<PAGE>
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, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- -------------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
------------------------
TRICORD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
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. / /
As of March 25, 1999, 18,995,500 shares of Common Stock of the Registrant
were outstanding, and the aggregate market value of the Common Stock of the
registrant as of that date (based on the closing price as reported by the Nasdaq
SmallCap Market System), excluding shares beneficially owned by directors and
executive officers, was approximately $39,192,974.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1998 (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 21, 1999
("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
Throughout 1998 the Company continued to focus its development efforts
exclusively on storage system management software, the strategy it defined in
1997. The storage system management software architecture includes an
entirely new generation of distributed file system and file-intelligent
input/output ("I/O") technology known as Tricord Storage Management Software
("TSMS"). No revenues were generated by TSMS for 1998, and the Company may not
receive revenues from TSMS-based products in 1999.
The Company has 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,
1998 relate to the server line of business (sometimes referred to as the
"legacy business").
The Company currently anticipates that revenues will continue to decrease in
1999 and expenses will continue to rise as the Company continues to focus its
resources on developing and marketing 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 and
provided such agreements are profitable.
The Company was incorporated in Minnesota in 1987 and reincorporated in
Delaware in 1992.
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 major changes in data storage. The first trend is
the growing user demand for large amounts of data and the increasing
complexity of applications used to manipulate that data. Reflecting this
trend, 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 increasing acceptance of clustered servers. These
computers need access to multiple storage systems providing data as a shared
network resource. In addition, access to data must be uninterrupted seven
days a week, 24 hours per day and 365 days per year ("7x24x365").
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* This Annual Report on Form 10-K includes trademarks of companies other
than Tricord Systems, Inc.
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Storage needs are also increasingly being met by external storage systems, in
both Windows NT and UNIX environments.
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 rapidly growing demand creates new
requirements that 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 application processing from storage both in
terms of purchase decision and functionality that can provide greater
configuration flexibility and a wider range of growth options.
- - The ability to aggregate storage beyond a single storage enclosure and
to expand in large and small increments, without downtime.
- - The ability to provide 7x24x365 availability regardless of the source of
failure, whether disk, controller or storage system.
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PRODUCTS UNDER DEVELOPMENT
The Company has responded to market requirements by developing intelligent
storage management software using an advanced architecture. This
software-based architecture, Tricord Storage Management Software ("TSMS"),
incorporates the Tricord File System ("TFS") and file intelligent I/O
technology. TSMS is based on the TFS and management interface software, user
configuration tools, initialization tools and other software specifically
configured for potential Original Equipment Manufacturer ("OEM") storage
products. TSMS will be offered to OEMs selling storage systems into three
distinct storage system environments - HOST-attached storage, Local Area
Network ("LAN")-attached storage and Storage Area Network ("SAN")-attached
storage. In each environment, TSMS runs on a storage controller. The Company
has developed a controller to support TSMS for development and marketing
purposes.
The TSMS software will be positioned to enable OEM products as follows:
- - HOST-Attached Storage - premier high-end Redundant Array of Inexpensive
Disks ("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 shared data
servers. Significant improvements in management, availability, 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, availability, expansion,
investment protection, performance and data sharing over competitive SAN
storage solutions.
Today, the interfaces between the UNIX and Windows NT file systems and
storage devices break files into pieces of data, called blocks, which are
identified by their location in the storage system when being transferred
between a server and a storage device. TSMS avoids the limitations of the
block I/O model by using file-intelligent I/O to manage the data.
The Company believes that the TSMS approach to storage management will offer
the following benefits:
- - Easier management of attached storage because TSMS manages storage as a
single file system for the system administrator to dynamically manage the
allocation of physical storage in storage systems.
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- - Maximum scalability in large and small storage increments because TSMS
uniquely and dynamically allocates files to physical storage media without
predetermined partitions of the storage media.
- - Continuous availability; whenever new storage is needed, it can be
non-disruptively added with no system downtime. TSMS defines RAID levels for
data across disks, controllers and storage systems enabling domain fault
tolerance.
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RESEARCH AND DEVELOPMENT
The Company performs all of its research and development activities at its
headquarters in Plymouth, Minnesota. During 1998, 1997 and 1996, research and
development expenses totaled approximately $2,473,000, $3,981,000 and
$7,264,000, respectively. The Company currently anticipates that research and
development costs will rise during 1999 as the Company continues to focus on
the development of TSMS.
SALES AND DISTRIBUTION
The Company continues to pursue OEM partners as well as other opportunities.
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
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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
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
by, among other things, demonstrating a working prototype of TSMS. Although a
number of these OEMs have expressed interest in this technology, adoption
requires a departure from existing technology plans by these OEMs.
COMPETITION
While the Company knows of no direct competition today for the Company's file
intelligent I/O technology and the TSMS implementation, 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 companies currently developing products in related areas
that compete indirectly with the Company's products. For instance, Veritas
Software Corporation ("Veritas") sells storage management products for
Windows NT and UNIX. These products are widely used and highly regarded in
the industry. Veritas is also developing storage management products for
Windows 2000.
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 develop products 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.
MANUFACTURING AND SUPPORT
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 its enterprise servers. The Company believes that it has
sufficient inventory on hand for substantially all warranty or replacement
parts required.
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Given the Company's intention to market TSMS through OEM partners by
licensing its software components, the Company anticipates that its
manufacturing requirements will be minimal. The Company currently has plans
to support TSMS-based products with its existing server technical expertise
and operational and process skills.
INTELLECTUAL PROPERTY
The Company currently has four U.S. patent applications pending with respect
to its TSMS products. The Company intends to continue to broaden its TSMS
patent application pool in 1999. There can be no assurance, however, that any
of these patent applications will result in issued patents or that any such
patents, if issued, will be held to be valid or will otherwise be of value to
the Company. 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 or threatened
against the Company, there can be no assurance that none will be initiated,
that the Company would prevail in any such litigation seeking damages or an
injunction against the sale of the Company's products, or that the Company
would be able to obtain any necessary licenses on reasonable terms or at all.
TEAM MEMBERS
As of December 31, 1998, the Company had 35 full-time team members, including
6 in marketing, sales and support services, 12 in research and development,
10 in operations, and 7 in corporate operations. In addition to the 35
full-time team members, the Company also had contracted with four 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
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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 previously initiated a project to prepare its computer systems
for the Year 2000. This project encompasses information technology ("IT")
systems, non-IT systems, Company products and third party products and
systems. Based on its efforts to date, management believes the Year 2000
issue will not have a significant impact on operations. If additional
modifications and conversions are necessary, however, and cannot be completed
on a timely basis, the Year 2000 issue could have an adverse effect on the
Company's operations. At this time, the Company believes that it is
unnecessary to adopt a contingency plan covering the possibility that
additional modifications and conversions will be needed, but, as part of the
overall project, the Company will continue to assess the need for such a
contingency plan, and will continue to analyze its computer systems to
determine if additional modifications and conversions will be needed.
The Company has reviewed its main IT system and to date 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 completely
reviewed. In the event that the Company determines that its smaller
supporting business systems will not transition properly at the end of the
millenium, the Company will transition these systems to its main business
system in order to mitigate any business disruption.
By the end of June, 1999, the Company expects to have completed an evaluation
of its telephone, facility heating and cooling and other non-IT systems for
Year 2000 readiness and to have completed any remedial action as necessary.
The Company has also reviewed its software related to its legacy business and
has completed a fix for the Year 2000 issue. The Company has made this fix
available to its customers on its web site. The Company will also commence an
effort to contact as many of its legacy business customers as possible. 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 has reviewed suppliers for its legacy business and has determined
that, due to the declining revenues associated with sales of spare parts,
there is no material impact to the Company. The Company has not yet released
any TSMS-based products, but it intends to work with future suppliers to
ensure that no Year 2000 issues will exist prior to release to market of
these products.
Substantially all of the Company's Year 2000 efforts have been made using
internal personnel, therefore, the costs associated with the Year 2000
assessment and corrections have not been, and currently are not anticipated
to be, material to the Company. All such costs to date have
been expensed as incurred.
Due to the complexity and pervasiveness of the Year 2000 issue and, in
particular, the uncertainty regarding the Year 2000 compliance programs of
third parties, no assurance can be given that a Year 2000 issue will not have
a material adverse effect on the Company's business or results of operations.
CERTAIN IMPORTANT FACTORS
This Annual Report on Form 10-K contains certain forward looking statements
within the meaning of the Private Securities Reform Act of 1995. For this
purpose, any statements contained in this Annual Report on Form 10-K that are
not statements of historical fact are deemed to be forward looking
statements. Without limiting the foregoing, words such as "may," "will,"
"should," "expects," "anticipates," "estimates," "believes," or "plans," or
comparable terminology, are intended to indicate forward looking statements.
These statements by their nature are based on current expectations and
assumptions and entail various risks and uncertainties that could cause
actual results to differ materially from those expressed in such forward
looking statements, including the following risks:
- - The Company will not realize sufficient revenues from its legacy business
to fund its ongoing TSMS product development and marketing operations.
The Company intends to manage its current cash to fund its operations
throughout 1999; however, continued aggressive product development and
product introduction necessarily requires that the Company obtain
additional funds from investors. The Company continues to pursue
additional investors, however, there can be no assurance that funds
will be obtained.
- - The market window for the Company's products is limited inasmuch as many
competitors with established brand identity are beginning to enter the
market with products that will be positioned against the Company's
products. Although the Company believes that it has a significant
headstart and that its technology is superior, established product
channels and bundling arrangements may impede the Company's product
introduction and market acceptance.
- - The market for distributed file system products for the Windows NT and
UNIX environment is new and developing. 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 and other
channels, 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 will need to maintain compliance with the Nasdaq SmallCap
Market requirements.
- - Many of the Company's potential competitors in the market for UNIX and
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 its own products. Additionally, the
Company's ability to market its products will necessarily require the
endorsement of industry leaders if the Company's products are to gain
wide-scale acceptance by the industry.
- - The Company's sales' lead time may be longer than most storage products
due to the general market reluctance to accept new entrants and due to
the sensitivity of the data on today's storage devices.
- - The Company will need to attract new team members and consultants and
retain existing team members and consultants.
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ITEM 2. PROPERTIES
The Company's principal administrative, sales, 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 August 2000. The Company's lease
payments are approximately $6,000 monthly with an additional approximately
$6,000 monthly for the Company's pro rata share of the lessor's operating
costs, including real estate taxes.
The Company opened a 4,000 square foot marketing office in Houston, Texas in
January 1999. The lease for this facility expires in January 2002. The
Company's lease payments are approximately $7,000 monthly, which include the
Company's pro rata share of the lessor's operating costs, including real
estate taxes. The lease is cancelable but provides that lease payments will
continue for a minimum of two years.
The Company has no other facilities in the U.S. or any foreign countries.
ITEM 3. LEGAL PROCEEDINGS
During 1997, a dispute occurred between the Company and Novell, Inc. ("Novell")
regarding alleged royalties owed to Novell with respect to Novell's software
that the Company disposed of 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
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Company pay royalties of approximately $800,000 on the software it disposed
of. 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 shipped for use with the Company's
servers. During 1998, an additional dispute occurred between the Company and
Novell regarding the return to the Company of five multi-processing
enterprise server units originally sent to Novell under the OEM agreement,
along with certain other computer hardware equipment provided to Novell. In
addition, the Company has claimed damages due to alleged defects in Novell's
software product. The Company commenced legal action in January, 1999 by
filing complaints in Federal District Court in Minnesota regarding the
disputes as discussed above. Novell has also commenced legal action regarding
these disputes. Management does not believe that the resolution of these
disputes will have a material adverse effect on its financial position,
results of operations or liquidity.
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 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of March 25, 1999 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John J. Mitcham 58 Chairman and Chief Executive Officer
J. David Cabello 47 Vice President and General Counsel,
Secretary and Interim Chief Financial
Officer
Kathleen H. Clark 36 Vice President, Marketing
Dr. Alexander H. Frey 65 Senior Vice President and Chief Technical
Officer
Charles E. Pearsall 56 Vice President, Engineering
</TABLE>
Mr. Mitcham has served as Chief Executive Officer and as a director of the
Company since joining the Company in May 1995, and was elected Chairman in
October 1998. From 1989 to 1995, Mr. Mitcham was President and Chief
Executive Officer of AT&T Paradyne Corporation. Prior to 1989, Mr. Mitcham
was President and Chief Executive Officer of Paradyne Corporation and served
in executive positions with IBM Corporation, Rolm Corporation, Memorex Telex
Corporation and Texas Instruments Corporation.
Mr. Cabello has served as the Company's Vice President and General Counsel
since December 1998. In January 1999, Mr. Cabello was elected Secretary of
the Company and in February 1999 he was elected as the Company's Interim
Chief Financial Officer. From September 1998 to December 1998, Mr. Cabello
was in private practice specializing in patent and corporate law. From July
1998 to August 1998, Mr. Cabello was Vice President, General Counsel and
Secretary of GK Intelligent Systems, Inc. From January 1997 to June 1998, Mr.
Cabello was Senior Vice President, General Counsel and Secretary for Compaq
Computer Corporation. Prior to January 1997, Mr. Cabello was Vice President
and Assistant General Counsel for Compaq Computer Corporation.
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Ms. Clark has served as the Company's Vice President, Marketing since
December 1998. From September 1998 to December 1998, Ms. Clark was in private
consulting practice specializing in brand strategy and product marketing.
From July 1998 to August 1998, Ms. Clark was Vice President of Marketing for
GK Intelligent Systems, Inc. From 1990 until July 1998, Ms. Clark was a
marketing executive for Compaq Computer Corporation.
Dr. Frey has served as the Company's Senior Vice President and Chief
Technical Officer since December 1998 and as Vice President, Architecture
from October 1996 to December 1998. From 1991 to 1996, Dr. Frey was CEO and
Chief Technology officer of Reliable Distributed Information Corporation.
Prior to 1991, 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 1993 to 1996, Mr. Pearsall was Senior Director of Program
Management and Field Services for Concurrent Computer Corporation. Prior to
1993, Mr. Pearsall, Colonel, USAF Retired, held a wide range of technical and
executive positions within the Air Force.
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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 1998
Annual Report to Stockholders ("the Annual Report").
In December 1998, the Company received $3,000,000 from a private placement to
certain investors of 3,000,000 shares of common stock at a price of $1.00 per
share. In connection with this private placement, investors also received
warrants to purchase an equal number of additional shares of common stock at
an exercise price of $3.50 per share. The warrants are exercisable for a
five-year period and expire on December 15, 2003. The sales of common stock
and warrants in connection with such private investment were made in reliance
on the exemptions from registration under the Securities Act of 1933 provided
by Regulation D and Section 4(2) thereunder. With respect to such reliance,
certain inquiries were made by the Company and certain representations and
warranties were received by the investors to establish that such exemptions
were available.
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
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" and subheading "Financial
Instruments" of the Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and notes thereto and the report
of its independent accountants are incorporated by reference to pages 13 through
30 of the Annual Report.
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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
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Investors Agreement."
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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 13 through
30 of the Annual Report.
Report of Independent Accountants.
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996.
Consolidated Balance Sheets - December 31, 1998 and 1997.
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedule
The following financial statement schedule and report of
independent accountants thereon should be read in conjunction
with the consolidated financial statements and the notes
thereto referred to above.
Page
----
Report of Independent Accountants..................... 18
Schedule II - Valuation and Qualifying Accounts....... 19
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3. Exhibits
The Exhibits to this Report are listed in the Exhibit Index on
pages 21 to 22 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. Employment Agreement, dated May 2, 1995, between the
Company and John J. Mitcham. (a)
2. Change in Control Agreement, dated September 13,
1996, between the Company and Charles E. Pearsall. (b)
3. Restricted Stock Agreement, dated November 3, 1998,
between the Company and Alexander H. Frey. (c)
4. Restricted Stock Agreement, dated December 7,
1998, between the Company and Jon W. Flower. (c)
5. Restricted Stock Agreement, dated December 7,
1998, between the Company and J. David Cabello. (c)
6. Restricted Stock Agreement, dated December 7, 1998,
between the Company and Kathleen H. Clark. (c)
7. 1998 Stock Incentive Plan, as amended effective
January 30, 1999. (c)
8. 1998 Non-Employee Director Stock Plan, as amended
effective January 30, 1999. (c)
----------------------------------------------------
(a) 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).
(b) Incorporated by reference from the exhibits to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
(c) Filed herewith.
16
<PAGE>
(B) REPORTS ON FORM 8-K
On December 24, 1998, the Company filed a report on Form 8-K
under Item 5, related to the sale of the Company's common
stock to a group of private investors effective December 15,
1998. No financial statements were included as part of this
filing.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of
Tricord Systems, Inc.
Our audits of the consolidated financial statements referred to in our
report, dated March 10, 1999, appearing in the 1998 Annual Report to
Stockholders of Tricord Systems, Inc. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the financial statement schedule listed
in Item 14(a)(2) of this Form 10-K. In our opinion, the financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 10, 1999, except as to the
information presented in Note 7,
for which the date is March 17, 1999
18
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
(in thousands)
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, 1998
Allowance for doubtful accounts (deducted from
accounts receivable) $ 1,213 (142) (1) (392) 679
Inventory obsolescence reserve (deducted from
inventory) 6,018 71 (2,780) 3,309
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
</TABLE>
Notes:
(1) Relates to a reduction in the allowance.
(2) Includes a credit of $366 included in restructure credits.
(3) Includes a credit of $1,173 included in restructure credits.
19
<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 31, 1999.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
--------------------------
John J. Mitcham
Chairman 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 31, 1999.
Signatures Title
---------- -----
/s/ John J. Mitcham Chairman of the Board and Chief
- ------------------------------ Executive Officer (Principal
John J. Mitcham Executive Officer) and Director
/s/ J. David Cabello Vice President and General Counsel, Secretary
- ------------------------------ and Interim Chief Financial Officer
J. David Cabello (Principal Accounting Officer)
/s/ Yuval Almog Director
- ------------------------------
Yuval Almog
/s/ Tom R. Dillon Director
- ------------------------------
Tom R. Dillon
/s/ Donald L. Lucas Director
- ------------------------------
Donald L. Lucas
/s/ Fred G. Moore Director
- ------------------------------
Fred G. Moore
20
<PAGE>
TRICORD SYSTEMS, INC.
---------------------
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------
<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)
4.2 Amendment to Rights Agreement, dated January 30, 1999,
between the Company and Norwest Bank Minnesota, N.A. (h)
10.1 Form of Indemnification Agreement (a)
10.2 Warrants of the Company, dated December 18, 1992, issued
to Sequent Computer Systems, Inc. (a)
10.3 1994 Employee Stock Purchase Plan (b)
10.4 1995 Stock Incentive Plan (c)
10.5 Employment Agreement, dated May 2, 1995, between the Company
and John J. Mitcham (d)
10.6 Change of Control Agreement, dated September 13, 1996,
between the Company and Charles E. Pearsall (f)
10.7 Restricted Stock Agreement, dated November 3, 1998,
between the Company and Alexander H. Frey (h)
10.8 Restricted Stock Agreement, dated December 7, 1998,
between the Company and Jon W. Flower (h)
10.9 Restricted Stock Agreement, dated December 7, 1998,
between the Company and J. David Cabello (h)
10.10 Restricted Stock Agreement, dated December 7, 1998,
between the Company and Kathleen H. Clark (h)
10.11 Stock Purchase Agreement, dated December 7, 1998,
by and among the Company and the Purchasers (g)
10.12 1998 Stock Incentive Plan, as amended effective
January 30, 1999 (h)
10.13 1998 Non-Employee Director Stock Plan, as amended
effective January 30, 1999 (h)
10.14 Lease Agreement, dated July 28, 1997, between the
Company and Liberty Property Limited Partnership (f)
<PAGE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
- ------ ---- -----
<S> <C> <C>
13.1 Annual Report to Stockholders for the year ended
December 31, 1998 (to be deemed filed only to the
extent required by the instructions to exhibits for
reports on Form 10-K) (h)
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) Filed in connection with Annual Report on Form 10-K for the year
ended December 31, 1997.
(g) Incorporated by reference to the exhibits to the Company's Current
Report on Form 8-K, dated December 15, 1998 (File No. 0-21366).
(h) Filed herewith.
<PAGE>
SECOND AMENDMENT TO RIGHTS AGREEMENT
This SECOND AMENDMENT TO RIGHTS AGREEMENT ("Amendment") is between
TRICORD SYSTEMS, INC., a Delaware corporation (the "Company"), and NORWEST BANK
MINNESOTA, N.A., a national banking association (the "Rights Agent"), effective
as of January 30, 1999.
A. The Company and the Rights Agent have entered into a Rights
Agreement, dated as of October 25, 1994 (the Rights Agreement") and first
amended the Rights Agreement on December 7, 1998. Capitalized terms used and not
otherwise defined herein will have the meaning given in the Rights Agreement.
B. Section 27 of the Rights Agreement provides that, prior to a
Distribution Date, the Company may amend the Rights Agreement, including the
definition of an Acquiring Person as set forth in Section 1(a) thereof, upon the
approval of at least a majority of the Continuing Directors, and that, upon any
such amendment, the Rights Agent shall amend the Rights Agreement as the Company
directs.
C. The Company desires, and hereby directs the Rights Agent, to amend
the definition of an Acquiring Person, and the Rights Agent agrees to such
amendment, on the terms and conditions hereof.
Accordingly, the Company and the Rights Agent agree as follows:
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to
the Rights Agent that:
(a) to the best knowledge of the Company, a Distribution Date has
not occurred prior to the effective date hereof; and
(b) this Amendment is authorized pursuant to the requirements
of Section 27 of the Rights Agreement, having been
approved by a majority of the Company's Continuing Directors.
2. AMENDMENT OF SECTION 1(a). Section 1(a) of the Rights Agreement is
hereby amended by adding the following additional sentence to the end
of such Section:
Notwithstanding the foregoing, with respect to the beneficial
ownership of Common Shares owned by Joseph Rodney Canion, each
reference in this Section to beneficial ownership of 20% or
more of the Common Shares shall be deemed to be modified to
refer to beneficial ownership of 25% or more of the Common
Shares.
<PAGE>
3. NO OTHER CHANGES. Except as specifically amended by this Amendment, all
other provisions of the Rights Agreement remain in full force and
effect. This Amendment shall not constitute or operate as a waiver of,
or estoppel with respect to, any provisions of the Rights Agreement by
any party hereto.
4. COUNTERPARTS. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same agreement.
The Company and the Rights Agent have caused this Amendment to be duly
executed on their behalf by their respective duly authorized representatives as
of the date first written above.
TRICORD SYSTEMS, INC. NORWEST BANK MINNESOTA, N.A.
By: /s/ John J. Mitcham By: /s/ Susan J. Roeder
---------------------------- -------------------------
John J. Mitcham Susan J. Roeder
Its: Chief Executive Officer Its: Corporate Officer -
Vice President
<PAGE>
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is entered into and effective as of this 3rd day of
November, 1998 (the "Date of Grant"), by and between Tricord Systems, Inc. (the
"Company") and Dr. Alexander H. Frey (the "Grantee").
A. The Company has adopted the 1998 Stock Incentive Plan (the
"Plan) authorizing the Board of Directors of the Company, or a
committee as provided for in the Plan (the Board or such a committee to
be referred to as the "Committee"), to grant restricted stock awards to
employees and non-employee consultants and independent contractors of
the Company and its Subsidiaries (as defined in the Plan).
B. The Company desires to give the Grantee a proprietary
interest in the Company and an added incentive to advance the interests
of the Company by granting to the Grantee a restricted award of shares
of common stock of the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF AWARD
The Company hereby grants to the Grantee a restricted stock award (the
"Award") consisting of 150,000 Shares (the "Award Shares") of the
Company's common stock, $.01 par value (the "Common Stock"), according
to the terms and subject to the restrictions and conditions hereinafter
set forth and as set forth in the Plan. Reference to the Award Shares
in this Agreement will be deemed to include the Dividend Proceeds (as
defined in Section 3.3 of this Agreement) with respect to such Award
Shares that are retained and held by the Committee as provided in
Section 3.3 of this Agreement.
2. GRANT RESTRICTION
2.1 RESTRICTION AND FORFEITURE. The Grantee's right to retain
the Award Shares will be subject to the Grantee remaining in
the continuous employ of the Company or any Subsidiary for a
period from the Date of Grant through December 1, 2000 (the
"Restriction Period"); provided, however, that such employment
period restrictions (the "Restrictions") will lapse and
terminate prior to end of the Restriction Period with respect
to installments of Award Shares to the extent and on such
dates as follows:
<TABLE>
<CAPTION>
Date of Number of Award Shares for
Restriction Lapse Which Restrictions Lapse
----------------- ---------------------------
<S> <C>
December 1, 1999 75,000
December 1, 2000 75,000
</TABLE>
<PAGE>
2.2 TERMINATION OF EMPLOYMENT
(a) TERMINATION DUE TO DEATH OR DISABILITY.
In the event that the Grantee's employment with the
Company and all Subsidiaries is terminated by reason
of the Grantee's death or Disability (as such term is
defined in the Plan), the Restrictions applicable to
the Award Shares will immediately lapse and
terminate.
(b) VOLUNTARY TERMINATION AND TERMINATION FOR CAUSE.
In the event the Grantee's employment with the
Company and all Subsidiaries is terminated
voluntarily by the Grantee or is terminated by the
Company for Cause (as such term is defined in the
Plan), all rights of the Grantee under the Plan and
this Agreement will terminate immediately without
notice of any kind, and this Award will be terminated
and all Award Shares with respect to which the
Restrictions have not lapsed will be forfeited.
(c) (c) TERMINATION WITHOUT CAUSE. In the
event the Grantee's employment with the Company and
all Subsidiaries is terminated by the Company without
Cause, the Restrictions applicable to the Award
Shares will immediately lapse and terminate.
2.3 CHANGE IN CONTROL
(a) IMPACT OF CHANGE IN CONTROL. If any events
constituting a Change in Control (as defined
in the Plan) of the Company occur, the Restrictions
will immediately lapse and terminate with respect to
all Award Shares that have been held for at least six
months from the Date of Grant.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS.
Notwithstanding anything in this Section 2.3 to the
contrary, if, with respect to the Grantee,
acceleration of the vesting of the Award Shares as
provided above (which acceleration could be deemed a
"payment" within the meaning of Section 280G(b)(2) of
the Internal Revenue Code of 1986, as amended (the
"Code")), together with any other payments which the
Grantee has the right to receive from the Company or
any corporation which is a member of an "affiliated
group" (as defined in Section 1504(a) of the Code
without regard to Section 1504(b) of the Code) of
which the Company is a member, would constitute a
"parachute payment" (as defined in Section 280G(b)(2)
of the Code), the payments to the Grantee as set
forth herein will be reduced to the largest amount as
will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of
the Code; provided, however, that if the Grantee is
subject to a separate agreement with the Company or a
Subsidiary that specifically provides that payments
to the Grantee will not be reduced even if such
payments would constitute excess parachute payments
or provides that the Grantee will have the discretion
to determine which payments will be reduced in order
to avoid excess parachute payments (regardless of
whether such separate agreement specifically
<PAGE>
references Award Shares under this Agreement), then
the limitations of this Section 2.3(b) will, to that
extent, not apply.
3. ISSUANCE OF AWARD SHARES
3.1 PRIVILEGES OF A SHAREHOLDER: TRANSFERABILITY. As
soon as practicable after the execution and delivery of this
Agreement and the satisfaction of any conditions to the
effective issuance of such Award Shares (including, without
limitation, the conditions set forth in Section 3 of this
Agreement and Section 15 of the Plan), the Grantee will be
recorded on the books of the Company as the owner of the Award
Shares, and the Company will issue one or more duly issued and
executed stock certificates evidencing the Award Shares. The
Grantee will have all voting, dividend, liquidation and other
rights with respect to the Award Shares in accordance with
their terms upon becoming the holder of record of such Award
Shares; provided, however, that, prior to the lapse or other
termination of the Restrictions applicable to Award Shares,
such Award Shares will not be assignable or transferable by
the Grantee, either voluntarily or involuntarily, and may not
be subjected to any lien, directly or indirectly, by operation
of law or otherwise. Any attempt to transfer, assign or
encumber the Award Shares other than in accordance with this
Agreement and the Plan will be null and void and will void the
Award, and all Award Shares for which the Restrictions have
not lapsed will be forfeited and immediately returned to the
Company.
3.2 ENFORCEMENT OF RESTRICTIONS. To enforce the
Restrictions imposed by this Agreement and the Plan, the
Committee may place a legend on the stock certificates
referring to the Restrictions and may require the Grantee,
until the Restrictions have lapsed with respect to Award
Shares, to keep the stock certificates evidencing such Award
Shares, together with duly endorsed stock powers, in the
custody of the Company or its transfer agent or to maintain
evidence of stock ownership of such Award Shares, together
with duly endorsed stock powers, in a certificateless
book-entry stock account with the Company's transfer agent.
3.3 DIVIDENDS AND OTHER DISTRIBUTIONS. Unless the
Committee determines otherwise in its sole discretion, the
Grantee will have no right to receive dividends or
distributions with respect to Award Shares, including cash
dividends, stock dividends or dividends in kind, the proceeds
of any stock split or the proceeds resulting from any changes
or exchanges described in Section 6 of this Agreement (all of
which will collectively be referred to as "Dividend
Proceeds"). The Committee may, in its sole discretion,
distribute such Dividend Proceeds to the Grantee or it may
retain and hold such Dividend Proceeds subject to the
Restrictions and the other terms and conditions of this
Agreement. In addition, the Committee may, in its sole
discretion, cause such Dividend Proceeds to be paid to the
Company pursuant to Section 5 of this Agreement in order to
satisfy any federal, state or local withholding or other
employment-related tax requirements attributable to such
dividends or distributions or to the Grantee's receipt of the
Award or the lapse or termination of the Restrictions
applicable to Award Shares.
<PAGE>
4. RIGHTS OF GRANTEE
4.1 EMPLOYMENT. Nothing in this Agreement will interfere with
or limit in any way the right of the Company or any Subsidiary
to terminate the employment of the Grantee at any time, nor
confer upon the Grantee any right to continue in the employ of
the Company or any Subsidiary at any particular position or
rate of pay or for any particular period of time.
4.2 RIGHTS AS A SHAREHOLDER. The Grantee will have no rights
as a shareholder until the Grantee becomes the holder of
record of such Award Shares, and no adjustment will be made
for dividends or distributions with respect to the Award
Shares as to which there is a record date proceeding the date
the Grantee becomes the holder of record of the Award Shares,
except as may otherwise be provided in the Plan or determined
by the Committee in its sole discretion.
5. WITHHOLDING TAXES
The Company is entitled to (a) withhold and deduct from future wages of
the Grantee (or from other amounts that may be due and owing to the
Grantee from the Company), or cause to be paid to the Company out of
Dividend Proceeds, or make other arrangements for the collection of,
all legally required amounts necessary to satisfy any federal, state or
local withholding and employment-related tax requirements attributable
to the receipt of the Award, the receipt of dividends or distributions
on Award Shares, or the lapse or termination of the Restrictions
applicable to Award Shares, or (b) require the Grantee promptly to
remit the amount of such withholding to the Company. In the event that
the Company is unable to withhold such amounts, for whatever reason,
the Grantee agrees to pay to the Company an amount equal to the amount
the Company would otherwise be required to withhold under federal,
state or local law.
6. ADJUSTMENTS
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering or divestiture (including
a spin-off) or any other change in the corporate structure or shares of
the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the
surviving corporation), in order to prevent dilution or enlargement of
the rights of the Grantee, will make appropriate adjustment (which
determination will be conclusive) as to the number and kind of
securities subject to this Award.
7. SUBJECT TO PLAN
The Award and the Award Shares granted pursuant to this Agreement have
been granted under, and are subject to the terms of, the Plan. Terms of
the Plan are incorporated by reference in this Agreement in their
entirety, and the Grantee, by execution hereof, acknowledges having
received a copy of the Plan. The provisions of this Agreement will be
interpreted as to be consistent with the Plan, and any ambiguities in
this Agreement will be interpreted by reference to the Plan. In the
event that any provision of this Agreement in
<PAGE>
inconsistent with the terms of the Plan, as amended or modified from
time to time, the terms of the Plan will prevail.
8. MISCELLANEOUS
8.1 BINDING EFFECT. This Agreement will be binding upon the
heirs, executors, administrators and successors of the parties
to this Agreement.
8.2 GOVERNING LAW. This Agreement and all rights and
obligations under this Agreement will be construed in
accordance with the Plan and governed by the laws of the State
of Delaware, without regard to conflicts of laws provisions.
Any legal proceeding related to this Agreement will be brought
in an appropriate Delaware court, and the parties to this
Agreement consent to the exclusive jurisdiction of the court
for this purpose.
8.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth
the entire agreement and understanding of the parties to this
Agreement with respect to the grant and vesting of this Award
and the administration of the Plan and supersede all prior
agreements, arrangements, plans and understandings relating to
the grant and vesting of this Award and the administration of
the Plan.
8.4 AMENDMENT AND WAIVER. Other than as provided in the Plan,
this Agreement may be amended, waived, modified or canceled
only by a written instrument executed by the parties to this
Agreement or, in the case of a waiver, by the party waiving
compliance.
The parties hereto have executed this Agreement effective the day and year first
above written.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
-------------------------------
Its Chairman/CEO
------------------------------
By execution of this Agreement, GRANTEE
The Grantee acknowledges having
Received a copy of the Plan /s/ Alexander H. Frey
------------------------------
(Signature)
Alexander H. Frey
------------------------------
(Name and Address)
------------------------------
------------------------------
<PAGE>
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is entered into and effective as of this 7th day of
December, 1998 (the "Date of Grant"), by and between Tricord Systems, Inc. (the
"Company") and Dr. Jon W. Flower (the "Grantee").
A. The Company has adopted the 1998 Stock Incentive Plan (the "Plan)
authorizing the Board of Directors of the Company, or a committee as
provided for in the Plan (the Board or such a committee to be referred to
as the "Committee"), to grant restricted stock awards to employees and
non-employee consultants and independent contractors of the Company and its
Subsidiaries (as defined in the Plan).
B. The Company desires to give the Grantee a proprietary interest in
the Company and an added incentive to advance the interests of the Company
by granting to the Grantee a restricted award of shares of common stock of
the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF AWARD
The Company hereby grants to the Grantee a restricted stock award (the
"Award") consisting of 57,143 Shares (the "Award Shares") of the Company's
common stock, $.01 par value (the "Common Stock"), according to the terms
and subject to the restrictions and conditions hereinafter set forth and as
set forth in the Plan. Reference to the Award Shares in this Agreement will
be deemed to include the Dividend Proceeds (as defined in Section 3.3 of
this Agreement) with respect to such Award Shares that are retained and
held by the Committee as provided in Section 3.3 of this Agreement.
2. GRANT RESTRICTION
2.1 RESTRICTION AND FORFEITURE. The Grantee's right to retain the
Award Shares will be subject to the Grantee remaining in the
continuous employ of the Company or any Subsidiary for a period of two
(2) years (the "Restriction Period") following the Date of Grant;
provided, however, that such employment period restrictions (the
"Restrictions") will lapse and terminate prior to end of the
Restriction Period with respect to installments of Award Shares to the
extent and on such dates as follows:
<TABLE>
<CAPTION>
Date of Number of Award Shares for
Restriction Lapse Which Restrictions Lapse
------------------ --------------------------
<S> <C>
December 7, 1999 28,572
December 7, 2000 28,571
</TABLE>
<PAGE>
2.2 TERMINATION OF EMPLOYMENT
(a) TERMINATION DUE TO DEATH OR DISABILITY. In the event
that the Grantee's employment with the Company and all
Subsidiaries is terminated by reason of the Grantee's death or
Disability (as such term is defined in the Plan), the Restrictions
applicable to the Award Shares will immediately lapse and
terminate.
(b) VOLUNTARY TERMINATION AND TERMINATION FOR CAUSE. In the
event the Grantee's employment with the Company and all
Subsidiaries is terminated voluntarily by the Grantee or is
terminated by the Company for Cause (as such term is defined in
the Plan), all rights of the Grantee under the Plan and this
Agreement will terminate immediately without notice of any kind,
and this Award will be terminated and all Award Shares with
respect to which the Restrictions have not lapsed will be
forfeited.
(c) (c) TERMINATION WITHOUT CAUSE. In the event the
Grantee's employment with the Company and all Subsidiaries is
terminated by the Company without Cause, the Restrictions
applicable to the Award Shares will immediately lapse and
terminate.
2.3 CHANGE IN CONTROL
(a) IMPACT OF CHANGE IN CONTROL. If any events constituting
a Change in Control (as defined in the Plan) of the Company occur,
the Restrictions will immediately lapse and terminate with respect
to all Award Shares that have been held for at least six months
from the Date of Grant.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in this Section 2.3 to the contrary, if, with respect
to the Grantee, acceleration of the vesting of the Award
Shares as provided above (which acceleration could be deemed
a "payment" within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code")), together
with any other payments which the Grantee has the right to receive
from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code
without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment" (as
defined in Section 280G(b)(2) of the Code), the payments to the
Grantee as set forth herein will be reduced to the largest amount
as will result in no portion of such payments being subject to the
excise tax imposed by Section 4999 of the Code; provided, however,
that if the Grantee is subject to a separate agreement with the
Company or a Subsidiary that specifically provides that payments
to the Grantee will not be reduced even if such payments would
constitute excess parachute payments or provides that the Grantee
will have the discretion to determine which payments will be
reduced in order to avoid excess parachute payments (regardless of
whether such separate agreement specifically
<PAGE>
references Award Shares under this Agreement), then the
limitations of this Section 2.3(b) will, to that extent, not
apply.
3. ISSUANCE OF AWARD SHARES
3.1 PRIVILEGES OF A SHAREHOLDER: TRANSFERABILITY. As soon
as practicable after the execution and delivery of this Agreement
and the satisfaction of any conditions to the effective issuance
of such Award Shares (including, without limitation, the
conditions set forth in Section 3 of this Agreement and Section 15
of the Plan), the Grantee will be recorded on the books of the
Company as the owner of the Award Shares, and the Company will
issue one or more duly issued and executed stock certificates
evidencing the Award Shares. The Grantee will have all voting,
dividend, liquidation and other rights with respect to the Award
Shares in accordance with their terms upon becoming the holder of
record of such Award Shares; provided, however, that, prior to the
lapse or other termination of the Restrictions applicable to Award
Shares, such Award Shares will not be assignable or transferable
by the Grantee, either voluntarily or involuntarily, and may not
be subjected to any lien, directly or indirectly, by operation of
law or otherwise. Any attempt to transfer, assign or encumber the
Award Shares other than in accordance with this Agreement and the
Plan will be null and void and will void the Award, and all Award
Shares for which the Restrictions have not lapsed will be
forfeited and immediately returned to the Company.
3.2 ENFORCEMENT OF RESTRICTIONS. To enforce the Restrictions
imposed by this Agreement and the Plan, the Committee may
place a legend on the stock certificates referring to the
Restrictions and may require the Grantee, until the Restrictions
have lapsed with respect to Award Shares, to keep the stock
certificates evidencing such Award Shares, together with duly
endorsed stock powers, in the custody of the Company or its
transfer agent or to maintain evidence of stock ownership of such
Award Shares, together with duly endorsed stock powers, in a
certificateless book-entry stock account with the Company's
transfer agent.
3.3 DIVIDENDS AND OTHER DISTRIBUTIONS. Unless the Committee
determines otherwise in its sole discretion, the Grantee will have
no right to receive dividends or distributions with respect to
Award Shares, including cash dividends, stock dividends or
dividends in kind, the proceeds of any stock split or the proceeds
resulting from any changes or exchanges described in Section 6 of
this Agreement (all of which will collectively be referred to as
"Dividend Proceeds"). The Committee may, in its sole discretion,
distribute such Dividend Proceeds to the Grantee or it may retain
and hold such Dividend Proceeds subject to the Restrictions and
the other terms and conditions of this Agreement. In addition, the
Committee may, in its sole discretion, cause such Dividend
Proceeds to be paid to the Company pursuant to Section 5 of this
Agreement in order to satisfy any federal, state or local
withholding or other employment-related tax requirements
attributable to such dividends or distributions or to the
Grantee's receipt of the Award or the lapse or termination of the
Restrictions applicable to Award Shares.
<PAGE>
4. RIGHTS OF GRANTEE
4.1 EMPLOYMENT. Nothing in this Agreement will interfere with or
limit in any way the right of the Company or any Subsidiary to
terminate the employment of the Grantee at any time, nor confer
upon the Grantee any right to continue in the employ of the
Company or any Subsidiary at any particular position or rate of
pay or for any particular period of time.
4.2 RIGHTS AS A SHAREHOLDER. The Grantee will have no rights as a
shareholder until the Grantee becomes the holder of record of such
Award Shares, and no adjustment will be made for dividends or
distributions with respect to the Award Shares as to which there
is a record date proceeding the date the Grantee becomes the
holder of record of the Award Shares, except as may otherwise be
provided in the Plan or determined by the Committee in its sole
discretion.
5. WITHHOLDING TAXES
The Company is entitled to (a) withhold and deduct from future wages of
the Grantee (or from other amounts that may be due and owing to the
Grantee from the Company), or cause to be paid to the Company out of
Dividend Proceeds, or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any federal, state or local
withholding and employment-related tax requirements attributable to the
receipt of the Award, the receipt of dividends or distributions on Award
Shares, or the lapse or termination of the Restrictions applicable to
Award Shares, or (b) require the Grantee promptly to remit the amount of
such withholding to the Company. In the event that the Company is unable
to withhold such amounts, for whatever reason, the Grantee agrees to pay
to the Company an amount equal to the amount the Company would otherwise
be required to withhold under federal, state or local law.
6. ADJUSTMENTS
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock
split, combination of shares, rights offering or divestiture (including a
spin-off) or any other change in the corporate structure or shares of the
Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the
surviving corporation), in order to prevent dilution or enlargement of
the rights of the Grantee, will make appropriate adjustment (which
determination will be conclusive) as to the number and kind of securities
subject to this Award.
7. SUBJECT TO PLAN
The Award and the Award Shares granted pursuant to this Agreement have
been granted under, and are subject to the terms of, the Plan. Terms of
the Plan are incorporated by reference in this Agreement in their
entirety, and the Grantee, by execution hereof, acknowledges having
received a copy of the Plan. The provisions of this Agreement will be
interpreted as to be consistent with the Plan, and any ambiguities in
this Agreement will be interpreted by reference to the Plan. In the event
that any provision of this Agreement in
<PAGE>
inconsistent with the terms of the Plan, as amended or modified from time
to time, the terms of the Plan will prevail.
8. MISCELLANEOUS
8.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this
Agreement.
8.2 GOVERNING LAW. This Agreement and all rights and obligations
under this Agreement will be construed in accordance with the Plan
and governed by the laws of the State of Delaware, without regard
to conflicts of laws provisions. Any legal proceeding related to
this Agreement will be brought in an appropriate Delaware court,
and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
8.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the
entire agreement and understanding of the parties to this
Agreement with respect to the grant and vesting of this Award and
the administration of the Plan and supersede all prior agreements,
arrangements, plans and understandings relating to the grant and
vesting of this Award and the administration of the Plan.
8.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this
Agreement may be amended, waived, modified or canceled only by a
written instrument executed by the parties to this Agreement or,
in the case of a waiver, by the party waiving compliance.
The parties hereto have executed this Agreement effective the day and year first
above written.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
-------------------------------
Its Chairman/CEO
------------------------------
By execution of this Agreement, GRANTEE
The Grantee acknowledges having
Received a copy of the Plan /s/ Jon W. Flower
------------------------------
(Signature)
Jon W. Flower
------------------------------
(Name and Address)
------------------------------
------------------------------
<PAGE>
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is effective as of this 7th day of December,
1998 (the "Date of Grant"), by and between Tricord Systems, Inc., a
Delaware corporation (the "Company"), and J. David Cabello (the "Grantee").
As a material inducement to the Grantee agreeing to become an employee of
the Company and in order to give the Grantee a proprietary interest in advancing
the Company's interests, the Company desires to grant to the Grantee a
restricted award of shares of the Company's common stock, $0.01 par value
("Common Stock").
Accordingly, the parties agree as follows:
1. GRANT OF AWARD.
The Company hereby grants to the Grantee a restricted stock award (the
"Award") consisting of three hundred thousand (300,000) shares (the "Award
Shares") of Common Stock, according to the terms and subject to the restrictions
and conditions hereinafter set forth. Reference to the Award Shares in this
Agreement will be deemed to include the Dividend Proceeds (as defined in this
Agreement) with respect to such Award Shares that are retained and held by the
Company as provided in Section 3.3 of this Agreement.
2. GRANT RESTRICTION.
2.1 RESTRICTION AND FORFEITURE. The Grantee's right to retain the Award
Shares will be subject to the Grantee remaining in the continuous employ or
service of the Company or any entity that is directly or indirectly controlled
by the Company or any entity in which the Company has a significant equity
interest (a "Subsidiary") for a period of two (2) years (the "Restriction
Period") following the Date of Grant; provided, however, that such
employment/service period restrictions (the "Restrictions") will lapse and
terminate prior to the end of the Restriction Period with respect to
installments of Award Shares to the extent and on such dates as follows:
(a) The Restrictions on one-third (1/3) of the Award Shares will lapse
and terminate on the earlier to occur of (i) the date on which the Company
completes an offering and sale of Common Stock in which the aggregate gross
proceeds received by the Company before commissions and expenses equals or
exceeds Two Million Dollars ($2,000,000), or (ii) three months after the
Date of Grant;
(b) The Restrictions on one-third (1/3) of the Award Shares will
lapse and terminate on the date one (1) year after the Date of Grant; and
(c) The Restrictions on one-third (1/3) of the Award Shares will
lapse and terminate on the date two (2) years after the Date of Grant.
2.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
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Restricted Stock Agreement
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<PAGE>
(a) TERMINATION DUE TO DEATH, DISABILITY, RETIREMENT. In the event
that the Grantee's employment or other service with the Company and all
Subsidiaries is terminated by reason of the Grantee's death, Disability or
Retirement (as such terms are defined below), the Restrictions applicable
to the Award Shares will immediately lapse and terminate.
(b) TERMINATION WITHOUT CAUSE. In the event that the Grantee's
employment or other service with the Company and all Subsidiaries is
terminated by the Company without Cause (as such term is defined below),
the Restrictions applicable to the Award Shares will immediately lapse and
terminate.
(c) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY, RETIREMENT
AND TERMINATION WITHOUT CAUSE. In the event the Grantee's employment or
other service with the Company and all Subsidiaries is terminated for any
reason other than death, Disability, Retirement or termination by the
Company without Cause, or in the event the Grantee is in the employ or
service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the
Company (unless the Grantee continues in the employ or service of the
Company or another Subsidiary), all rights of the Grantee under this
Agreement will terminate immediately without notice of any kind, and this
Agreement will be terminated and all Award Shares with respect to which the
Restrictions have not lapsed will be forfeited.
(d) DEFINITIONS. For purposes of this Agreement:
(i) "Cause" will be determined by the Committee (as defined in
Section 8.1 of this Agreement), and will be as defined in any
employment or other agreement or policy applicable to the Grantee or,
if no such agreement or policy exists, will mean (A) dishonesty,
fraud, misrepresentation, embezzlement or deliberate injury or
attempted injury, in each case related to the Company or any
Subsidiary, (B) any unlawful or criminal activity of a serious nature,
(C) any intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Grantee's overall duties, or (D) any material breach of any
employment, service, confidentiality or non-compete agreement entered
into with the Company or any Subsidiary;
(ii) "Disability" means the disability of the Grantee such as
would entitle the Grantee to receive disability income benefits
pursuant to the long-term disability plan of the Company or Subsidiary
then covering the Grantee or, if no such plan exists or is applicable
to the Grantee, the permanent and total disability of the Grantee
within the meaning of Section 22(e)(3) of the Internal Revenue Code of
1986, as amended (the "Code"); and
(iii) "Retirement" means termination of employment or service
pursuant to and in accordance with the regular (or, if approved by the
Committee, early) retirement/pension plan or practice of the Company
or Subsidiary then covering the Grantee, provided that if the Grantee
is not covered by any such plan
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Restricted Stock Agreement
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<PAGE>
or practice, the Grantee will be deemed to be covered by the Company's
plan or practice for purposes of this determination.
(e) Notwithstanding the other provisions of this Section 2.2, upon the
Grantee's termination of employment or other service with the Company and
all Subsidiaries, the Committee may in its discretion (which may be
exercised at any time on or after the Date of Grant, including following
such termination) cause Award Shares (or any part thereof) then held by
such Grantee to become free of Restrictions following such termination of
employment or service, in each case in the manner determined by the
Committee.
2.3 CHANGE IN CONTROL.
(a) CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" of the Company will mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of all or substantially all of the assets of the Company
(in one transaction or in a series of related transactions) to a
person or entity that is not controlled by the Company;
(ii) the approval by the stockholders of the Company of any
plan or proposal for the liquidation or dissolution of the Company;
(iii) any person becomes after the Date of Grant the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), directly or indirectly, of 30%
or more of the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of
directors;
(iv) a merger or consolidation to which the Company is a party
if the shareholders of the Company immediately prior to effective date
of such merger or consolidation have "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 corporation representing 70% or less of the combined
voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of
directors;
(v) the Incumbent Directors cease for any reason to constitute
at least a majority of the Board of Directors of the Company (the
"Board"); or
(vi) any other change in control of the Company of a nature
that would be required to be reported pursuant to Section 13 or 15(d)
of the Exchange Act, whether or not the Company is then subject to
such reporting requirement.
(b) INCUMBENT DIRECTORS. For purposes of this Agreement, "Incumbent
Directors" of the Company means any individuals who are members of the
Board on the
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<PAGE>
effective date of this Agreement and any individual who subsequently
becomes a member of the Board whose election, or nomination for election by
the Company's stockholders, was approved by a vote of at least a majority
of the Incumbent Directors (either by specific vote or by approval of the
Company's proxy statement in which such individual is named as a nominee
for director without objection to such nomination).
(c) ACCELERATION OF VESTING. If a Change in Control of the Company
occurs, the Restrictions will immediately lapse and terminate with respect
to all Award Shares that have been held for at least six (6) months from
the Date of Grant.
(d) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in this Section 2.3 to the contrary, if, with respect to the
Grantee, acceleration of the vesting of the Award Shares as provided above
(which acceleration could be deemed a "payment" within the meaning of
Section 280G(b)(2) of the Code), together with any other payments which the
Grantee has the right to receive from the Company or any corporation which
is a member of an "affiliated group" (as defined in Section 1504(a) of the
Code without regard to Section 1504(b) of the Code) of which the Company
is a member, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code), then the payments to the Grantee as set forth
herein will be reduced to the largest amounts as will result in no portion
of such payments being subject to the excise tax imposed by Section 4999 of
the Code; provided, however, that if the Grantee is subject to a separate
agreement with the Company or a Subsidiary that specifically provides that
payments to the Grantee will not be reduced even if such payments would
constitute excess parachute payments or provides that the Grantee will have
the discretion to determine which payments will be reduced in order to
avoid excess parachute payments (regardless of whether such separate
agreement specifically references Award Shares under this Agreement), then
the limitations of this Section 2.3(d) will, to that extent, not apply
3. ISSUANCE OF AWARD SHARES.
3.1 PRIVILEGES OF A SHAREHOLDER; TRANSFERABILITY. As soon as practicable
after the execution and delivery of this Agreement and the satisfaction of any
conditions (including, without limitation, conditions imposed by federal or
state securities laws) to the effective issuance of such Award Shares, the
Grantee will be recorded on the books of the Company as the owner of the Award
Shares, and the Company will issue one or more duly issued and executed stock
certificates evidencing the Award Shares. The Grantee will have all voting,
dividend, liquidation and other rights with respect to the Award Shares in
accordance with their terms upon becoming the holder of record of such Award
Shares; provided, however, that prior to the lapse or other termination of the
Restrictions applicable to Award Shares, such Award Shares will not be
assignable or transferable by the Grantee, either voluntarily or involuntarily,
and may not be subjected to any lien, directly or indirectly, by operation of
law or otherwise. Any attempt to transfer, assign or encumber the Award Shares
other than in accordance with this Agreement will be null and void and will void
the Award, and all Award Shares for which the Restrictions have not lapsed will
be forfeited and immediately returned to the Company.
Tricord Systems, Inc.
Restricted Stock Agreement
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<PAGE>
3.2 ENFORCEMENT OF RESTRICTIONS. To enforce the Restrictions imposed by
this Agreement, the Company may place a legend on the stock certificates
referring to the Restrictions and may require the Grantee, until the
Restrictions have lapsed with respect to Award Shares, to keep the stock
certificates evidencing such Award Shares, together with duly endorsed stock
powers, in the custody of the Company or its transfer agent or to maintain
evidence of stock ownership of such Award Shares, together with duly endorsed
stock powers, in a certificateless book-entry stock account with the
Company's transfer agent.
3.3 DIVIDENDS AND OTHER DISTRIBUTIONS. The Grantee will have the
right to receive dividends or distributions with respect to Award Shares,
including cash dividends, stock dividends or dividends in kind, the proceeds of
any stock split or the proceeds resulting from any changes or exchanges
described in Section 6 of this Agreement (all of which will collectively be
referred to as "Dividend Proceeds"); provided, however, that the Company may
retain and hold such Dividend Proceeds subject to the Restrictions and the other
terms and conditions of this Agreement. In addition, the Company may cause such
Dividend Proceeds to be paid to the Company pursuant to Section 5 of this
Agreement in order to satisfy any federal, state or local withholding or other
employment-related tax requirements attributable to such dividends or
distributions or to the Grantee's receipt of the Award or the lapse or
termination of the Restrictions applicable to Award Shares.
4. RIGHTS OF GRANTEE.
4.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere with
or limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of the Grantee at any time, nor confer upon the Grantee
any right to continue in the employ or service of the Company or any Subsidiary
at any particular position or rate of pay or for any particular period of time.
4.2 RIGHTS AS A SHAREHOLDER. The Grantee will have no rights as a
shareholder until the Grantee becomes the holder of record of such Award Shares,
and no adjustment will be made for dividends or distributions with respect to
the Award Shares as to which there is a record date preceding the date the
Grantee becomes the holder of record of the Award Shares.
5. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of the
Grantee (or from other amounts that may be due and owing to the Grantee from the
Company), or cause to be paid to the Company out of Dividend Proceeds, or make
other arrangements for the collection of, all legally required amounts necessary
to satisfy any federal, state or local withholding and employment-related tax
requirements attributable to the receipt of the Award Shares, the receipt of
dividends or distributions on Award Shares, or the lapse or termination of the
Restrictions applicable to Award Shares, or (b) require the Grantee promptly to
remit the amount of such withholding to the Company. In the event that the
Company is unable to withhold such amounts, for whatever reason, the Grantee
agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal, state or local law.
Tricord Systems, Inc.
Restricted Stock Agreement
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<PAGE>
6. ADJUSTMENTS.
In the event of any reorganization merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering or divestiture (including a spin-off) or any other
change in the corporate structure or shares of the Company, the Company (or, if
the Company is not the surviving corporation in any such transaction, the board
of directors of the surviving corporation), in order to prevent dilution or
enlargement of the rights of the Grantee, will make appropriate adjustment
(which determination will be conclusive) as to the number and kind of securities
or other property (including cash) subject to this Agreement.
7. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of this Agreement, the Company will
not be required to issue any Award Shares to the Grantee, and the Grantee may
not sell, assign, transfer or otherwise dispose of Award Shares, unless (a)
there is in effect with respect to such shares a registration statement under
the Securities Act of 1933, as amended (the "Securities Act") and any
applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign
securities laws, and (b) there has been obtained any other consent, approval
or permit from any other regulatory body which the Company, in its sole
discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or
agreements from the parties involved, and the placement of any legends on
certificates representing shares of Common Stock, as may be deemed necessary
or advisable by the Company in order to comply with such securities law or
other restrictions.
8. ADMINISTRATION.
8.1 THE COMMITTEE. This Agreement will be administered by the Board,
or by a committee of the Board consisting of not less than two persons, all of
whom will be "nonemployee directors" within the meaning of Rule 16b-3 under
the Exchange Act. As used in this Agreement, the term "Committee" will refer to
the Board or to such a committee, if established. To the extent consistent with
corporate law, the Committee may delegate to any officers of the Company the
duties, power and authority of the Committee under the Agreement pursuant to
such conditions or limitations as the Committee may establish; provided,
however, that only the Committee may exercise such duties, power and authority
with respect to the Grantee if the Grantee is subject to Section 16 of the
Exchange Act. The Committee may exercise its duties, power and authority under
this Agreement in its sole and absolute discretion without the consent of the
Grantee, unless this Agreement specifically provides otherwise. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of this Agreement will be conclusive and binding for
all purposes and on all persons, and no member of the Committee will be liable
for any action or determination made in good faith with respect to this
Agreement.
8.2 AUTHORITY OF THE COMMITTEE. The Committee will have the authority to
take such action as the Committee may deem necessary or desirable and as
consistent with the terms of this Agreement, including, without limitation, the
authority to modify the number of shares or other terms and conditions of the
Award, extend the term of the Award, accelerate the exercisability or
Tricord Systems, Inc.
Restricted Stock Agreement
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<PAGE>
vesting or otherwise terminate any restrictions relating to the Award; provided,
however that the Grantee, if adversely affected by such amended or modified
terms, has consented to such amendment or modification.
9. MISCELLANEOUS.
9.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
9.2 GOVERNING LAW. This Agreement and all rights and obligations under
this Agreement will be construed in accordance with and governed by the laws of
the State of Minnesota, without regard to conflicts of laws provisions. Any
legal proceeding related to this Agreement will be brought in an appropriate
Minnesota court, and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
9.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
and understanding of the parties to this Agreement with respect to the grant
and vesting of this Award and supersedes all prior agreements, arrangements,
plans and understandings relating to the grant and vesting of this Award.
9.4 AMENDMENT AND WAIVER. This Agreement may be amended, waived,
modified or canceled only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance.
The parties hereto have executed this Agreement effective the day and
year first above written.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
----------------------------------
Its CHAIRMAN/CEO
---------------------------------
GRANTEE
/s/ J. David Cabello
------------------------------------
(Signature)
J. David Cabello
18207 Theiss Mail Route Rd.
Spring, Texas 77379
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Restricted Stock Agreement
Page -7-
<PAGE>
RESTRICTED STOCK AWARD AGREEMENT
THIS AGREEMENT is effective as of this 7th day of December,
1998 (the "Date of Grant"), by and between Tricord Systems, Inc., a
Delaware corporation (the "Company"), and Kathleen H. Clark (the "Grantee").
As a material inducement to the Grantee agreeing to become an employee of
the Company and in order to give the Grantee a proprietary interest in advancing
the Company's interests, the Company desires to grant to the Grantee a
restricted award of shares of the Company's common stock, $0.01 par value
("Common Stock").
Accordingly, the parties agree as follows:
1. GRANT OF AWARD.
The Company hereby grants to the Grantee a restricted stock award (the
"Award") consisting of three hundred thousand (300,000) shares (the "Award
Shares") of Common Stock, according to the terms and subject to the restrictions
and conditions hereinafter set forth. Reference to the Award Shares in this
Agreement will be deemed to include the Dividend Proceeds (as defined in this
Agreement) with respect to such Award Shares that are retained and held by the
Company as provided in Section 3.3 of this Agreement.
2. GRANT RESTRICTION.
2.1 RESTRICTION AND FORFEITURE. The Grantee's right to retain the Award
Shares will be subject to the Grantee remaining in the continuous employ or
service of the Company or any entity that is directly or indirectly controlled
by the Company or any entity in which the Company has a significant equity
interest (a "Subsidiary") for a period of two (2) years (the "Restriction
Period") following the Date of Grant; provided, however, that such
employment/service period restrictions (the "Restrictions") will lapse and
terminate prior to the end of the Restriction Period with respect to
installments of Award Shares to the extent and on such dates as follows:
(a) The Restrictions on one-third (1/3) of the Award Shares will lapse
and terminate on the earlier to occur of (i) the date on which the Company
completes an offering and sale of Common Stock in which the aggregate gross
proceeds received by the Company before commissions and expenses equals or
exceeds Two Million Dollars ($2,000,000), or (ii) three months after the
Date of Grant;
(b) The Restrictions on one-third (1/3) of the Award Shares will
lapse and terminate on the date one (1) year after the Date of Grant; and
(c) The Restrictions on one-third (1/3) of the Award Shares will
lapse and terminate on the date two (2) years after the Date of Grant.
2.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
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Restricted Stock Agreement
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<PAGE>
(a) TERMINATION DUE TO DEATH, DISABILITY, RETIREMENT. In the event
that the Grantee's employment or other service with the Company and all
Subsidiaries is terminated by reason of the Grantee's death, Disability or
Retirement (as such terms are defined below), the Restrictions applicable
to the Award Shares will immediately lapse and terminate.
(b) TERMINATION WITHOUT CAUSE. In the event that the Grantee's
employment or other service with the Company and all Subsidiaries is
terminated by the Company without Cause (as such term is defined below),
the Restrictions applicable to the Award Shares will immediately lapse and
terminate.
(c) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY, RETIREMENT
AND TERMINATION WITHOUT CAUSE. In the event the Grantee's employment or
other service with the Company and all Subsidiaries is terminated for any
reason other than death, Disability, Retirement or termination by the
Company without Cause, or in the event the Grantee is in the employ or
service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the
Company (unless the Grantee continues in the employ or service of the
Company or another Subsidiary), all rights of the Grantee under this
Agreement will terminate immediately without notice of any kind, and this
Agreement will be terminated and all Award Shares with respect to which the
Restrictions have not lapsed will be forfeited.
(d) DEFINITIONS. For purposes of this Agreement:
(i) "Cause" will be determined by the Committee (as defined in
Section 8.1 of this Agreement), and will be as defined in any
employment or other agreement or policy applicable to the Grantee or,
if no such agreement or policy exists, will mean (A) dishonesty,
fraud, misrepresentation, embezzlement or deliberate injury or
attempted injury, in each case related to the Company or any
Subsidiary, (B) any unlawful or criminal activity of a serious nature,
(C) any intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Grantee's overall duties, or (D) any material breach of any
employment, service, confidentiality or non-compete agreement entered
into with the Company or any Subsidiary;
(ii) "Disability" means the disability of the Grantee such as
would entitle the Grantee to receive disability income benefits
pursuant to the long-term disability plan of the Company or Subsidiary
then covering the Grantee or, if no such plan exists or is applicable
to the Grantee, the permanent and total disability of the Grantee
within the meaning of Section 22(e)(3) of the Internal Revenue Code of
1986, as amended (the "Code"); and
(iii) "Retirement" means termination of employment or service
pursuant to and in accordance with the regular (or, if approved by the
Committee, early) retirement/pension plan or practice of the Company
or Subsidiary then covering the Grantee, provided that if the Grantee
is not covered by any such plan
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Restricted Stock Agreement
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<PAGE>
or practice, the Grantee will be deemed to be covered by the Company's
plan or practice for purposes of this determination.
(e) Notwithstanding the other provisions of this Section 2.2, upon the
Grantee's termination of employment or other service with the Company and
all Subsidiaries, the Committee may in its discretion (which may be
exercised at any time on or after the Date of Grant, including following
such termination) cause Award Shares (or any part thereof) then held by
such Grantee to become free of Restrictions following such termination of
employment or service, in each case in the manner determined by the
Committee.
2.3 CHANGE IN CONTROL.
(a) CHANGE IN CONTROL. For purposes of this Agreement, a "Change
Control" of the Company will mean the following:
(i) the sale, lease, exchange or other transfer, directly or
indirectly, of all or substantially all of the assets of the Company
(in one transaction or in a series of related transactions) to a
person or entity that is not controlled by the Company;
(ii) the approval by the stockholders of the Company of any
plan or proposal for the liquidation or dissolution of the Company;
(iii) any person becomes after the Date of Grant the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), directly or indirectly, of 30%
or more of the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections of
directors;
(iv) a merger or consolidation to which the Company is a party
if the shareholders of the Company immediately prior to effective date
of such merger or consolidation have "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 corporation representing 70% or less of the combined
voting power of the surviving corporation's then outstanding
securities ordinarily having the right to vote at elections of
directors;
(v) the Incumbent Directors cease for any reason to constitute
at least a majority of the Board of Directors of the Company (the
"Board"); or
(vi) any other change in control of the Company of a nature
that would be required to be reported pursuant to Section 13 or 15(d)
of the Exchange Act, whether or not the Company is then subject to
such reporting requirement.
(b) INCUMBENT DIRECTORS. For purposes of this Agreement, "Incumbent
Directors" of the Company means any individuals who are members of the
Board on the
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effective date of this Agreement and any individual who subsequently
becomes a member of the Board whose election, or nomination for election by
the Company's stockholders, was approved by a vote of at least a majority
of the Incumbent Directors (either by specific vote or by approval of the
Company's proxy statement in which such individual is named as a nominee
for director without objection to such nomination).
(c) ACCELERATION OF VESTING. If a Change in Control of the Company
occurs, the Restrictions will immediately lapse and terminate with respect
to all Award Shares that have been held for at least six (6) months from
the Date of Grant.
(d) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in this Section 2.3 to the contrary, if, with respect to the
Grantee, acceleration of the vesting of the Award Shares as provided above
(which acceleration could be deemed a "payment" within the meaning of
Section 280G(b)(2) of the Code), together with any other payments which the
Grantee has the right to receive from the Company or any corporation which
is a member of an "affiliated group" (as defined in Section 1504(a) of the
Code without regard to Section 1504(b) of the Code) of which the Company
is a member, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code), then the payments to the Grantee as set forth
herein will be reduced to the largest amounts as will result in no portion
of such payments being subject to the excise tax imposed by Section 4999 of
the Code; provided, however, that if the Grantee is subject to a separate
agreement with the Company or a Subsidiary that specifically provides that
payments to the Grantee will not be reduced even if such payments would
constitute excess parachute payments or provides that the Grantee will have
the discretion to determine which payments will be reduced in order to
avoid excess parachute payments (regardless of whether such separate
agreement specifically references Award Shares under this Agreement), then
the limitations of this Section 2.3(d) will, to that extent, not apply
3. ISSUANCE OF AWARD SHARES.
3.1 PRIVILEGES OF A SHAREHOLDER: TRANSFERABILITY. As soon as practicable
after the execution and delivery of this Agreement and the satisfaction of any
conditions (including, without limitation, conditions imposed by federal or
state securities laws) to the effective issuance of such Award Shares, the
Grantee will be recorded on the books of the Company as the owner of the Award
Shares, and the Company will issue one or more duly issued and executed stock
certificates evidencing the Award Shares. The Grantee will have all voting,
dividend, liquidation and other rights with respect to the Award Shares in
accordance with their terms upon becoming the holder of record of such Award
Shares; provided, however, that prior to the lapse or other termination of the
Restrictions applicable to Award Shares, such Award Shares will not be
assignable or transferable by the Grantee, either voluntarily or involuntarily,
and may not be subjected to any lien, directly or indirectly, by operation of
law or otherwise. Any attempt to transfer, assign or encumber the Award Shares
other than in accordance with this Agreement will be null and void and will void
the Award, and all Award Shares for which the Restrictions have not lapsed will
be forfeited and immediately returned to the Company.
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Restricted Stock Agreement
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3.2 ENFORCEMENT OF RESTRICTIONS. To enforce the Restrictions imposed by
this Agreement, the Company may place a legend on the stock certificates
referring to the Restrictions and may require the Grantee, until the
Restrictions have lapsed with respect to Award Shares, to keep the stock
certificates evidencing such Award Shares, together with duly endorsed stock
powers, in the custody of the Company or its transfer agent or to maintain
evidence of stock ownership of such Award Shares, together with duly endorsed
stock powers, in a certificateless book-entry stock account with the
Company's transfer agent.
3. 3 DIVIDENDS AND OTHER DISTRIBUTIONS. The Grantee will have the
right to receive dividends or distributions with respect to Award Shares,
including cash dividends, stock dividends or dividends in kind, the proceeds of
any stock split or the proceeds resulting from any changes or exchanges
described in Section 6 of this Agreement (all of which will collectively be
referred to as "Dividend Proceeds"); provided, however, that the Company may
retain and hold such Dividend Proceeds subject to the Restrictions and the other
terms and conditions of this Agreement. In addition, the Company may cause such
Dividend Proceeds to be paid to the Company pursuant to Section 5 of this
Agreement in order to satisfy any federal, state or local withholding or other
employment-related tax requirements attributable to such dividends or
distributions or to the Grantee's receipt of the Award or the lapse or
termination of the Restrictions applicable to Award Shares.
4. RIGHTS OF GRANTEE.
4.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere with
or limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of the Grantee at any time, nor confer upon the Grantee
any right to continue in the employ or service of the Company or any Subsidiary
at any particular position or rate of pay or for any particular period of time.
4.2 RIGHTS AS A SHAREHOLDER. The Grantee will have no rights as a
shareholder until the Grantee becomes the holder of record of such Award Shares,
and no adjustment will be made for dividends or distributions with respect to
the Award Shares as to which there is a record date preceding the date the
Grantee becomes the holder of record of the Award Shares.
5. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of the
Grantee (or from other amounts that may be due and owing to the Grantee from the
Company), or cause to be paid to the Company out of Dividend Proceeds, or make
other arrangements for the collection of, all legally required amounts necessary
to satisfy any federal, state or local withholding and employment-related tax
requirements attributable to the receipt of the Award Shares, the receipt of
dividends or distributions on Award Shares, or the lapse or termination of the
Restrictions applicable to Award Shares, or (b) require the Grantee promptly to
remit the amount of such withholding to the Company. In the event that the
Company is unable to withhold such amounts, for whatever reason, the Grantee
agrees to pay to the Company an amount equal to the amount the Company would
otherwise be required to withhold under federal, state or local law.
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Restricted Stock Agreement
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6. ADJUSTMENTS.
In the event of any reorganization merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering or divestiture (including a spin-off) or any other
change in the corporate structure or shares of the Company, the Company (or, if
the Company is not the surviving corporation in any such transaction, the board
of directors of the surviving corporation), in order to prevent dilution or
enlargement of the rights of the Grantee, will make appropriate adjustment
(which determination will be conclusive) as to the number and kind of securities
or other property (including cash) subject to this Agreement.
7. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of this Agreement, the Company will
not be required to issue any Award Shares to the Grantee, and the Grantee may
not sell, assign, transfer or otherwise dispose of Award Shares, unless (a)
there is in effect with respect to such shares a registration statement under
the Securities Act of 1933, as amended (the "Securities Act") and any
applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign
securities laws, and (b) there has been obtained any other consent, approval
or permit from any other regulatory body which the Company, in its sole
discretion, deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or
agreements from the parties involved, and the placement of any legends on
certificates representing shares of Common Stock, as may be deemed necessary
or advisable by the Company in order to comply with such securities law or
other restrictions.
8. ADMINISTRATION.
8.1 THE COMMITTEE. This Agreement will be administered by the Board,
or by a committee of the Board consisting of not less than two persons, all of
whom will be "nonemployee directors" within the meaning of Rule 16b-3 under
the Exchange Act. As used in this Agreement, the term "Committee" will refer to
the Board or to such a committee, if established. To the extent consistent with
corporate law, the Committee may delegate to any officers of the Company the
duties, power and authority of the Committee under the Agreement pursuant to
such conditions or limitations as the Committee may establish; provided,
however, that only the Committee may exercise such duties, power and authority
with respect to the Grantee if the Grantee is subject to Section 16 of the
Exchange Act. The Committee may exercise its duties, power and authority under
this Agreement in its sole and absolute discretion without the consent of the
Grantee, unless this Agreement specifically provides otherwise. Each
determination, interpretation or other action made or taken by the Committee
pursuant to the provisions of this Agreement will be conclusive and binding for
all purposes and on all persons, and no member of the Committee will be liable
for any action or determination made in good faith with respect to this
Agreement.
8.2 AUTHORITY OF THE COMMITTEE. The Committee will have the authority to
take such action as the Committee may deem necessary or desirable and as
consistent with the terms of this Agreement, including, without limitation, the
authority to modify the number of shares or other terms and conditions of the
Award, extend the term of the Award, accelerate the exercisability or
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Restricted Stock Agreement
Page -6-
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vesting or otherwise terminate any restrictions relating to the Award; provided,
however that the Grantee, if adversely affected by such amended or modified
terms, has consented to such amendment or modification.
9. MISCELLANEOUS.
9.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
9.2 GOVERNING LAW. This Agreement and all rights and obligations under
this Agreement will be construed in accordance with and governed by the laws of
the State of Minnesota, without regard to conflicts of laws provisions. Any
legal proceeding related to this Agreement will be brought in an appropriate
Minnesota court, and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
9.3 ENTIRE AGREEMENT. This Agreement sets forth the entire agreement
and understanding of the parties to this Agreement with respect to the grant
and vesting of this Award and supersedes all prior agreements, arrangements,
plans and understandings relating to the grant and vesting of this Award.
9.4 AMENDMENT AND WAIVER. This Agreement may be amended, waived,
modified or canceled only by a written instrument executed by the parties to
this Agreement or, in the case of a waiver, by the party waiving compliance.
The parties hereto have executed this Agreement effective the day and
year first above written.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
----------------------------------
Its Chairman/CEO
---------------------------------
GRANTEE
/s/ Kathleen H. Clark
------------------------------------
(Signature)
Kathleen H. Clark
5025 Doliver
Houston, Texas 77056
Tricord Systems, Inc.
Restricted Stock Agreement
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TRICORD SYSTEMS, INC.
1998 STOCK INCENTIVE PLAN
(AS AMENDED DECEMBER 7, 1998 AND JANUARY 30, 1999)
1. PURPOSE OF PLAN.
The purpose of the Tricord Systems, Inc. 1998 Stock Incentive Plan (the "Plan")
is to advance the interests of Tricord Systems, Inc. (the "Company") and its
stockholders by enabling the Company and its Subsidiaries to attract and retain
persons of ability to perform services for the Company and its Subsidiaries by
providing an incentive to such individuals through equity participation in the
Company and by rewarding such individuals who contribute to the achievement by
the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the context
clearly otherwise requires:
2.1. "BOARD" means the Board of Directors of the Company.
2.2. "BROKER EXERCISE NOTICE" means a written notice pursuant to which
a Participant, upon exercise of an Option, irrevocably instructs a
broker or dealer to sell a sufficient number of shares or loan a
sufficient amount of money to pay all or a portion of the exercise
price of the Option and/or any related withholding tax obligations
and remit such sums to the Company and directs the Company to
deliver stock certificates to be issued upon such exercise
directly to such broker or dealer.
2.3. "CHANGE IN CONTROL" means an event described in Section 13.1 of
the Plan.
2.4. CODE" means the Internal Revenue Code of 1986, as amended.
2.5. "COMMITTEE" means the group of individuals administering the Plan,
as provided in Section 3 of the Plan.
2.6. "COMMON STOCK" means the common stock of the Company, no par
value, or the number and kind of shares of stock or other
securities into which such Common Stock may be changed in
accordance with Section 4.3 of the Plan.
2.7. "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits
pursuant to the long-term disability plan of the Company or
Subsidiary then covering the Participant or, if no such plan
exists or is applicable to the Participant, the permanent and
total disability of the Participant within the meaning of Section
22(e)(3) of the Code.
2.8. "ELIGIBLE RECIPIENTS" means all employees (including, without
limitation, officers and directors who are also employees) of the
Company or any Subsidiary and any non-employee consultants and
independent contractors of the Company or any Subsidiary.
<PAGE>
2.9. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.10. "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date (or, if no shares were traded or quoted on such date, as
of the next preceding date on which there was such a trade or
quote) (a) the closing sale price of the Common Stock if the
Common Stock is listed, admitted to unlisted trading privileges or
reported on any foreign or national securities exchange or on the
Nasdaq National Market System or an equivalent foreign market on
which sale prices are reported; (b) if the Common stock is not so
listed, admitted to unlisted trading privileges or reported, the
closing bid price reported by the Nasdaq SmallCap Market, OTC
Bulletin Board or the National Quotation Bureau, Inc. or other
comparable reporting service; or (c) if the Common Stock is not so
listed or reported, such price as the Committee determines in good
faith in the exercise of its reasonable discretion.
2.11. "INCENTIVE AWARD" means an Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit or Stock Bonus granted to
an Eligible Recipient pursuant to the Plan.
2.12. "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan
that qualifies as an "incentive stock option" within the meaning
of Section 422 of the Code.
2.13. "NON-STATUTORY STOCK OPTION" means a right to purchase Common
Stock granted to an Eligible Recipient pursuant to Section 6 of
the Plan that does not qualify as an Incentive Stock Option.
2.14. "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15. "PARTICIPANT" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
2.16. "PERFORMANCE UNIT" means a right granted to an Eligible Recipient
pursuant to Section 9 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, upon
the achievement of established performance goals.
2.17. "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock that are
already owned by the Participant or, with respect to any Incentive
Award, that are to be issued upon the grant, exercise or vesting
of such Incentive Award.
2.18. "RESTRICTED STOCK AWARD" means an award of Common Stock granted to
an Eligible Recipient pursuant to Section 8 of the Plan that is
subject to the restrictions on transferability and the risk of
forfeiture imposed by the provisions of such Section 8.
2.19. "RETIREMENT" means normal or approved early termination of
employment or service pursuant to and in accordance with the
regular retirement/pension plan or practice of the Company or
Subsidiary then covering the Participant, provided that if the
Participant is not covered by any such plan or practice, the
Participant will be deemed to be covered by the Company's plan or
practice for purposes of this determination.
2.20. "SECURITIES ACT" means the Securities Act of 1933, as amended.
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<PAGE>
2.21. "STOCK APPRECIATION RIGHT" means a right granted to an Eligible
Recipient pursuant to Section 7 of the Plan to receive a payment
from the Company, in the form of stock, cash or a combination of
both, equal to the difference between the Fair Market Value of one
or more shares of Common Stock and the exercise price of such
shares under the terms of such Stock Appreciation Right.
2.22. "STOCK BONUS" means an award of Common Stock granted to an
Eligible Recipient pursuant to Section 10 of the Plan.
2.23. "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a
significant equity interest, as determined by the Committee.
2.24. "TAX DATE" means the date any withholding tax obligation arises
under the Code for a Participant with respect to an Incentive
Award.
3. PLAN ADMINISTRATION.
3.1. THE COMMITTEE. The Plan will be administered by the Board or by a
committee of the Board. So long as the Company has a class of its
equity securities under section 12 of the Exchange Act, any
committee administering the Plan will consist solely of two or
more members of the Board who are "non-employee directors: within
the meaning of Rule 16b-3 under the Exchange Act and, if the board
so determines in its sole discretion, who are "outside directors
within the meaning of section 162(m) of the Code. Such a
committee, if established, will act by a majority approval of the
members, and a majority of the members of such a committee will
constitute a quorum. As used in this Plan, the term "Committee"
will refer to the Board or to such a committee, if established. To
the extent consistent with corporate law, the Committee may
delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such
conditions or limitations as the Committee may establish;
provided, however, that only the Committee may exercise such
duties, power and authority with respect to Eligible Recipients
who are subject to Section 16 of the Exchange Act. The Committee
may exercise its duties, power and authority under the Plan in its
sole and absolute discretion without the consent of any
Participant or other party, unless the Plan specifically provides
otherwise. Each determination, interpretation or other action made
or taken by the Committee pursuant to the provisions of the Plan
will be conclusive and binding for all purposes and on all
persons, and no member of the Committee will be liable for any
action or determination made in good faith with respect to the
Plan or any Incentive Award granted under the Plan.
3.2. AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the
Plan, the Committee will have the authority to determine
all provisions of Incentive Awards as the Committee may
deem necessary or desirable and as consistent with the
terms of the Plan, including, without limitation, the
following: (i) the Eligible Recipients to be selected as
Participants; (ii) the nature and extent of the Incentive
Awards to be made to each Participant (including the number
of shares of Common Stock to be subject to each Incentive
Award, any exercise price, the manner in which
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<PAGE>
Incentive Awards will vest or become exercisable and
whether Incentive Awards will be granted in tandem with
other Incentive Awards) and the form of written agreement,
if any, evidencing such Incentive Award; (iii) the time or
times when Incentive Awards will be granted; (iv) the
duration of each Incentive Award; and (v) the restrictions
and other conditions to which the payment or vesting of
Incentive Awards may be subject. In addition, the Committee
will have the authority under the Plan to pay the economic
value of any Incentive Award in the form of cash, Common
Stock or any combination of both.
(b) The Committee will have the authority under the Plan to
amend or modify the terms of any outstanding Incentive
Award in any manner, including, without limitation, the
authority to modify the number of shares or other terms and
conditions of an Incentive Award, extend the term of an
Incentive Award, accelerate the exercisability or vesting
or otherwise terminate any restrictions relating to an
Incentive Award, accept the surrender of any outstanding
Incentive Award or, to the extent not previously exercised
or vested, authorize the grant of new Incentive Awards in
substitution for surrendered Incentive Awards; provided,
however that the amended or modified terms are permitted by
the Plan as then in effect and that any Participant
adversely affected by such amended or modified terms has
consented to such amendment or modification. No amendment
or modification to an Incentive Award, however, whether
pursuant to this Section 3.2 or any other provisions of the
Plan, will be deemed to be a regrant of such Incentive
Award for purposes of this Plan.
(c) In the event of (i) any reorganization, merger,
consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination
of shares, rights offering, extraordinary dividend or
divestiture (including a spin-off) or any other change in
corporate structure or shares, (ii) any purchase,
acquisition, sale or disposition of a significant amount of
assets or a significant business, (iii) any change in
accounting principles or practices, or (iv) any other
similar change, in each case with respect to the Company or
any other entity whose performance is relevant to the grant
or vesting of an Incentive Award, the Committee (or, if the
Company is not the surviving corporation in any such
transaction, the board of directors of the surviving
corporation) may, without the consent of any affected
Participant, amend or modify the vesting criteria of any
outstanding Incentive Award that is based in whole or in
part on the financial performance of the Company (or any
Subsidiary or division thereof) or such other entity so as
equitably to reflect such event, with the desired result
that the criteria for evaluating such financial performance
of the Company or such other entity will be substantially
the same (in the discretion of the Committee or the board
of directors of the surviving corporation) following such
event as prior to such event; provided, however, that the
amended or modified terms are permitted by the Plan as then
in effect.
4. SHARES AVAILABLE FOR ISSUANCE.
4.1. MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in
Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be
5,000,000 shares, plus any shares of Common Stock which, as of
4
<PAGE>
the date the Plan is approved by the shareholders of the Company,
are reserved for issuance under the Company's 1995 Stock Incentive
Plan and which are not thereafter issued or which have been issued
but are subsequently forfeited and which would otherwise have been
available for further issuance under the Plan. Notwithstanding any
other provision of the Plan to the contrary, no Participant in the
Plan may be granted, during the term of the Plan, any Options or
Stock Appreciation Rights, or any other Incentive Awards with a
value based solely on an increase in the value of the Common Stock
after the date of grant, relating to more than 500,000 shares of
Common Stock in the aggregate in any fiscal year of the Company
(subject to adjustment as provided in Section 4.3 of the Plan).
The shares available for issuance under the Plan may, at the
election of the Committee, be either treasury shares or shares
authorized but unissued, and, if treasury shares are used, all
references in the Plan to the issuance of shares will, for
corporate law purposes, be deemed to mean the transfer of shares
from treasury.
4.2. ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive
Awards will be applied to reduce the maximum number of shares of
Common Stock remaining available for issuance under the Plan. Any
shares of Common Stock that are subject to an Incentive Award that
lapses, expires, is forfeited or for any reason is terminated
unexercised or unvested and any shares of Common Stock that are
subject to an Incentive Award that is settled or paid in cash or
any form other than shares of Common Stock will automatically
again become available for issuance under the Plan. Any shares of
Common Stock that constitute the forfeited portion of a Restricted
Stock Award, however, will not become available for further
issuance under the Plan.
4.3. ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or
extraordinary dividend (including a spin-off) or any other change
in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such
transaction, the board of directors of the surviving corporation)
will make appropriate adjustment (which determination will be
conclusive) as to the number and kind of securities available for
issuance under the Plan and, in order to prevent dilution or
enlargement of the rights of Participants, the number, kind and,
where applicable, exercise price of securities subject to
outstanding Incentive Awards.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in the judgment
of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Incentive Awards, singly or in combination or in tandem with other Incentive
Awards, as may be determined by the Committee. Incentive Awards will be deemed
to be granted as of the date specified in the grant resolution of the Committee,
which date will be the date of any related agreement with the Participant.
6. OPTIONS.
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<PAGE>
6.1. GRANT. An Eligible Recipient may be granted one or more Options
under the Plan, and such Options will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee. The Committee may designate
whether an Option is to be considered an Incentive Stock Option or
a Non-Statutory Stock Option.
6.2. EXERCISE PRICE. The per share price to be paid by a Participant
upon exercise of an Option will be determined by the Committee in
its discretion at the time of the Option grant, provided that (a)
such price will not be less than 100% of the Fair Market Value of
one share of Common Stock on the date of grant with respect to an
Incentive Stock Option (110% of the Fair Market Value if, at the
time the Incentive Stock Option is granted, the Participant owns,
directly or indirectly, more than 10% of the total combined voting
power of all classes of stock of the Company or any parent or
subsidiary corporation of the Company), and (b) such price will
not be less than 100% of the Fair Market Value of one share of
Common Stock on the date of grant with respect to a Non-Statutory
Stock Option.
6.3. EXERCISABILITY AND DURATION. An Option will become exercisable at
such times and in such installments as may be determined by the
Committee at the time of grant; provided, however, that no Option
may be exercisable prior to six months from its date of grant and
no Incentive Stock Option may be exercisable after 10 years from
its date of grant (five years from its date of grant if, at the
time the Incentive Stock Option is granted, the Participant owns,
directly or indirectly, more than 10% of the total combined voting
power of all classes of stock of the Company or any parent or
subsidiary corporation of the Company).
6.4. PAYMENT OF EXERCISE PRICE. The total purchase price of the shares
to be purchased upon exercise of an Option will be paid entirely
in cash (including check, bank draft or money order); provided,
however, that the Committee may allow such payments to be made, in
whole or in part and upon such terms and conditions as may be
established by the Committee, by tender of a Broker Exercise
Notice, Previously Acquired Shares, a promissory note (on terms
and conditions acceptable to the Committee) or by a combination of
such methods.
6.5. MANNER OF EXERCISE. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions
contained in the Plan and in the agreement evidencing such Option,
by delivery in person, by facsimile or electronic transmission or
through the mail of written notice of exercise to the Company
(Attention: Chief Financial Officer) at its principal executive
office in Plymouth, Minnesota and by paying in full the total
exercise price for the shares of Common Stock to be purchased in
accordance with Section 6.4 of the Plan.
6.6. AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS.
To the extent that the aggregate Fair Market Value (determined as
of the date an Incentive Stock Option is granted) of the shares of
Common Stock with respect to which incentive stock options (within
the meaning of Section 422 of the Code) are exercisable for the
first time by a Participant during any calendar year (under the
Plan and any other incentive stock option plans of the Company or
any subsidiary or parent corporation of the Company (within the
meaning of the Code)) exceeds $100,000 (or such other amount as
may be prescribed by the Code from time to time), such excess
Options will be treated as Non-Statutory Stock
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Options. The determination will be made by taking incentive stock
options into account in the order in which they were granted. If
such excess only applies to a portion of an incentive stock
option, the Committee will designate which shares will be treated
as shares to be acquired upon exercise of an incentive stock
option.
7. STOCK APPRECIATION RIGHTS.
7.1. GRANT. An Eligible Recipient may be granted one or more Stock
Appreciation Rights under the Plan, and such Stock Appreciation
Rights shall be subject to such terms and conditions, consistent
with the other provisions of the Plan, as will be determined by
the Committee.
7.2. EXERCISE PRICE. The exercise price of a Stock Appreciation Right
will be determined by the Committee at the date of grant but will
not be less than 100% of the Fair Market Value of one share of
Common Stock on the date of grant.
7.3. EXERCISABILITY AND DURATION. A Stock Appreciation Right will
become exercisable at such time and in such installments as may be
determined by the Committee at the time of grant; provided,
however, that no Stock Appreciation Right may be exercisable prior
to six months or after 10 years from its date of grant. A Stock
Appreciation Right will be exercised by giving notice in the same
manner as for Options, as set forth in Section 6.5 of the Plan.
8. RESTRICTED STOCK AWARDS.
8.1. GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will
be subject to such terms and conditions, consistent with the other
provisions of the Plan, as may be determined by the Committee. The
Committee may impose such restrictions or conditions, not
inconsistent with the provisions of the Plan, to the vesting of
such Restricted Stock Awards as it deems appropriate, including,
without limitation, that the Participant remain in the continuous
employ or service of the Company or a Subsidiary for a certain
period or that the Participant or the Company (or any Subsidiary
or division thereof) satisfy certain performance goals or
criteria; provided, however, that no Restricted Stock Award may
vest prior to six months from its date of grant.
8.2. RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have
all voting, dividend, liquidation and other rights with respect to
shares of Common Stock issued to the Participant as a Restricted
Stock Award under this Section 8 upon the Participant becoming the
holder of record of such shares as if such Participant were a
holder of record of shares of unrestricted Common Stock.
8.3. DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines
otherwise (either in the agreement evidencing the Restricted Stock
Award at the time of grant or at any time after the grant of the
Restricted Stock Award), any dividends or distributions (including
regular quarterly cash dividends) paid with respect to shares of
Common Stock subject to the unvested portion of a Restricted Stock
Award will be subject to the same restrictions as the shares to
which such dividends or distributions relate. In the event the
Committee determines not to pay such dividends or distributions
currently, the Committee will
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determine whether any interest will be paid on such dividends or
distributions. In addition, the Committee may require such
dividends and distributions to be reinvested (and in such case the
Participants consent to such reinvestment) in shares of Common
Stock that will be subject to the same restrictions as the shares
to which such dividends or distributions relate.
8.4. ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred
to in this Section 8, the Committee may place a legend on the
stock certificates referring to such restrictions and may require
the Participant, until the restrictions have lapsed, to keep the
stock certificates, together with duly endorsed stock powers, in
the custody of the Company or its transfer agent or to maintain
evidence of stock ownership, together with duly endorsed stock
powers, in a certificateless book-entry stock account with the
Company's transfer agent.
9. PERFORMANCE UNITS.
An Eligible Recipient may be granted one or more Performance Units under the
Plan, and such Performance Units will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee. The Committee may impose such restrictions or conditions, not
inconsistent with the provisions of the Plan, to the vesting of such Performance
Units as it deems appropriate, including, without limitation, that the
Participant remain in the continuous employ or service of the Company or any
Subsidiary for a certain period or that the Participant or the Company (or any
Subsidiary or division thereof) satisfy certain performance goals or criteria.
The Committee will have the discretion either to determine the form in which
payment of the economic value of vested Performance Units will be made to the
Participant (i.e., cash, Common Stock or any combination thereof) or to consent
to or disapprove the election by the Participant of the form of such payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses under the Plan,
and such Stock Bonuses will be subject to such terms and conditions, consistent
with the other provisions of the Plan, as may be determined by the Committee.
The Participant will have all voting, dividend, liquidation and other rights
with respect to the shares of Common Stock issued to a Participant as a Stock
Bonus under this Section 10 upon the Participant becoming the holder of record
of such shares; provided, however, that the Committee may impose such
restrictions on the assignment or transfer of a Stock Bonus as it deems
appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1. TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event a
Participant's employment or other service with the Company and all
Subsidiaries is terminated by reason of death, Disability or
Retirement:
(a) All outstanding Options and Stock Appreciation Rights then
held by the Participant will remain exercisable to the
extent exercisable as of such termination for a period of
one year (three months in the case of termination by reason
of Retirement) after such termination (but in no event
after the expiration date of any such Option or Stock
Appreciation Right);
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(b) All outstanding Restricted Stock Awards then held by the
Participant that have not vested will become fully vested
and non-forfeitable; and
(c) All outstanding Performance Units and Stock Bonuses then
held by the Participant will vest and/or continue to vest
in the manner determined by the Committee and set forth in
the agreement evidencing such Performance Units or Stock
Bonuses.
11.2. TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
(a) In the event a Participant's employment or other service is
terminated with the Company and all Subsidiaries for any reason
other than death, Disability or Retirement, or a Participant is in
the employ or service of a Subsidiary and the Subsidiary ceases to
be a Subsidiary of the Company (unless the Participant continues
in the employ or service of the Company or another Subsidiary),
all rights of the Participant under the Plan and any agreements
evidencing an Incentive Award will immediately terminate without
notice of any kind, and no Options or Stock Appreciation Rights
then held by the Participant will thereafter be exercisable, all
Restricted Stock Awards then held by the Participant that have not
vested will be terminated and forfeited, and all Performance Units
and Stock Bonuses then held by the Participant will vest and/or
continue to vest in the manner determined by the Committee and set
forth in the agreement evidencing such Performance Units or Stock
Bonuses; provided, however, that if such termination is due to any
reason other than voluntary termination by the Participant or
termination by the Company or any Subsidiary for "cause," all
outstanding Options and Stock Appreciation Rights then held by
such Participant will remain exercisable to the extent exercisable
as of such termination for a period of three months after such
termination (but in no event after the expiration date of any such
Option or Stock Appreciation Right).
(b) For purposes of this Section 11.2, "cause" (as determined by the
Committee) will be as defined in any employment or other agreement
or policy applicable to the Participant or, if no such agreement
or policy exists, will mean (i) dishonesty, fraud,
misrepresentation, embezzlement or deliberate injury or attempted
injury, in each case related to the Company or any Subsidiary,
(ii) any unlawful or criminal activity of a serious nature, (iii)
any intentional and deliberate breach of a duty or duties that,
individually or in the aggregate, are material in relation to the
Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement
entered into with the Company or any Subsidiary.
11.3. MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
provisions of this Section 11, upon a Participant's termination of
employment or other service with the Company and all Subsidiaries,
the Committee may in its discretion (which may be exercised at any
time on or after the date of grant, including following such
termination) cause Options and Stock Appreciation Rights (or any
part thereof) then held by such Participant to become or continue
to become exercisable and/or remain exercisable following such
termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant
to vest and/or continue to vest or become free of transfer
restrictions, as the case may be, following such
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termination of employment or service, in each case in the manner
determined by the Committee; provided, however, that (a) no Option
or Stock Appreciation may become exercisable, and no Restricted
Stock Award may vest and become non-forfeitable, prior to six
months from its date of grant, and (b) no Option or Stock
Appreciation Right may remain exercisable beyond its expiration
date.
11.4. BREACH OF CONFIDENTIALITY OR NON-COMPETE AGREEMENTS.
Notwithstanding anything in this Plan to the contrary, in the
event that a Participant materially breaches the terms of any
confidentiality or non-compete agreement entered into with the
Company or any Subsidiary, whether such breach occurs before or
after termination of such Participant's employment or other
service with the Company or any Subsidiary, the Committee may
immediately terminate all rights of the Participant under the Plan
and any agreements evidencing an Incentive Award then held by the
Participant without notice of any kind.
11.5. DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
Committee otherwise determines, a Participant's employment or
other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records
of the Company or the Subsidiary for which the Participant
provides employment or other service, as determined by the
Committee based upon such records.
12. PAYMENT OF WITHHOLDING TAXES.
12.1. GENERAL RULES. The Company is entitled to (a) withhold and deduct
from future wages of the Participant (or from other amounts that
may be due and owing to the Participant from the Company or a
Subsidiary), or make other arrangements for the collection of, all
legally required amounts necessary to satisfy any and all federal,
state and local withholding and employment-related tax
requirements attributable to an Incentive Award, including,
without limitation, the grant, exercise or vesting of, or payment
of dividends with respect to, an Incentive Award or a
disqualifying disposition of stock received upon exercise of an
Incentive Stock Option, or (b) require the Participant promptly to
remit the amount of such withholding to the Company before taking
any action, including issuing any shares of Common Stock, with
respect to an Incentive Award.
12.2. SPECIAL RULES. The Committee may, upon terms and conditions
established by the Committee, permit or require a Participant to
satisfy, in whole or in part, any withholding or
employment-related tax obligation described in Section 12.1 of the
Plan by electing to tender Previously Acquired Shares, a Broker
Exercise Notice or a promissory note (on terms acceptable to the
Committee), or by a combination of such methods.
13. CHANGE IN CONTROL.
13.1. CHANGE IN CONTROL. For purposes of this Section 13.1, a "Change in
Control" of the Company will mean the following:
(a) the sale, lease, exchange or other transfer, directly or
indirectly, of substantially all of the assets of the
Company (in one transaction or in a series of related
transactions) to a person or entity that is not controlled
by the Company;
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(b) the approval by the stockholders of the Company of any plan
or proposal for the liquidation or dissolution of the
Company;
(c) a merger or consolidation to which the Company is a party
if the stockholders of the Company immediately prior to the
effective date of such merger or consolidation have
"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 corporation representing 70% or less of the
combined voting power of the surviving corporation's then
outstanding securities ordinarily having the right to vote
at elections of directors;
(d) any person becomes after the effective date of the Plan the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of 30% or more of
the combined voting power of the Company's outstanding
securities ordinarily having the right to vote at elections
of directors;
(e) the Incumbent Directors cease for any reason to constitute
at least a majority of the Board; or
(f) a change in control of the Company of a nature that would
be required to be reported pursuant to Section 13 or 15(d)
of the Exchange Act, whether or not the Company is then
subject to such reporting requirements.
13.2. INCUMBENT DIRECTORS. For purposes of this Section 13, "Incumbent
Directors" of the Company means any individuals who are members of
the Board on the effective date of the Plan and any individual who
subsequently becomes a member of the Board whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the Incumbent
Directors (either by specific vote or by approval of the Company's
proxy statement in which such individual is named as a nominee for
director without objection to such nomination).
13.3. ACCELERATION OF VESTING. Without limiting the authority of the
Committee under Section 3.2 of the Plan, if a Change in Control of
the Company occurs, then, unless otherwise provided in the
agreement evidencing an Incentive Award, (a) all outstanding
Options and Stock Appreciation Rights that have been held by a
Participant for at least six months will become immediately
exercisable in full and will remain exercisable for the remainder
of their terms, regardless of whether the Participant to whom such
Options or Stock Appreciation Rights have been granted remains in
the employ or service of the Company or any Subsidiary; (b) all
outstanding Restricted Stock Awards that have been held by the
Participant for at least six months will become immediately fully
vested and non-forfeitable; and (c) all outstanding Performance
Units and Stock Bonuses then held by the Participant will vest
and/or continue to vest in the manner determined by the Committee
and set forth in the agreement evidencing such Performance Units
or Stock Bonuses.
13.4. CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee either in
an agreement evidencing an Incentive Award at the time of grant or
at any time after the grant of an Incentive Award, may determine
that some or all Participants holding outstanding Options will
receive, with respect to some or all of the shares of Common Stock
subject to such Options, as of the
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effective date of any such Change in Control of the Company, cash
in an amount equal to the excess of the Fair Market Value of such
shares immediately prior to the effective date of such Change in
Control of the Company over the exercise price per share of such
Options.
13.5. LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything
in Section 13.3 or 13.4 of the Plan to the contrary, if, with
respect to a Participant, the acceleration of the vesting of an
Incentive Award as provided in Section 13.3 or the payment of cash
in exchange for all or part of an Incentive Award as provided in
Section 13.4 (which acceleration or payment could be deemed a
"payment" within the meaning of Section 280G(b)(2) of the Code),
together with any other payments which such Participant has the
right to receive from the Company or any corporation that is a
member of an "affiliated group" (as defined in Section 1504(a) of
the Code without regard to Section 1504(b) of the Code) of which
the Company is a member, would constitute a "parachute payment"
(as defined in Section 280G(b)(2) of the Code), then the payments
to such Participant pursuant to Section 13.3 or 13.4 will be
reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999
of the Code; provided, however, that if such Participant is
subject to a separate agreement with the Company or a Subsidiary
that specifically provides that payments to such Participant will
not be reduced even if such payments would constitute excess
parachute payments or provides that the Participant will have the
discretion to determine which payments will be reduced in order to
avoid excess parachute payments (regardless of whether such
separate agreement specifically references Incentive Awards under
this Plan), then the limitations of this Section 13.5 will, to
that extent, not apply.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1. EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to
terminate the employment or service of any Eligible Recipient or
Participant at any time, nor confer upon any Eligible Recipient or
Participant any right to continue in the employ or service of the
Company or any Subsidiary.
14.2. RIGHTS AS A STOCKHOLDER. As a holder of Incentive Awards (other
than Restricted Stock Awards and Stock Bonuses), a Participant
will have no rights as a stockholder unless and until such
Incentive Awards are exercised for, or paid in the form of, shares
of Common Stock and the Participant becomes the holder of record
of such shares. Except as otherwise provided in the Plan, no
adjustment will be made for dividends or distributions with
respect to such Incentive Awards as to which there is a record
date preceding the date the Participant becomes the holder of
record of such shares, except as the Committee may determine.
14.3. RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly
permitted by the Plan, no right or interest of any Participant in
an Incentive Award prior to the exercise or vesting of such
Incentive Award will be assignable or transferable, or subjected
to any lien, during the lifetime of the Participant, either
voluntarily or involuntarily, directly or indirectly, by operation
of law or otherwise. A Participant will, however, be entitled to
designate a beneficiary to receive an Incentive Award upon such
Participant's death, and in the event of a Participant's death,
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payment of any amounts due under the Plan will be made to, and
exercise of any Options or Stock Appreciation Rights (to the
extent permitted pursuant to Section 11 of the Plan) may be made
by, the Participant's legal representatives, heirs and legatees.
14.4. NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation
plans or programs of the Company or create any limitations on the
power or authority of the Board to adopt such additional or other
compensation arrangements as the Board may deem necessary or
desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered into
pursuant to the Plan, the Company will not be required to issue any shares of
Common Stock under this Plan, and a Participant may not sell, assign, transfer
or otherwise dispose of shares of Common Stock issued pursuant to Incentive
Awards granted under the Plan, unless (a) there is in effect with respect to
such shares a registration statement under the Securities Act and any applicable
state securities laws or an exemption from such registration under the
Securities Act and applicable state securities laws, and (b) there has been
obtained any other consent, approval or permit from any other regulatory body
which the Committee deems necessary or advisable. The Company may condition such
issuance, sale or transfer upon the receipt of any representations or agreements
from the parties involved, and the placement of any legends on certificates
representing shares of Common Stock, as may be deemed necessary or advisable by
the Company in order to comply with such securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any time,
and may amend the Plan from time to time in such respects as the Board may deem
advisable in order that Incentive Awards under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the stockholders of
the Company if stockholder approval of the amendment is then required pursuant
to Rule 16b-3 under the Exchange Act, Section 422 of the Code or the rules of
Nasdaq or any stock exchange. No termination, suspension or amendment of the
Plan may adversely affect any outstanding Incentive Award without the consent of
the affected Participant; provided, however, that this sentence will not impair
the right of the Committee to take whatever action it deems appropriate under
Sections 3.2(c) and 4.3 of the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective as of February 20, 1998, the date it was adopted by the
Board. The Plan will terminate at midnight on February 20, 2008, and may be
terminated prior to such time by Board action, and no Incentive Award will be
granted after such termination. Incentive Awards outstanding upon termination of
the Plan may continue to be exercised, or vest or become free of restrictions,
in accordance with their terms.
18. MISCELLANEOUS.
18.1. GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations
and actions relating to the Plan will be governed by and construed
exclusively in accordance with the laws of the State of Minnesota,
without
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regard to the conflicts of laws provisions of the State of
Minnesota or any other jurisdictions.
18.2. SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company
and the Participants.
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TRICORD SYSTEMS, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK PLAN
(AS AMENDED EFFECTIVE JANUARY 30, 1999)
1. PURPOSE. The purpose of the 1998 Non-Employee Director Stock
Plan (the "Plan"), is to advance the interests of Tricord Systems, Inc. (the
"Company") and its stockholders by enabling the Company to attract and retain
the services of experienced and knowledgeable non-employee directors and to
increase the proprietary interests of such directors in the Company's
long-term success and progress and their identification with the interests of
the Company's stockholders.
2. ADMINISTRATION. The Plan will be administered by the Board or by
a committee of the Board. So long as the Company has a class of its equity
securities registered under section 12 of the Exchange act, any committee
administering the Plan will consist solely of two or more members of the
Board who are "non-employee directors" within the meaning of Rule 16b-3 under
the Exchange Act. Such a committee, if established, will act by majority
approval of the members, and a majority of the members of such a committee
will constitute a quorum. As used in the Plan, "Committee" will refer to the
Board or to such a committee, if established. All questions of
interpretation of the Plan or of any stock options and stock awards under the
Plan (collectively, "Awards") shall be determined by the Committee and such
determination shall be final and binding upon all persons having an interest
in the Plan.
3. PARTICIPATION IN THE PLAN. Directors of the Company who are not
employees of the Company or any subsidiary of the Company shall be eligible
to participate in the Plan ("Eligible Directors").
4. STOCK SUBJECT TO THE PLAN.
(a) NUMBER OF SHARES. The maximum number of shares of Common
Stock that shall be reserved for issuance under the Plan shall be five
hundred fifty thousand (550,000) shares of the Company's common stock,
$.01 par value (the "Common Stock"), subject to adjustment upon changes
in capitalization of the Company as provided in subparagraph (b) below.
The maximum number of shares authorized may be increased from time to
time by approval of the Board of Directors and the stockholders of the
Company. Shares of Common Stock that are issued as stock awards or that
may be issued upon exercise of stock options granted under the Plan
shall be applied to reduce the maximum number of shares of Common Stock
remaining available for use under the Plan. The shares to be issued
pursuant to the Plan may be, at the election of the Company, either
treasury shares or shares authorized but unissued. Any shares of Common
Stock that are subject to a stock option granted under the Plan (or any
portion thereof) that lapses, expires or for any reason is terminated
unexercised shall automatically again become available for use under the
Plan.
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(b) CHANGES IN STOCK. In the event of any reorganization,
merger, consolidation, recapitalization, liquidation, reclassification,
stock dividend, stock split, combination of shares, rights offering, or
extraordinary dividend or divestiture (including a spin-off), or any
other change in the corporate structure or shares of the Company, the
Committee (or, if the Company is not the surviving entity in any such
transaction, the board of directors of the surviving corporation) shall
make adjustments, determined by the Committee in its discretion to be
appropriate, as to the number and kind of securities subject to and
reserved under the Plan and, in order to prevent dilution or enlargement
of rights of Eligible Directors, the number, kind and, where applicable,
the exercise price of outstanding Awards granted under the Plan.
5. GRANT OF OPTIONS.
(a) NON-STATUTORY STOCK OPTIONS. All stock options granted
under the Plan (the "Options") shall be non-statutory stock options not
entitled to special tax treatment under Section 422 of the Internal
Revenue Code of 1986, as amended to date and as may be amended from time
to time (the "Code").
(b) TERMS, CONDITIONS AND FORM OF OPTIONS. Each Option
granted under the Plan shall be evidenced by a written agreement in such
form as the Committee shall from time to time approve, which agreements
shall comply with and be subject to the following terms and conditions:
(i) GRANT OF OPTIONS. At such time as additional Eligible
Directors are first elected or appointed to the Board of Directors to
fill new directorships or to fill vacancies, such Eligible Directors
will be granted automatically, on a one-time basis on the date of
their election or appointment, an Option to purchase 25,000 shares of
Common Stock. In addition to the one-time grant of an Option to
purchase 25,000 shares as described above (the "One-Time Option"), an
Option to purchase 10,000 shares of Common Stock (the "Annual
Option") shall be granted on January 5, 1998 and on each succeeding
January 5 thereafter to each Eligible Director as of such dates.
The written agreement evidencing each Option granted under the
Plan shall be dated as of the applicable date of grant (the "Date of
Grant"). An Eligible Director accepting such a grant of an Option
(an "Optionee") shall execute and return a copy of such option
agreement to the Committee.
(ii) OPTION EXERCISE PRICE. The per share price to be paid
by the Optionee at the time an Option is exercised shall be 100% of
the Fair Market Value of one share of Common Stock on the Date of
Grant. For purposes of the Plan, "Fair Market Value" shall mean,
with respect to the Common Stock, as of any date, (or, if no shares
were traded or quoted on such date, as of the next preceding day on
which there was such a trade or quote) (A) the closing sale price of
the Common Stock if the Common Stock is listed, admitted to unlisted
trading
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privileges or reported on any foreign or national securities
exchange or on the Nasdaq National Market or an equivalent foreign
market on which sale prices are reported; (B) if the Common Stock is
not so listed, admitted to unlisted trading privileges or reported,
the closing bid price as reported by the Nasdaq SmallCap Market, OTC
Bulletin Board or the National Quotation Bureau, Inc. or other
comparable service; or (C) if the Common Stock is not so listed or
reported, such price as the Committee determines in good faith in the
exercise of its reasonable discretion.
(iii) EXERCISABILITY AND DURATION OF OPTIONS. Each One-Time
Option shall become exercisable each month on a cumulative basis with
respect to 2.78% of the total shares covered by the Option,
commencing one month after its Date of Grant and shall terminate
five years after its Date of Grant. Each Annual Option shall become
exercisable in full six months after its Date of Grant and shall
terminate five years after its Date of Grant.
(iv) TERMINATION OF DIRECTORSHIP. Each Option shall
terminate and may no longer be exercised if and when the Optionee
ceases to serve as a director of the Company, except (A) if the
Optionee ceases to serve as a director of the Company by reason of
death or the occurrence of an event which constitutes permanent and
total disability (within the meaning of Section 22(e)(3) of the
Code), then the Option shall remain exercisable to the extent that
the Option was exercisable as of such termination until the earlier
of the expiration of one year after such termination or the
remaining term of the Option, (B) if the Optionee ceases to serve
as a director of the Company by reason of his or her retirement,
then the Option shall remain exercisable to the extent that the
Option was exercisable on the date of retirement until the earlier
of the expiration of three months after such retirement or the
remaining term of the Option, (C) if the Optionee ceases to serve
as a director of the Company for any other reason, other than
voluntary termination or termination for "cause," then the Option
shall remain exercisable to the extent that the Option was
exercisable on the date the Optionee ceased to serve as a director
of the Company until the earlier of the expiration of three months
after the date the Optionee ceased to serve as a director of the
Company or the remaining term of the Option, and (D) if the
Optionee ceases to serve as a director of the Company as a result
of voluntary termination by the Optionee or termination by the
Company for "cause," then all outstanding Options then held by such
Optionee shall immediately terminate without notice of any kind and
no Options then held by the Optionee shall thereafter be
exercisable.
(v) MANNER OF OPTION EXERCISE. An Option may be exercised
by an Optionee in whole or in part from time to time, subject to the
conditions contained in the Plan and in the agreement evidencing such
Option, by giving written notice of exercise to the Company at its
principal executive office (such notice to specify the particular
Option that is being exercised and the number of shares with respect
to which the Option is being exercised) accompanied by payment, in
cash or
3
<PAGE>
personal check payable to the Company, of the total purchase
price of the shares to be purchased under the Option. The Company
shall not be required to sell or issue any shares under any
outstanding Option if, in the sole opinion of the Committee, the
issuance of such shares would constitute a violation by the Optionee
or the Company of any applicable law or regulation of any
governmental authority, including without limitation federal and
state securities laws.
(vi) NONTRANSFERABILITY. No Option granted under the Plan
shall be assignable or transferable during the lifetime of the
Optionee, either voluntarily or involuntarily, or subjected to any
lien, directly or indirectly, by operation of law or otherwise,
including execution, levy, garnishment, attachment, pledge or
bankruptcy. In the event of an Optionee's death, an Optionee's
rights and interest in any Option shall be transferable by
testamentary will or the laws of descent and distribution, and the
exercise of any Options (to the extent permitted pursuant to
paragraph 5(b)(iv)(A) above) may be made by the Participant's legal
representatives, heirs or legatees. An Option shall be exercisable
during the Optionee's lifetime only by the Optionee.
(vii) SUCCESSIVE OPTIONS. Successive Options may be granted
to the same Optionee, whether or not the Options previously granted
to such Optionee remain unexercised. An Optionee may exercise an
Option if then exercisable, notwithstanding that Options previously
granted to such Optionee remain unexercised.
(viii) WITHHOLDING. The Company may require an Optionee to
promptly pay the Company the amount of any federal, state or local
withholding tax attributable to the Optionee's exercise of an Option
before acting on the Optionee's notice of exercise of the Option.
6. ANNUAL RETAINER PAYMENT. Each Eligible Director shall receive an
annual retainer payment of $10,000 in the discretion of the Board by action
of a majority of the Board in cash or Common Stock, commencing on November 1,
1997 and continuing on each succeeding November 1. If payment is made in
Common Stock, each Eligible Director shall receive such number of shares of
Common Stock as equals $10,000 divided by the Fair Market Value of one share
of Common Stock as of each immediately preceding October 31.
7. MEETING FEES. Each Eligible Director shall receive meeting fees
of $1,500 payable in the discretion of the Board by action of a majority of
the Board in cash or Common Stock, for each Board meeting attended and for
each Committee meeting attended if separate from each Board meeting. If
payment is made in Common Stock, each Eligible Director shall receive such
number of shares of Common Stock as equals $1,500 divided by the Fair Market
Value of one share of Common Stock as of each immediately preceding day prior
to such meetings. In addition, each Eligible Director shall receive such
number of shares of Common Stock as equals
4
<PAGE>
any unpaid meeting payments due them through the February 20, 1998 Board
meeting, divided by the Fair Market Value of one share of Common Stock on
February 20, 1998.
8. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor
the granting of an Award nor any other action taken pursuant to the
Plan, shall constitute or be evidence of any agreement or understanding,
express or implied, that the Company will retain a director for any
period of time, or at any particular rate of compensation.
(b) RIGHTS AS A STOCKHOLDER. No Optionee shall have any
rights as a stockholder with respect to any shares of Common Stock
covered by an Option granted pursuant to the Plan until the Optionee
shall have become the holder of record of such shares, and no
adjustments shall be made for dividends or other distributions or other
rights as to which there is a record date preceding the date the
Optionee becomes the holder of record of such shares.
9. AMENDMENT OF THE PLAN. The Board may amend the Plan from time to
time in such respects as the Board may deem advisable in order that Awards
under the Plan will conform to any change in applicable laws or regulations
or in any other respect the Board may deem to be in the best interests of the
Company; provided, however, that no amendments to the Plan will be effective
without approval of the stockholders of the Company if stockholder approval
of the amendment is then required pursuant to section 422 of the Code or the
rules of Nasdaq or any stock exchange. The Board may suspend or terminate
the Plan or any portion thereof at any time. No termination, suspension or
amendment of the Plan shall alter any outstanding Option without the consent
of the Optionee affected thereby; provided, however, that this sentence shall
not impair the right of the Committee to take whatever action it deems
appropriate under paragraph 4(b) above.
10. EFFECTIVE DATE AND DURATION OF THE PLAN. The Plan shall be
effective as of February 20, 1998, on the date of adoption by the Board. The
Plan shall terminate at midnight on February 20, 2003 and may be terminated
prior thereto by action of the Board, and no Award shall be granted after
such termination. Options outstanding upon termination of the Plan may
continue to be exercised in accordance with their terms.
11. GOVERNING LAWS. The Plan and all rights and obligations under
the Plan shall be construed in accordance with and governed by the laws of
the State of Minnesota, notwithstanding any conflicts of law principles.
5
<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, 1998 and 1997 and for each of the
three years ended December 31, 1998 should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in
this annual report.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS: For the years ended December 31,
---------------------------------------------------------------------------------
(In thousands, except per share data) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues $ 3,853 12,660 51,269 60,181 81,121
Cost of goods sold 2,361 12,525 35,416 60,483 50,862
-------- -------- -------- -------- --------
Gross margin 1,492 135 15,853 (302) 30,259
-------- -------- -------- -------- --------
Research and development 2,473 3,981 7,264 8,621 7,291
Sales and marketing 991 4,312 18,395 21,897 18,456
General and administrative 714 1,697 5,578 6,333 3,692
Nonrecurring items, net (195) 864 -- -- --
Other income, net (380) (12) (180) -- (1,017)
-------- -------- -------- -------- --------
3,603 10,842 31,057 36,851 28,422
-------- -------- -------- -------- --------
Income (loss) before income taxes (2,111) (10,707) (15,204) (37,153) 1,837
Provision for income taxes -- (224) -- -- (125)
-------- -------- -------- -------- --------
Net income (loss) $ (2,111) (10,931) (15,204) (37,153) 1,712
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per share - basic
and diluted $ (0.14) (0.81) (1.14) (2.81) 0.13
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
FINANCIAL POSITION (IN THOUSANDS): 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 5,599 2,977 8,140 20,020 51,872
Total Assets 7,353 6,755 21,938 40,167 77,144
Stockholder's Equity $ 5,842 3,667 14,175 28,754 64,454
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------
GENERAL DATA AND RATIOS 1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Ratio 4.7:1 2.0:1 2.0:1
Common shares outstanding (in thousands) 18,961 13,460 13,407
Book value per share $ 0.31 0.27 1.06
Number of employees 35 38 156
Average revenue per employee (in thousands) $ 110 166 291
</TABLE>
TRICORD SYSTEMS, INC.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
Throughout 1998 the Company continued to focus its development
efforts exclusively on storage system management software, the strategy it
defined in 1997. The storage system management software architecture includes
an entirely new generation of distributed file system and file-intelligent
input/output ("I/O") technology known as Tricord Storage Management Software
("TSMS"). No revenues were generated by TSMS for 1998, and the Company may
not receive revenues from TSMS-based products in 1999.
The Company has 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,
1998 relate to the server line of business (sometimes referred to as the
"legacy business").
RESULTS OF OPERATIONS
REVENUES
Revenues for 1998 decreased 70% from 1997 compared to a decrease of
approximately 75% from 1996 to 1997. The decreases in product revenues are
primarily due to the Company's announcement in February 1997, that it would not
bring its next generation enterprise server to market. As a result, product
revenues for 1998 and 1997 consisted primarily of the sale of spare parts, disk
drives, memory and expansion products from its server line of business. The
Company continued to sell new service contracts, with revenues from such
contracts of approximately $1,600,000 for 1998 and approximately $2,000,000 each
for 1997 and 1996. In 1998 and 1997, no single customer accounted for more than
10% of the Company's revenues. Toshiba Corporation and Memorex Telex Corporation
accounted for 14.9% and 14.5% of revenues in 1996, respectively.
The Company currently anticipates that revenues will continue to decrease in
1999 and expenses will continue to rise as the Company continues to focus its
resources on developing and marketing 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 and
provided such agreements are profitable. Since the Company has not completed
its development of TSMS products, the Company may not receive revenues in
1999 from the sale or licensing of TSMS-based products.
TRICORD SYSTEMS, INC.
5
<PAGE>
GROSS MARGIN
As a percent of revenues, gross margin increased to 38.7% in 1998 compared to
1.1% in 1997 and 30.9% in 1996. The increase in gross margin from 1997 to
1998 was primarily due to the impact of a full year of cost reductions in
1998, compared to only a partial year impact in 1997, and due to a 1997
adjustment of $1,332,000 to write-down inventories to their estimated net
realizable values.
The decrease in gross margin from 1996 to 1997 was primarily due to the
significant decrease in the Company's sales volume and the write-down of
inventory discussed above. Gross margin was negatively impacted in 1997 by sales
volume decreasing before certain variable costs were reduced. In addition, the
product sales mix, which consisted primarily of spare parts and expansion
products in 1997, resulted in a lower gross margin than in 1996, when the mix
was comprised primarily of system sales. The Company currently anticipates that
gross margin dollars will continue to decline in 1999 because of the anticipated
decrease in revenues in 1999 as discussed above.
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 $2,473,000 in 1998 from $3,981,000 in 1997 and $7,264,000 in
1996. The decreases from 1997 to 1998 and from 1996 to 1997 were due
primarily to a decrease in salary and benefit costs associated with the
workforce reduction which took effect at the end of the second quarter of
1997. In addition, 1996 costs included a $335,000 charge to research and
development expense in connection with the acquisition of certain assets of
Reliable Distributed Information Corporation. The Company currently
anticipates that research and development costs will rise during 1999 as the
Company continues to focus on the development of TSMS.
SALES AND MARKETING
For 1998, sales and marketing expenses consisted primarily of compensation and
trade shows and marketing materials. For 1997 and 1996, 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 $991,000
in 1998 from $4,312,000 in 1997 and from $18,395,000 in 1996. The decreases from
1997 to 1998 and from 1996 to 1997 were primarily due to lower salaries and
benefits due to the workforce reduction which took place at the end of the
second quarter of 1997, the reduction of commissions related to reduced
revenues, and the closing of the Company's domestic and international sales
offices. The Company currently anticipates that sales and marketing expenses
will increase significantly in 1999 as the Company continues to focus on the
development and marketing of TSMS and explores market and sales opportunities.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased to $714,000 in 1998 from
$1,697,000 in 1997 and $5,578,000 in 1996. The decrease from 1997 to 1998 was
due to lower salaries
TRICORD SYSTEMS, INC.
6
<PAGE>
and benefits associated with fewer team members, lower depreciation expense,
and fourth quarter 1998 reductions in general and administrative expenses
totaling $400,000, including $250,000 related to warrants previously made
available for settlement purposes related to the securities class action
lawsuit that were not required and therefore were cancelled and a $150,000
refund from the escrow account also related to the securities class action
lawsuit. These reversals were made after the securities lawsuit was resolved
in the Company's favor and all appeals were exhausted. All estimated loss
accruals related to the securities litigation amounts were originally charged
to general and administrative expense in 1996.
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.
The Company currently anticipates that general and administrative expenses
for 1999 will be higher than in 1998 due to the additional costs associated
with the December 1998 addition of J. David Cabello, Vice President, General
Counsel and Interim Chief Financial Officer and the planned addition of a new
Chief Financial Officer in 1999.
CERTAIN NON-CASH CHARGES
The Company recorded non-cash charges in the fourth quarter of 1998 of
$194,000 for the amortization of unearned compensation related to the grants
of restricted stock awards and for employee stock options granted subject to
shareholder approval. These non-cash charges will be amortized over the
vesting periods and are estimated to be $1,531,000 in 1999.
NONRECURRING ITEMS
Nonrecurring items, net for 1998 included a payment to the Company of
$300,000 from the sale of its former headquarters facility pursuant to a
termination agreement with its previous landlord net of the write-off of the
remaining net present value of the sublease payments receivable of $105,000.
Nonrecurring items, net 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 former 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 settlement and mutual release between
the Company and International Business Machines ("IBM") without admission of
liability by either party regarding IBM's assertion that certain of the
Company's server systems and related products infringed IBM's patents; 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 right and license to the
Availability Management System ("AMS") Software. The AMS Software was related
to the Company's server line of business.
TRICORD SYSTEMS, INC.
7
<PAGE>
INCOME TAXES
As of December 31, 1998, for federal income tax purposes, the Company had
domestic net operating loss carryforwards of approximately $70,000,000. These
loss carryforwards expire if not utilized by various dates between 2002 and
2018. Due to uncertainty as to the realizability of the loss and tax credit
carryforwards, full valuation allowances have been established for the
benefits associated with these carryforwards. The Company did not incur tax
liabilities in 1998, 1997 and 1996 due to its net losses.
Included in 1997 is a charge of $224,000 to the provision for income taxes to
establish a reserve for a deferred tax asset related to the Company's
alternative minimum tax credit carryforwards.
FINANCIAL INSTRUMENTS
The Company invests excess funds not required for current operations in cash
equivalents, primarily money market funds or commercial paper. As of
December 31, 1998, cash equivalents had an average maturity of less than
three months. Market risk was estimated as the potential decrease in interest
income resulting from a hypothetical one percent decrease in interest rates
for the cash equivalents, which would result in an annual interest income
decrease of approximately $30,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,277,000 in 1998. Cash was primarily
used in 1998 to fund the Company's net loss, and was offset by decreases in
accounts receivable and inventories due primarily to lower sales. Cash used in
operating activities was $2,060,000 in 1997 and $4,774,000 in 1996. Cash was
primarily used in 1997 and 1996 to fund the Company's net loss in each year and
was offset by decreases in accounts receivable and inventories and the primarily
non-cash nature of certain 1997 charges.
Cash used in investing activities in 1998, 1997 and 1996 was $55,000, $361,000,
and $1,346,000, respectively, principally due to capital expenditures, which was
partially offset in 1996 by proceeds from the maturity of investments. The
Company anticipates that its capital expenditures in 1999 will be more than the
1998 level. Other than capital expenditures associated with the opening of the
Company's Houston facility in early 1999 which are estimated to be $74,000, the
Company has no significant commitments for the purchase of capital equipment.
Cash from financing activities in 1998, 1997 and 1996 was $3,834,000, $85,000,
and $443,000, respectively, principally due to $3,000,000 received from a
private placement in 1998, as described below, and stock options exercised and
stock issued under the Company's Employee Stock Purchase Plan in each of the
three years.
In December 1998, the Company received $3,000,000 from a private placement of
3,000,000 shares of common stock at a price of $1.00 per share. In connection
with this private placement, investors also received warrants to purchase an
equal number of additional shares of common stock at an exercise price of
$3.50 per share. The warrants are exercisable for a five-year period and
expire on December 15, 2003. The Company intends to use these funds to
further its TSMS development and marketing efforts in 1999.
As of December 31, 1998, the Company had $6,215,000 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 it will be able to
manage its cash resources to
TRICORD SYSTEMS, INC.
8
<PAGE>
continue operations for at least the next twelve months. However, should the
Company incur additional costs within the next twelve months due to the
product launch of its TSMS-based products (which have yet to be fully
developed), the related channel development for distributing TSMS-based
products and other significant increases in research and development costs
and marketing and sales costs, the Company will need to adjust its plans as
necessary, if it fails to secure additional financing.
In any event, however, the Company will need to raise additional capital in
order to complete development and commence commercial marketing of its
TSMS-based products. The Company may seek such additional capital through the
sale of debt or equity securities. In addition, the Company continues to look
for 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 previously initiated a project to prepare its computer systems
for the Year 2000. This project encompasses information technology ("IT")
systems, non-IT systems, Company products and third party products and
systems. Based on its efforts to date, management believes the Year 2000
issue will not have a significant impact on operations. If additional
modifications and conversions are necessary, however, and cannot be completed
on a timely basis, the Year 2000 issue could have an adverse effect on the
Company's operations. At this time, the Company believes that it is
unnecessary to adopt a contingency plan covering the possibility that
additional modifications and conversions will be needed, but, as part of the
overall project, the Company will continue to assess the need for such a
contingency plan, and will continue to analyze its computer systems to
determine if additional modifications and conversions will be needed.
The Company has reviewed its main IT system and to date 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 completely
reviewed. In the event that the Company determines that its smaller
supporting business systems will not transition properly at the end of the
millenium, the Company will transition these systems to its main business
system in order to mitigate any business disruption.
By the end of June, 1999, the Company expects to have completed an evaluation
of its telephone, facility heating and cooling and other non-IT systems for
Year 2000 readiness and to have completed any remedial action as necessary.
The Company has also reviewed its software related to its legacy business and
has completed a fix for the Year 2000 issue. The Company has made this fix
available to its customers on its web site. The Company will also commence an
effort to contact as many of its legacy business customers as possible. 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 has reviewed suppliers for its legacy business and has determined
that, due to the declining revenues associated with sales of spare parts,
there is no material impact to the Company. The Company has not yet released
any TSMS-based products, but it intends to work with future suppliers to
ensure that no Year 2000 issues will exist prior to release to market of
these products.
Substantially all of the Company's Year 2000 efforts have been made using
internal personnel, therefore, the costs associated with the Year 2000
assessment and corrections have not been, and currently are not anticipated
to be, material to the Company. All such costs to date have been expensed as
incurred.
Due to the complexity and pervasiveness of the Year 2000 issue and, in
particular, the uncertainty regarding the Year 2000 compliance programs of
third parties, no assurance can be given that a Year 2000 issue will not have
a material adverse effect on the Company's business or results of operations.
TRICORD SYSTEMS, INC.
9
<PAGE>
This Annual Report contains certain forward looking statements within the
meaning of the Private Securities Reform Act of 1995. For this purpose, any
statements contained in this Annual Report that are not statements of
historical fact are deemed to be forward looking statements. Without limiting
the foregoing, words such as "may," "will," "should," "expects,"
"anticipates," "estimates," "believes," or "plans," or comparable
terminology, are intended to indicate forward looking statements. These
statements by their nature are based on current expectations and assumptions
and entail various risks and uncertainties that could cause actual results to
differ materially from those expressed in such forward looking statements,
including the following risks:
- The Company will not realize sufficient revenues from its legacy
business to fund its ongoing TSMS product development and marketing
operations. The Company intends to manage its current cash to fund
its operations throughout 1999; however, continued aggressive product
development and product introduction necessarily requires that the
Company obtain additional funds from investors. The Company continues
to pursue additional investors, however, there can be no assurance that
funds will be obtained.
- The market window for the Company's products is limited inasmuch as
many competitors with established brand identity are beginning to
enter the market with products that will be positioned against the
Company's products. Although the Company believes it has a significant
headstart and that its technology is superior, established product
channels and bundling arrangements may impede the Company's product
introduction and market acceptance.
- The market for distributed file system products for the Windows NT and
UNIX environment is new and developing. 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.
TRICORD SYSTEMS, INC.
10
<PAGE>
- The Company currently intends to market its TSMS throgh OEM and other
channels, 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 will need to maintain compliance with the Nasdaq SmallCap
Market requirements.
- Many of the Company's potential competitors in the market for UNIX and
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 its own products.
Additionally, the Company's ability to market its products will
necessarily require the endorsement of industry leaders if the
Company's products are to gain wide-scale acceptance by the industry.
- The Company's sales' lead time may be longer than most storage
products due to the general market reluctance to accept new entrants
and due to the sensitivity of the data on today's storage devices.
- The Company will need to attract new team members and consultants and
retain existing team members and consultants.
TRICORD SYSTEMS, INC.
11
<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 PricewaterhouseCoopers LLP. 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. Tom R. Dillon. The Audit Committee meets
periodically with the independent accountants 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 J. David Cabello
Chairman and Chief Interim Chief Financial Officer
Executive Officer
TRICORD SYSTEMS, INC.
12
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Tricord Systems, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations of cash flows and of stockholders'
equity present fairly, in all material respects, the consolidated financial
position of Tricord Systems, Inc. at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. 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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 10, 1999, except as to the
information in Note 7, for which the
date is March 17, 1999
TRICORD SYSTEMS, INC.
13
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
(in thousands, except per share data) 1998 1997 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales $ 2,243 10,676 49,162
Service contracts 1,610 1,984 2,107
------------ ------------ ------------
3,853 12,660 51,269
Cost of goods sold:
Product sales 1,988 11,966 35,008
Service contracts 373 559 408
------------ ------------ ------------
2,361 12,525 35,416
Gross margin 1,492 135 15,853
------------ ------------ ------------
Operating expenses:
Research and development 2,473 3,981 7,264
Sales and marketing 991 4,312 18,395
General and administrative 714 1,697 5,578
Nonrecurring items, net (195) 864 -
------------ ------------ ------------
3,983 10,854 31,237
------------ ------------ ------------
Operating loss (2,491) (10,719) (15,384)
------------ ------------ ------------
Other income (expense):
Interest, net 193 204 385
Other, net 187 (192) (205)
------------ ------------ ------------
380 12 180
------------ ------------ ------------
Loss before provision for income taxes (2,111) (10,707) (15,204)
Provision for income taxes - 224 -
------------ ------------ ------------
Net loss $ (2,111) (10,931) (15,204)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share - basic and diluted $ (0.14) (0.81) (1.14)
------------ ------------ ------------
------------ ------------ ------------
Weighted average common shares outstanding -
basic and diluted 14,573 13,447 13,357
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
TRICORD SYSTEMS, INC.
14
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
--------------------------------------
(In thousands, except per share data) 1998 1997
------------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,215 3,713
Accounts receivable, net 162 681
Inventories, net 637 1,497
Other current assets 96 174
----------------- -----------------
Total current assets 7,110 6,065
Equipment and improvements, net 243 565
Other assets - 125
----------------- -----------------
Total Assets $ 7,353 6,755
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 398 708
Accrued payroll, benefits and related taxes 344 509
Deferred revenue 525 946
Other accrued expenses 244 925
----------------- -----------------
Total current liabilities 1,511 3,088
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 27,000 shares authorized,
18,961 and 13,460 shares outstanding 190 135
Additional paid-in capital 87,483 77,606
Unearned compensation (5,564) -
Cumulative translation adjustments - 82
Accumulated deficit (76,267) (74,156)
----------------- -----------------
Total stockholders' equity 5,842 3,667
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 7,353 6,755
----------------- -----------------
----------------- -----------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
TRICORD SYSTEMS, INC.
15
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Year Ended December 31,
----------------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,111) (10,931) (15,204)
Adjustments to reconcile net loss to net
cash used in operating activities:
Restructuring credits - - (1,848)
Depreciation and amortization 355 2,598 4,485
Loss on disposal of equipment 22 643 353
Provision for losses on accounts receivable (142) (455) 2,028
Provision for losses on inventories 71 1,818 994
Loss on termination of facilities lease - 975 -
Provision for loss on equipment - 764 -
Deferred income taxes - 224 -
Amortization of unearned compensation 194 - -
Other 82 196 250
Changes in operating assets and liabilities:
Accounts receivable 661 4,410 3,381
Inventories 789 1,669 3,726
Other current assets 86 704 195
Accounts payable (310) (2,189) (3,229)
Accrued payroll, benefits and related taxes (75) (766) (68)
Deferred revenue (421) (99) (158)
Other accrued expenses (478) (1,621) 321
-------------- -------------- --------------
Net cash used in operating activities (1,277) (2,060) (4,774)
-------------- -------------- --------------
Cash flows from investing activities:
Proceeds from maturity of investments - - 1,000
Capital expenditures (55) (420) (2,501)
Change in other assets - 59 155
-------------- -------------- --------------
Net cash used in investing activities (55) (361) (1,346)
-------------- -------------- --------------
Cash flows from financing activities:
Stock option exercises and employee stock purchase plan 834 85 443
Proceeds from private placement 3,000 - -
-------------- -------------- --------------
Net cash provided by financing activities 3,834 85 443
-------------- -------------- --------------
Effect of exchange rate changes on cash - 338 (68)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents 2,502 (1,998) (5,745)
Cash and cash equivalents at beginning of year 3,713 5,711 11,456
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 6,215 3,713 5,711
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
TRICORD SYSTEMS, INC.
16
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except shares) Common Stock
-----------------------------------------------
Additional Cumulative
Par Paid-In Unearned Translation Accumulated
Shares Value Capital Compensation Adjustments Deficit
----------------- ------- --------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 13,272,560 $ 133 76,830 -- (188) (48,021)
Stock options and employee stock
purchase plan 134,570 1 442 -- -- --
Warrant issued related to
class action matter -- -- 250 -- -- --
Foreign currency translation
adjustments -- -- -- -- (68) --
Net loss -- -- -- -- -- (15,204)
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1996 13,407,130 134 77,522 -- (256) (63,225)
Stock options and employee stock
purchase plan 52,754 1 84 -- -- --
Foreign currency translation
adjustments -- -- -- -- 338 --
Net loss -- -- -- -- -- (10,931)
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1997 13,459,884 135 77,606 -- 82 (74,156)
Sale of common stock and warrants 3,000,000 30 2,970 -- -- --
Stock options and employee stock
purchase plan 965,462 10 824 -- -- --
Stock issued to employees 482,526 5 344 -- -- --
Stock issued to Directors 221,997 2 149 -- -- --
Restricted stock issued to employees 831,143 8 498 (506) -- --
Stock compensation for options
issued subject to shareholder
approval -- -- 5,252 (5,252) -- --
Amortization of unearned
compensation -- -- -- 194 -- --
Stock options issued for services 90 -- -- --
Cancellation of warrant -- -- (250) -- -- --
Foreign currency translation
adjustments -- -- -- -- (82) --
Net loss -- -- -- -- -- (2,111)
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 1998 18,961,012 $ 190 87,483 (5,564) -- (76,267)
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
TRICORD SYSTEMS, INC.
17
<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
Throughout 1998, Tricord Systems, Inc. (the "Company") continued to focus its
development efforts exclusively on storage system management software, the
strategy it defined in 1997. The storage system management software
architecture includes an entirely new generation of distributed file system
and file-intelligent input/output ("I/O") technology known as Tricord Storage
Management Software ("TSMS"). No revenues were generated by TSMS for 1998,
and the Company may not receive revenues from TSMS-based products in 1999.
The Company has historically 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, 1998
relate to the server line of business.
In 1997 the Company redefined its corporate strategy to focus its development
efforts exclusively on storage system management software. During the second
quarter of 1997, this strategic shift in the Company's business necessitated a
reduction in the Company's workforce affecting approximately 90 employees.
The Company intends to sell its remaining enterprise server product inventories,
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 and provided such agreements are profitable. The
Company's product sales during 1998 and 1997 have consisted mainly of spare
parts, disk drives, memory and expansion products.
If the Company's operations progress as currently anticipated, of which there
can be no assurance, the Company believes that it will be able to manage its
cash resources to continue operations for at least the next twelve months.
However, should the Company incur additional costs within the next twelve
months due to the product launch of its TSMS-based products (which have yet
to be fully developed), the related channel development for distributing the
TSMS-based products and other significant increases in research and
development costs and marketing and sales costs, the Company will need to
adjust its plans as necessary if it fails to secure additional financing.
In any event, however, the Company will need to raise additional capital in
order to complete development and commence commercial marketing of its
TSMS-based products. The Company may seek such additional capital through the
sale of debt or equity securities. The Company continues to look for
additional capital through OEM or other strategic investments or alliances.
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. The Company liquidated all of its international
subsidiaries during 1998, except for the United Kingdom.
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, 1998 and
1997 are concentrated in money market accounts and 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. Inventories consist
mostly of spare parts and expansion products for the Company's legacy business.
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 five 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
TRICORD SYSTEMS, INC.
18
<PAGE>
depreciation or amortization of assets sold or disposed of are removed from
the accounts and the resulting gain or loss is included in the results of
operations.
REVENUE RECOGNITION
Revenue on product sales is recognized upon shipment. Revenue under service
contracts is deferred and recognized on a straight-line basis over the contract
period.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to expense as incurred.
Software development costs are expensed as incurred. Such software development
costs are required to be expensed until the point that technological feasibility
and proven marketability of the product are established.
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.
COMPREHENSIVE INCOME (LOSS)
The Company has no significant comprehensive income (loss) items other than
net loss.
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.
TRICORD SYSTEMS, INC.
19
<PAGE>
2. SELECTED FINANCIAL STATEMENT INFORMATION
SUPPLEMENTAL BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------- -------
<S> <C> <C>
Accounts receivable:
Accounts receivable ........................... $ 841 1,894
Less allowance for doubtful accounts .......... (679) (1,213)
------- -------
$ 162 681
------- -------
------- -------
Inventories:
Spare parts and expansion products............. $ 3,946 7,515
Less inventory reserves........................ (3,309) (6,018)
------- -------
$ 637 1,497
------- -------
------- -------
Equipment and improvements:
Office equipment and leasehold improvements ... $ 1,314 1,369
Engineering equipment ......................... 770 869
Production equipment .......................... 99 204
------- -------
2,183 2,442
Less accumulated depreciation and amortization (1,940) (1,877)
------- -------
$ 243 565
------- -------
------- -------
Other accrued expenses:
Warranty ...................................... $ 144 371
Relocation .................................... -- 175
Other ......................................... 100 379
------- -------
$ 244 925
------- -------
------- -------
</TABLE>
SUPPLEMENTAL STATEMENT OF OPERATIONS INFORMATION:
OTHER INCOME:
Other income includes foreign currency losses of approximately $202 in 1996.
TRICORD SYSTEMS, INC.
20
<PAGE>
NONRECURRING ITEMS, NET:
During the second quarter of 1998, the Company recorded a net reduction in
operating expenses of $195, which included a payment to the Company of $300
for the Company's portion of the proceeds from the sale of its former
headquarters facility based on a termination agreement with its previous
landlord and a related charge of $105 for the write-off of the remaining net
present value of the sublease payments receivable.
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 former
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 between the Company or International Business Machines ("IBM")
without admission of liability by either party regarding IBM's assertion that
certain of the Company's server systems and related products infringed IBM's
patents; 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.
SUPPLEMENTAL CASH FLOW INFORMATION:
During 1998, $90 of accrued payroll obligations and $203 of other accrued
expenses were settled through the issuance of 402,236 shares of common stock of
the Company. Also during 1998, expenses of $207 were settled through the
issuance of 302,287 shares of common stock of the Company to employees and
directors.
GEOGRAPHICAL DATA AND MAJOR CUSTOMERS
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL CONSOLIDATED
------------- ------------- ------------
<S> <C> <C> <C>
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
</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 exported its
products to unaffiliated customers located in those channels. Substantially
all of the Company's international sales were denominated in U.S. dollars,
except Japan, in which sales were negotiated, invoiced and paid in yen. The
Company had no significant international sales or operations during 1998 and
1997 and liquidated most of its international subsidiaries during 1998. The
Company had no significant gains or losses related to the liquidation of
these international subsidiaries in 1998. The Company's United Kingdom
subsidiary remains in existence, but has no significant operating activity.
United States sales to unaffiliated customers in 1997 included 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.
United States sales to unaffiliated customers in 1996 included export sales
of $3,982 to Europe and $2,653 to other foreign countries. Sales to Toshiba
and Memorex Telex Corporation accounted for 14.9% and 14.5%, respectively, of
the Company's revenues during 1996. Substantially all sales of Tricord K.K.
were sales to Toshiba.
TRICORD SYSTEMS, INC.
21
<PAGE>
3. LEASES
The Company leases office and warehouse facilities and certain equipment under
cancelable and noncancelable operating leases expiring at various dates through
2002. The Company's 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
$101, $691 and $1,546 for the years 1998, 1997 and 1996, respectively.
As of December 31, 1998 future minimum lease payments due under noncancelable
operating leases, excluding operating costs, are as follows:
<TABLE>
<S> <C>
1999 .................................................... $166
2000 .................................................... 149
2001 .................................................... 88
2002 .................................................... 7
----
$410
----
----
</TABLE>
In January 1999, the Company entered into an operating lease for a marketing
office facility in Houston, Texas, which includes a provision that the
Company pay a pro rata share of the lessor's operating costs, including real
estate taxes. The Company may cancel the lease agreement, which expires in
January 2002, but the company must pay a minimum of two years of lease
payments.
4. INCOME TAXES
As of December 31, 1998, the Company had generated domestic net operating
loss carryforwards of approximately $70,000 for tax reporting purposes that
may be offset against future taxable income. Such net operating losses expire
if not used within 15 years of the date they were generated (20 years for the
1998 net operating loss). In addition, as of December 31, 1998 the Company
also had available approximately $2,100 of research and experimentation tax
credit carryovers available to reduce future income taxes. Such tax credit
carryovers expire if not used within 15 years of the date they were generated
(20 years for the 1998 credit carryover). Due to uncertainty as to the
realizability of the loss and tax credit carryforwards, full valuation
allowances have been established for the benefits associated with these
carryforwards and for net deductible temporary differences related primarily
to accounts receivable and obsolete inventory allowances, and depreciation
and deferred revenue.
For 1996, the domestic and foreign components of loss
TRICORD SYSTEMS, INC.
22
<PAGE>
before provision for income taxes were $11,817 and $3,387, respectively.
5. 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 $28, $46 and $114 of matching
contributions for 1998, 1997 and 1996, respectively.
The Company has determined that a partial termination of its 401(k) plan
under the Internal Revenue Code occurred in 1997. A partial termination
requires that the 401(k) plan must vest 100% of an affected participant's
Company matching contribution. The Company has been advised that a partial
termination is a tax concept and has no other significance. The Company
estimates that approximately $38 of unvested matching contributions became
100% vested plus an appropriate earnings factor. The Company currently does
not anticipate that additional cash will be required to fund this partial
termination.
6. 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. At
that time, the Company charged $650 to general and administrative expense for
the $400 cash deposit and the $250 estimated value of the warrants.
In October 1997, the plaintiffs for the class action appealed the jury decision.
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.
TRICORD SYSTEMS, INC.
23
<PAGE>
This agreement was accepted by the federal court and the appeal by the
plaintiffs was dismissed in February 1998. In December 1998, the Company
received a $150 refund of a portion of the cash escrow payment and canceled
the warrants. As a result, the Company recorded a $400 reduction to general
and administrative expense.
During 1997, a dispute occurred between the Company and Novell, Inc.
("Novell") regarding alleged royalties owed to Novell with respect to
Novell's software that the Company disposed of 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 of approximately $800 on the software it disposed of.
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 shipped for use with the Company's
servers. During 1998, an additional dispute arose between the Company and
Novell regarding the return to the Company of five multi-processing
enterprise server units originally sent to Novell under the OEM agreement,
along with certain other computer hardware equipment provided to Novell. In
addition, the Company has claimed damages due to alleged defects in Novell's
software product. Both the Company and Novell have commenced legal action by
filing complaints regarding the disputes as discussed above. Management does
not believe that the resolution of these disputes will have a material effect
on its financial position, results of operations or liquidity.
In addition to matters disclosed above, the Company is 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 financial position,
results of operations or liquidity of the Company.
7. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENT
In December 1998, the Company sold 3,000,000 shares of the Company's common
stock at a price of $1.00 per share to a group of private investors. These
investors also received warrants to purchase an equal number of additional
shares of common stock at an exercise price of $3.50 per share. The warrants
are exercisable immediately and expire on December 15, 2003. At December 31,
1998, none of these warrants have been exercised.
The common stock sold to the private investors has not been registered by the
Company and such stock is subject to certain restrictions on resale by the
investors. The investors have piggyback registration rights and can request
registration if the Company files a registration statement for a public
offering. In addition, the majority investor can demand
TRICORD SYSTEMS, INC.
24
<PAGE>
registration by the Company under certain conditions and can cause the
Company to use its best efforts to have a representative of such majority
investor elected as a director of the Company.
RESTRICTED STOCK
During 1998, the Company issued restricted common stock related to the
settlement of the contingent payment related to a 1996 acquisition (207,143
shares) and to new officers of the Company (600,000 shares). The restrictions
are generally based on continuous employment for a defined time period. The
Company recorded the full value of the restricted stock as unearned
compensation at the closing market price ($0.50 and $0.66 per share) of the
Company's common stock on the date of the issuance. The portion of the
restricted stock for which restrictions have lapsed as of December 31, 1998
has been included as a charge to operations for 1998 ($136) and the unearned
compensation amount was reduced accordingly.
UNEARNED COMPENSATION
On December 7, 1998, the Company granted options for 2,895,000 shares of
common stock, 2,240,615 of which were subject to shareholder approval due to
the fact that no shares remained available for grant under the 1998 Stock
Incentive Plan (the "1998 Plan"). The options granted subject to shareholder
approval have been recorded by the Company as unearned compensation in
stockholders' equity, in the amount of $5,252, which is equal to the
aggregate difference between the market closing price of the Company's common
stock on March 17, 1999 (the date of shareholder approval) and the option
price at date of grant. Unearned compensation will be charged to operations
over the 48 months vesting term of these options.
STOCK OPTION PLANS
On February 20, 1998, the Company's Board of Directors established the 1998
Plan, which succeeds a prior plan which was terminated upon approval of the 1998
Plan by the Company's stockholders in May 1998. The 1998 Plan provides 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 1,000,000 shares of common stock for issuance under the
1998 Plan, plus any unissued shares from previous stock option plans. On March
17, 1999, the Company's shareholders approved an increase in the number of
shares reserved for issuance under the 1998 Plan from 1,000,000 to 5,000,000
shares and an increase in the per participant limitation from 100,000 shares to
500,000 shares. The 1998 Plan terminates in 2008. 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.
On February 20, 1998, the Company's Board of Directors established the 1998
Non-Employee Director Stock Plan (the "1998 Director Plan"). The 1998 Director
Plan replaced the 1995 Non-Employee Director Stock Plan, which expired in June
1997. The
TRICORD SYSTEMS, INC.
25
<PAGE>
1998 Director Plan provides for awards of options and common stock to
directors who are not employees of the Company. The Company has reserved
350,000 shares of common stock for issuance under the 1998 Director Plan,
which terminates in 2003. On March 17, 1999, the Company's shareholders
approved an increase in the number of shares reserved for issuance under the
1998 Director Plan from 350,000 to 550,000 shares. The Company's 1998
Director Plan provides for the granting to all non-employee directors of
certain grants of options to purchase common stock at the fair market value
on the date of grant. Such grants generally are exercisable for periods of up
to three years and expire within five years. These options include an initial
one-time grant of 25,000 shares and an annual grant of 10,000 shares. In
addition, each non-employee director may be granted, at the Board's
discretion, an annual stock award in lieu of any cash retainer for services
as a Director. Also, each non-employee director may be granted, at the
Board's discretion, a meeting fee stock award in lieu of any cash meeting
fees for services as a director at Board meetings or Board committee
meetings.
The following summarizes stock option activity during each of the three years in
the period ended December 31, 1998:
<TABLE>
<CAPTION>
Shares 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 3,976,000 3,717,261 1,962,000
Exercised 934,541 -- (64,691)
Canceled (585,465) (4,021,907) (1,564,219)
------------- ------------ ------------
December 31:
Options outstanding 5,563,994 3,108,000 3,412,646
------------- ------------ ------------
------------- ------------ ------------
Options exercisable 676,798 182,375 894,810
------------- ------------ ------------
------------- ------------ ------------
<CAPTION>
Weighted average exercise
price per share 1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted $ 0.64 0.86 3.05
Exercised 0.87 -- 3.19
Canceled 3.01 3.41 4.74
December 31:
Options outstanding 0.78 1.41 4.33
Options exercisable 1.47 9.99 6.08
</TABLE>
TRICORD SYSTEMS, INC.
26
<PAGE>
Stock options outstanding at December 31, 1998 had a range of exercise prices
of $0.50 to $25.00 and an average contractual useful life of 3.9 years.
Approximately 99% of the options outstanding had an exercise price of $3.00
or less, of which approximately 12% of these options are exercisable and have
a weighted average contractual life of 3.9 years.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") has reserved
250,000 shares of common stock for 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 30,000, 53,000 and 46,000 shares in 1998, 1997 and 1996,
respectively.
WARRANTS
At December 31, 1998, the Company has exercisable warrants outstanding to
purchase 200,000 shares of the Company's common stock at a price of $10.00
per share. These warrants were issued to an original equipment manufacturer
and expire in June 1999.
The Company issued additional warrants during 1998 in connection with its sale
of common stock as described above.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS
The Company has continued to measure compensation cost for its stock incentive
and option plans using the intrinsic-value-based method of accounting. 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>
1998 1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $ (2,111) (10,931) (15,204)
Pro forma (4,572) (13,306) (16,845)
Net loss per common share
As reported $ (0.14) (0.81) (1.14)
Pro forma (0.31) (0.99) (1.26)
</TABLE>
TRICORD SYSTEMS, INC.
27
<PAGE>
The pro forma information above only includes stock options granted since
1995. Compensation expense under the fair-value-based method of accounting
will increase over the next few years as additional stock option grants are
considered and as the full impact of the 1998 activity is reflected.
The weighted average grant-date fair value of the options granted in 1998, 1997
and 1996 was $0.43, $0.56 and $1.89 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 the grant dates
were as follows: the options were assumed to be exercised approximately one year
earlier than the end of their term at date of grant; no dividends will be paid
by the Company during the term of the options granted; cumulative stock price
volatility ranged from approximately 91% to 95%; and the weighted average
risk-free interest rate was 5.01%, 5.92% and 6.67% for 1998, 1997 and 1996,
respectively. In addition, average forfeitures were assumed to be 4%, 35% and
23% for 1998, 1997 and 1996, respectively.
SHAREHOLDERS' RIGHTS PLAN
The Company maintains 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 in the event of a change in control of the Company, as
defined. The description and terms of the Rights are set forth in a Rights
Agreement dated October 24, 1994, as amended December 7, 1998 and January
30,1999, between the Company and Norwest Bank Minnesota, N.A., as Rights
Agent. The rights will expire in October 2004.
AUTHORIZED CAPITAL
On March 17, 1999, the Company's shareholders approved an increase in the number
of authorized shares of common stock from 27,000,000 to 75,000,000 shares.
8. BUSINESS SEGMENTS
The Company had only one business segment, the server business, for 1996. In
February 1997 the Company changed its business focus to concentrate on
storage system management software (see Note 1). The table below represents
information related to the Company's business segments as of and for the
years ended December 31, 1998 and 1997. Effective December 31, 1998, the
Company adopted Statement of Financial Accounting Standards 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 reporting and decision making. The Company
continues to report its operations as being comprised of two business
segments. 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.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues:
Server business $ 3,853 12,660
Software business -- --
TRICORD SYSTEMS, INC.
28
<PAGE>
------------ ------------
Total 3,853 12,660
------------ ------------
Operating income (loss):
Server business 1,528 (8,116)
Software business (4,019) (2,603)
------------ ------------
Total (2,491) (10,719)
------------ ------------
Total assets:
Server business 4,100 6,347
Software business 3,060 124
Corporate 243 284
------------ ------------
Total 7,403 6,755
------------ ------------
Depreciation expense:
Server business 94 2,049
Software business 103 130
Corporate 158 419
------------ ------------
Total 355 2,598
------------ ------------
Capital expenditures:
Server business -- 175
Software business 50 35
Corporate 5 210
------------ ------------
Total 55 420
------------ ------------
</TABLE>
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
1998
Revenues $ 1,315 993 999 546
Gross margin 513 333 453 193
Net loss (692) (555) (234) (630)
Net loss per share -
basic and diluted (0.05) (0.04) (0.02) (0.04)
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 -
basic and diluted (0.38) (0.34) (0.08) (0.02)
</TABLE>
Quarterly calculations of net loss per share are made discretely for each
quarter during the fiscal year.
TRICORD SYSTEMS, INC.
29
<PAGE>
1998:
During the fourth quarter of 1998, the Company recorded a reduction to
general and administrative expense of $400 comprised of the $250 cancellation
of warrants previously made available for settlement purposes related to the
securities class action lawsuit (see Note 6) and a $150 refund from the
escrow account also related to the securities class action lawsuit. The net
impact of these adjustments benefited the fourth quarter net loss by $0.03
per share.
During the second quarter of 1998, the Company recorded a net reduction in
operating expenses of $195, as discussed in Note 2. This reduction in
operating expenses benefited the quarterly net loss by $0.01 per share.
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.
During the third quarter of 1997, the Company agreed to a $350, or $.03 per
share, settlement of the Memorex Telex Corporation Chapter 11 bankruptcy
preferential payment claim. The Company recorded the required payment as a
charge to general and administrative expense in the third quarter of 1997.
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. 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 were nonrecurring items, net, of
$864, as discussed in Note 2. This increased the second quarter 1997 net loss
by $0.06 per share.
TRICORD SYSTEMS, INC.
30
<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 21, 1999. A formal notice of the meeting, together with proxy
statement and proxy, will be mailed on or about April 14, 1999 to stockholders
of record on April 9, 1999.
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. maintains 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 SmallCap Market
System. The Nasdaq trading symbol is TRCD.
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 (until July 29, 1998) and the Nasdaq SmallCap Market
(since July 30, 1998). These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
1998 1997
---- ----
High Low High Low
------------ ------------
<S> <C> <C> <C> <C>
First quarter $ 1.31 0.56 2.03 0.63
Second quarter 1.19 0.84 1.31 0.50
Third quarter 1.09 0.50 1.22 0.63
TRICORD SYSTEMS, INC.
31
<PAGE>
Fourth quarter 2.97 0.44 1.50 0.50
</TABLE>
On March 25, 1999, the closing price for the Company's common stock was $2.59.
On March 25, 1999, there were approximately 399 shareholders of record of the
Company's common stock. The Company estimates that an additional 5,600
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.
TRICORD SYSTEMS, INC.
32
<PAGE>
CORPORATE INFORMATION
DIRECTORS
Yuval Almog - President, CORAL Group, Inc.
Tom R. Dillon - Vice President and CIO, Candescent Technologies, Inc.
Donald L. Lucas - Private Investor
Fred G. Moore - President, Horison, Inc.
John J. Mitcham - Chairman of the Board of Directors; Chief
Executive Officer, Tricord Systems, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
FINANCE AND AUDIT COMMITTEE
Donald L. Lucas, Chairman
Tom R. Dillon
COMPENSATION COMMITTEE
Yuval Almog, Chairman
Donald L. Lucas
EXECUTIVE OFFICERS
John J. Mitcham - Chief Executive Officer
J. David Cabello - Vice President and General Counsel, Interim Chief
Financial Officer and Secretary
Kathleen H. Clark - Vice President, Marketing
Dr. Alexander H. Frey - Senior Vice President, Architecture
Charles E. Pearsall - Vice President, Engineering
CORPORATE HEADQUARTERS
Plymouth, Minnesota
SATELLITE OFFICE
Houston, Texas
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly LLP
San Jose, California
TRICORD SYSTEMS, INC.
33
<PAGE>
EXHIBIT 21.1 - SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of % Owned by
Name of Subsidiary Incorporation Tricord Systems, Inc.
- ------------------ ---------------- ---------------------
<S> <C> <C>
Tricord Systems Europe Ltd. United Kingdom 100%
</TABLE>
<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, 333-04701
and 333-58195) of our reports, dated March 5, 1999, except as to the
information in Note 7, for which the date is March 17, 1999, on our audits of
the consolidated financial statements and financial statement schedule of
Tricord Systems, Inc. as of December 31, 1998 and 1997, and for the years
ended December 31, 1998, 1997, 1996, which reports are included or
incorporated by reference in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 30, 1999
<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, 1998, 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,215
<SECURITIES> 0
<RECEIVABLES> 841
<ALLOWANCES> (679)
<INVENTORY> 637
<CURRENT-ASSETS> 7,110
<PP&E> 2,183
<DEPRECIATION> (1,940)
<TOTAL-ASSETS> 7,353
<CURRENT-LIABILITIES> 1,511
<BONDS> 0
0
0
<COMMON> 190
<OTHER-SE> 5,652
<TOTAL-LIABILITY-AND-EQUITY> 7,353
<SALES> 3,853
<TOTAL-REVENUES> 3,853
<CGS> 2,361
<TOTAL-COSTS> 2,361
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (142)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,111)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,111)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,111)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
