or an increase in any
Imposition.
(ii) If it shall not be lawful for Tenant to reimburse Landlord
for any of the Impositions, the Minimum Annual Rent shall be increased by the
amount of the portion of such Imposition allocable to Tenant, unless prohibited
by law.
(c) INSURANCE.
(i) PROPERTY. Landlord shall keep in effect, and Tenant shall
pay to Landlord its Proportionate Share of the cost of, insurance against loss
or damage to the Building or the Property by fire and such other casualties as
may be included within fire, extended coverage and special form insurance
covering the full replacement cost of the Building (but excluding coverage of
Tenant's personal property in, and any alterations by Tenant to, the Premises),
and such other insurance as Landlord may reasonably deem appropriate or as may
be required from time-to-time by any mortgagee.
(ii) LIABILITY. Tenant, at its own expense, shall keep in effect
comprehensive general public liability insurance with respect to the Premises
and the Property, including contractual liability insurance, with such limits of
liability for bodily injury (including death) and property damage as reasonably
may be required by Landlord from time-to-time, but not less than a combined
single limit of $1,000,000 per occurrence and a general aggregate limit of not
less than $3,000,000 (which aggregate limit shall apply separately to each of
Tenant's locations if more than the Premises); however, such limits shall not
limit the liability of Tenant hereunder. The policy of comprehensive general
public liability insurance also shall name Landlord and Landlord's agent as
insured parties with respect to the Premises, shall be written on an
"occurrence" basis and not on a "claims made" basis, shall provide that it is
primary with respect to any policies carried by Landlord and that any coverage
carried by Landlord shall be excess insurance, shall provide that it shall not
be cancelable or reduced without at least 30 days prior written notice to
Landlord and shall be issued in form satisfactory to Landlord. The insurer shall
be a responsible insurance carrier which is authorized to issue such insurance
and licensed to do business in the state in which the Property is located and
which has at all times during the Term a rating of no less than A VII in the
most current edition of BEST'S INSURANCE REPORTS. Tenant shall deliver to
Landlord on or before the
3
<PAGE>
Commencement Date, and subsequently renewals of, a certificate of insurance
evidencing such coverage and the waiver of subrogation described below.
(iii) WAIVER OF SUBROGATION. Landlord and Tenant shall have
included in their respective property insurance policies waivers of their
respective insurers' right of subrogation against the other party. If such a
waiver should be unobtainable or unenforceable, then such policies of
insurance shall state expressly that such policies shall not be invalidated
if, before a casualty, the insured waives the right of recovery against any
party responsible for a casualty covered by the policy.
(iv) INCREASE OF PREMIUMS. Tenant agrees not to do anything
or fail to do anything which will increase the cost of Landlord's insurance
or which will prevent Landlord from procuring policies (including public
liability) from companies and in a form satisfactory to Landlord. If any
breach of the preceding sentence by Tenant causes the rate of fire or other
insurance to be increased, Tenant shall pay the amount of such increase as
additional rent promptly upon being billed.
(d) REPAIRS AND MAINTENANCE; COMMON AREAS; BUILDING MANAGEMENT.
Except as specifically otherwise provided in this Section (d), Tenant at its
sole expense shall maintain the Premises in good order and condition,
promptly make all repairs necessary to maintain such condition, and repair
any damage to the Premises caused by Tenant or its Agents. All repairs made
by Tenant shall utilize materials and equipment which are comparable to those
originally used in constructing the Building and Premises. When used in this
Section (d), the term "REPAIRS" shall include replacements and renewals when
necessary.
(i) Landlord, at its sole expense, shall make all necessary
repairs to the footings, foundations, structural steel columns and girders
forming a part of the Premises, provided that Landlord shall have no
responsibility to make any repair until Landlord receives written notice of
the need for such repair.
(ii) Landlord, at Tenant's sole expense, shall maintain and
repair the HVAC systems appurtenant to the Premises.
(iii) Landlord shall make all necessary repairs to the roof,
exterior portions of the Premises and the Building, utility and
communications lines, equipment and facilities in the Building, which serve
more than one tenant, and to the Common Areas, the cost of which shall be an
operating expense of which Tenant shall pay its Proportionate Share, provided
that Landlord shall have no responsibility to make any repair until Landlord
receives written notice of the need for such repair. Landlord shall operate
and manage the Property and shall maintain all Common Areas and any paved
areas appurtenant to the Property in a clean and orderly condition. Landlord
reserves the right to make alterations to the Common Areas from time to time.
Operating expenses also shall include (A) all sums; expended by Landlord for
the supervision, maintenance, repair, replacement and operation of the Common
Areas (including the costs of utility services), (B) any costs of building
improvements made by Landlord to the Property that are required by any
governmental authority or for the purpose of reducing operating expenses and
(C) a management and administrative fee applicable to the overall operation
of the Property.
(iv) Notwithstanding anything herein to the contrary, repairs
and replacements to the Property including the Premises made necessary by
Tenant's use, occupancy or alteration of, or Tenant's installation in or upon
the Property or by any act or omission of Tenant or its Agents shall be made
at the sole expense of Tenant to the extent not covered by any applicable
insurance proceeds paid to Landlord. Tenant shall not bear the expense of any
repairs or replacements to the Property arising out of or caused by any other
tenant's use, occupancy or alteration of, or any other tenant's installation
in or upon, the Property or by any act or omission of any other tenant or any
other tenant's Agents.
(e) UTILITY CHARGES. Tenant shall pay for water, sewer, gas,
electricity, heat, power, telephone and other communication services and any
other utilities supplied to or consumed in or an the Premises. Landlord shall
not be responsible or liable for any interruption in utility service, nor
shall such interruption affect the continuation or validity of this lease.
(f) NET LEASE. Except for the obligations of Landlord expressly set
forth herein, this lease is a "triple net lease" and Landlord shall receive
the Minimum Annual Rent as net income from the Premises, not diminished by
any expenses other than payments under any mortgages, and Landlord is not and
shall not be required to render any services of any kind to Tenant. The term
"RENT" as used in this lease means the Minimum Annual Rent, Annual Operating
Expenses and any other additional rent or sums payable by Tenant to Landlord
pursuant to this lease, all of which shall be deemed rent for purposes of
Landlord's rights and remedies with respect thereto. Tenant shall pay all
Rent to Landlord within 30 days after Tenant is billed, unless otherwise
provided in this lease, and interest shall accrue on all sums due but unpaid.
8. SIGNS. Except for signs which are located wholly within the interior
of the Premises and not visible from the exterior of the Premises, no signs
shall be placed on the Property without the prior written consent of
Landlord. All signs installed by Tenant shall
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be maintained by Tenant in good condition and Tenant shall remove all such
signs at the termination of this lease and shall repair any damage caused by
such installation, existence or removal.
9. ALTERATIONS AND FIXTURES.
(a) Subject to Section 10, Tenant shall have the right to install
its trade fixtures in the Premises, provided that no such installation or
removal thereof shall affect any structural portion of the Property nor any
utility lines, communications lines, equipment or facilities in the Building
serving any tenant other than Tenant. At the expiration or termination of
this lease and at the option of Landlord or Tenant, Tenant shall remove such
installation(s) and, in the event of such removal, Tenant shall repair any
damage caused by such installation or removal; if Tenant, with Landlord's
written consent, elects not to remove such installation(s) at the expiration
or termination of this lease, all such installations shall remain on the
Property and become the property of Landlord without payment by Landlord.
(b) Except for non-structural changes which do not exceed $5000 in
the aggregate, Tenant shall not make or permit to be made any alterations to
the Premises without Landlord's prior written consent. Tenant shall pay the
costs of any required architectural/engineering reviews. In making any
alterations, (i) Tenant shall deliver to Landlord the plans, specifications
and necessary permits, together with certificates evidencing that Tenant's
contractors and subcontractors have adequate insurance coverage naming
Landlord and Landlord's agent as additional insureds, at least 10 days prior
to commencement thereof, (ii) such alterations shall not impair the
structural strength of the Building or any other improvements or reduce the
value of the Property or affect any utility lines, communications lines,
equipment or facilities in the Building serving any tenant other than Tenant,
(iii) Tenant shall comply with Section 10 and (iv) the occupants of the
Building and of any adjoining property shall not be disturbed thereby. All
alterations to the Premises by Tenant shall be the property of Tenant until
the expiration or termination of this lease; at that time all such
alterations shall remain on the Property and become the property of Landlord
without payment by Landlord unless Landlord gives written notice to Tenant to
remove the same, in which event Tenant will remove such alterations and
repair any resulting damage. At Tenant's request prior to Tenant making any
alterations, Landlord shall notify Tenant in writing, whether Tenant is
required to remove such alterations at the expiration or termination of this
lease.
10. MECHANICS' LIENS. Tenant shall pay promptly any contractors and
materialmen who supply labor, work or materials to Tenant at the Property and
shall take all steps permitted by law in order to avoid the imposition of any
mechanic's lien upon all or any portion of the Property. Should any such lien
or notice of lien be filed for work performed for Tenant other than by
Landlord, Tenant shall bond against or discharge the same within 5 days after
Tenant has notice that the lien or claim is filed regardless of the validity
of such lien or claim. Nothing in this lease is intended to authorize Tenant
to do or cause any work to be done or materials to be supplied for the
account of Landlord, all of the same to be solely for Tenant's account and at
Tenant's risk and expense. Throughout this lease the term "mechanic's lien"
is used to include any lien, encumbrance or charge levied or imposed upon all
or any portion of, interest in or income from the Property on account of any
mechanic's, laborer's, materialman's or construction lien or arising out of
any debt or liability to or any claim of any contractor, mechanic, supplier,
materialman or laborer and shall include any mechanic's notice of intention
to file a lien given to Landlord or Tenant, any stop order given to Landlord
or Tenant, any notice of refusal to pay naming Landlord or Tenant and any
injunctive or equitable action brought by any person claiming to be entitled
to any mechanic's lien.
11. LANDLORD'S RIGHT OF ENTRY. Tenant shall permit Landlord and its Agents
to enter the Premises at all reasonable times following reasonable notice
(except in the event of an emergency), for the purpose of inspection,
maintenance or making repairs, alterations or additions as well as to exhibit
the Premises for the purpose of sale or mortgage and, during the last 12
months of the Term, to exhibit the Premises to any prospective tenant.
Landlord will make reasonable efforts not to inconvenience Tenant in
exercising the foregoing rights, but shall not be liable for any loss of
occupation or quiet enjoyment thereby occasioned.
12. DAMAGE BY FIRE OR OTHER CASUALTY.
(a) If the Premises or Building shall be damaged or destroyed by
fire or other casualty, Tenant promptly shall notify Landlord and Landlord,
subject to the conditions set forth in this Section 12, shall repair such
damage and restore the Premises to substantially the same condition in which
they were immediately prior to such damage or destruction, but not including
the repair, restoration or replacement of the fixtures or alterations
installed by Tenant. Landlord shall notify Tenant in writing, within 30 days
after the date of the casualty, if Landlord anticipates that the restoration
will take more than 180 days from the date of the casualty to complete; in
such event, either Landlord or Tenant may terminate this lease effective as
of the date of casualty by giving written notice to the other within 10 days
after Landlord's notice. Further, if a casualty occurs during the last 12
months of the Term or any extension thereof, Landlord may cancel this lease
unless Tenant has the right to extend the Term for at least 3 more years and
does so within 30 days after the date of the casualty.
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(b) Landlord shall maintain a 12 month rental coverage endorsement
or other comparable form of coverage as part of its fire, extended coverage
and special form insurance. Tenant will receive an abatement of its Minimum
Annual Rent and Annual Operating Expenses to the extent the Premises are
rendered untenantable as determined by the carrier providing the rental
coverage endorsement.
13. CONDEMNATION.
(a) TERMINATION. If (i) all of the Premises are taken by a
condemnation or otherwise for any public or quasi-public use, (ii) any part
of the Premises is so taken and the remainder thereof is insufficient for the
reasonable operation of Tenant's business or (iii) any of the Property is so
taken, and, in Landlord's opinion, it would be impractical or the
condemnation proceeds are insufficient to restore the remainder of the
Property, then this lease shall terminate and all unaccrued obligations
hereunder shall cease as of the day before possession is taken by the
condemnor.
(b) PARTIAL TAKING. If there is a condemnation and this lease has
not been terminated pursuant to this Section, (i) Landlord shall restore the
Building and the improvements which are a part of the Premises to a condition
and size as nearly comparable as reasonably possible to the condition and
size thereof immediately prior to the date upon which the condemnor took
possession and (ii) the obligations of Landlord and Tenant shall be
unaffected by such condemnation except that there shall be an equitable
abatement of the Minimum Annual Rent according to the rental value of the
Premises before and after the date upon which the condemnor took possession
and/or the date Landlord completes such restoration.
(c) AWARD. In the event of a condemnation affecting Tenant, Tenant
shall have the right to make a claim against the condemnor for moving
expenses and business dislocation damages to the extent that such claim does
not reduce the sums otherwise payable by the condemnor to Landlord. Except as
aforesaid and except as set forth in (d) below, Tenant hereby assigns all
claims against the condemnor to Landlord.
(d) TEMPORARY TAKING. No temporary taking of the Premises shall
terminate this lease or give Tenant any right to any rental abatement. Such a
temporary taking will be treated as if Tenant had sublet the Premises to the
condemnor and had assigned the proceeds of the subletting to Landlord to be
applied on account of Tenant's obligations hereunder. Any award for such a
temporary taking during the Term shall be applied first, to Landlord's costs
of collection and, second, on account of sums owing by Tenant hereunder, and
if such amounts applied on account of sums owing by Tenant hereunder should
exceed the entire amount owing by Tenant for the remainder of the Term, the
excess will be paid to Tenant.
14. NON-ABATEMENT OF RENT. Except as otherwise expressly provided as to
damage by fire or other casualty in Section 12(b) and as to condemnation in
Section 13(b), there shall be no abatement or reduction of the Rent for any
cause whatsoever, and this lease shall not terminate, and Tenant shall not be
entitled to surrender the Premises.
15. INDEMNIFICATION OF LANDLORD. Subject to Sections 7(c)(iii) and 16,
Tenant will protect, indemnify and hold harmless Landlord and its Agents from
and against any and all claims, actions, damages, liability and expense
(including fees of attorneys, investigators and experts) in connection with
loss of life, personal injury or damage to property in or about the Premises
or arising out of the occupancy or use of the Premises by Tenant or its
Agents or occasioned wholly or in part by any act or omission of Tenant or
its Agents, whether prior to, during or after the Term, except to the extent
such loss, injury or damage was caused by the negligence of Landlord or its
Agents. In case any action or proceeding is brought against Landlord and/or
its Agents by reason of the foregoing, Tenant, at its expense, shall resist
and defend such action or proceeding, or cause the same to be resisted and
defended by counsel (reasonably acceptable to Landlord and its Agents)
designated by the insurer whose policy covers such occurrence or by counsel
designated by Tenant and approved by Landlord and its Agents. Tenant's
obligations pursuant to this Section 15 shall survive the expiration or
termination of this lease.
16. WAIVER OF CLAIMS. Landlord and Tenant each hereby waives all claims
for recovery against the other for any loss or damage which may be inflicted
upon the property of such party even if such loss or damage shall be brought
about by the fault or negligence of the other party or its Agents; provided,
however, that such waiver by Landlord shall not be effective with respect to
any liability of Tenant described in Sections 4(c) and 7(d)(iv).
17. QUIET ENJOYMENT. Landlord covenants that Tenant, upon performing all
of its covenants, agreements and conditions of this lease, shall have quiet
and peaceful possession of the Premises as against anyone claiming by or
through Landlord, subject, however, to the exceptions, reservations and
conditions of this lease.
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18. ASSIGNMENT AND SUBLETTING.
(a) LIMITATION. Tenant shall not transfer this lease, voluntarily
or by operation of law, without the prior written consent of Landlord which
shall not be withheld unreasonably. However, Landlord's consent shall not be
required in the event of any transfer by Tenant to an affiliate of Tenant
which is at least as creditworthy as Tenant as of the date of this lease and
provided Tenant delivers to Landlord the instrument described in Section
(c)(iii) below, together with a certification of such creditworthiness by
Tenant and such affiliate. Any transfer not in conformity with this Section
18 shall be void at the option of Landlord, and Landlord may exercise any or
all of its rights under Section 23. A consent to one transfer shall not be
deemed to be a consent to any subsequent transfer. "Transfer" shall include
any sublease, assignment, license or concession agreement, change in
ownership or control of Tenant's mortgage or hypothecation of this lease or
Tenant's interest therein or in all or a portion of the Premises.
(b) OFFER TO LANDLORD. Tenant acknowledges that the terms of this
lease, including the Minimum Annual Rent, have been based on the
understanding that Tenant physically shall occupy the Premises for the entire
Term. Therefore, upon Tenant's request to transfer all or a portion of the
Premises, at the option of Landlord, Tenant and Landlord shall execute an
amendment to this lease removing such space from the Premises, Tenant shall
be relieved of any liability with respect to such space and Landlord shall
have the right to lease such space to any party, including Tenant's proposed
transferee.
(c) CONDITIONS. Notwithstanding the above, the following shall
apply to any transfer, with or without Landlord's consent:
(i) As of the date of any transfer, Tenant shall not be in
default under this lease nor shall any act or omission have occurred which
would constitute a default with the giving of notice and/or the passage of
time.
(ii) No transfer shall relieve Tenant of its obligation to
pay the Rent and to perform all its other obligations hereunder. The
acceptance of Rent by Landlord from any person shall not be deemed to be a
waiver by Landlord of any provision of this lease or to be a consent to any
transfer.
(iii) Each transfer shall be by a written instrument in form
and substance satisfactory to Landlord which shall (A) include an assumption
of liability by any transferee of all Tenant's obligations and the
transferee's ratification of and agreement to be bound by all the provisions
of this lease, (B) afford Landlord the right of direct action against the
transferee pursuant to the same remedies as are available to Landlord against
Tenant and (C) be executed by Tenant and the transferee.
(iv) Tenant shall pay, within 10 days of receipt of an
invoice which shall be no less than $250, Landlord's reasonable attorneys'
fees and costs in connection with the review, processing and documentation of
any transfer for which Landlord's consent is requested.
19. SUBORDINATION; MORTGAGEE'S RIGHTS.
(a) This lease shall be subordinate to any first mortgage or other
primary encumbrance now or hereafter affecting the Premises. Although the
subordination is self-operative, within 10 days after written request, Tenant
shall execute and deliver any further instruments confirming such
subordination of this lease and any further instruments of attornment that
may be desired by any such mortgagee or Landlord. However, any mortgagee may
at any time subordinate its mortgage to this lease, without Tenant's consent,
by giving written notice to Tenant, and thereupon this lease shall be deemed
prior to such mortgage without regard to their respective dates of execution
and delivery; provided, however, that such subordination shall not affect any
mortgagee's right to condemnation awards, casualty insurance proceeds,
intervening liens or any right which shall arise between the recording of
such mortgage and the execution of this lease.
(b) It is understood and agreed that any mortgagee shall not be
liable to Tenant for any funds paid by Tenant to Landlord unless such funds
actually have been transferred to such mortgagee by Landlord.
(c) Notwithstanding the provisions of Sections 12 and 13 above,
Landlord's obligation to restore the Premises after a casualty or
condemnation shall be subject to the consent and prior rights of Landlord's
first mortgagee.
20. RECORDING; TENANT'S CERTIFICATE. Tenant shall not record this lease or
a memorandum thereof without Landlord's prior written consent. Within 10 days
after Landlord's written request from time to time:
(a) Tenant shall execute, acknowledge and deliver to Landlord a
written statement certifying the Commencement Date and Expiration Date of
this lease, that this lease is in full force and effect and has not been
modified and otherwise as set forth in the
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form of estoppel certificate attached as Exhibit "D" or with such
modifications as may be necessary to reflect accurately the stated facts
and/or such other certifications as may be requested by a mortgagee or
purchaser. Tenant understands that its failure to execute such documents may
cause Landlord serious financial damage by causing the failure of a financing
or sale transaction.
(b) Tenant shall furnish to Landlord, Landlord's mortgagee,
prospective mortgagee or purchaser reasonably requested financial information.
21. SURRENDER; ABANDONED PROPERTY.
(a) Subject to the terms of Sections 9(b), 12(a) and 13(b), at the
expiration or termination of this lease, Tenant promptly shall yield up in
the same condition, order and repair in which they are required to be kept
throughout the Term, the Premises and all improvements thereto, and all
fixtures and equipment servicing the Building, ordinary wear and tear
excepted.
(b) Upon or prior to the expiration or termination of this lease,
Tenant shall remove any personal property from the Property. Any personal
property remaining thereafter shall be deemed conclusively to have been
abandoned, and Landlord, at Tenant's expense, may remove, store, sell or
otherwise dispose of such property in such manner as Landlord may see fit
and/or Landlord may retain such property as its property. If any part thereof
shall be sold, then Landlord may receive and retain the proceeds of such sale
and apply the same, at its option, against the expenses of the sale, the cost
of moving and storage and any Rent due under this lease.
(c) If Tenant or any person claiming through Tenant, shall continue
to occupy the Premises after the expiration or termination of this lease or
any renewal thereof, such occupancy shall be deemed to be under a
month-to-month tenancy under the same terms and conditions set forth in this
lease, except that the monthly installment of the Minimum Annual Rent during
such continued occupancy shall be double the amount applicable to the last
month of the Term. Anything to the contrary notwithstanding, any holding over
by Tenant without Landlord's prior written consent shall constitute a default
hereunder and shall be subject to all the remedies available to Landlord.
22. CURING TENANT'S DEFAULTS. If Tenant shall be in default in the
performance of any of its obligations hereunder, Landlord, without any
obligation to do so, in addition to any other rights it may have in law or
equity, may elect to cure such default on behalf of Tenant after written
notice (except in the case of emergency) to Tenant. Tenant shall reimburse
Landlord upon demand for any sums paid or costs incurred by Landlord in
curing such default, including interest thereon from the respective dates of
Landlord's incurring such costs, which sums and costs together with interest
shall be deemed additional rent.
23. DEFAULTS - REMEDIES.
(a) DEFAULTS. It shall be an event of default:
(i) If Tenant does not pay in full when due any and all Rent;
(ii) If Tenant fails to observe and perform or otherwise
breaches any other provision of this lease;
(iii) If Tenant abandons the Premises, which shall be
conclusively presumed if the Premises remain unoccupied for more than 10
consecutive days, or removes or attempts to remove Tenant's goods or property
other than in the ordinary course of business; or
(iv) If Tenant becomes insolvent or bankrupt in any sense or
makes a general assignment for the benefit of creditors or offers a
settlement to creditors, or if a petition in bankruptcy or for reorganization
or for an arrangement with creditors under any federal or state law is filed
by or against Tenant, or a bill in equity or other proceeding for the
appointment of a receiver for any of Tenant's assets is commenced, or if any
of the real or personal property of Tenant shall be levied upon; provided,
however, that any proceeding brought by anyone other than Landlord or Tenant
under any bankruptcy, insolvency, receivership or similar law shall not
constitute a default until such proceeding has continued unstayed for more
than 60 consecutive days.
(b) REMEDIES. Then, and in any such event, Landlord shall have the
following rights:
(i) To charge a late payment fee equal to the greater of
$100 or 5% of any amount owed to Landlord pursuant to this lease which is not
paid within 5 days after the due date.
(ii) To enter and repossess the Premises, by breaking open
locked doors if necessary, and remove all persons and all or any property
therefrom, by action at law or otherwise, without being liable for
prosecution or damages therefor, and Landlord may,
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at Landlord's option, make alterations and repairs in order to relet the
Premises and relet all or any part(s) of the Premises for Tenant's account.
Tenant agrees to pay to Landlord on demand any deficiency that may arise by
reason of such reletting. In the event of reletting without termination of
this lease, Landlord may at any time thereafter elect to terminate this lease
for such previous breach.
(iii) To accelerate the whole or any part of the Rent for the
balance of the Term, and declare the same to be immediately due and payable.
(iv) To terminate this lease and the Term without any right
on the part of Tenant to save the forfeiture by payment of any sum due or by
other performance of any condition, term or covenant broken.
(c) GRACE PERIOD. Notwithstanding anything hereinabove stated,
neither party will exercise any available right because of any default of the
other, except those remedies contained in subsection (b)(i) of this Section,
unless such party shall have first given 10 days written notice thereof to
the defaulting party, and the defaulting party shall have failed to cure the
default within such period; provided, however, that
(i) No such notice shall be required if Tenant fails to
comply with the provisions of Sections 10 or 20(a), in the case of emergency
as set forth in Section 22 or in the event of any default enumerated in
subsections (a)(iii) and (iv) of this Section.
(ii) Landlord shall not be required to give such 10 days
notice more than 2 times during any 12 month period
(iii) If the default consists of something other than the
failure to pay money which cannot reasonably be cured within 10 days, neither
party will exercise any right if the defaulting party begins to cure the
default within the 10 days and continues actively and diligently in good
faith to completely cure said default.
(iv) Tenant agrees that any notice given by Landlord pursuant
to this Section which is served in compliance with Section 27 shall be
adequate notice for the purpose of Landlord' s exercise of any available
remedies.
(d) NON-WAIVER, NON-EXCLUSIVE. No waiver by Landlord of any breach
by Tenant shall be a waiver of any subsequent breach, nor shall any
forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver
by Landlord of any rights and remedies with respect to such or any subsequent
breach. Efforts by Landlord to mitigate the damages caused by Tenant's
default shall not constitute a waiver of Landlord's right to recover damages
hereunder. No right or remedy herein conferred upon or reserved to Landlord
is intended to be exclusive of any other right or remedy provided herein or
by law, but each shall be cumulative and in addition to every other right or
remedy given herein or now or hereafter existing at law or in equity. No
payment by Tenant or receipt or acceptance by Landlord of a lesser amount
than the total amount due Landlord under this lease shall be deemed to be
other than on account, nor shall any endorsement or statement on any check or
payment be deemed an accord and satisfaction, and Landlord may accept such
check or payment without prejudice to Landlord's right to recover the balance
of Rent due, or Landlord's right to pursue any other available remedy.
(e) COSTS AND ATTORNEYS' FEES. If either party commences an action
against the other party arising out of or in connection with this lease, the
prevailing party shall be entitled to have and recover from the losing party
attorneys' fees, costs of suit, investigation expenses and discovery costs,
including costs of appeal.
24. REPREPRESENTATIONS OF TENANT. Tenant represents to Landlord and agrees
that:
(a) The word "TENANT" as used herein includes the Tenant named
above as well as its successors and assigns, each of which shall be under the
same obligations and liabilities and each of which shall have the same
rights, privileges and powers as it would have possessed had it originally
signed this lease as Tenant. Each and every of the persons named above as
Tenant shall be bound jointly and severally by the terms, covenants and
agreements contained herein. However, no such rights, privileges or powers
shall inure to the benefit of any assignee of Tenant immediate or remote,
unless Tenant has complied with the terms of Section 18 and the assignment to
such assignee is permitted or has been approved in writing by Landlord. Any
notice required or permitted by the terms of this lease may be given by or to
any one of the persons named above as Tenant and shall have the same force
and effect as if given by or to all thereof.
(b) If Tenant is a corporation, partnership or any other form of
business association or entity, Tenant is duly formed and in good standing
and has full corporate or partnership power and authority, as the case may
be, to enter into this lease and has taken all corporate or partnership
action, as the case may be, necessary to carry out the transaction
contemplated herein, so that when executed, this lease constitutes a valid
and binding obligation enforceable in accordance with its terms. Tenant shall
provide
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Landlord with corporate resolutions or other proof in a form acceptable to
Landlord, authorizing the execution of this lease at the time of such
execution.
25. LIABILITY OF LANDLORD. The word "LANDLORD" as used herein includes the
Landlord named above as well as its successors and assigns, each of which
shall have the same rights, remedies, powers, authorities and privileges as
it would have had it originally signed this lease as Landlord. Any such
person or entity, whether or not named herein, shall have no liability
hereunder after it ceases to hold title to the Premises except for
obligations already accrued (and, as to any unapplied portion of Tenant's
Security Deposit, Landlord shall be relieved of all liability therefor upon
transfer of such portion to its successor in interest) and Tenant shall look
solely to Landlord's successor in interest for the performance of the
covenants and obligations of the Landlord hereunder which thereafter shall
accrue. Neither Landlord nor any principal of Landlord nor any owner of the
Property, whether disclosed or undisclosed, shall have any personal liability
with respect to any of the provisions of this lease or the Premises, and if
Landlord is in breach or default with respect to Landlord s obligations under
this lease or otherwise, Tenant shall took solely to the equity of Landlord
in the Property for the satisfaction of Tenant's claims. Notwithstanding the
foregoing, no mortgagee or ground lessor succeeding to the interest of
Landlord hereunder (either in terms of ownership or possessory rights) shall
be (a) liable for any previous act or omission of a prior landlord, (b)
subject to any rental offsets or defenses against a prior landlord or (c)
bound by any amendment of this lease made without its written consent, or by
payment by Tenant of Minimum Annual Rent in advance in excess of one monthly
installment.
26. INTERPRETATION; DEFINITIONS.
(a) CAPTIONS. The captions in this lease are for convenience only
and are not a part of this lease and do not in any way define, limit,
describe or amplify the terms and provisions of this lease or the scope or
intent thereof.
(b) ENTIRE AGREEMENT. This lease represents the entire agreement
between the parties hereto and there are no collateral or oral agreements or
understandings between Landlord and Tenant with respect to the Premises or
the Property. No rights, easements or licenses are acquired in the Property
or any land adjacent to the Property by Tenant by implication or otherwise
except as expressly set forth in the provisions of this lease. This lease
shall not be modified in any manner except by an instrument in writing
executed by the parties. The masculine (or neuter) pronoun and the singular
number shall include the masculine, feminine and neuter genders and the
singular and plural number. The word "INCLUDING" followed by any specific
item(s) is deemed to refer to examples rather than to be words of limitation.
Both parties having participated fully and equally in the negotiation and
preparation of this lease, this lease shall not be more strictly construed,
nor any ambiguities in this lease resolved, against either Landlord or Tenant.
(c) COVENANTS. Each covenant, agreement, obligation, term,
condition or other provision herein contained shall be deemed and construed
as a separate and independent covenant of the party bound by, undertaking or
making the same, not dependent on any other provision of this lease unless
otherwise expressly provided. All of the terms and conditions set forth in
this lease shall apply throughout the Term unless otherwise expressly set
forth herein.
(d) INTEREST. Wherever interest is required to be paid hereunder,
such interest shall be at the highest rate permitted under law but not in
excess of 15% per annum.
(e) SEVERABILITY; GOVERNING LAW. If any provisions of this lease
shall be declared unenforceable in any respect, such unenforceability shall
not affect any other provision of this lease, and each such provision shall
be deemed to be modified, if possible, in such a manner as to render it
enforceable and to preserve to the extent possible the intent of the parties
as set forth herein. This lease shall be construed and enforced in accordance
with the laws of the state in which the Property is located.
(f) "MORTGAGE" AND "MORTGAGEE." The word "MORTGAGE" as used herein
includes any lien or encumbrance on the Premises or the Property or on any
part of or interest in or appurtenance to any of the foregoing, including
without limitation any ground rent or ground lease if Landlords interest is
or becomes a leasehold estate. The word "MORTGAGEE" as used herein includes
the holder of any mortgage, including any ground lessor if Landlords interest
is or becomes a leasehold estate. Wherever any right is given to a mortgagee,
that right may be exercised on behalf of such mortgagee by any representative
or servicing agent of such mortgagee.
(g) "PERSON." The word "PERSON" is used herein to include a natural
person, a partnership, a corporation, an association and any other form of
business association or entity.
(h) PROPORTIONATE SHARE. At any time or times, upon request of
Landlord or of any tenant of the Building, the method for allocating Tenant's
Proportionate Share of any Impositions, cost, charge, rent, expense or
payment then or thereafter payable shall be redetermined by an independent
qualified expert. The cost of such redetermination shall be borne by the
tenants of the Building in
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the same proportion as that determined by such expert for reallocation of
said relevant sum; except that if such redetermination is requested by a
tenant, the cost thereof shall be borne entirely by such tenant if the
proportionate share of said relevant sum allocable to such tenant as the
result of such redetermination shall not vary by at least 5% from the amount
which would have been allocable to such tenant in accordance with the
percentage based on square foot area.
27. NOTICES. Any notice or other communication under this lease shall be
in writing and addressed to Landlord or Tenant at their respective addresses
specified at the beginning of this lease, except that after the Commencement
Date Tenant's address shall be at the Premises, (or to such other address as
either may designate by notice to the other) with a copy to any mortgagee or
other party designated by Landlord. Each notice or other communication shall
be deemed given if sent by prepaid overnight delivery service or by certified
mail, return receipt requested, postage prepaid or in any other manner, with
delivery in any case evidenced by a receipt, and shall be deemed received on
the day of actual receipt by the intended recipient or on the business day
delivery is refused. The giving of notice by Landlord's attorneys,
representatives and agents under this Section shall be deemed to be the acts
of Landlord; however, the foregoing provisions governing the date on which a
notice is deemed to have been received shall mean and refer to the date on
which a party to this lease, and not its counsel or other recipient to which
a copy of the notice may be sent, is deemed to have received the notice.
28. SECURITY DEPOSIT. At the time of signing this lease, Tenant shall
deposit with Landlord the Security Deposit to be retained by Landlord as cash
security for the faithful performance and observance by Tenant of the
provisions of this lease. Tenant shall not be entitled to any interest
whatever on the Security Deposit. Landlord shall have the right to commingle
the Security Deposit with its other funds. Landlord may use the whole or any
part of the Security Deposit for the payment of any amount as to which Tenant
is in default hereunder or to compensate Landlord for any loss or damage it
may suffer by reason of Tenant's default under this lease. If Landlord uses
all or any portion of the Security Deposit as herein provided, within 10 days
after written demand therefor, Tenant shall pay Landlord cash in amount equal
to that portion of the Security Deposit used by Landlord. If Tenant shall
comply fully and faithfully with all of the provisions of this lease, the
Security Deposit shall be returned to Tenant after the Expiration Date and
surrender of the Premises to Landlord.
IN WITNESS WHEREOF, and in consideration of the mutual entry into this
lease and for other good and valuable consideration, and intending to be
legally bound, Landlord and Tenant have executed this lease.
Date signed: LANDLORD:
LIBERTY PROPERTY LIMITED PARTNERSHIP
7/28/97
- -------------------------------
By: Liberty Property Trust, Sole
General Partner
By: /s/ John S. Gattuso
-------------------------
Name: JOHN S. GATTUSO
Title: SENIOR VICE PRESIDENT
Date signed: Tennant: TRICORD SYSTEMS
/s/ John Mitcham
- ----------------------- -------------------------------
Attest:
By: /s/ John Mitcham
- ----------------------- -----------------------------
Name: Name:
Title: Title: PRESIDENT/TRICORD
11
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RIDER
This Rider is attached to and made a part of that certain Lease dated
of even date herewith by and between LIBERTY PROPERTY LIMITED PARTNERSHIP, a
Pennsylvania limited partnership, as Landlord, and TRICORD SYSTEMS, INC., a
Delaware corporation, as Tenant. In the event of any conflict between the
terms of this Rider and the terms of the Lease to which this Rider is
attached, the terms of this Rider shall control.
29. LANDLORD'S WORK. Landlord shall construct the leasehold improvements
set forth in the plans and specifications attached hereto as EXHIBIT "E"
("Landlord's Work"). The Premises will be delivered to Tenant in compliance
with the ADA and any other laws, codes, ordinances or regulations applicable
to the Premises, as such laws are interpreted at the time of the issuance of
the building permit for Landlord's Work. Landlord shall use all commercially
reasonable efforts to substantially complete Landlord's Work on or before
August 23, 1997, subject only to delays caused by Tenant or delays otherwise
outside of the reasonable control of Landlord. Subject to Landlord's warranty
as provided below, taking of possession by Tenant of the Demised Premises
shall be conclusively deemed to establish that Landlord's Work has been
completed and that the Leased Premises are in good and satisfactory condition
and are in compliance with the terms of this Lease, as of the date possession
was so taken by Tenant, except as to such items, if any, as are disclosed to
Landlord by Tenant in writing within ten (10) days of such taking of
possession. Landlord warrants to Tenant that Landlord's Work will be free of
defects in workmanship and materials for a period of one-year following the
Commencement Date. Upon execution of this Lease, Tenant shall pay into
escrow with Commonwealth Land Title Insurance Company $145,493.00 as payment
for the costs of Landlord's Work and related expenses, which money shall be
disbursed to Landlord in accordance with the Escrow Agreement attached to
this Lease as EXHIBIT "G". If the costs and expenses of Landlord's Work
(including design and other "soft" costs) exceed $145,493.00, Tenant shall
pay the excess to Landlord within 10 business days of a request from Landlord
for payment accompanied by reasonable documentation evidencing such costs. If
the costs and expenses of Landlord's Work (including design and other "soft"
costs) are less than $145,493.00, the balance remaining in escrow shall be
disbursed to Tenant as provided in the Escrow Agreement.
30. COMMENCEMENT DATE. The Commencement Date shall be the date Landlord
delivers the Premises to Tenant with Landlord's Work substantially completed,
which the parties anticipate will occur on or before August 23, 1997. The
Landlord's Work will be deemed substantially completed at such time as
Landlord's Work has been performed except for minor punch list items and
finishing work that does not interfere with Tenant's occupancy of the
Premises and Tenant's use and enjoyment of the Premises for Tenant's intended
purposes.
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31. ENVIRONMENTAL. Section 4(c) notwithstanding, Tenant shall only be
responsible and liable for hazardous or toxic substances used, generated,
stored, treated, disposed of or released on or from the Premises or the
Property by Tenant or Tenant's subtenants, agents, licensees, invitees,
contractors or employees.
32. OPERATING EXPENSES. Attached hereto as EXHIBIT "F" is a detailed
breakdown of the estimated Annual Operating Expenses of $4.30 per rentable
square foot as specified at Section 1(d)(ii). Utilities serving the Premises
are separately metered, and Tenant shall pay the same when due. Any provision
of Section 7(d)(iii) to the contrary notwithstanding, any management and
administrative fee includable in annual Operating Expenses shall be capped at
an amount equal to 5% of annual gross rents (base rent plus operating
expenses) payable to Landlord with respect to the Property.
33. HVAC. The following sentence is hereby added at the end of Section
7(d)(ii) of the Lease: "Landlord has provided Tenant, and Tenant acknowledges
receipt of, a copy of the maintenance contract for the HVAC systems serving
the Premises and a copy of a recent inspection report regarding the condition
thereof."
34. LANDLORD'S RIGHT OF ENTRY. The provisions of Section 11
notwithstanding, Landlord shall give Tenant not less than 48 hours notice
(except in the event of an emergency or other circumstances in which 48 hours
notice would not be appropriate or reasonable) prior to exercising its rights
of entry under said Section 11. Said notice may be by telephone and need not
otherwise comply with the formal notice requirements of the Lease. Landlord
agrees to keep confidential any information about Tenant's business
activities learned by Landlord in connection with any such entry that might
reasonably be regarded as confidential, sensitive or of the nature of a trade
secret.
35. AWARD. The provisions of Section 13(c) notwithstanding, Tenant may
also assert a claim against the condemnor for the value tenant improvements
to the Premises paid for by Tenant to the extent that any such claim does not
reduce the sums otherwise payable by the condemnor to Landlord.
36. NET LEASE. The parties agree and understand that the characterization
of the lease as a "triple net lease" in Section 7(f) is not intended to
impose on Tenant any obligations or liabilities that are not expressly set
forth in the Lease.
37. NONDISTURBANCE AGREEMENT. Tenant acknowledges that Landlord's
mortgagee is under no obligation to provide Tenant a nondisturbance agreement
in favor of Tenant. Landlord agrees, however, upon written request of Tenant,
to request a nondisturbance agreement from Landlord's mortgagee in such
commercially reasonable form to be provided by Tenant to Landlord in
connection
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<PAGE>
with Tenant's request. Landlord will reasonably cooperate with Tenant in
Tenant's efforts to obtain such a nondisturbance agreement.
Landlord and Tenant have executed this Rider (consisting of Sections 29 - 37)
as of the last date indicated below.
Landlord:
Date signed: 7/28, 1997 LIBERTY PROPERTY LIMITED
PARTNERSHIP
By: Liberty Property Trust, Sole
General Parntner
By: /s/ John S. Gattuso
---------------------
Name: JOHN S. GATTUSO
Title: SENIOR VICE PRESIDENT
Date signed:_________,1997 TENANT:
TRICORD SYSTEMS, INC.
By: /s/ John Mitcham
-----------------------------
Its PRESIDENT
---------------------------
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[LETTERHEAD]
September 13, 1996
Charles E. Pearsall, Jr.
Tricord Systems, Inc.
2800 Northwest Blvd.
Plymouth, MN 55441
Dear Ed:
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.
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 2
(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, 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
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 3
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.
(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.
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 4
(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.
(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:
(1) 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;
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 5
(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 dependents at a
substantially similar total cost to you (e.g., premiums,
deductibles, copays, 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 Chance 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
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 6
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 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 I 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 24 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 (1) one times your Base Pay plus
(ii) one 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
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 7
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 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
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 8
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 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.
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 9
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.
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.
10. 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
<PAGE>
CHARLES E. PEARSALL, JR.
September 13, 1996
Page 10
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 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,
<PAGE>
Charles E. Pearsall, Jr.
September 13, 1996
Page 11
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 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 24th day of
September 1996.
/s/ Charles E. Pearsall
-----------------------------------
Charles E. Pearsall
<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, 1997 and 1996 and for each of the three years ended December 31,
1997 should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this annual report.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS: For the years ended December 31,
------------------------------------------------------------------
(In thousands, except per share data) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 12,660 51,269 60,181 81,121 80,024
Cost of goods sold 12,525 35,416 60,483 50,862 50,405
------- ------- ------- ------- -------
Gross margin 135 15,853 (302) 30,259 29,619
------- ------- ------- ------- -------
Research and development 3,981 7,264 8,621 7,291 5,031
Sales and marketing 4,312 18,395 21,897 18,456 13,194
General and administrative 1,697 5,578 6,333 3,692 2,360
Nonrecurring items, net 864 - - - -
Other (income), net (12) (180) - (1,017) (463)
------- ------- ------- ------- -------
10,842 31,057 36,851 28,422 20,122
------- ------- ------- ------- -------
Income (loss) before income taxes (10,707) (15,204) (37,153) 1,837 9,497
Provision for income taxes (224) - - (125) (498)
------- ------- ------- ------- -------
Net income (loss) $(10,931) (15,204) (37,153) 1,712 8,999
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per share - basic $ (0.81) (1.14) (2.81) 0.13 0.96
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Net income (loss) per share - diluted $ (0.81) (1.14) (2.81) 0.13 0.71
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
See Note 3 to the consolidated financial statements for Supplemental Statement
of Operations Information.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
FINANCIAL POSITION (IN THOUSANDS): 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 2,977 8,140 20,020 51,872 56,556
Total assets 6,755 21,938 40,167 77,144 81,393
Stockholders' equity $ 3,667 14,175 28,754 64,454 63,840
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------
GENERAL DATA AND RATIOS: 1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current ratio 2.0:1 2.0:1 2.8:1
Common shares outstanding (in thousands) 13,460 13,407 13,273
Book value per share 0.27 1.06 2.17
Number of employees 38 156 211
Average revenue per employee (in thousands) $ 166 291 290
</TABLE>
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
The Company historically 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-Registered Trademark- and Novell-Registered Trademark- NetWare-Registered
Trademark-. All revenues generated through December 31, 1997 related to the
server line of business.
A combination of competitive pressures and a vision for a highly distributed
and scalable storage systems architecture led the Company in February 1997 to
redefine its corporate strategy to focus its development efforts exclusively
on storage system management software. The architecture includes an entirely
new generation of Distributed File System and File-Intelligent I/O technology
known as Tricord Storage Management Software ("TSMS"). No revenues have been
generated by TSMS through December 31, 1997. The Company does not anticipate
significant revenues from the development of TSMS-based products in 1998.
During the second quarter of 1997, the strategic shift in the Company's
business, as discussed above, necessitated a reduction in the Company's
workforce affecting approximately 90 employees.
RESULTS OF OPERATIONS
7
<PAGE>
REVENUES
Revenues for 1997 decreased 75% from 1996 compared to a decrease of
approximately 15% from 1995 to 1996. The decrease in product revenues from 1996
to 1997 is primarily due to the Company's announcement, as previously discussed,
that it would not bring its next generation enterprise server to market. As a
result, product revenues for 1997 consisted primarily of the sale of spare
parts, disk drives, memory and expansion products. The Company continued to
sell new service contracts, with revenues from such contracts remaining at
approximately $2,000,000 for each of the past three years.
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. The decrease
in revenues with respect to channels of distribution occurred primarily in the
OEM channel, specifically Memorex Telex Corporation ("Memorex Telex"). Revenues
from Memorex Telex were negatively impacted by the Chapter 11 bankruptcy filing
by Memorex Telex in October 1996.
Toshiba Corporation ("Toshiba") accounted for 7.0% of the Company's revenues in
1997 compared to 14.9% of revenues in 1996 and 12.9% of revenues in 1995. Sales
to Memorex Telex were 3.3% of revenues in 1997 compared to 14.5% in 1996 and
15.7% of revenues in 1995. Memorex Telex revenues in 1997 were primarily from
the European subsidiaries of Memorex Telex due to the bankruptcy filing of the
Memorex Telex domestic operations.
The Company currently anticipates that revenues will decrease significantly
in 1998 as the Company continues to focus its resources on developing TSMS.
The Company intends to sell its remaining enterprise server product
inventory, consisting primarily of spare parts and expansion products, as
long as there is sufficient customer demand and materials are available. The
Company will honor its service agreements and enter into new agreements as
long as there is sufficient demand. The Company does not anticipate
significant revenues in 1998 from the sale or license of TSMS-based products,
which have yet to be fully developed. Actual 1998 revenues could materially
differ from those expressed in the foregoing forward-looking statements,
depending on a number of factors, including whether anticipated demand in
1998 for the Company's enterprise server products differs
8
<PAGE>
from the Company's expectations, the ability of the Company to purchase
components to satisfy customer demand and the ability of the Company to develop
and license TSMS.
GROSS MARGIN
As a percent of revenues, gross margin decreased to 1.1% in 1997 compared to
30.9% of revenue in 1996 and (0.5)% of revenue in 1995. The decrease in
gross margin from 1996 to 1997 was primarily due to the significant decrease
in the Company's sales volume as discussed above. The gross margin was
negatively impacted in 1997 by sales volume decreasing at a rate faster than
costs were able to be decreased. In addition, the product mix of primarily
sales of spare parts and expansion products in 1997 resulted in a lower gross
margin. Finally, 1997 gross margin was negatively impacted by approximately
7% due to reserve adjustments, while reserve adjustments benefited 1996
gross margin by approximately 3%.
The increase in gross margin percent from 1995 to 1996 was due primarily to a
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 a
reduction in workforce. In addition, the 1996 gross margin was favorably
impacted by a credit of $1,360,000 to cost of goods sold resulting from the
adjustment of the remaining reserves from the 1995 charge. Gross margin, as a
percent of revenue, increased to 28.3% in 1996, excluding the $1,360,000 credit,
from 24.0% in 1995, excluding the $14,761,000 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 1995, which had significantly
more sales of the Company's lower margin DS and Model series products. Gross
margins were also negatively impacted during 1996 by decreased revenues, which
lowered the amount over which fixed costs could be allocated.
The Company anticipates that its inventory purchases for 1998 will consist
mainly of disk drives and memory based on customer demand. The Company
currently anticipates that gross margin dollars will decline significantly in
1998 because of the anticipated decrease in revenues in 1998, but that its
gross margin percent in 1998 will be higher than 1997. Actual 1998 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 1998 anticipated revenue level and the ability
of the Company to purchase disk drives, memory and other 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 $3,981,000 in 1997 from $7,264,000 in 1996 and from $8,621,000 in 1995. The
decrease from 1996 to
9
<PAGE>
1997 was due primarily to a decrease in salary and benefit costs associated with
fewer team members as a result of the workforce reduction which took effect at
the end of the second quarter of 1997, as well as a $335,000 charge to research
and development expense in 1996 in connection with the acquisition of certain
assets of Reliable Distributed Information Corporation.
The decrease from 1995 to 1996 was primarily due to the 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 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 Company currently anticipates that research and development costs will be
a key expense during 1998 as the Company focuses on the continued development
of TSMS. The Company does not, however, anticipate that research and
development costs in 1998 will reach the 1997 level. Actual 1998 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 $4,312,000 in 1997 from $18,395,000 in 1996 and
from $21,897,000 in 1995. The decrease from 1996 to 1997 was primarily due to
lower salaries and benefits due to fewer team members as a result of the
workforce reduction which took place at the end of the second quarter of 1997,
the reduction of commissions related to reduced revenues, the closing of the
Company's domestic sales offices and the consolidation and closing of the
Company's international sales offices.
The decrease from 1995 to 1996 was partially due to the 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 international subsidiaries.
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 plans to liquidate its remaining international
subsidiaries in 1998 and does not anticipate significant losses from these
liquidations.
10
<PAGE>
Sales and marketing expenses decreased as a percentage of revenues to 34.1% in
1997 from 35.9% in 1996 from 36.4% in 1995. Excluding the 1995 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 1998 as revenues are expected to decrease and as
the Company continues to focus on the development of TSMS. Actual 1998 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 of TSMS, achieve
its revenue plan and retain its current sales and marketing team members.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $1,697,000 in 1997 from
$5,578,000 in 1996 and $6,333,000 in 1995. The decrease from 1996 to 1997 was
due to the 1996 increase in the allowance for doubtful accounts of $1,700,000
for Memorex Telex due to their bankruptcy filing and lower salaries and benefits
associated with fewer team members.
General and administrative expenses decreased to $5,578,000 in 1996 from
$6,333,000 in 1995. The decrease from 1995 to 1996 was due to the 1996 credit
of $368,000 related to the final accounting for the 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 1996 related to the Chapter 11 bankruptcy filing of Memorex Telex.
The Company currently anticipates that general and administrative expenses for
1998 will be less than in 1997 due to the move in August 1997 to a smaller
headquarters facility and the support necessary for fewer team members.
NONRECURRING ITEMS
Nonrecurring items for 1997 included the following items: a charge of $975,000
for the net value of leasehold improvements written off due to the termination
of the Company's lease at its previous headquarters facility; a charge of
$764,000 for the write-down of certain equipment based on an updated review of
the equipment required to support the operations of the Company; a charge of
$125,000 for the mutual settlement and release without admission of liability by
either the Company or International Business Machines ("IBM") regarding IBM's
assertion that certain of the Company's server systems and related products
infringe on certain patents owned by IBM; and a credit of $1,000,000 for a
one-time license fee paid to the Company by Toshiba for the world-wide,
non-exclusive
11
<PAGE>
right and license to the Availability Management System ("AMS") Software. The
AMS Software license related to the Company's server line of business.
INCOME TAXES
At December 31, 1997, for federal income tax purposes, the Company has
domestic net operating loss carryforwards of approximately $57,000,000. The
Company did not incur tax liabilities in 1997, 1996 and 1995 due to its net
losses.
Included in 1997 is a charge of $224,000 to provision for income taxes for the
establishment of a reserve for a deferred tax asset related to the Company's
alternative minimum tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $2,060,000 in 1997. Cash was primarily
used in 1997 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
the primarily non-cash nature of certain 1997 charges. Cash used in operating
activities was $4,774,000 in 1996 and $58,000 in 1995. Cash was primarily
used in 1996 and 1995 to fund the Company's net loss in each year and was
offset by decreases in accounts receivable and the primarily non-cash nature
of certain 1995 charges.
Cash used in investing activities in 1997, 1996 and 1995 was $361,000,
$1,346,000, and $1,611,000, respectively, principally due to capital
expenditures, which was partially offset in 1996 and 1995 by proceeds from the
maturity of investments. The Company does not currently anticipate
significant capital expenditures in 1998. The Company has no significant
commitments for the purchase of capital equipment.
As of December 31, 1997, accounts receivable and inventory were $681,000 and
$1,497,000, respectively, compared to $4,636,000 and $4,984,000, respectively,
as of December 31, 1996. The average days sales outstanding ("DSO") at December
31, 1997 and 1996, were 24 and 32 days, respectively. The decrease in DSO at
December 31, 1997 compared to 1996 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 3.9
times in 1997 compared to 5.4 times in 1996.
As of December 31, 1997, the Company had $3,713,000 in cash and cash
equivalents. 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, together with the funds generated from the
continued liquidation of its
12
<PAGE>
remaining enterprise server inventory, 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 achieve anticipated revenue levels from the continued sale of the
remaining enterprise server inventory, the ability of the Company to maintain
its cost structure in accordance with its operating plan, the ability of the
Company to develop, test and release TSMS 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
and the Company's success in establishing one or more OEM or other strategic
relationships. The Company will adjust its plans as necessary if it
determines that additional cash will be required during 1998.
The Company is seeking additional capital through 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, and the failure to
obtain additional capital as needed may have an adverse effect on the Company.
YEAR 2000
The Company has begun the process of analyzing its business systems to
determine if a significant Year 2000 issue exists. The Company has reviewed
its main business system and has determined that a Year 2000 problem does not
exist in that system. However, the Company has other smaller supporting
business systems which it has not yet reviewed. The Company has also
reviewed its software related to its server business and is in the process of
completing a fix for the Year 2000 issue. The Company has not yet released
any TSMS products, but it intends to review and correct any Year 2000 issues,
if necessary, prior to release to market of these products. The Company does
not currently anticipate significant costs to modify any internal use
software. The Company also does not anticipate any significant costs to
modify its server business software or software related to TSMS. However, the
Company has not completed its review of the Year 2000 issue and additional
cost may be incurred if significant future modifications are required.
NEW ACCOUNTING STANDARDS
In October 1997, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which must
be adopted by the Company effective January 1, 1998. Management does not
anticipate that the adoption of this SOP will have a significant impact on the
Company's financial position or results of operations.
Effective at year-end 1998, the Company will adopt the Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which requires disclosure of segment data
in a manner consistent with that used by an enterprise for internal management
reporting and decision making. The Company believes that it will continue to
report its operations as being comprised of two business segments.
13
<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
independent accountants have full and free access to the Audit Committee and
its individual members at any time.
John J. Mitcham Jeff A. Stewart
President and Chief Vice President and Controller
Executive Officer
14
<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, 1997 and 1996, and the related consolidated statements
of operations, cash flows and stockholders' equity for each of the three years
in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
February 26, 1998
15
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(in thousands, except per share data) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Revenues:
Product sales $ 10,676 49,162 58,262
Service contracts 1,984 2,107 1,919
-------- -------- --------
12,660 51,269 60,181
-------- -------- --------
Cost of goods sold:
Product sales 11,966 35,008 60,132
Service contracts 559 408 351
-------- -------- --------
12,525 35,416 60,483
-------- -------- --------
Gross margin 135 15,853 (302)
-------- -------- --------
Operating expenses:
Research and development 3,981 7,264 8,621
Sales and marketing 4,312 18,395 21,897
General and administrative 1,697 5,578 6,333
Nonrecurring items, net 864 - -
-------- -------- --------
10,854 31,237 36,851
-------- -------- --------
Operating loss (10,719) (15,384) (37,153)
-------- -------- --------
Other income (expense):
Interest, net 204 385 643
Other, net (192) (205) (643)
-------- -------- --------
12 180 -
-------- -------- --------
Loss before provision for income taxes (10,707) (15,204) (37,153)
Provision for income taxes 224 - -
-------- -------- --------
Net loss $ (10,931) (15,204) (37,153)
-------- -------- --------
-------- -------- --------
Net loss per share - basic and diluted $ (0.81) (1.14) (2.81)
-------- -------- --------
-------- -------- --------
Weighted average common shares outstanding 13,447 13,357 13,212
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
----------------------
(In thousands, except per share data) 1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,713 5,711
Accounts receivable, net 681 4,636
Inventories, net 1,497 4,984
Other current assets 174 572
------- -------
Total current assets 6,065 15,903
Equipment and improvements, net 565 5,717
Other assets 125 318
------- -------
Total Assets $ 6,755 21,938
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 708 2,897
Accrued payroll, benefits and related taxes 509 1,275
Deferred revenue 946 1,045
Other accrued expenses 925 2,546
------- -------
Total current liabilities 3,088 7,763
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 27,000 shares authorized,
13,460 and 13,407 shares outstanding 135 134
Additional paid-in capital 77,606 77,522
Cumulative translation adjustments 82 (256)
Accumulated deficit (74,156) (63,225)
------- -------
Total stockholders' equity 3,667 14,175
------- -------
Total Liabilities and Stockholders' Equity $ 6,755 21,938
------- -------
------- -------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (10,931) (15,204) (37,153)
Adjustments to reconcile net loss to net
cash used in operating activities:
Restructure and related charges (credits) - (1,848) 18,066
Depreciation and amortization 2,598 4,485 4,942
Amortization of premium on investments - - 20
Loss on disposal of equipment 643 353 296
Provision for losses on accounts receivable (455) 2,028 618
Provision for losses on inventories 1,818 994 1,454
Loss on termination of facilities lease 975 - -
Provision for loss on equipment 764 - -
Deferred taxes 224 - -
Other 196 250 27
Changes in operating assets and liabilities:
Accounts receivable 4,410 3,381 13,098
Inventories 1,669 3,726 (925)
Other current assets 704 195 101
Accounts payable (2,189) (3,229) (597)
Accrued payroll, benefits and related taxes (766) (68) (703)
Other current liabilities (1,720) 163 698
--------- --------- ---------
Net cash used in operating activities (2,060) (4,774) (58)
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity of investments - 1,000 1,000
Capital expenditures (420) (2,501) (2,819)
Change in other assets 59 155 201
Other - - 7
--------- --------- ---------
Net cash used in investing activities (361) (1,346) (1,611)
--------- --------- ---------
Cash flows from financing activities:
Principal payments on capital lease obligations - - (50)
Settlement of put warrants - - (656)
Stock transactions 85 443 535
--------- --------- ---------
Net cash provided by (used in) financing activities 85 443 (171)
--------- --------- ---------
Effect of exchange rate changes on cash 338 (68) 55
--------- --------- ---------
Net decrease in cash and cash equivalents (1,998) (5,745) (1,785)
Cash and cash equivalents at beginning of year 5,711 11,456 13,241
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,713 5,711 11,456
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except shares) Common Stock
----------------------------------------
Additional Cumulative Total
Par Paid-In Translation Accumulated Stockholders'
Shares Value Capital Adjustments Deficit Equity
---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 related to 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
Stock options and employee
stock purchase plan 52,754 1 84 - - 85
Foreign currency translation adjustments - - - 338 - 338
Net loss for the year - - - - (10,931) (10,931)
---------- ------ ---------- ----------- ----------- -------------
Balances, December 31, 1997 13,459,884 $ 135 77,606 82 (74,156) 3,667
---------- ------ ---------- ----------- ----------- -------------
---------- ------ ---------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE>
TRICORD SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS DESCRIPTION
Tricord Systems, Inc. (the "Company") is currently engaged in the business of
developing and marketing storage system management software for the Windows
NT market. Tricord Storage Management Software ("TSMS") facilitates the
transparent sharing of data on network-attached storage devices, enabling
organizations to centralize data storage functions and reduce the costs
associated with data management and storage. No revenues have been generated
by TSMS through December 31, 1997. The Company does not anticipate
significant revenues in 1998 from the development of TSMS-based products,
which have yet to be fully developed.
The Company historically has 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. All revenues generated through December 31, 1997
related to the server line of business.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. As discussed in Note 3, the Company intends to
liquidate its international subsidiaries in 1998.
CASH EQUIVALENTS
The Company considers investments with original maturities of three months or
less to be cash equivalents. Cash and cash equivalents at December 31, 1997 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 of generally two to seven 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.
20
<PAGE>
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
service contracts is deferred and recognized on a straight-line basis over the
contract period.
In October 1997, the AICPA's Accounting Standards Executive Committee issued
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," which must
be adopted by the Company effective January 1, 1998. Management does not
anticipate that the adoption of this SOP will change the Company's revenue
recognition practices or otherwise impact the Company's financial position or
results of operations.
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.
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 LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during each period. Potential dilutive
common shares relate to common stock options and warrants. Potentially dilutive
common shares are excluded from the calculation of net loss per share as their
impact is antidilutive.
The Company adopted the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," in the fourth quarter of 1997. Net
loss per share after adoption of this new accounting standard is the same as
reported prior to adoption due to the Company's net loss position.
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 and accrued warranty costs.
2. CHANGE IN BUSINESS FOCUS
21
<PAGE>
A combination of competitive pressures and a vision for a highly distributed
and scalable storage systems architecture led the Company in February 1997 to
redefine its corporate strategy to focus its development efforts exclusively
on storage system management software. The architecture includes an entirely
new generation of Distributed File System and File-Intelligent I/O technology
known as Tricord Storage Management Software ("TSMS"). No revenues have been
generated by TSMS through December 31, 1997. The Company does not anticipate
significant revenues from the development of TSMS-based products in 1998.
During the second quarter of 1997, the strategic shift in the Company's
business, as discussed above, necessitated a reduction in the Company's
workforce affecting approximately 90 employees.
The Company intends to sell its remaining enterprise server product
inventory, consisting primarily of spare parts and expansion products, as
long as there is sufficient customer demand and materials are available. The
Company will honor its service agreements and enter into new agreements as
long as there is sufficient demand. The Company's product sales during 1997
have consisted mainly of spare parts, disk drives, memory and expansion
products. The Company expects that its 1998 revenues will decline
significantly from the 1997 levels and will continue to consist mainly of
spare parts, disk drives, memory and expansion products as well as new
service contracts. The Company does not anticipate significant revenues in
1998 from the development of TSMS-based products, which have yet to be fully
developed.
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 is continuing to seek additional capital through OEM or
other strategic investments or alliances.
3. SELECTED FINANCIAL STATEMENT INFORMATION
SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
------ ------
<S> <C> <C>
Accounts receivable:
Accounts receivable . . . . . . . . . . . . . . . . . $ 1,894 7,480
Less allowance for doubtful accounts. . . . . . . . . (1,213) (2,844)
-------- --------
$ 681 4,636
-------- --------
-------- --------
Inventories:
Raw materials . . . . . . . . . . . . . . . . . . . . $ 1,125 3,658
Work-in-process . . . . . . . . . . . . . . . . . . . 1,192 4,696
Finished goods. . . . . . . . . . . . . . . . . . . . 1,877 3,205
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Spare parts and expansion products. . . . . . . . . . 3,321 755
Less inventory reserves . . . . . . . . . . . . . . . (6,018) (7,330)
-------- --------
$ 1,497 4,984
-------- --------
-------- --------
Equipment and improvements:
Office equipment and leasehold improvements . . . . . $ 1,369 4,614
Engineering equipment . . . . . . . . . . . . . . . . 869 9,525
Production equipment. . . . . . . . . . . . . . . . . 204 1,796
-------- --------
2,442 15,935
Less accumulated depreciation and amortization. . . . (1,877) (10,218)
-------- --------
$ 565 5,717
-------- --------
-------- --------
Accrued payroll, benefits and related taxes:
Salaries, commissions and bonus . . . . . . . . . . . $ 310 762
Vacation. . . . . . . . . . . . . . . . . . . . . . . 134 407
Medical benefits . . . . . . . . . . . . . . . . . . 65 106
-------- --------
$ 509 1,275
-------- --------
-------- --------
Other accrued expenses:
Warranty . . . . . . . . . . . . . . . . . . . . . . $ 371 626
Relocation . . . . . . . . . . . . . . . . . . . . . 175 175
Other . . . . . . . . . . . . . . . . . . . . . . . . 379 1,745
-------- --------
$ 925 2,546
-------- --------
-------- --------
</TABLE>
SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION
1997:
During the fourth quarter of 1997, the Company recorded credits to cost of goods
sold of $270 for a reduction to the Company's obsolete and excess inventory
reserves and $226 for a reduction to the warranty accrual. Also during the
fourth quarter of 1997, the Company took credits to general and administrative
expense totaling $440 to reduce the allowance for doubtful accounts and to
reduce a benefits accrual. These adjustments were made based on analyses the
Company performed during the fourth quarter of 1997. These adjustments totaled
$936, or $.07 per share.
In September 1997, the Company agreed to a $350, or $.03 per share, settlement
of the Memorex Telex Corporation ("Memorex Telex") Chapter 11 bankruptcy
preferential payment claim, which was accepted by the U.S. Bankruptcy Court in
October 1997. The Company recorded the required payment as a charge to general
and administrative expense in the third quarter of 1997. In June 1997, the
Company had filed a response to the complaint filed against the Company
regarding certain payments made by Memorex Telex to the Company within 90 days
prior to Memorex Telex's October 15, 1996 Chapter 11 bankruptcy filing. The
Complaint alleged that these payments were avoidable transfers under the
Bankruptcy code and had sought return of approximately $1,300 from the Company,
together with interest and attorney's fees.
23
<PAGE>
Also included in the third quarter of 1997 is a charge of $224 to provision for
income taxes for the establishment of a reserve for a deferred tax asset related
to the Company's alternative minimum tax credit carryforwards.
During the second quarter of 1997, the Company completed an updated forecast of
its anticipated usage of current on-hand inventories and determined that it had
more inventory than was required through the end of 1998. Accordingly, the
Company recorded a second quarter 1997 charge of $1,332, or $.10 per share, to
cost of goods sold to adjust inventories to their net realizable value.
Also included in the second quarter of 1997 are nonrecurring items, net, for the
following items: a charge of $975 for the net value of leasehold improvements
written off due to the termination of the Company's lease at its previous
headquarters facility; a charge of $764 for the write-down of certain equipment
based on an updated review of the equipment required to support the operations
of the Company; a charge of $125 for the mutual settlement and release without
admission of liability by either the Company or International Business Machines
("IBM") regarding IBM's assertion that certain of the Company's server systems
and related products infringe on certain patents owned by IBM; and a credit of
$1,000 for a one-time license fee paid to the Company by Toshiba for the
world-wide, non-exclusive right and license to the Availability Management
System ("AMS") Software. The AMS Software license related to the Company's
server line of business.
1996:
During the fourth quarter of 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-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).
In the third quarter of 1996, the Company took a charge of $1,700, or $.13
per share, by increasing its allowance for doubtful accounts due to the
October 1996 Chapter 11 bankruptcy filing of Memorex Telex. This charge
represented the entire outstanding balance due from Memorex Telex as of
September 30, 1996.
1995:
In the second quarter of 1995, the Company took 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.
Other Income:
24
<PAGE>
Other income includes foreign currency losses of approximately $202 and $183 in
1996 and 1995, respectively.
<TABLE>
<CAPTION>
SUPPLEMENTAL CASH FLOW INFORMATION
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Cash paid for interest. . . . . . . . . . . . . . . . . $ 3 2 6
Cash paid for income taxes. . . . . . . . . . . . . . . - - -
</TABLE>
GEOGRAPHICAL DATA AND MAJOR CUSTOMERS
<TABLE>
<CAPTION>
United States International Consolidated
------------- ------------- ------------
<S> <C> <C> <C>
1997
Sales to unaffiliated customers $ 12,660 - 12,660
Operating loss (10,676) (43) (10,719)
Identifiable assets 6,748 7 6,755
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
</TABLE>
International activity historically related to activities of the Company's
Japanese subsidiary, Tricord K.K. The Company's other international
subsidiaries were 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 were negotiated, invoiced and paid in yen. The
impact of foreign currency exchange rate changes and transactions was not
significant for any of the periods presented. The Company intends to
liquidate its international subsidiaries in 1998. There was no significant
activity in 1997 related to the international subsidiaries. The Company does
not anticipate significant gains or losses related to the liquidation of
its international subsidiaries in 1998.
United States sales to unaffiliated customers in 1997 includes export sales
of $857 to Europe and $613 to other foreign countries. Toshiba Corporation
("Toshiba") and Actium Tools, Inc. comprised 17.0% and 10.3%, respectively,
of the Company's accounts receivable balance at December 31, 1997.
25
<PAGE>
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 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 23.1% and
14.8%, 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.
4. 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") 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 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 Company is
currently negotiating with the principals of RDI regarding the contingent
payment. No adjustment has been made for this contingent payment in 1997.
The technology purchased from RDI Corporation remains a significant part of
the development of TSMS.
5. LEASES
The Company leases office and warehouse facilities and certain equipment under
cancelable and noncancelable operating leases expiring at various dates through
2001. In August 1997 the Company moved its corporate headquarters to a smaller
leased facility to fit its current operating space requirements. The Company's
new headquarters facility lease has a three-year term and includes a provision
that the Company pay a pro rata share of the lessor's operating costs, including
real estate taxes. Rent expense under all leases was $691, $1,546 and $1,881
for the years 1997, 1996 and 1995, respectively.
26
<PAGE>
In the second quarter of 1997 the Company negotiated a termination agreement
with the landlord of its previous headquarters facility. The termination
agreement provides that the Company will continue to receive sublease rentals,
net of related costs, through the sublease term and would also be paid an
additional $300 if the landlord sells the building prior to the end of the
sublease in January 2002.
Future minimum lease payments, excluding operating costs, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998. . . . . . . . . . . . . . . . . . . . . $ 103
1999. . . . . . . . . . . . . . . . . . . . . 91
2000. . . . . . . . . . . . . . . . . . . . . 67
2001. . . . . . . . . . . . . . . . . . . . . 6
--------
$ 267
--------
--------
</TABLE>
6. INCOME TAXES
At December 31, 1997, the Company had generated domestic net operating loss
carryforwards of approximately $57,000 for tax reporting purposes that may be
offset against future taxable income through 2012. In addition, the Company
also had generated approximately $1,911 of research and experimentation tax
credit carryovers available to reduce future income taxes. These credits expire
from 2002 through 2012. Due to uncertainty as to the realizability of the loss
and tax credit carryforwards, full 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
1997 are $10,631 and $76, respectively. For 1996, domestic and foreign
components of loss before provision for income taxes are $11,817 and $3,387,
respectively, while for 1995, the domestic and foreign components of loss before
provision for income taxes are $30,235 and $6,918, respectively.
7. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit sharing plan covering all
employees, which is intended to qualify under Section 401(k) of the Internal
Revenue Code. Employee contributions are limited to 20% 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 Board of Directors approved $46, $114 and $143 of matching
contributions for 1997, 1996 and 1995, respectively.
27
<PAGE>
8. LEGAL PROCEEDINGS
In June 1997, a federal jury in St. Paul, Minnesota absolved the Company of any
liability in a class action lawsuit alleging securities fraud. In July 1996,
one of the insurance carriers had 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 price of $6.00 per share.
In October 1997, the plaintiffs for the class action appealed the jury decision
to the U.S. Eighth District Court of Appeals. In December 1997, the insurance
company reached an agreement with the attorneys for the plaintiffs to pay for a
portion of the legal costs incurred by the attorneys for the class. This
agreement was accepted by the federal court and the appeal by the plaintiffs was
dismissed in February 1998. The Company believes that it will receive back some
portion of the cash escrow payment, as discussed above, in the first or second
quarter of 1998. The amount of this potential refund is unknown at this time.
In addition, the Company will cancel the warrants as discussed above and record
a gain of $250 in 1998. The resolution of these gain contingencies is dependent
on a termination agreement successfully being executed between the Company and
the insurance carriers.
There is currently a dispute between the Company and Novell, Inc. ("Novell")
regarding alleged royalties owed to Novell with respect to Novell's software
that the Company destroyed when such software could not be sold. The Company
had entered into an OEM agreement with Novell, pursuant to which it purchased
Novell's software that was to be installed on the Company's servers. The
Company paid Novell $100 in advance royalties pursuant to the OEM agreement.
The Company's sales of Novell's software did not result in royalties in excess
of this advance royalty payment, and the Company disposed of the remaining
Novell software. Novell has requested that the Company pay royalties on the
destroyed software, which would total approximately $800. The Company has
informed Novell that it does not owe royalties on the disposed software because
the OEM agreement only provides for the payment of royalties on the sale of the
software. The parties are currently attempting to resolve this dispute and the
Company does not believe that this dispute will have a material adverse effect
on the Company.
9. 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 shares from
previous stock option plans, under the 1995 Stock
28
<PAGE>
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 the date of grant and expire within ten years from date of grant. The
Company intends to submit a new plan for shareholder approval at its annual
meeting in May 1998.
On February 25, 1997 the Board of Directors of the Company approved the exchange
of stock options then held ("old options") for new stock options ("new options")
which were deemed granted on March 14, 1997. These new options have an exercise
price of $.875 per share and have an initial vesting period of one year to March
14, 1998, at which time each new option would become exercisable with respect
to the number of options that were then exercisable under the old option plus
the number of shares that would have become exercisable under the old option
between March 14, 1997 and March 14, 1998. After March 14, 1998 each new option
would become exercisable with respect to any shares in accordance with the
vesting schedule applicable to the old option for which the new option was
exchanged. On February 13, 1998 the Company's Board of Directors approved the
acceleration of the initial vesting period from March 14, 1998 to February 19,
1998. All other vesting for the new options remain the same as discussed above.
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, 1997, 280,000 shares had been issued under the 1992 Non-Employee Director
Stock Option Plan, at exercise prices ranging from $1.88 to $25.00 per share.
At December 31, 1997, 150,000 of these options are exercisable, 18,070 have been
exercised, 80,000 have been canceled and 31,930 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 stock as equals the annual retainer divided by the fair market
value of one share of common stock at the annual award date. The Company's 1992
Non-Employee Director Stock Option Plan, as amended, expired in May 1997,
however, any options outstanding upon termination of this plan may continue to
be exercised in accordance with their terms. The Company intends to submit a
new director plan for shareholder approval at its annual meeting in May 1998.
Stock option transactions were as follows:
<TABLE>
<CAPTION>
Shares 1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 3,717,261 1,962,000 2,428,500
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exercised - (64,691) (218,584)
Canceled (4,021,907) (1,564,219) (866,721)
---------- --------- ---------
December 31:
Outstanding 3,108,000 3,412,646 3,079,556
---------- --------- ---------
---------- --------- ---------
Exercisable 182,375 894,810 580,916
</TABLE>
<TABLE>
<CAPTION>
Average exercise price
per share 1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Granted $ 0.86 $ 3.05 $ 4.06
Exercised - 3.19 1.52
Canceled 3.41 4.74 7.88
December 31:
Outstanding 1.41 4.33 5.34
Exercisable 9.99 6.08 8.22
</TABLE>
Stock options outstanding at December 31, 1997 had a range of exercise prices of
$0.56 to $25.00 and an average contractual useful life of 4.1 years.
Approximately 96% of the options outstanding had an exercise price of less than
$4.00, of which approximately 2% of these options are exercisable.
Approximately 4% of the options outstanding had an exercise price of $4.00 to
$25.00, of which approximately 98% are exercisable. The weighted average
contractual life for each of these groups of options was 4.3 years and 1.3
years, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
In 1996, the Company adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123. 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.
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:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $ (10,931) $ (15,204) $ (37,153)
Pro forma (13,306) (16,845) (37,813)
Net loss per common share
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
As reported $ (0.81) $ (1.14) $ (2.81)
Pro forma $ (0.99) (1.26) (2.86)
</TABLE>
The pro forma information above only includes stock options granted in 1995,
1996 and 1997. 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 1997,
1996 and 1995 was $0.56, $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 approximately one year earlier than their term 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 5.92% for 1997 and 6.67% for
1996 and 1995. In addition, average forfeitures were assumed to be 35%, 23%
and 20% for 1997, 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 53,000, 46,000 and 49,000 shares in 1997, 1996 and 1995,
respectively.
WARRANTS
In 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, 1997, 200,000 of these warrants are exercisable,
20,000 have been exercised, none have been canceled and 540,000 have expired.
SHAREHOLDERS' RIGHTS PLAN
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.
10. CONTINGENCIES
31
<PAGE>
In addition to matters disclosed in Note 8 to the consolidated financial
statements, the Company is a party to various claims and disputes arising in
the ordinary course of business and pertaining to the enterprise server
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.
11. BUSINESS SEGMENTS
The Company had only one business segment, the server business, for 1996 and
1995. In 1996 the Company began development of the software purchased from
RDI for use in its next generation enterprise server. In February 1997, as
previously discussed, the Company changed its business focus to concentrate
on storage system management software. The table below represents
information related to the Company's business segments for 1997. Cost
allocations are necessary in the determination of operating results by
segment. For this reason, management does not represent that these segments,
if operated as independent businesses, would result in the operating results
shown.
Effective at year-end 1998, the Company will adopt the SFAS No. 131, "Disclosure
About Segments of an Enterprise and Related Information," which requires
disclosure of segment data in a manner consistent with that used by an
enterprise for internal management reporting and decision making. The Company
believes that it will continue to report its operations as being comprised of
two business segments under SFAS No. 131.
<TABLE>
<CAPTION>
December 31,
------------
1997
------
<S> <C>
Revenues:
Server business $ 12,660
Software business -
Total 12,660
Operating loss:
Server business (8,116)
Software business (2,603)
Total (10,719)
Total assets:
Server business 6,347
Software business 124
Corporate 284
Total 6,755
Depreciation expense:
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Server business 2,049
Software business 130
Corporate 419
Total 2,598
Capital expenditures:
Server business 175
Software business 35
Corporate 210
Total 420
</TABLE>
The Company estimates that research and development expense for developing
TSMS was approximately $1,500 in 1996. The Company estimates that its
general and administrative expenses are approximately $1,000 annually.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
Revenues $ 4,873 3,311 2,582 1,894
Gross margin (43) (1,179) 662 695
Net loss (5,149) (4,563) (1,014) (205)
Net loss per share (.38) (.34) (.08) (.02)
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)
</TABLE>
See Note 3 to the consolidated financial statements for Supplemental Statement
of Operations Information.
Quarterly calculations of net loss per share are made discretely for each
quarter during the fiscal year.
33
<PAGE>
INVESTOR INFORMATION
NOTICE OF ANNUAL MEETING
The annual meeting of stockholders will be held at the Radisson Hotel and
Conference Center in Plymouth, Minnesota, beginning at 1:00 p.m. local time,
on Friday May 15, 1998. A formal notice of the meeting, together with proxy
statement and proxy, will be mailed on or about April 10, 1998 to
stockholders of record on March 27, 1998.
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 shareholders 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., 2905 Northwest Boulevard, Suite 20,
Plymouth, Minnesota 55441; telephone (612) 557-9005.
SECURITIES LISTINGS
The Company's common stock is listed and traded on the Nasdaq National Market
System. The Nasdaq trading symbol is TRCD.
In February 1998, the Company received notice from the Nasdaq Stock Market
that the Company was not in compliance with Nasdaq National Market listing
requirements and that the Company could be subject to transfer to the
SmallCap Market or delisting. The Company has since successfully resolved
the Nasdaq minimum bid price requirement, thereby avoiding delisting action.
The Company intends to follow all procedures available under Nasdaq rules to
avoid transfer to the SmallCap Market. The Company's goal is to remain on
the Nasdaq National Market, however, there can be no assurance that the
Company will be successful in remaining on the Nasdaq National Market or
ultimately, on the Nasdaq Stock Market.
FORM 10-K
The Company will provide a copy of its most recent Annual Report on Form 10-K 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 National Market. These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.
34
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
High Low High Low
---------------- ----------------
<S> <C> <C> <C> <C>
First quarter $ 2.03 0.63 4.63 2.50
Second quarter 1.31 0.50 7.25 3.63
Third quarter 1.22 0.63 4.50 2.50
Fourth quarter 1.50 0.50 2.69 1.36
</TABLE>
On February 27, 1998, the closing price for the Company's common stock was
$1.09.
On February 27, 1998, there were approximately 365 shareholders of record of the
Company's common stock. The Company estimates that an additional 5,700
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
35
<PAGE>
Dr. Charles C. Devor - Vice President, Business Development
Dr. Alexander H. Frey - Vice President of Architecture
Charles E. Pearsall - Vice President, Engineering
Jeff A. Stewart - Vice President and Controller, Secretary
CORPORATE HEADQUARTERS
Plymouth, Minnesota
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly LLP
Minneapolis, Minnesota
36
<PAGE>
EXHIBIT 21.1 - SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of % Owned by
Name of Subsidiary Incorporation Tricord Systems, Inc.
- --------------------------- ----------------- ---------------------
<S> <C> <C>
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%
</TABLE>
The Company intends to liquidate its international subsidiaries in 1998.
<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, dated February 26, 1998, on our audits of the consolidated
financial statements and financial statement schedule of Tricord Systems, Inc.
as of December 31, 1997 and 1996, and for the years ended December 31, 1997,
1996, 1995, which reports are included or incorporated by reference in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 30, 1998
<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, 1997, 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,713
<SECURITIES> 0
<RECEIVABLES> 681
<ALLOWANCES> (1,213)
<INVENTORY> 1,497
<CURRENT-ASSETS> 6,065
<PP&E> 2,442
<DEPRECIATION> (1,877)
<TOTAL-ASSETS> 6,755
<CURRENT-LIABILITIES> 3,088
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 3,532
<TOTAL-LIABILITY-AND-EQUITY> 6,755
<SALES> 12,660
<TOTAL-REVENUES> 12,660
<CGS> 12,525
<TOTAL-COSTS> 12,525
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,818
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (10,707)
<INCOME-TAX> 224
<INCOME-CONTINUING> (10,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,931)
<EPS-PRIMARY> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
