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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
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SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of March 24, 2000, 20,797,995 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 $179,128,099.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended December 31,
1999 (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 18, 2000
("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 1999 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 1999, and the Company may or may not receive
revenues from TSMS-based products in 2000.
The Company had 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(R) and Novell(R) NetWare(R).
In August 1999, the Company sold all of its remaining assets related to the
server line of business (sometimes referred to as the "legacy business"),
except for existing trade accounts receivable, in exchange for the assumption
of all liabilities of the legacy business, except Year 2000 issues relating to
the legacy server business, which the Company believes are not material.
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").
Storage needs are also increasingly being met by external storage systems, in
both Windows NT and UNIX environments.
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* This Annual Report on Form 10-K includes trademarks of companies other than
Tricord Systems, Inc.
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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, eCommerce, 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.
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 networking software. TSMS can be specifically
configured for potential Original Equipment Manufacturer ("OEM") storage
products and other storage products distributed by the Company. TSMS technology
and solutions support three distinct storage system environments - HOST-attached
storage, Local Area Network ("LAN")-attached storage and Storage Area Network
("SAN")-attached storage and are platform independent. In all configurations,
TSMS provides the ease of management and high availability of a storage pool of
clustered storage systems.
The TSMS software will be positioned to enable storage products as follows:
- - HOST-Attached Storage - premier high-end Redundant Array of Inexpensive
Disks ("RAID") controller. Significant improvements in management,
availability, expansion, investment protection and performance over
conventional Intelligent RAID controllers.
- - LAN-Attached Storage - premier workgroup, departmental and enterprise
shared data servers. Significant improvements in management, availability,
expansion,
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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 filesystem for the system administrator to dynamically manage the
allocation of physical storage in storage systems.
- - 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.
RESEARCH AND DEVELOPMENT
The Company performs all of its research and development activities at its
headquarters in Plymouth, Minnesota. During 1999, 1998, and 1997, research and
development expenses totaled approximately $3,442,000, $2,473,000 and
$2,351,000, respectively. The Company currently anticipates that research and
development costs will rise during 2000 as the Company continues to focus on the
development of TSMS.
SALES AND DISTRIBUTION
The Company is pursuing OEM partners as well as other distribution channels. The
most likely partners would be storage suppliers, computer system vendors, disk
drive manufacturers and disk controller vendors. The Company would make
available its technology and/or solutions to these partners who would then build
it into storage solution offerings for their end users.
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The Company believes that these types of partnerships will provide a rapid and
cost-effective method for its technology and solutions to gain visibility and
penetrate the storage market. The Company is also taking additional steps to
increase the visibility of its technology and solutions by, among other things,
demonstrating a working prototype of TSMS. Although a number of partners have
expressed interest in the Company's technology and solutions, adoption requires
a departure from existing technology plans by these partners.
COMPETITION
While the Company believes that its file intelligent I/O technology and the TSMS
implementation have a significant lead in the marketplace, there are competitors
in the area of specialized file systems, including Veritas Software Corporation
("Veritas"), CrosStor Software, Inc. and university projects. The Company
expects that additional competitors may also be developing products that have
not yet been announced. In addition, many of the same companies that represent
potential 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 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
On August 27, 1999, the Company sold all of its remaining assets related to the
server line of business (sometimes referred to as the "legacy business"),
except for existing trade accounts receivable, to EFC Systems, Inc. ("EFC") in
exchange for the assumption of all liabilities of the legacy business,
excluding Year 2000 issues relating to the legacy server business, which the
Company believes are not material. In July 1999, the Company effected a
workforce reduction to streamline its operations. The reduction resulted in
the severance
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of eleven employees engaged in performing legacy business activities. In
connection with future product introductions, the Company will determine what
level of manufacturing and/or support capability will be required.
INTELLECTUAL PROPERTY
The Company's intellectual property strategy is both a strength and a high
priority. The Company currently has been granted one patent in the core
distributed file system technology and has six U.S. patent applications pending
with respect to its TSMS products. The Company intends to continue to broaden
its TSMS patent application pool in 2000. 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, 1999, the Company had 26 full-time and 2 part-time team
members, including 2 in marketing, 19 in research and development and technical
support and 7 in corporate operations. In addition to these 28 team members, the
Company also has contracted with four outside contractors to provide research
and development expertise and are considered by the Company to be crucial to the
success of TSMS development.
In March 2000, the Company named Joan Wrabetz as President and Chief Operating
Officer. Ms. Wrabetz was most recently Vice President and General Manager for
SAN operations at Storage Technology Corporation. Previously, Ms. Wrabetz was
Vice President and Chief Technical Officer for the Company.
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In February 2000, David Cabello, the Company's Vice President, Counsel and
Secretary and Kathleen Clark, the Company's Vice President of Marketing, left
the Company to pursue other interests.
The Company's future success depends to a significant extent upon the
performance of its executive officers and other key personnel. The future
success of the Company will also depend in large part upon its ability to
continue to attract and retain highly skilled and qualified personnel. In
addition, the Company's success will also depend in large part on its ability to
retain key contract team members. None of the Company's team members are
represented by a labor union. The Company has experienced no work stoppages and
believes that its relations with its team members are good.
YEAR 2000
Prior to January 2000, the Company evaluated its business and operational
systems to ensure readiness for the Year 2000. As a result, the Company
believes that all mission critical software and hardware was assessed, and if
necessary, remedied to be ready for the Year 2000. All mission critical software
and hardware has continued to function beyond January 1, 2000 without
interruption.
Because substantially all of the Company's Year 2000 efforts were made using
internal personnel, the costs associated with the Year 2000 assessment and
corrections were not material to the Company. All such costs to date have been
expressed as incurred.
The Company is responsible for all Year 2000 issues, if any, related to its
server line of business sold to EFC. The Company has had no claims related to
Year 2000 issues related to its server line of business.
CERTAIN IMPORTANT FACTORS
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:
- - Because of the sale of the legacy server business, the Company has no
revenues to fund its ongoing TSMS product development and marketing
operations. During 2000, continued product development and product
introduction necessarily requires that the Company obtain additional
funds from investors. The Company is pursuing additional investors,
however, there can be no assurance that funds will be obtained on
acceptable terms or at all, and the failure to obtain such additional
funds would have a material adverse effect on the Company.
- - 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.
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- - 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 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
distribution channels, and the failure to establish such relationships
on acceptable terms or develop other distribution channels 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 partners. The Company's ability to introduce and market its
technology and solutions 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 technology and
solutions 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. In February, 2000, the Company agreed to a two year extension of
its headquarters facility lease, which will expire in August 2002. The Company's
lease payments beginning September 2000 will be approximately $11,000 monthly
with an additional $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 discontinued using this facility at the end of
December 1999 and is attempting to sublease the office space.
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 by the Company 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 the Company 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 had requested that the Company
pay royalties of approximately $800,000 on the software it disposed of. The
Company had informed Novell that it did not owe royalties on the disposed
software because the OEM agreement only provided 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
had claimed damages due to
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alleged defects in Novell's software product. Both the Company and Novell
commenced legal action by filing complaints regarding these disputes.
In June 1999, the Company entered into a mediation settlement with Novell to
settle the disputes discussed above. The terms of the settlement will remain
confidential, but the resolution of this dispute had no material adverse effect
on the Company's financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There was no matter submitted to a vote of security holders during the fourth
quarter of 1999.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their ages as of March 30, 2000 are as
follows:
Name Age Position
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John J. Mitcham 59 Chairman and Co-Chief Executive Officer
Rod Canion 55 Co-Chief Executive Officer
Joan M. Wrabetz 40 President and Chief Operating Officer
Dr. Alexander H. Frey 66 Senior Vice President and
Chief Technical Officer
John F. Gribi 59 Vice President and Chief Financial Officer
Charles E. Pearsall 57 Vice President, Engineering
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. Canion has served as the Company's Co-Chief Executive Officer since May
1999.
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Since 1992, Mr. Canion has been involved in the technology industry as a board
member of various technology companies. Mr. Canion is a co-founder of Compaq
Computer Corporation and served as its Chief Executive Officer from 1982 to
1992.
Ms. Wrabetz joined the Company in March 2000 as President and Chief Operating
Officer. From February 1998 to February 2000, Ms. Wrabetz was Vice President and
General Manager for SAN operations at Storage Technology Corporation. From
December 1995 to February 1998, Ms. Wrabetz served in various executive
positions with the Company, the last being Vice President and Chief Technical
Officer.
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. Gribi has served as the Company's Vice President and Chief Financial Officer
since July 1999. From 1990 to July 1999, Mr. Gribi performed various consulting
assignments in the technology industry. Mr. Gribi served as Chief Financial
Officer of Compaq Computer Corporation from 1982 to 1990.
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 1999
Annual Report to Stockholders ("the Annual Report").
In July 1999, the Company received $2,100,000 from a private placement to
certain investors of 840,000 shares of common stock at a price of $2.50 per
share. 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 12 through
29 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's directors required by this Item is
incorporated by reference to the Company's Proxy Statement under the captions
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance."
Information regarding the Company's executive officers is included in Part I
hereof under the caption "Item 4A. Executive Officers of the Company" and is
incorporated by reference into this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the captions "Security Ownership of Certain
Beneficial Owners and Management" and "Election of Directors."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 12 through
28 of the Annual Report.
Report of Independent Accountants.
Consolidated Statements of Operations - Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Balance Sheets - December 31, 1999 and 1998.
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity - Years
Ended December 31, 1999, 1998 and 1997.
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.................... 16
Schedule II - Valuation and Qualifying Accounts...... 17
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3. Exhibits
The Exhibits to this Report are listed in the Exhibit Index on
pages 19 to 20 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)
9. Employment Letter, dated March 1, 2000, between the
Company and Joan M. Wrabetz. (d)
-----------------------------------------------------------
(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) Incorporated by reference from the exhibits to the
Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
(d) Filed herewith.
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(B) REPORTS ON FORM 8-K
On August 4, 1999, 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 July 26, 1999.
No financial statements were included as part of this filing.
On September 23, 1999, the Company filed a report on Form 8-K
under Item 5, related to the sale of the Company's server
hardware business to EFC Systems of Nashville, Tennessee. No
financial statements were included as part of this filing.
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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 February 17, 2000, appearing in the 1999 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
February 17, 2000
16
<PAGE> 18
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Additions Deductions Balance
Beginning of Charged to from at End of
Description Period Expense Allowance Period
- -------------------------------------------------- ---------------- --------------- ------------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts (deducted
from accounts receivable) $ 679 (22)(1) (657) -
Inventory obsolescence reserve (deducted
from inventory) 3,259 - (3,259) -
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 21 (2,780) 3,259
Year ended December 31, 1997
Allowance for doubtful accounts (deducted
from accounts receivable) 2,844 (455) (1,176) 1,213
Inventory obsolescence reserve (deducted
from inventory) 7,330 1,818 (3,130) 6,018
</TABLE>
Notes:
(1) Relates to a reduction in the allowance.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 30, 2000.
TRICORD SYSTEMS, INC.
By /s/ John J. Mitcham
John J. Mitcham
Chairman and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant in
the capacities indicated on March 30, 1999.
Signatures Title
/s/ John J. Mitcham Chairman of the Board and
- ---------------------------- Co-Chief Executive Officer
John J. Mitcham (Principal Executive Officer)
and Director
/s/ John F. Gribi. Vice President and Chief Financial
- ---------------------------- Officer (Principal Financial and
John F. Gribi 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
18
<PAGE> 20
TRICORD SYSTEMS, INC.
---------------------
EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
- ------ ---- ------
<S> <C> <C>
3.1 Certificate of Incorporation (a)
3.2 Amendment to Certificate of Incorporation, dated
March 29, 1999 (i)
3.3 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)
10.15 Stock Purchase Agreement, dated July 23, 1999,
by and among the Company and the Purchasers (j)
</TABLE>
<PAGE> 21
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
- ------ ---- ------
<S> <C> <C>
10.16 Amendment to Lease Agreement, dated February 10,
2000, between the Company and Liberty Property
Limited Partnership (j)
10.17 Employment Agreement, dated March 1, 2000, between
the Company and Joan M. Wrabetz (j)
13.1 Annual Report to Stockholders for the year ended
December 31, 1999 (to be deemed filed only to the
extent required by the instructions to exhibits
for reports on Form 10-K) (j)
</TABLE>
<TABLE>
<CAPTION>
ITEM PAGE
NUMBER ITEM NUMBER
- ------ ---- ------
<S> <C> <C>
21.1 Subsidiaries of the Company (j)
23.1 Consent of Independent Accountants (j)
27.1 Financial Data Schedule (j)
</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 in connection with Annual report on Form 10-K for the year Ended
December 31, 1998.
(i) Incorporated by reference to the exhibits to the Company's Quarterly
Report on Form 10-Q For the Quarter Ended March 31, 1999 (File No.
0-21366).
(j) Filed herewith.
<PAGE> 1
TRICORD SYSTEMS, INC.
================================================================================
STOCK PURCHASE AGREEMENT
July 23, 1999
================================================================================
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION 1 AUTHORIZATION AND SALE OF COMMON STOCK ........................................................1
1.1 Authorization .................................................................................1
1.2 Sale of the Shares ............................................................................1
SECTION 2 CLOSING DATE; DELIVERY ........................................................................1
2.1 Closing .......................................................................................1
2.2 Delivery ......................................................................................1
SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY .................................................2
3.1 Organization and Standing; Charter and Bylaws .................................................2
3.2 Corporate Power ...............................................................................2
3.3 Capitalization ................................................................................2
3.4 Authorization .................................................................................2
3.5 SEC Reports ...................................................................................3
3.6 No Conflicts ..................................................................................3
3.7 Brokers or Finders ............................................................................3
SECTION 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS ..............................................4
4.1 Experience; Accredited Investor ...............................................................4
4.2 Investment ....................................................................................4
4.3 Rule 144 ......................................................................................4
4.4 No Federal or State Approval ..................................................................4
4.5 Access to Data ................................................................................4
4.6 Authorization .................................................................................5
4.7 Address and Taxpayer Identification Number ....................................................5
SECTION 5 CONDITIONS TO CLOSING BY THE PURCHASERS .......................................................5
5.1 Representations and Warranties Correct ........................................................5
5.2 Covenants .....................................................................................5
5.3 Compliance Certificate ........................................................................5
5.4 Opinion of Company's Counsel ..................................................................5
5.5 Investors Agreement ...........................................................................6
5.6 Proceedings and Documents; Legal Matters ......................................................6
5.7 Good Standing Certificate .....................................................................6
5.8 Secretary's Certificate .......................................................................6
SECTION 6 CONDITIONS TO CLOSING BY THE COMPANY ..........................................................6
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.1 Representations................................................................................6
SECTION 7 RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
COMPLIANCE WITH SECURITIES ACT ................................................................7
7.1 Restrictions on Transferability ...............................................................7
7.2 Restrictive Legend ............................................................................7
SECTION 8 COVENANTS .....................................................................................7
8.1 Fulfillment of Closing Conditions .............................................................7
8.2 Agreement by Purchasers .......................................................................7
8.3 Publicity .....................................................................................8
SECTION 9 MISCELLANEOUS .................................................................................8
9.1 Governing Law .................................................................................8
9.2 Survival ......................................................................................8
9.3 Successors and Assigns ........................................................................8
9.4 Entire Agreement; Amendment ...................................................................9
9.5 Notices, etc ..................................................................................9
9.6 Delays or Omissions ...........................................................................9
9.7 Severability .................................................................................10
9.8 Titles and Subtitles .........................................................................10
9.9 Counterparts .................................................................................10
9.10 Construction .................................................................................10
</TABLE>
<PAGE> 4
EXHIBITS
A -- Schedule of and Signature Page for Purchasers
A-1 -- Purchaser Address and Taxpayer Identification Number Schedule
B -- Form of Opinion of Counsel to the Company
C -- Form of Investors Agreement
<PAGE> 5
STOCK PURCHASE AGREEMENT
This Agreement is entered into effective as of July 23, 1999 by and among
Tricord Systems, Inc., a Delaware corporation (the "Company"), and each of the
persons listed on the Schedule of and Signature Page for Purchasers attached
hereto as Exhibit A (each a "Purchaser" and, collectively, the "Purchasers").
SECTION I
AUTHORIZATION AND SALE OF COMMON STOCK
1.1 AUTHORIZATION. The Company has authorized the sale and issuance of up
to 1,600,000 shares (the "Shares") of its common stock, par value $.01 per share
("Common Stock"), at the Closing (as hereinafter defined).
1.2 SALE OF THE SHARES. Subject to the terms and conditions hereof, the
Company will severally issue and sell to the Purchasers, and the Purchasers will
severally buy from the Company, the number of shares of Common Stock for the
aggregate purchase price set forth opposite such Purchaser's name on Exhibit A
hereto. The Company's agreements with each of the Purchasers are separate
agreements, and the sales of the Shares to each of the Purchasers are separate
sales.
SECTION 2
CLOSING DATE; DELIVERY
2.1 CLOSING.
Closing Date. The closing of the purchase and sale of the Shares
hereunder shall be held at Five Post Oak Park, #1655, Houston, Texas 77027, on
or prior to July 23, 1999 (the "Closing"), or at such other time and place upon
which the Company and the Purchasers acquiring in the aggregate more than 50% of
such shares of Common Stock to be sold pursuant to the terms hereto mutually
agree upon orally or in writing (the date of the Closing is hereinafter referred
to as the "Closing Date").
2.2 DELIVERY. At the Closing, the Company will deliver to each Purchaser a
certificate or certificates, registered in such Purchaser's name representing
the number of shares of Common Stock in the amount set forth opposite such
Purchaser's name on Exhibit A hereto, against payment of the purchase price
therefor, by certified check payable to the Company or wire transfer per the
Company's instructions.
1
<PAGE> 6
SECTION 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the disclosure schedule prepared by the Company and
delivered to the Purchasers, dated as of the date hereof (the "Disclosure
Schedule"), the Company represents and warrants to each Purchaser both as of the
date hereof and again as of the Closing as follows:
3.1 ORGANIZATION AND STANDING: CHARTER AND BYLAWS. The Company is a
corporation duly organized, existing and in good standing under the laws of the
State of Delaware. The Company has all requisite corporate power and authority
to own and operate its properties and assets, and to carry on its business as
presently conducted. The Company currently is qualified to do business as a
foreign corporation in each jurisdiction where the failure to be so qualified
would have a material adverse affect on the Company's properties and business
as now conducted or its financial condition. The Company has made available to
Purchasers a true, correct and complete copy of its Bylaws as in full force and
effect on the date hereof (the "Bylaws") and a true, correct and complete copy
of the Company's Certificate of Incorporation, as amended (the "Charter"), as in
full force and effect on the date hereof.
3.2 CORPORATE POWER. The Company has and will have at the Closing Date all
requisite corporate power and authority to execute and deliver this Agreement
and the Investors Agreement (as defined in Section 5.5 hereof), to sell and
issue the Shares hereunder and to carry out and perform its obligations under
the terms of this Agreement and the Investors Agreement referred to in Section
5.5 below.
3.3 CAPITALIZATION. The authorized capital stock of the Company consists of
80,750,677 shares, 75,000,000 of which are designated as Common Stock, 2,043,966
of which are designated as series C convertible preferred stock, $.01 par value
("Series C Preferred Stock"), 706,711 of which are designated as series D
convertible preferred stock ("Series D Preferred Stock") 2,500,000 of which is
undesignated stock, $.01 par value ("Undesignated Stock") and 500,000 shares
which are designated as series A junior preferred stock, $.01 par value ("Series
A Junior Preferred Stock"), As of April 9, 1999, there were 19,018,309 shares of
Common Stock outstanding, and there were no shares of Series C Preferred Stock,
Series D Preferred Stock, Undesignated Stock or Series A Junior Preferred Stock
outstanding. The outstanding shares of the Company's capital stock have been
duly authorized and validly issued, and are fully paid and nonassessable.
3.4 AUTHORIZATION. All corporate action on the part of the Company, its
directors and its stockholders necessary for the authorization, execution,
delivery and performance of this Agreement and the Investors Agreement by the
Company, the authorization, sale, issuance and delivery of the Shares and the
performance of all of the Company's obligations hereunder has been taken or will
have been taken prior to the Closing. This Agreement and the Investors
Agreement, when executed and delivered by the Company, shall constitute valid
and binding obligations of the Company, enforceable in accordance with their
terms. The Shares, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable; and will be
2
<PAGE> 7
free of any pledges, liens, encumbrances, preemptive rights or restrictions
except for restrictions on transfer under federal and state securities laws as
set forth herein and as set out in the Investors Agreement.
3.5 SEC REPORTS. The Company has previously made available to the
Purchasers true and complete copies of its (i) Annual Reports on Form 10-K for
its fiscal years ended December 31, 1997 and December 31, 1998, (ii) Quarterly
Reports on Form 10-Q for its quarterly periods ended March 31, 1998, June 30,
1998, September 30, 1998 and March 31, 1999, (iii) Current Reports on Form 8-K
dated December 24, 1998 and May 18, 1999, (iv) definitive proxy statements for
its 1998 and 1999 annual stockholders meetings, and (v) any other reports or
registration statements filed by the Company with the Securities and Exchange
Commission (the "Commission") since January 1, 1998, except for preliminary
material, which are all the documents that the Company was required to file
since that date (collectively, the "SEC Reports"). As of their respective dates,
the SEC Reports complied as to form in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as the
case may be, and the rules and regulations of the Commission thereunder
applicable to such SEC Reports. As of their respective dates, the SEC Reports
did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading.
The audited consolidated financial statements and unaudited interim financial
statements of the Company included in the SEC Reports comply as to form in all
material respects with applicable accounting requirements and with the published
rules and regulations of the Commission with respect thereto (except as may be
indicated thereon or in the notes thereto), have been prepared in accordance
with GAAP applied on a consistent basis throughout the periods covered thereby
and present fairly the financial condition of the Company as of such dates and
the results of operations, changes in stockholders' equity and cash flows of the
Company for such period.
3.6 NO CONFLICTS. The execution, delivery and performance of and compliance
with this Agreement and the Investors Agreement, and the issuance of the Shares,
have not resulted and will not result (i) in any material violation of, or
conflict with, or constitute a material default under, the Company's Charter or
Bylaws or any mortgage, indebtedness, lease, indenture, contract, agreement,
license, instrument, judgement or decree to which the Company is party or
otherwise subject to, or (ii) in the creation of, any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of the Company; and
there is no such violation or default which materially and adversely affects the
business of the Company or any of its properties or assets.
3.7 BROKERS OR FINDERS. The Company has not incurred, and will not incur,
directly or indirectly, as a result of any action taken by the Company, any
liability for brokerage or finders' fees or agents' commissions or any similar
charge in connection with this Agreement.
3
<PAGE> 8
SECTION 4
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby severally represents and warrants to the Company with
respect to the purchase of the Shares as of the date hereof and again as of the
Closing, as to himself only, as follows:
4.1 EXPERIENCE: ACCREDITED INVESTOR. He is a sophisticated investor and has
experience in evaluating and investing in private placement transactions of
securities in companies similar to the Company so that he is capable of
evaluating the merits and risks of his investment in the Company and has the
capacity to protect his own interests. Further, he recognizes that an investment
in the Company is highly speculative and involves significant risks (including
those identified in the SEC Reports) including a complete loss of such
investment. In addition, he is an "accredited investor" as such term is defined
in Rule 501(a) of Regulation D under the Securities Act. He (i) has no need for
liquidity in the investment in the Shares, (ii) is able to bear the substantial
economic risk of an investment in the Shares for an indefinite period and (iii)
could afford the complete loss of his investment in the Shares.
4.2 INVESTMENT. He is acquiring the Shares for investment for his own
account, not as a nominee or agent, and not with the view to, or for resale in
connection with, any distribution thereof and, if Purchaser is not a natural
person, it was not formed solely for purposes of making this investment. He
understands that the Shares to be purchased have not been, and will not be,
registered under the Securities Act or qualified under applicable blue sky or
other state securities laws by reason of specific exemptions from the
registration provisions of the Securities Act and the qualification provisions
of applicable blue sky and other state securities laws, the availability of
which depends upon, among other things, the bona fide nature of the investment
intent and the accuracy of such Purchaser's representations as expressed herein.
In acquiring the Shares, he is acting on his own behalf and is not acting
together with any other person or entity (including any other Purchasers) for
the purpose of acquiring, holding, voting or disposing of the Shares within the
meaning of Section 13(d) of the Exchange Act.
4.3 RULE 144. He acknowledges that the Shares must be held indefinitely
unless subsequently registered under the Securities Act or unless an exemption
from such registration is available. He is aware of the provisions of Rule 144
promulgated under the Securities Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions.
4.4 NO FEDERAL OR STATE APPROVAL. He understands that no Federal or state
agency has passed upon the Shares or made any finding or determination as to the
fairness of the investment or any recommendation or endorsement of the Shares.
4.5 ACCESS TO DATA. He has read carefully and understands this agreement
and has consulted with his own attorney, accountant or investment advisor with
respect to the investment
4
<PAGE> 9
contemplated hereby and its suitability for him. He has had an opportunity to
discuss the Company's business, management and financial affairs with its
management and has had the opportunity to review the Company's facilities. He
also has had opportunity to ask questions of officers of the Company. His taking
advantage of any such opportunity however, does not limit or modify the
representations and warranties of the Company in Section 3 hereof or the right
of any of the Purchasers to rely thereon.
4.6 AUTHORIZATION. This Agreement and the Investors Agreement when executed
and delivered by such Purchaser, will constitute valid and legally binding
obligations of the Purchaser, enforceable in accordance with their terms, except
as such enforcement is subject to the effect of (i) any applicable bankruptcy,
insolvency, reorganization or other laws relating to or affecting creditors'
rights generally, and (ii) general principles of equity (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
4.7 ADDRESS AND TAXPAYER IDENTIFICATION NUMBER. The address and taxpayer
identification number set forth opposite his name on the Purchaser Address and
Taxpayer Identification Number Schedule attached hereto as Exhibit A-1 are true
and correct, such address is his resident or principal place of business, and he
has no present intention of changing such residence or principal place of
business to any other state or jurisdiction.
SECTION 5
CONDITIONS TO CLOSING BY THE PURCHASERS
The Purchasers' obligations to purchase the Shares at the Closing are, at
the option of the Purchasers, subject to the fulfillment of the following
conditions:
5.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations and
warranties made by the Company in Section 3 hereof shall be true and correct in
all material respects as of the Closing Date with the same effect as though such
representations and warranties had been made on the Closing Date except to the
extent any such representation specifically references an earlier date.
5.2 COVENANTS. All covenants, agreements and conditions contained in this
Agreement to be performed by the Company on or prior to the Closing Date shall
have been performed or complied with.
5.3 COMPLIANCE CERTIFICATE. The Company shall have delivered to the
Purchasers a certificate executed by the Co-Chief Executive Officer of the
Company, dated the Closing Date, and certifying, among other things, to the
fulfillment of the conditions specified in Sections 5.1 and 5.2 of this
Agreement.
5.4 OPINION OF COMPANY'S COUNSEL. The Purchasers shall have received from
J. David Cabello, Vice President and General Counsel to the Company, an opinion
addressed to the
5
<PAGE> 10
Purchasers, dated the Closing Date, in form and substance satisfactory to the
Purchasers, substantially in the form of Exhibit B hereto.
5.5 INVESTORS AGREEMENT. The Purchasers and the Company shall have entered
into an investors agreement providing for, among other things, certain
registration rights, rights of first refusal and information rights,
substantially in the form attached hereto as Exhibit C (the "Investors
Agreement").
5.6 PROCEEDINGS AND DOCUMENTS: LEGAL MATTERS. All corporate and other
proceedings in connection with the transactions contemplated at the Closing, and
all documents incident thereto, shall be reasonably satisfactory in form and
substance to the Purchasers. All material matters of a legal nature which
pertain to this Agreement and the Investors Agreement and the transactions
contemplated hereby and thereby, shall be reasonably approved by the Purchasers
on advice of counsel.
5.7 GOOD STANDING CERTIFICATE. The Company shall have delivered to the
Purchasers a Certificate dated as of a recent date issued by the Secretary of
State of Delaware to the effect that the Company is legally existing and in good
standing.
5.8 SECRETARY'S CERTIFICATE. The Company shall have delivered to the
Purchasers a certificate executed by the Secretary of the Company dated as of
the Closing, certifying as to (a) the directors resolutions authorizing the
transactions contemplated by this Agreement; (b) the Charter of the Company; (c)
the Bylaws of the Company; (d) the incumbency of the Chairman, Co-Chief
Executive Officer and Secretary of the Company; and (e) such other matters as
the Purchasers may reasonably request.
SECTION 6
CONDITIONS TO CLOSING BY THE COMPANY
The Company's obligation to sell and issue the Shares at the Closing is, at
the option of the Company, subject to the fulfillment as of the Closing Date of
the following conditions:
6.1 REPRESENTATIONS. The representations made by the Purchasers in Section
4 hereof shall be true and correct in all material respects on the Closing Date
with the same effect as though such representations and warranties had been made
on the Closing Date except to the extent any such representation specifically
references an earlier date.
6
<PAGE> 11
SECTION 7
RESTRICTIONS ON TRANSFERABILITY OF SHARES;
COMPLIANCE WITH SECURITIES ACT
7.1 RESTRICTIONS ON TRANSFERABILITY. The Shares referred to herein are
"Restricted Securities" and shall not be sold, assigned, transferred or pledged
except upon the conditions specified in this Section 7, which conditions are
intended to be in compliance with the provisions of the Securities Art. Each
Purchaser will cause any proposed purchaser, assignee, transferee, or pledgee of
the Shares held by such Purchaser to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Section 7.
7.2 RESTRICTIVE LEGEND. Each certificate representing (i) the Shares, and
(ii) any other securities issued in respect of the Shares upon any stock split,
stock dividend, recapitalization, merger, consolidation or similar event, shall
be stamped or otherwise imprinted with a legend in the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS THE COMPANY RECEIVES AN OPINION OF COUNSEL OR OTHER
EVIDENCE REASONABLY ACCEPTABLE TO IT THAT SUCH SALE OR TRANSFER IS EXEMPT
FROM THE REGISTRATION REQUIREMENTS OF SAID ACT.
Each Purchaser consents to the Company making a notation on its records and
giving instructions to any transfer agent of the Shares in order to implement
the restrictions on transfer established in this Section 7.
The Company agrees to cause new certificates to be issued without any such
legend to any Purchaser and such notation to be removed upon request by such
Purchaser when reasonable in light of the then general practice under the
Securities Act.
SECTION 8
COVENANTS
8.1 FULFILLMENT OF CLOSING CONDITIONS. The Company and each Purchaser
agrees to use its commercially reasonable best efforts to cause the fulfillment
of the closing conditions (to the extent, in whole or in part, within its or his
direct or indirect control) set forth in Sections 5 and 6 hereof.
8.2 AGREEMENT BY PURCHASERS. Each Purchaser hereby severally agrees not to
take any of the following actions without the advance approval of the Board of
Directors of the Company:
7
<PAGE> 12
(a) No Purchaser shall, directly or indirectly, offer, sell or
otherwise transfer any Shares except pursuant to a bona fide public
offering registered under the Securities Act, Rule 144 under the Securities
Act or other transaction that effects a broad distribution of such Shares
and that, to the best of the Purchaser's knowledge, would not result in
such acquiring party or related group of persons to such acquiring party
beneficially owning more than 3% of the combined voting power of the then
outstanding securities of the Company ordinarily having the right to vote
at elections of directors ("Voting Securities"); provided, however, that
this provision shall not prohibit (i) the assignment by a Purchaser to any
wholly owned subsidiary or parent of, or to any corporation or entity that
is, within the meaning of the Securities Act, controlling, controlled by or
under common control with, any such Purchaser, (ii) the assignment to
members of the Purchaser's immediate family and to trusts or entities
established for the benefit of the Purchaser or his immediate family, or
(iii) a bona fide pledge to an institutional lender for money borrowed,
provided, in each case, that the transferees agree to be bound by the terms
and conditions of this Section.
(b) No Purchaser shall solicit proxies or become a "participant" in a
"solicitation" (as such terms are defined in Regulation 14A under the
Exchange Act) in opposition to the recommendation of the majority of the
directors of the Company with respect to the election of directors.
9.3 PUBLICITY. The Company and each Purchaser agrees not to issue any press
release or make any public announcement with respect to this Agreement or the
transactions contemplated hereby unless the prior written consents of the other
parties hereto have been obtained, which consents shall not be unreasonably
withheld; provided however, that the Company may make any public disclosure it
believes in good faith is required by applicable law or any listing or trading
agreement concerning its publicly-traded securities (in which case it will use
its best efforts to advise the Purchasers prior to making such disclosure).
SECTION 9
MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed and construed in all
respects in accordance with the laws of the State of Texas as applied to
agreements made and performed in Texas by residents of the State of Texas.
9.2 SURVIVAL. The representations, warranties, covenants and agreements
made herein shall survive any investigation made by Purchasers and the closing
of the transactions contemplated hereby for a period of two years.
9.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
8
<PAGE> 13
9.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto at the Closing constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that holders of a majority of the Shares, issued and issuable
hereunder may waive, modify or amend, on behalf of all such holders, any
provisions hereof
9.5 NOTICES. ETC. All notices and other communications required or
permitted hereunder shall be in writing (or in the form of a telex or telecopy
(confirmed in writing) to be given only during the recipient's normal business
hours unless arrangements have otherwise been made to receive such notice by
telex or telecopy outside of normal business hours) and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand or
by messenger, or telex or telecopy (as provided above) addressed (a) if to a
Purchaser, at such address as such Purchaser shall have furnished to the Company
in writing or (b) if to any other holder of any Shares, at such address as such
holder shall have furnished the Company in writing or, until any such holder so
furnishes an address to the Company, then to the address of the last holder of
such Shares who has so furnished an address to the Company or (c) if to the
Company, sent to its principal executive offices and addressed to the attention
of the Co-Chief Executive Officer, or at such other address as the Company shall
have furnished to the Purchasers.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid or, if
by telex or telecopy, when received and confirmed in the manner provided above.
9.6 DELAYS OR OMISSIONS. Except as expressly provided herein, no delay or
omission to exercise any right, power or remedy accruing to any holder of any
Shares, upon any breach or default of the Company under this Agreement shall
impair any such right, power or remedy of such holder nor shall it be construed
to be a waiver of any such breach or default, or an acquiescence therein, or of
or in any similar breach or default thereafter occurring; nor shall any waiver
of any single breach or default be deemed a waiver of any other breach or
default theretofore or thereafter occurring. Any waiver, permit, consent or
approval of any kind or character on the part of any holder of any breach or
default under this Agreement, or any waiver on the part of any holder of any
provisions or conditions of this Agreement, must be in writing and shall be
effective only to the extent specifically set forth in such writing. All
remedies, either under this Agreement or by law or otherwise afforded to any
holder, shall be cumulative and not alternative.
9
<PAGE> 14
9.7 SEVERABILITY. In the event that any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal, invalid,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision. In such event, the parties shall negotiate, in good
faith, a legal, valid and enforceable substitute provision which most nearly
effects the intent of the parties in entering into this Agreement.
9.8 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement
are used for convenience only and are not considered in construing or
interpreting this Agreement.
9.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
9.10 CONSTRUCTION. Whenever the context so requires, the singular number
includes the plural and vice versa, and a reference to one gender includes the
other gender or the neuter.
10
<PAGE> 15
The foregoing agreement is hereby executed as of the date first above
written.
TRICORD SYSTEMS, INC.
By: /s/ J. David Cabello
----------------------------------
Name: J. David Cabello
----------------------------
Title: Vice President
----------------------------
General Counsel & Secretary
11
<PAGE> 16
EXHIBIT A
Schedule of and Signature Page for Purchasers
<TABLE>
<CAPTION>
PURCHASER SIGNATURE NUMBER OF SHARES AMOUNT
--------- --------- ---------------- ------
<S> <C> <C> <C>
James M. Harris 400,000 $1,000,000.00
James Easterling 120,000 $ 300,000.00
Jack and Nancy Dinerstein
Family Investment
Partnership, Ltd. 80,000 $ 200,000.00
Alfred Deaton 56,000 $ 140,000.00
Scott Caven 24,000 $ 60,000.00
James Braniff, III 40,000 $ 100,000.00
Murry Bowden 80,000 $ 200,000.00
William D. Leven /s/ William D. Leven 40,000 $ 100,000.00
</TABLE>
<PAGE> 17
EXHIBIT B
Form of Opinion of Counsel to the Company
(attached)
<PAGE> 18
[TRICORD LOGO]
July 23, 1999
To the Purchasers
Listed in Exhibit A
To the Purchase Agreement
Described Herein
Ladies and Gentlemen:
This opinion is being furnished pursuant to Section 5.4 of the Stock
Purchase Agreement, dated as of July 23, 1999 (the "Purchase Agreement"), by and
among Tricord Systems, Inc., a Delaware corporation (the "Company"), and the
Purchasers identified in Exhibit A thereto (the "Purchasers"), relating to the
sale by the Company to the Purchasers of up to 1,600,000 shares of the Company's
common stock, par value $0.01 per share ("Common Stock"). Capitalized terms used
but not defined herein shall have the meaning assigned to such terms in the
Purchase Agreement.
As Vice President, General Counsel and Secretary of the Company, I have
caused to be examined the originals, or copies certified or otherwise
identified, of the Purchase Agreement, the Investors Agreement, the Certificate
of Incorporation and Bylaws of the Company, each as amended to date, corporate
records of the Company, including certain resolutions of the Board of Directors
of the Company, certificates of public officials and of representatives of the
Company, statutes and other instruments and documents, as a basis for the
opinions hereinafter expressed. In giving such opinions, I have relied upon
certificates, statements or other representatives of the Company with respect to
the accuracy of the material factual matters contained in or covered by such
certificates, statements or representations.
In such examinations, I have assumed (i) the genuineness of all signatures,
the authenticity and completeness of all documents, certificates, instruments
and records submitted to me as originals and the conformity to the original
instruments of all documents submitted to me as copies, and the authenticity and
completeness of the originals of such copies, (ii) the due authorization,
execution and delivery by the parties thereto, other than the Company, of all
such documents and instruments examined by me and (iii) that, to the extent that
any such documents and instruments purport to constitute
<PAGE> 19
Purchasers
July 23, 1999
Page -2-
agreements of such other parties, they constitute valid and binding obligations
of such other parties.
Based upon and subject to the foregoing and subject to the limitations set
forth herein, I am of the opinion that:
1. The Company has been duly incorporated and is validly existing in
good standing under the laws of the State of Delaware and has
corporate power and authority to enter into and perform its
obligations under the Purchase Agreement and the Investors Agreement.
2. The Shares have been duly authorized and, when issued and paid for
in compliance with the provisions of the Purchase Agreement, will be
validly issued, fully paid and nonassessable.
3. The Purchase Agreement and the Investors Agreement have each been duly
authorized, executed and delivered by the Company and each constitutes
a valid and legally binding agreement of the Company, enforceable
against the Company in accordance with its respective terms, except as
such enforceability is subject to the effect of any applicable
bankruptcy, insolvency, reorganization or other law relating to or
affecting creditors' rights generally and to general principles of
equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
I am a member of the State Bar of Texas. The opinions set forth
herein are based upon and limited to the laws of the State of Texas and the
general corporation law of the state of Delaware.
This opinion is intended to be for the benefit of the Purchasers and
may be relied upon only by the Purchasers and may not be relied by any other
person or for any other purpose.
Very truly yours,
/s/ J. David Cabello
-----------------------------
J. David Cabello
Vice President,
General Counsel and Secretary
<PAGE> 20
EXHIBIT C
Form of Investors Agreement
(attached)
15
<PAGE> 21
INVESTORS AGREEMENT
THIS INVESTORS AGREEMENT is entered into effective as of July 23, 1999
by and among Tricord Systems, Inc., a Delaware corporation (the "Company"), and
the individuals listed as "Investors" on the signature pages hereto (each an
"Investor" and, collectively, the "Investors").
RECITALS
WHEREAS, the Company and the Investors are parties to that certain
Stock Purchase Agreement, dated as of July 23, 1999 (the "Purchase Agreement"),
providing for the sales by the Company and the purchases by the Investors of
shares of the Company's Common Stock, $.01 par value (the "Common Stock"); and
WHEREAS, the sales of the Common Stock to the Investors is conditioned
upon granting the rights set forth herein to the respective Investors;
NOW THEREFORE, in consideration of the foregoing, the parties agree as
follows:
SECTION 1
DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
"BOARD" means the Board of Directors of the Company.
"COMMISSION" means the Securities and Exchange Commission of the United
States or any other U.S. federal agency at the time administering the Securities
Act.
"COMMON STOCK" means the common stock of the Company, par value $.01
per share.
"EXEMPT ISSUANCES" means:
(i) the sale or issuance of Voting Securities pursuant to an effective
registration statement under the Securities Act,
(ii) the sale or issuance of shares of Common Stock to officers,
directors and employees of, and consultants and advisors to, the Company
pursuant to stock grants, option plans, purchase plans or other compensatory
benefit contracts, programs or arrangements approved by the Board or
<PAGE> 22
upon exercise of options or warrants granted to such parties pursuant to any
such plan or arrangement,
(iii) shares of Common Stock issued upon exercise or conversion of any
options, warrants or rights to acquire shares of Common Stock outstanding on the
date hereof,
(iv) Voting Securities issued pursuant to any merger, consolidation or
acquisition involving the Company or in connection with a Recapitalization,
(v) Voting Securities issued in connection with any acquisition of a
third parties' assets, products, technology or other rights, and
(vi) Voting Securities issued in connection with research and
development partnerships, OEM or distribution arrangements, licensing or
collaborative arrangements or similar transactions, in each case approved by the
Board.
"HOLDER" means each of the Investors, and their transferees as
permitted by Section 2.8 hereof, holding Registrable Securities.
"OTHER HOLDERS" means holders of Company securities, other than
Holders, proposing to distribute their securities pursuant to a registration
under this Agreement.
"PRO RATA PORTION" means, for purposes of Section 4 hereof, the amount
of Company Offered Securities multiplied by a fraction, the numerator of which
shall equal the number of shares of Common Stock issued then held by the
applicable Holder, and the denominator of which shall equal the aggregate number
of shares of Common Stock issued.
"RECAPITALIZATION" means any stock split, stock dividend, stock
combination, recapitalization or similar event.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act (and all applicable blue sky or other
securities laws), and the declaration or ordering of the effectiveness of such
registration statement (and qualification or compliance with such laws).
"REGISTRABLE SECURITIES" means (i) the Common Stock and (ii) any shares
of Common Stock issued or issuable in respect of such Common Stock upon any
Recapitalization, in each case, held by Holders; provided, however, that
Registrable Securities shall not include (i) shares that have been sold to the
public either pursuant to a registration statement or Rule 144 under the
Securities Act or (ii) shares sold in a transaction in which the registration
rights conferred by this Agreement are not transferred as provided in Section
2.8 hereof.
-2-
<PAGE> 23
"REGISTRATION EXPENSES" means all expenses, other than Selling
Expenses, incurred by the Company in complying with Section 2 hereof, including,
without limitation, all registration, qualification, listing and filing fees,
printing expenses, escrow fees, fees and disbursements of counsel for the
Company and one counsel for the Investors as a group selected by holders of at
least a majority of the Registrable Securities proposed to be included in such
registration, blue sky fees and expenses and the expense of any special audits
incident to or required by any such registration (but excluding the compensation
of regular employees of the Company which shall be paid in any event by the
Company).
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the
rules and regulations of the Commission thereunder, all as the same shall be in
effect at the time.
"SELLING EXPENSES" means all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
Holders.
"SELLING HOLDER" means each Holder who holds Registrable Securities
included in a registration statement under the Securities Act pursuant to this
Agreement.
"TRANSFER" means any transfer, sale, assignment, conveyance, pledge,
mortgage, donation, change of legal record or beneficial ownership, issuance or
other disposal or delivery.
"VOTING SECURITIES" means the Common Stock, any other securities of the
Company entitled to vote in the election of directors of the Company, any
securities convertible into or exchangeable for such securities, and any
options, warrants or other rights to purchase such securities.
SECTION 2
REGISTRATION RIGHTS
2.1 Piggyback Registration.
(a) Notice of Registration. If at any time, or from time to time,
the Company shall determine to register any of its Common Stock, either for its
own account or the account of any security holder or holders, other than (i) a
registration relating solely to employee benefit plans, or (ii) a registration
relating solely to a Rule 145 transaction, the Company will:
(A) promptly give to each Holder written notice thereof; and
(B) include in such registration (and any related qualification
under Blue Sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within 20 days after receipt of such written notice from the
Company, by any Holder.
-3-
<PAGE> 24
(b) Underwriting. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.1(a). In such event the right of any Holder to
registration pursuant to Section 2.1 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting shall be limited to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall, together with the Company and Other Holders, enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 2.1, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit or eliminate the Registrable Securities and other
securities to be included in such registration by Holders and Other Holders. The
Company shall so advise all Holders and Other Holders, and the number of shares
that may be included in the registration and underwriting by all Holders and
Other Holders shall be allocated among them, as nearly as practicable, first,
among the Holders in proportion to the respective amounts of Registrable
Securities held by such holders at the time of filing of the registration
statement, and, second, among the Other Holders in proportion to the number of
shares proposed to be included in such registration by such Other Holders. To
facilitate the allocation of shares in accordance with the above provisions, the
Company may round the number of shares allocated to any Holder or Other Holder
to the nearest 100 shares.
If any Holder or Other Holder disapproves of the terms of any such
underwriting, such person may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 2.1 prior to the effectiveness of such registration whether or not any
Holder has elected to include Registrable Securities in such registration.
2.2 Limitations on Subsequent Registration Rights. From and after the
date hereof, the Company will not, without the prior written consent of Holders
of a majority of the then outstanding Registrable Securities, enter into any
agreement with respect to its securities which is inconsistent with, or grants
rights superior or pari passu to, the registration rights granted under this
Section 2; provided, however, that such purchasers shall agree to lockup
restrictions identical to those imposed on the Holders pursuant to Section 2.9
hereof.
2.3 Expenses of Registration.
(a) Registration Expenses. The Company shall bear all Registration
Expenses incurred in connection with all registrations pursuant to Section 2.1.
-4-
<PAGE> 25
(b) Selling Expenses. Unless otherwise stated, all Selling Expenses
directly relating to securities registered on behalf of the Holders and Other
Holders shall be borne by the Holders and Other Holders pro rata on the basis of
the number of shares so registered.
2.4 Registration and Qualification. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act, pursuant to this Agreement, the Company
will as promptly as is practicable and in good faith:
(a) prepare and file with the Commission, as soon as practicable,
and use its best efforts to cause to become effective, a registration statement
under the Securities Act relating to the Registrable Securities to be offered on
such form as the Company determines and for which the Company then qualifies;
(b) prepare and file with the Commission such amendments (including
post-effective amendments) and supplements to such registration statement and
the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the
Securities Act with respect to the disposition of all Registrable Securities
until the earlier of such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition set forth in
such registration statement or the expiration of 135 days after such
registration statement becomes effective; provided that: (i) such 135-day period
shall be extended for a period of time equal to the period the Holder refrains
from selling any securities included in such registration at the request of the
Company or an underwriter of Common Stock (or other securities) of the Company;
and (ii) in the case of any registration of Registrable Securities on Form S-3
which are intended to be offered on a continuous or delayed basis, such 135-day
period shall be extended, if necessary, to keep the registration statement
effective until all such Registrable Securities are sold, provided that Rule
415, or any successor rule under the Securities Act, permits an offering on a
continuous or delayed basis, and provided further that applicable rules under
the Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (A) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (B) reflects
facts or events representing a material or fundamental change in the information
set forth in the registration statement, the incorporation by reference of
information required to be included in (A) and (B) above to be contained in
periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in
the registration statement;
(c) furnish to the Selling Holders and to any underwriter of
Registrable Securities such number of conformed copies of such registration
statement and of each such amendment and supplement thereto (in each case
including exhibits), such number of copies of the prospectus included in such
registration statement (including each preliminary prospectus and any summary
prospectus), in conformity with the requirements of the Securities Act, such
documents incorporated by reference in such registration statement or
prospectus, and such other documents, as the Selling Holders or such underwriter
may reasonably request, and, if requested, a copy of any and all transmittal
letters or other correspondence to, or received from, the commission or any
other
-5-
<PAGE> 26
governmental agency or self regulatory body or other body having jurisdiction
(including any domestic or foreign securities exchange) relating to such
offering;
(d) make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of such registration statement at the
earliest possible moment;
(e) if requested by a Selling Holder, use its best efforts to
furnish to each Selling Holder a "comfort" or "special procedures" letter
addressed to each Selling Holder and any underwriters and signed by the
independent public accountants who have audited the Company's financial
statements included in such registration statement, in each such case covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) and with respect to events subsequent to the
date of such financial statements as are customarily covered in accountants'
letters delivered to underwriters in underwritten public offerings of securities
and such other matters as the Selling Holders may reasonably request;
(f) immediately notify the Selling Holders in writing (i) at any
time when a prospectus relating to a registration hereunder is required to be
delivered under the Securities Act of the happening of any event as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, and
(ii) of any request by the Commission or any other regulatory body or other body
having jurisdiction for any amendment of or supplement to any registration
statement or other document relating to such offering, and in either such case
(i) or (ii) at the request of a Selling Holder prepare and furnish to such
Selling Holders a reasonable number of copies of a supplement to or an amendment
of such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities, such prospectus shall not include an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading;
(g) cause the listing of all such Registrable Securities covered
by such registration statement on each securities exchange and inter-dealer
quotation system on which similar securities issued by the Company are then
listed or quoted and to pay all fees and expenses in connection therewith;
(h) otherwise use its reasonable best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securities holders, as soon as
-6-
<PAGE> 27
reasonably practicable, an earnings statement covering the period of at least
12 months, but not more than 18 months, beginning with the first month after the
effective date of the Registration Statement which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act; and
(i) prepare and file such forms, prosecute such registrations,
obtain such qualifications and comply with all requirements of all state or
foreign governmental or other agencies having jurisdiction under blue sky or
other securities laws and regulations.
2.5 Indemnification; Contribution.
(a) By Company. To the extent permitted by law, the Company will
indemnify each Selling Holder, each of its officers and directors, partners and
legal counsel, and each person controlling such Selling Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions or proceedings in respect thereof),
including any of the foregoing incurred in settlement of any litigation,
commenced or threatened, arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any registration
statement, prospectus, offering circular or other document, or any amendment or
supplement thereto, incident to any such registration, qualification or
compliance or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation by the Company of the Securities Act or
any rule or regulation promulgated under the Securities Act applicable to the
Company in connection with any such registration, qualification or compliance,
and the Company will reimburse each such Selling Holder, each of its officers,
directors, partners and legal counsel, and each person controlling such Selling
Holder, each such underwriter and each person who controls any such
underwriter, for any legal and any other expenses reasonably incurred in
connection with investigating, preparing, settling or defending any such claim,
loss, damage, liability or action, provided that the Company will not be liable
in any such case to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on any untrue statement or omission or alleged
untrue statement or omission, made in reliance upon and in conformity with
written information furnished to the Company by an instrument duly executed by
such Selling Holder, controlling person or underwriter and stated to be
specifically for use therein or such Selling Holder's failure to deliver a copy
of the registration statement or prospectus or any amendment thereto after the
Company has furnished such Selling Holder with a sufficient number of copies of
the same.
(b) By Selling Holders. To the extent permitted by law, each
Selling Holder will indemnify the Company, each of its directors, officers and
legal counsel, each underwriter, if any, of the Company's securities covered by
such a registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, and each
other Selling Holder, each of its officers, directors and partners, and each
person controlling such Selling Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages
-7-
<PAGE> 28
and liabilities (or actions or proceedings in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company, such Selling Holders,
such officers, directors, partners, legal counsel, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating, settling or defending any such claim, loss,
damage, liability or action, in each case to the extent, but only to the extent
that such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Selling Holder
and stated to be specifically for use therein. Notwithstanding the foregoing,
the liability of each Selling Holder under this subsection (b) shall be limited
in an amount equal to the net proceeds of the shares sold by such Selling
Holder, unless such liability arises out of or is based on willful misconduct by
such Selling Holder.
(c) Procedure for Indemnification. Each party indemnified under
subsection (a) or (b) of this Section 2.5 (the "Indemnified Party") shall,
promptly after receipt of actual notice of any claim or the commencement of any
action against such Indemnified Party in respect of which indemnity may be
sought notify the party required to provide indemnification (the "Indemnifying
Party") in writing of the claim or the commencement thereof, provided that the
failure of the Indemnified Party to notify the Indemnifying Party shall not
relieve the Indemnifying Party from any liability which it may have to an
Indemnified Party on account of the indemnity agreement contained in subsection
(a) or (b) of this Section 2.5, unless the Indemnifying Party was materially
prejudiced by such failure, and in no event shall relieve the Indemnifying Party
from any other liability which it may have to such Indemnified Party. If any
such claim or action shall be brought against an Indemnified Party, it shall
notify the Indemnifying Party thereof and the Indemnifying Party shall be
entitled to participate therein, and, to the extent that it wishes, jointly with
any other similarly notified Indemnifying Party, to assume the defense thereof
with counsel reasonably satisfactory to the Indemnified Party. After notice from
the Indemnifying Party to the Indemnified Party of its election to assume the
defense of such claim or action, the Indemnifying Party shall not be liable
(except to the extent the proviso to this sentence is applicable, in which event
it will be so liable) to the Indemnified Party under this Section 2.5 for any
legal or other expenses subsequently incurred by the Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation; provided that each Indemnified Party shall have the right to
employ separate counsel to represent it and assume its defense (in which case,
the Indemnifying Party shall not represent it) if (i) upon the advice of
counsel, the representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them, or
(ii) in the event the Indemnifying Party has not assumed the defense thereof
within 10 days of receipt of notice of such claim or commencement of action, and
in which case the fees and expenses of one such separate counsel shall be paid
by the Indemnifying Party. The Indemnifying Party shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the fees and expenses of more than one firm for all such Indemnified Parties,
unless conflicting interests of
-8-
<PAGE> 29
the Indemnified Parties make the retention of one firm on behalf of all of them
unreasonable. If any Indemnified Party employs such separate counsel it will not
enter into any settlement agreement which is not approved by the Indemnifying
Party, such approval not to be unreasonably withheld. If the Indemnifying Party
so assumes the defense thereof, it may not agree to any settlement of any such
claim or action as the result of which any remedy or relief, other than monetary
damages for which the Indemnifying Party shall be responsible hereunder, shall
be applied to or against the Indemnified Party, without the prior written
consent of the Indemnified Party which consent shall not be unreasonably
withheld. In any action hereunder as to which the Indemnifying Party has assumed
the defense thereof with counsel reasonably satisfactory to the Indemnified
Party, the Indemnified Party shall continue to be entitled to participate in the
defense thereof with counsel of its own choice, but, except as set forth above,
the Indemnifying Party shall not be obligated hereunder to reimburse the
Indemnified Party for the costs thereof. Each Indemnified Party shall furnish
such information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably required in
connection with defense of such claim and litigation resulting therefrom.
(d) Contribution. If the indemnification provided for in this
Section 2.5 shall for any reason be unavailable to an Indemnified Party in
respect of any loss, claim, damage or liability, or any action in respect
thereof, referred to therein, then each Indemnifying Party shall, in lieu of
indemnifying such Indemnified Party, contribute to the amount paid or payable by
such Indemnified Party as a result of such loss, claim, damage or liability, or
action in respect thereof, in such proportion as shall be appropriate to reflect
the relative fault of the Indemnifying Party on the one hand and the Indemnified
Party on the other with respect to the statements or omissions which resulted in
such loss, claim, damage or liability, or action in respect thereof, as well as
any other relevant equitable considerations. The relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Indemnifying Party on the one hand or the
Indemnified Party on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission, but not by reference to any Indemnified Party's stock
ownership in the Company. In no event, however, shall a Selling Holder be
required to contribute in excess of the amount of the net proceeds received by
such Selling Holder in connection with the sale of Registrable Securities in the
offering which is the subject of such loss, claim, damage or liability. The
amount paid or payable by an Indemnified Party as a result of the loss, claim,
damage or liability, or action in respect thereof referred to above in this
subsection (d) shall be deemed to include, for purposes of this paragraph, any
legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating, settling or defending any such action or claim.
No person guilty of fraudulent misrepresentation (within the meaning of Section
1 1(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) Conflicts. Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the underwriting
agreement entered into in
-9-
<PAGE> 30
connection with an underwritten public offering are in conflict with the
foregoing provisions, the provisions in the underwriting agreement shall
control.
2.6 Information by Selling Holder. Selling Holders including any
Registrable Securities in any registration shall promptly furnish to the Company
such information regarding such Selling Holders as shall be necessary to enable
the Company to comply with the provisions hereof in connection with any
registration referred to in this Agreement.
2.7 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its reasonable best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) Furnish to any Holder forthwith upon written request a written
statement by the Company as to its compliance with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act, a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as such Holder may reasonably request in writing in
availing itself of any rule or regulation of the Commission allowing such Holder
to sell any such securities without registration.
2.8 Transfer of Registration Rights. The rights to cause the Company to
register securities granted to Holders under Section 2.1, may be assigned only
concurrent with the sale or transfer of Registrable Securities and only in
connection with (i) the assignment by a Holder to any wholly owned subsidiary or
parent of, or to any corporation or entity that is, within the meaning of the
Securities Act, controlling, controlled by or under common control with, any
such Holder, (ii) the assignment to members of the Holder's immediate family and
to trusts or entities established for the benefit of the Holder or his immediate
family, or (iii) in connection with the sale or transfer of at least 1% of the
total outstanding shares of Registrable Securities (subject to adjustment for
any stock dividend, stock split, subdivision, combination or other
recapitalization of the Company). Notwithstanding the foregoing, such rights may
only be assigned provided that all of the following additional conditions are
satisfied: (a) such assignment is effected in compliance with applicable
securities laws; (b) such assignee agrees in writing to become subject to the
terms of this Agreement; and (c) the Company is given written notice by such
Holder of such assignment, stating the name
-10-
<PAGE> 31
and address of the assignee and identifying the Registrable Securities with
respect to which such rights are being assigned.
2.9 Lockup Agreement. Each Investor agrees that, if in connection with an
underwritten public offering of the Company's securities, the Company or the
underwriters managing the offering so request, he shall not sell, make any short
sale or loan, grant any option for the purchase of or otherwise dispose of any
Company securities (other than those included in the registration) other than
intra-family transfers and transfers to trusts or entities established for the
benefit of him or his immediate family, without the prior written consent of the
Company or such underwriters, as the case may be, for such period of time (not
to exceed 180 days) from the effective date of such registration as may be
requested by the Company or the underwriters; provided that each other officer
and each other director of the Company also agrees to such restrictions. This
Section 2.9 shall also be binding on all Holders and on all transferees or
assignees of Registrable Securities, whether or not such persons are entitled
to registration rights pursuant to Section 2.8.
2.10 Termination. The right of any Holder to effect registration of its
Registrable Securities pursuant to Section 2.1 shall terminate, with respect to
each Holder, upon the seventh anniversary of the date hereof. The respective
indemnities, representations and warranties of the Investors and the Company
shall survive such termination.
2.11 Acknowledgment of Other Registration Rights. The Company hereby
notifies the Investors, and the Investors hereby acknowledge receipt of notice,
of the existence of certain registration rights held by the investors party to
that certain Investors Agreement, dated as of December 7, 1998 (the "December
1998 Investors Agreement"), between such investors and the Company relating to
shares of Common Stock purchased pursuant to that certain Stock Purchase
Agreement, dated as of December 7, 1998, between such investors and the Company.
The Company hereby represents to the Investors that the registration rights
granted by the December 1998 Investors Agreement are as stated in the December
1998 Investors Agreement, a copy of which has been provided to the Investors.
SECTION 3
INFORMATION RIGHTS
3.1 Delivery of Company Information. The Company hereby covenants and agrees
that it will promptly deliver to each Holder a copy of each filing with the
Commission by the Company and a copy of each press release issued by the
Company.
-11-
<PAGE> 32
SECTION 4
RIGHT OF FIRST REFUSAL
4.1 Company Offer. Subject to the terms and conditions contained in this
Section 4, the Company hereby grants to each Investor the right to purchase all
or any part of his Pro Rata Portion of any Voting Securities (other than Exempt
Issuances) which the Company intends to sell or issue after the date hereof.
The Company shall give each Investor 20 days' prior written notice (the
"Company Offer"), delivered or mailed as provided in Section 5.4, of the
Company's intention to sell or issue any Voting Securities (the "Company Offered
Securities"), other than an Exempt Issuance, stating the proposed price per
Voting Security, the number of Voting Securities offered and the other material
terms of such proposed sale or issuance and the Investor's respective record
ownership of Voting Securities. Such notice shall include a representation to
the Investors that the Company has a good faith intention to sell such Voting
Securities to such person on the terms specified. A Company Offer shall
constitute an offer by the Company, irrevocable for 20 days, to sell or issue
to each Investor all or any part of such Investor's Pro Rata Portion of the
Company Offered Securities on the same terms as specified in the Company Offer
or, if such terms provide for consideration other than cash, for cash in an
amount equal to the fair market value of such noncash consideration (as
determined in good faith by the Board) if the parties cannot mutually agree
upon such value.
4.2 Acceptance of Company Offer. Within 20 days after receipt of a
Company Offer, each Investor may elect to provide written notice to the Company
(a "Section 4 Acceptance Notice") that such Investor has elected to purchase all
or a part of his Pro Rata Portion of the Company Offered Securities. If such
Investor fails to give a Section 4 Acceptance Notice by the end of such 20-day
period, such Investor shall be deemed to have elected not to purchase any of
the Company Offered Securities. In addition, in such notice an Investor who
elects to purchase all of his Pro Rata Portion may also elect to purchase his
pro rata share (with others who so elect) of the Pro Rata Portions of other
Investors who do not elect to purchase all of their Pro Rata Portions.
4.3 Closing. The closing of any sale or issue of Company Offered
Securities to an Investor pursuant to this Section 4 shall take place at such
time and on such terms as may be provided for by the terms of such sale of
Voting Securities. At any such closing, the Company shall deliver to such
Investor certificate(s) representing the Company Offered Securities being
issued, registered in the name of such Investor or its nominee, against payment
of the applicable purchase price by check or wire transfer of same day funds.
4.4 Sale to Third Parties. If the Investors in the aggregate do not elect
to purchase all of the Company Offered Securities, the Company shall have the
right to sell and issue the Company Offered Securities not purchased by the
Investors at not less than the price stated in the Company Offer and otherwise
on terms and conditions that are not materially more favorable than those set
forth in the Company Offer on or before the 90th day following the expiration of
the 20-day period in Section 4.2 hereof (subject to extension to comply with
applicable securities and other applicable laws and regulations related to the
sale and issuance of the Company Offered Securities to such third
-12-
<PAGE> 33
party). If the Company Offered Securities have not been sold and issued within
such period, then the Company may not sell or issue any Company Offered
Securities unless it provides the Investors with a new Company Offer pursuant to
Section 4.1 hereof.
4.5 Continuing Rights
(a) The election or non-election to participate in a Company Offer
shall not adversely affect an Investor's right to participate in subsequent
Company Offers pursuant to this Section 4.
(b) To the extent that an Investor does not elect to purchase his Pro
Rata Portion of the Company Offered Securities in connection with any particular
Company Offer, he shall have the prior right to acquire more than his then Pro
Rata Portion in any subsequent Company Offer so as to permit him (even though at
the different price of the later Company Offer) to restore or move toward
restoring his proportionate ownership of Common Stock as in effect on the date
hereof; provided, however, that this should not increase the total number of
Company Offered Securities that may be purchased by Investors. Reasonable
allocations and procedures shall be instituted by the Company to achieve this
goal.
4.6 Termination of Right of First Refusal. The rights of the Investors
under this Section 4 shall terminate upon the fifth anniversary of the date
hereof.
4.7 Transfer. The right of first offer set forth in this Section 4 may
not be assigned or transferred, except that (i) such right is assignable by each
Investor to any wholly owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Securities Act, controlling,
controlled by or under common control with, any such Investor, (ii) such right
is assignable between and among any of the Investors, and (iii) such right is
assignable to members of the Investor's immediate family and to trusts or
entities established for the benefit of the Investor or his immediate family.
SECTION 5
MISCELLANEOUS
5.1 Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas without regard to any principles
of conflicts of law that, if applied, might require or permit the application of
the laws of a different jurisdiction.
5.2 Amendment and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the consent of holders of at least
two-thirds of the then-outstanding Registrable Securities, voting as a class, if
such amendment or waiver would adversely effect the terms and conditions of
Section 2,
-13-
<PAGE> 34
3 or 4 of this Agreement. Any amendment or waiver effected in accordance with
this paragraph will be binding upon the Company, each Investor and each future
holder of Registrable Securities.
5.3 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegally
invalid, unenforceable or void, this Agreement shall continue in full force and
effect without said provision. In such event, the parties shall negotiate, in
good faith, a legal, valid and binding substitute provision which most nearly
effects the intent of the parties in entering into this Agreement,
5.4 Notices. All notices and other communications required or permitted
hereunder shall be in writing (or in the form of a telex or telecopy (confirmed
in writing) to be given only during the recipient's normal business hours unless
arrangements have otherwise been made to receive such notice by telex or
telecopy outside of normal business hours) and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand, messenger, or
telex or telecopy (as provided above) addressed (a) if to an Investor, at such
other address as such Investor shall have furnished to the Company in writing or
(b) if to the Company, one copy should be sent to its principal executive
offices and addressed to the attention of the Corporate Secretary, or at such
other address as the Company shall have furnished to the Investors.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when delivered if
delivered personally, or, if sent by mail, at the earlier of its receipt or 72
hours after the same has been deposited in a regularly maintained receptacle for
the deposit of the United States mail, addressed and mailed as aforesaid, or, if
by telex or telecopy pursuant to the above, when received.
5.5 Facsimile Signatures. Any signature page delivered by a fax machine or
telecopy machine shall be binding to the same extent as an original signature
page, with regard to any agreement subject to the terms hereof or any amendment
thereto. Any party who delivers such a signature page agrees to later deliver an
original counterpart to any party which requests it.
5.6 Conflict with Certificate of Incorporation or Bylaws. It is expressly
agreed that whether or not the Certificate of Incorporation or Bylaws of the
Company fully incorporate the provisions hereof, or any of them, the parties'
rights and obligations shall be governed by this Agreement which shall prevail
in the event of any ambiguity or inconsistency between this Agreement and the
Certificate of Incorporation or Bylaws.
5.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
5.8 Headings and Subheadings. The headings and subheadings used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
-14-
<PAGE> 35
5.9 Termination. Except as otherwise provided herein, this Agreement shall
terminate on the tenth anniversary of the date hereof.
-15-
<PAGE> 36
IN WITNESS WHEREOF, the parties have executed this Investors Agreement as
of the date first above written.
TRICORD SYSTEMS INC.
By: /s/ J. David Cabello
----------------------------------
Name: J. David Cabello
---------------------------
Title: Vice President,
---------------------------
General Counsel & Secretary
---------------------------
INVESTORS:
/s/ James M. Harris
- ----------------------------------
James M. Harris
/s/ James Easterling
- ----------------------------------
James Easterling
/s/ Jack Dinerstein, G.P.
- ----------------------------------
Jack Dinerstein, General Partner
Jack & Nancy Dinerstein
Family Investment Partnership, Ltd.
/s/ Alfred Deaton
- --------------------------------
Alfred Deaton
/s/ H. Scott Caven
- -------------------------------
Scott Caven
/s/ James Braniff
- -------------------------------
James Braniff, III
/s/ Murry Bowden
- -------------------------------
Murry Bowden
-16-
<PAGE> 1
AMENDMENT TO LEASE
This Amendment to Lease is entered into this 10th day of February,
2000, by and between Liberty Property Limited Partnership, a Pennsylvania
limited partnership ("Landlord") and Tricord Systems, Inc., a Delaware
corporation ("Tenant").
WHEREAS, Landlord and Tenant entered into that certain Lease Agreement
dated July 28, 1997 ("Lease") leasing approximately fourteen thousand eight
hundred thirty-one (14,831) rentable square feet designated as Suite 20, in the
building having an address of 2905 NW Boulevard, Plymouth, Minnesota 55441.
WHEREAS, Landlord and Tenant mutually desire to amend the Lease to
extend the term for an additional twenty-four (24) months (through August 31,
2002), and in certain other respects
NOW, THEREFORE, in consideration of the foregoing and of the terms
and conditions herein set forth, it is agreed by and between the parties as
follows:
1. Term Extension. Section 1(c) of the Lease is amended by deletion
of the current definition of "Term" and the substitution therefor of the
following:
"TERM: Sixty (60) months plus any partial month from the
Commencement Date until the first day of the first calendar
month during the Term."
2. Minimum Annual Rent. Section 1(d)(i) is amended to reflect the
Minimum Annual Rent payable in the years ending August 31, 2001 and 2002 as
follows:
In the chart contained in section 1(d)(i) in line 4, insert $134,220.60
in the column labeled "Annual" and $11,185.05 in the column labeled
"Monthly", and in line 5 insert $135,703.68 in the column labeled
"Annual" and $11,308.64 labeled Monthly.
3. Attorney's Fees. Section 18(c)(iv) is amended by the deletion of the
current provision and the substitution therefor of the following:
"Tenant shall pay, within ten (10) days of receipt of an invoice,
Landlord's reasonable attorneys' fees and costs in connection with the
review, processing and documentation of any transfer for which
Landlord's consent is required, provided that such fees and costs shall
not exceed One Thousand Dollars ($1,000)."
4. Other Terms and Conditions. All other terms and conditions of the
Lease shall remain in full force and effect and have not been modified, altered
or changed.
1
<PAGE> 2
IN WITNESS WHEREOF, this Amendment to Lease has been entered into as of
the date first above written.
LANDLORD:
LIBERTY PROPERTY LIMITED PARTNERSHIP,
a Pennsylvania limited partnership
By: Liberty Property Trust
Its: Sole General Partner
By: /s/ Robert L. Kiel
------------------------------------
Robert L. Kiel
Its: Senior Vice President
Regional Director
TENANT:
TRICORD SYSTEMS, INC., a Delaware
corporation
By: /s/ J. Mitcham
------------------------------------
J. Mitcham
Its: Co-Chief Executive Officer
2
<PAGE> 1
March 1, 2000
Joan M. Wrabetz
2175 Tamarack Drive
Medina, MN 55356
Dear Joan:
On behalf of Tricord Systems, Inc., I am pleased to extend to you the following
offer to join the Tricord Team as President and Chief Operating Officer of the
Company. This offer letter is subject to your acceptance and approval by
Tricord's Board of Directors. This offer letter is not an employment contract,
and you will be deemed an at-will employee of Tricord.
Set forth below are the terms of your employment:
1. Your employment will commence on March 1, 2000. During your
employment with the Company, you will make yourself available to
perform such duties, consistent with your other business and
employment activities, as may be agreed to by the Chief Executive
Officer of the Company and you.
2. Your base salary in connection with such employment will be
$200,000 per year. Tricord's pay periods are the 15th and the end
of the month.
3. You will be granted, effective as of the date you commence
employment, an incentive stock option (the "Plan Option") to
purchase 500,000 shares (the "Plan Option Shares") of the
Company's common stock at an exercise price equal to the closing
bid price of the common stock on the first trading day prior to
the date you commence employment. You should note, however, that
the number of shares subject to the Plan Option that will actually
qualify for incentive stock option tax treatment will be limited
by the provisions of the Internal Revenue Code. The Plan Option
will be granted under the terms of the Company's 1998 Stock
Incentive Plan (the "1998 Plan") and the standard form of option
agreement thereunder. The Plan Option will become exercisable in
38 installments as follows: (i) 3% of the Plan Option Shares will
become exercisable six months after the date of grant; (ii) 22% of
the Plan Option Shares will become exercisable 12 months following
the date of grant; and (iii) 75% of the Plan Option Shares will
become exercisable in 36 equal monthly installments thereafter
(i.e., approximately 2.083% of the Plan Option Shares for each
full month of continuous service thereafter).
4. You will also be granted, effective as of the date you commence
employment, a non-statutory stock option (the "Non-Plan Option")
to purchase 200,000 shares (the "Non-Plan Option Shares") of the
Company's common stock at an exercise price equal to the closing
bid price of the common stock on the first trading day prior to
the date you commence employment. The Non-Plan Option will be
granted outside of the Company's 1998 Plan. The Non-Plan Option
will become exercisable in six equal monthly installments
commencing one month following the date of grant (i.e.,
approximately 16.67% of the Non-Plan Option Shares).
<PAGE> 2
5. You agree to execute prior to commencing employment the Company's
standard form of nondisclosure/confidentiality agreement and to
abide by the terms of such agreement.
6. If a Change in Control of the Company (as defined in the 1998
Plan) occurs while you remain employed by the Company and prior to
six months from the date you commence employment, you will receive
a lump sum cash payment equal to 12 months of your then current
base salary.
7. Pursuant to authority granted under Section 13.3 of the 1998 Plan
and the proviso at the end of Section 13.5 of the 1998 Plan, in
the event that your employment with the Company is terminated for
any reason including death, disability or resignation by you (but
not including termination by the Company for "cause," as such term
is defined in the 1998 Plan) within 24 months following a Change
in Control of the Company, (i) your Plan Option (to the extent
held at least six months from the date of grant) and Non-Plan
Option will become immediately exercisable in full as of such
termination and will remain exercisable for the remainder of their
terms and (ii) the limitation on such acceleration of
exercisability set forth in Section 13.5 of the 1998 Plan will
only be applied to the extent that the application of such
limitation would result in the receipt by you, on an after-tax
basis, of a greater amount than if such limitation had not been
applied.
8. If your employment with the Company is terminated without "cause"
(as such term is defined in the 1998 Plan), or you terminate your
employment following a significant reduction in your
responsibilities, you will receive the following: (i) a lump sum
cash payment equal to 12 months of your then current base salary;
(ii) acceleration of the exercisability of options that have been
held at least six months from the date of grant and that would
have become exercisable during the 12-month period following your
termination; and (iii) a 90-day post termination period within
which to exercise options that are exercisable as of your
termination (including the options becoming exercisable pursuant
to clause (ii) above).
9. You represent that neither commencing employment with the Company
nor performing your duties on behalf of the Company will conflict
with, constitute a breach under, or give any third party rights to
Company intellectual property pursuant to, any agreement, contract
or other arrangement to which you are subject.
10. You agree that at no time will you use any trade secrets or other
intellectual property of your current employer or any other third
party while performing your duties for the Company.
As an employee, you will have the opportunity to participate in the Tricord
Employee Benefit Package, subject to eligibility requirements of the various
plans.
Please indicate your acceptance of this offer by signing and returning this
letter to me. Your employment will be effective upon approval by the Board of
Directors.
<PAGE> 3
March 1, 2000
Joan M. Wrabetz
Page 3
I am confident that you will make a significant contribution to the success and
growth of Tricord, and we are looking forward to having you on the Tricord Team.
Very truly yours,
/s/ John J. Mitcham
- ---------------------------------------
John J. Mitcham
Chairman and Co-Chief Executive Officer
ACCEPTED:
/s/ Joan M. Wrabetz
- --------------------------------------
Joan M. Wrabetz
March 1, 2000
DATE OF BOARD APPROVAL: March 1, 2000
<PAGE> 1
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, 1999 and 1998 and for each of the three years ended December 31,
1999 should be read in conjunction with the consolidated financial statements
and notes included elsewhere in this annual report.
On August 27, 1999, the Company sold all remaining assets related to
the server line of business (sometimes referred to as the "legacy business").
The Company has reported results of operations of the legacy business as
discontinued operations for all periods presented.
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS: For the years ended December 31,
----------------------------------------------------
(In thousands, except per share data) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $ 3,442 2,473 2,351 - -
Sales and marketing 2,645 905 1,058 - -
General and administrative 1,890 856 1,099 3,256 4,278
Other income, net (270) (380) (12) - -
------- ------ ------ ------ ------
7,707 3,854 4,496 3,256 4,278
------- ------ ------ ------ ------
Loss from continuing operations (7,707) (3,854) (4,496) (3,256) (4,278)
Discontinued operations:
Income (loss) from operations of
legacy server business (net of
taxes of $224 in 1997) 228 1,743 (6,435) (11,948) (32,875)
Loss on disposal of legacy
server business (158) - - - -
------- ------ ------ ------ ------
70 1,743 6,435) (11,948) (32,875)
------- ------ ------ ------ ------
Net loss $(7,637) (2,111) (10,931) (15,204) (37,153)
======= ====== ====== ====== ======
Loss per share from continuing
operations - basic and diluted $ (0.39) (0.26) (0.33 ) (0.24) (O.32)
======= ====== ====== ====== ======
Income (loss) per share from
discontinued operations - basic
and diluted $ - 0.12 (0.48) (0.90) (2.49)
======= ====== ====== ====== ======
Net loss per share - basic and diluted $ (0.39) (0.14) (0.81) (1.14) (2.81)
======= ====== ====== ====== ======
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
4
<PAGE> 2
<TABLE>
<CAPTION>
December 31,
------------
FINANCIAL POSITION (IN THOUSANDS): 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 2,625 5,599 2,977 8,140 20,020
Total Assets 3,432 7,353 6,755 21,938 40,167
Stockholders' Equity 2,902 5,842 3,667 14,175 28,754
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
GENERAL DATA AND RATIOS 1998 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current Ratio 5.9:1 4.7:1 2.0:1
Common shares outstanding (in thousands) 20,169 18,961 13,460
Book value per share $ 0.14 0.31 0.27
Number of employees 26 35 38
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
Throughout 1999 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 1999, and the Company may not receive
revenues from TSMS-based products in 2000.
The Company had 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(R) and Novell(R) NetWare(R).
On August 27, 1999, the Company sold all assets related to the server line of
business (sometimes referred to as the "legacy business"), except for existing
trade accounts receivable, to EFC Systems, Inc. ("EFC") in exchange for the
assumption of all liabilities of the legacy business, excluding Year 2000 issues
relating to the legacy business, which the Company believes are not material.
The sale of the legacy business resulted in an initial loss of $207,000, which
was recorded in 1999. Pursuant to terms of the sale agreement, the Company may
receive up to $200,000 of cash payments from EFC, contingent upon the level of
sales of Tricord server-related products and services from the date of sale
through December 31, 2000. In 1999 the Company received payments of
approximately $49,000 from EFC related to this contingent payment portion of the
sale agreement, which reduced the net loss from the sale of the legacy business
to $158,000 for the year ended December 31, 1999.
The Company has reported results of operations of the legacy business as
discontinued operations for all periods presented. Except where otherwise
indicated, the discussion below relates to the Company's continuing operations.
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 3
In July 1999, the Company effected a workforce reduction to streamline its
operations. The reduction resulted in the severance of eleven employees
primarily engaged in performing legacy business activities. The costs of the
workforce reduction, which included severance payments and stock compensation
charges totaling $339,000, have been included in the 1999 loss from
discontinued operations. The Company expects this workforce reduction to have
favorable effects on the costs of the Company in 2000.
See "Certain Important Factors" at the end of this section for a discussion
regarding forward looking statements contained herein.
RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT
During the last three years, expenses for research and development consisted
primarily of personnel costs and depreciation of capital equipment used in
research and development. Research and development expenses increased to
$3,442,000 in 1999 from $2,473,000 in 1998 and increased in 1998 from $2,351,000
in 1997. The increase from 1998 to 1999 was due primarily to $510,000 in
non-cash compensation expense in 1999, related to certain options granted and
restricted stock issued in 1998 and $302,000 in non-cash consulting expense
related to an increase in the value of options granted to non-employee
development contractors for services provided in 1999. The increase from 1997 to
1998 was due to increases in various operating expenses. The Company
currently anticipates that research and development costs will rise during 2000
as the Company continues to focus on the development of TSMS.
SALES AND MARKETING
For 1999, sales and marketing expenses consisted primarily of compensation and
expenses for marketing research and analysis for TSMS. For 1998 and 1997, these
expenses consisted primarily of compensation and marketing materials. Sales and
marketing expenses increased to $2,645,000 in 1999 from $905,000 in 1998 and
decreased in 1998 from $1,058,000 in 1997. The increase from 1998 to 1999 was
primarily due to increases in personnel costs due to headcount additions and
expenses for marketing research and analysis for TSMS, as well as $511,000 of
non-cash stock compensation expense in 1999 related to certain options granted
and restricted stock issued in 1998. The Company currently anticipates that
sales and marketing expenses will increase in 2000 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 increased to $1,890,000 in 1999 from
$856,000 in 1998 and decreased in 1998 from $1,099,000 in 1997. The increase
from 1998 to 1999 was due to an increase in personnel costs related to headcount
additions, an increase in professional fees and $405,000 of non-cash
compensation expense in 1999 related to certain options granted and restricted
stock issued in 1998. The decrease from 1997 to
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 4
1998 was due to lower fees for professional services. The Company currently
anticipates that general and administrative expenses for 2000 will be higher
than in 1999 as the Company expands its infrastructure in anticipation of future
growth of TSMS.
DISCONTINUED OPERATIONS
On August 27, 1999, the Company sold all remaining assets related to its server
line of business (sometimes referred to as the "legacy business"), except for
existing trade accounts receivable, to EFC Systems, Inc. ("EFC") in exchange for
the assumption of all liabilities of the legacy business, excluding Year 2000
issues relating to the legacy business, which the Company believes are not
material. The sale of the legacy business resulted in an initial loss of
$207,000, which was recorded in 1999. Pursuant to terms of the sale agreement,
the Company may receive up to $200,000 of cash payments from EFC, contingent
upon the level of sales of Tricord server-related products and services from the
date of sale through December 31, 2000. In 1999 the Company received payments of
approximately $49,000 from EFC related to this contingent payment portion of the
sale agreement, which reduced the net loss from the sale of the legacy business
to $158,000 for the year ended December 31, 1999.
[TRICORD SYSTEMS, INC. LOGO]
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INCOME TAXES
As of December 31, 1999, for federal income tax purposes, the Company had
domestic net operating loss carryforwards of approximately $80,000,00. These
loss carryforwards expire if not utilized by various dates between 2002 and
2019. Due to uncertainty as to the Company's ability to generate taxable income,
the Company has established a full valuation allowance to offset the benefits
associated with the net operating loss and tax credit carryforwards. The Company
did not incur income tax liabilities in 1999, 1998 and 1997 due to its net
losses.
FINANCIAL INSTRUMENTS
The Company invests excess funds not required for current operations in cash
equivalents, primarily money market funds or commercial paper with original
maturities 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 $33,000.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $5,224,000 in 1999. Cash was primarily
used in 1999 to fund the Company's net loss, and was primarily offset by
non-cash stock compensation expense. Cash used in operating activities was
$1,277,000 in 1998 and $2,060,000 in 1997. Cash was primarily used in 1998 and
1997 to fund the Company's net loss in each year and decreases in accounts
payable. These uses were partially offset principally by non-cash depreciation
and amortization expenses and decreases in accounts receivable and inventories.
Cash used in investing activities in 1999, 1998 and 1997 was $233,000, $55,000
and $361,000, respectively, principally due to capital expenditures. The Company
anticipates that its capital expenditures in 2000 will be more than the 1999
level. The Company has no significant commitments for the purchase of capital
equipment.
Cash provided by financing activities in 1999, 1998 and 1997 was $2,324,000,
$3,834,000 and $85,000, respectively, principally due to proceeds from private
placements in 1999 and 1998, as described below, as well as stock options
exercised and stock issued under the Company's Employee Stock Purchase Plan.
In July 1999, the Company received $2,100,000 from a private placement of
840,000 shares of common stock at a price of $2.50 per share.
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
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 6
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.
None of these warrants have been exercised as of December 31, 1999.
As of December 31, 1999, the Company had $3,082,000 in cash and cash
equivalents. The Company plans to raise additional working capital through debt
or equity financing. If the Company is unable to raise the capital it is seeking
or if there is a significant delay in raising such capital, management would
implement a contingency plan to conserve working capital which could include
significant cost-reduction measures. Management believes implementation of this
plan would allow the Company to manage its cash resources to continue its
operations through at least March 31, 2001, although research and development
efforts would be slowed. Additionally, capital will ultimately be required for
the Company to complete development and commence commercial marketing of its
TSMS-based products. 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's ability
to complete its product development in the time frame contemplated.
YEAR 2000
Prior to January 2000, the Company evaluated its business and operational
systems to ensure readiness for the year 2000. As a result, the Company believes
that all mission critical software and hardware was assessed, and if necessary,
remedied to be ready for the year 2000. All mission critical software and
hardware has continued to function beyond January 1, 2000 without interruption.
Because substantially all of the Company's Year 2000 efforts were made using
internal personnel, the costs associated with the Year 2000 assessment and
corrections were not material to the Company. All such costs to date have been
expensed as incurred.
The Company is responsible for all Year 2000 issues, if any, related to its
server line of business sold to EFC. The Company has had no claims related to
Year 2000 issues related to its server line of business, although there can be
no assurance that claims will not be asserted in the future.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No 133"). This statement establishes a new model
for accounting for derivatives and hedging activities. Under SFAS No. 133, all
derivatives must be recognized as assets and liabilities and measured at fair
value. In July 1999, the FASB issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral
of Effective Date of FASB
[TRICORD SYSTEMS, INC. LOGO]
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Statement No. 133," which defers the effective date to all fiscal quarters of
fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 is not
expected to have a significant impact on the Company's financial position or
results of operations.
In January 1999, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-9 ("SOP 98-9"), "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 retains the
limitations of SOP 97-2 on what constitutes vendor-specific objective evidence
of fair value. SOP 98-9 will be effective for transactions entered into in
fiscal years beginning after March 15, 1999. The adoption of SOP 98-9 is not
expected to have a significant impact on the Company's financial position or
results of operations.
CERTAIN IMPORTANT FACTORS
This Annual Report contains certain forward looking statements within the
meaning of federal and state securities laws. 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:
- Because the Company sold its legacy server business, it has no
revenues to fund its ongoing TSMS product development and marketing
operations. During 2000, continued product development and marketing
necessarily requires that the Company obtain additional funds from
investors. The Company is pursuing additional investors, however,
there can be no assurance that funds will be obtained on acceptable
terms or at all, and the failure to obtain additional funds would have
a material adverse effect on the Company.
- 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.
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 8
- 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,
including successful development of TSMS. 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 OEMs and
other distribution 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. LOGO]
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<PAGE> 9
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 generally accepted in the
United States 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, Mr. Yuval Almog 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 John F. Gribi
Chairman and Vice President and
Co-Chief Executive Officer Chief Financial Officer
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 10
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, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 auditing standards generally accepted in the
United States 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
February 17, 2000
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 11
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(in thousands, except per share data) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating expenses:
Research and development 3,442 2,473 2,351
Sales and marketing 2,645 905 1,058
General and administrative 1,890 856 1,099
--------- --------- ---------
7,977 4,234 4,508
--------- --------- ---------
Operating loss (7,977) (4,234) (4,508)
--------- --------- ---------
Other income (expense):
Interest, net 216 193 204
Other, net 54 187 (192)
--------- --------- ---------
270 380 12
--------- --------- ---------
Loss from continuing operations (7,707) (3,854) (4,496)
--------- --------- ---------
Discontinued operations:
Income (loss) from operations of legacy server business 228 1,743 (6,435)
Loss on disposal of legacy server business (158) - -
--------- --------- ---------
Income (loss) from discontinued operations 70 1,743 (6,435)
--------- --------- ---------
Net loss $ (7,637) (2,111) (10,931)
========= ========= =========
Loss per share from continuing operations-
basic and diluted $ (0.39) (0.26) (0.33)
========= ========= =========
Income per share from discontinued
operations - basic and diluted $ - 0.12 0.48
========= ========= =========
Net loss per share - basic and diluted $ (0.39) (0.14) (0.81)
========= ========= =========
Weighted average common shares outstanding -
basic and diluted 19,472 14,573 13,447
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 14
<PAGE> 12
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
At December 31,
------------------------
(In thousands, except per share data) 1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,082 6,215
Accounts receivable, net - 162
Inventories, net - 637
Other current assets 73 96
--------- ---------
Total current assets 3,155 7,110
Equipment and improvements, net 277 243
--------- ---------
Total Assets $ 3,432 7,353
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 98 398
Accrued payroll, benefits and related taxes 306 344
Deferred revenue - 525
Other accrued expenses 126 244
--------- ---------
Total current liabilities 530 1,511
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 75,000 shares authorized,
20,169 and 18,961 shares outstanding 202 190
Additional paid-in capital 91,277 87,483
Unearned compensation (4,673) (5,564)
Accumulated deficit (83,904) (76,267)
--------- ---------
Total stockholders' equity 2,902 5,842
--------- ---------
Total Liabilities and Stockholders' Equity $ 3,432 7,353
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 15
<PAGE> 13
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
(In thousands) 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,637) (2,111) (10,931)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock compensation 2,208 194 -
Depreciation and amortization 227 355 2,598
Loss on disposal of equipment - 22 643
Provision for losses on accounts receivable (22) (142) (455)
Loss on sale of legacy server business 158 - -
Provision for losses on inventories - 71 1,818
Loss on termination of facilities lease - - 975
Provision for loss on equipment - - 764
Deferred income taxes - - 224
Other (42) 82 196
Changes in operating assets and liabilities:
Accounts receivable 184 661 4,410
Inventories 333 789 1,669
Other current assets 12 86 704
Accounts payable (169) (310) (2,189)
Accrued payroll, benefits and related taxes 37 (75) (766)
Deferred revenue (395) (421) (99)
Other accrued expenses (118) (478) (1,621)
--------- --------- ---------
Net cash used in operating activities (5,224) (1,277) (2,060)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (282) (55) (420)
Sale of legacy server business 49 - -
Change in other assets - - 59
--------- --------- ---------
Net cash used in investing activities (233) (55) (361)
--------- --------- ---------
Cash flows from financing activities:
Stock option exercises and employee stock purchase plan 224 834 85
Proceeds from private placement 2,100 3,000 -
--------- --------- ---------
Net cash provided by financing activities 2,324 3,834 85
--------- --------- ---------
Effect of exchange rate changes on cash - - 338
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (3,133) 2,502 (1,998)
Cash and cash equivalents at beginning of year 6,215 3,713 5,711
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,082 6,215 3,713
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 16
<PAGE> 14
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, 1996 13,407,130 134 77,522 - (256) (63,225)
Stock options and stock purchase plan 52,754 1 84 - - -
Foreign currency translation adjustments - - - - 338 -
Net and comprehensive 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 stock purchase plan 965,462 10 824 - - -
Stock issued to employees and Directors 704,523 7 493 - - -
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 and comprehensive loss - - - - - (2,111)
---------- ------- ---------- --------- --------- --------
Balances, December 31, 1998 18,961,012 $ 190 87,483 (5,564) - (76,267)
Sale of common stock 840,000 8 2,092
Stock options and stock purchase plan 272,062 4 457
Stock issued to employees and Directors 56,332 165
Amortization of unearned compensation 1,530
Stock issued for services 39,872 90
Stock options issued for services 990 (639)
Net and comprehensive loss (7,637)
---------- ------- ---------- --------- --------- --------
Balances, December 31, 1999 20,169,278 $ 202 91,277 (4,673) - (83,904)
========== ======= ========== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 17
<PAGE> 15
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 1999, 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 1999, and
the Company may not receive revenues from TSMS-based products in 2000.
The Company plans to raise additional working capital through debt or equity
financing. If the Company is unable to raise the capital it is seeking or if
there is a significant delay in raising such capital, management would implement
a contingency plan to conserve working capital which could include significant
cost-reduction measures. Management believes implementation of this plan would
allow the Company to continue its operations to at least March 31, 2001,
although research and development efforts would be slowed. Additionally, capital
will ultimately be required for the Company to complete development and commence
commercial marketing of its TSMS-based products. 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's ability to complete its product development in the time
frame contemplated.
The Company had 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.
DISCONTINUED OPERATIONS
On August 27, 1999, the Company sold all remaining assets related to the server
line of business (sometimes referred to as the "legacy business"), except for
existing trade accounts receivable, to EFC Systems, Inc. ("EFC") in exchange for
the assumption of all liabilities of the legacy business, excluding Year 2000
issues relating to the legacy business which the Company believes are not
material. The sale of the legacy business resulted in an initial loss of $207
in 1999. Pursuant to terms of the sale agreement, the Company may receive up to
$200 of cash payments from EFC, contingent upon the level of sales of Tricord
server-related products and services from the date of sale through December 31,
2000. In 1999 the Company received contingent payments of approximately $49 from
EFC related to this contingent payment portion of the sale agreement, which
reduced the net loss from the sale of the legacy business to $158 for the year
ended December 31, 1999.
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The Company has reported results of operations of the legacy business as
discontinued operations for all periods presented. Revenues from the legacy
server business included in discontinued operations were $291, $3,853 and
$12,660 in 1999, 1998 and 1997, respectively.
In July 1999, the Company effected a workforce reduction to streamline its
operations. The reduction resulted in the severance of eleven employees engaged
in performing legacy business activities. The costs of the workforce reduction,
which included severance payments and stock compensation charges totaling $339,
have been included in the 1999 loss from discontinued operations.
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 most of its international
subsidiaries during 1998, and has begun the liquidation of its remaining
subsidiary in the United Kingdom, which will be completed in the first quarter
of 2000.
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, 1999 and
1998 are concentrated in money market accounts and commercial paper.
INVENTORIES
Inventories were stated at the lower of cost or market. Cost was determined
using standard costs, which approximated costs determined using the first-in,
first-out method. Appropriate consideration was given to deterioration,
obsolescence and other factors in the evaluation of net realizable value.
Inventories consisted mostly of spare parts and expansion products for the
Company's legacy business.
On August 27, 1999, the Company sold inventories related to the legacy server
line of 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 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.
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
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 17
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 INCOME (LOSS) PER SHARE
Net loss per share from continuing operations is computed by dividing net loss
from continuing operations by the weighted average number of common shares
outstanding during each period. Net income (loss) per share from discontinued
operations is computed by dividing net income from discontinued operations by
the weighted average number of common shares outstanding during each period. Net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during each period. Potentially dilutive common
shares are excluded from the calculation of net loss per share from continuing
operations and net loss per share as their impact is antidilutive. Net loss per
share from continuing operations and net loss per share do not include common
stock options and warrants ultimately exercisable for the purchase of
approximately 8,500,000 shares as of December 31, 1999.
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.
2. SELECTED FINANCIAL STATEMENT INFORMATION
SUPPLEMENTAL BALANCE SHEET INFORMATION:
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
Accounts receivable:
Accounts receivable......................................... $ - 841
Less allowance for doubtful accounts........................ - (679)
-------- --------
$ - 162
======== ========
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
20
<PAGE> 18
<TABLE>
<S> <C> <C>
Inventories:
Spare parts and expansion products.......................... $ - 3,946
Less inventory reserves..................................... - (3,309)
-------- --------
$ - 637
======== ========
Equipment and improvements:
Office equipment and leasehold improvements................. $ 537 1,314
Engineering equipment....................................... 127 770
Production equipment........................................ - 99
-------- --------
664 2,183
Less accumulated depreciation and amortization.............. (387) (1,940)
-------- --------
$ 277 243
======== ========
Other accrued expenses:
Warranty.................................................... $ 25 144
Other....................................................... 101 100
-------- --------
$ 126 244
======== ========
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
21
<PAGE> 19
SUPPLEMENTAL CASH FLOW INFORMATION:
During 1999, $75 of accrued payroll obligations were settled through the
issuance of 22,640 shares of common stock of the Company. Also during 1999,
expenses of $180 were settled through the issuance of 73,564 shares of common
stock of the Company to directors and consultants.
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
The Company had no significant international operations during 1999, 1998 or
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 is in the process of liquidating
its United Kingdom subsidiary, which has no significant operating activity. The
Company anticipates no significant gains or losses related to the liquidation of
its United Kingdom subsidiary.
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 five-year term and
requires the Company to pay a pro rata share of the lessor's operating costs,
including real estate taxes. Rent expense under all leases was $237, $101 and
$691 for the years 1999, 1998 and 1997, respectively. Rent expense for 1999
includes an accrual of $69 related to the Company's remaining rent obligations,
net of estimated sublease rental income, for its Houston, Texas office, which
the Company vacated during 1999.
As of December 31, 1999 future minimum lease payments due under noncancelable
operating leases, excluding operating costs, are as follows:
2000.............................................. $ 189
2001.............................................. 221
2002.............................................. 98
---------
$ 508
=========
[TRICORD SYSTEMS, INC. LOGO]
22
<PAGE> 20
In February 2000, the Company amended its headquarters facility lease to extend
the term through August 2002.
4. INCOME TAXES
As of December 31, 1999, the Company had generated domestic net operating loss
carryforwards of approximately $80,000 for tax reporting purposes that may be
offset against future taxable income. In addition, as of December 31, 1999, the
Company also had available approximately $2,200 of research and experimentation
tax credit carryovers available to reduce future income taxes. These net
operating losses and credit carryforwards expire if not utilized by various
dates between 2002 and 2019. 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 depreciation as of
December 31, 1999 and related to obsolete inventory reserves, accounts
receivable and deferred revenue as of December 31, 1998.
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 $24, $28, and $46 of matching
contributions for 1999, 1998 and 1997, respectively.
The Company has determined that partial terminations of its 401(k) plan, as
defined in the Internal Revenue Code, occurred in 1999 and 1997. A partial
termination requires that the 401(k) plan must vest 100% of an affected
participant's Company matching contributions. The Company estimates that it will
be required to fund approximately $69 of unvested matching contributions in 2000
that became 100% vested as a result of these partial terminations.
6. 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
[TRICORD SYSTEMS, INC. LOGO]
23
<PAGE> 21
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 had requested that the Company pay royalties of approximately
$800 on the software it disposed of. The Company had informed Novell that it did
not owe royalties on the disposed software because the OEM agreement only
provided 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
had claimed damages due to alleged defects in Novell's software product. Both
the Company and Novell commenced legal action by filing complaints regarding
these disputes.
In June 1999, the Company entered into a mediation settlement with Novell to
settle the disputes discussed above. The terms of the settlement will remain
confidential, however, the resolution of this dispute had no material effect on
the Company's operations or financial position.
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 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.
7. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS
[TRICORD SYSTEMS, INC. LOGO]
24
<PAGE> 22
In July 1999, the Company sold 840,000 shares of the Company's common stock at a
price of $2.50 per share to a group of private investors. 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.
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, 1999,
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 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 a contingent payment related to a 1996 acquisition (207,143
shares) and to new officers of the Company (600,000 shares). The restrictions on
the shares issued to officers of the Company lapse based on continuous
employment for a defined time period. The Company recorded the full fair market
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, 1999 has been included as a charge to operations for
1999 ($187) and 1998 ($136). As of December 31, 1999 $183 of unearned
compensation related to unvested restricted stock grants remains to be
recognized as the underlying options lapse.
OTHER STOCK COMPENSATION EXPENSE
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 were
recorded by the Company as unearned compensation in stockholders' equity in the
amount of $5,252 as of December 31, 1998, 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. Related compensation charges to operations were $1,343 and $58 for
1999 and 1998, respectively.
As of December 31, 1999, the Company has outstanding options for the purchase of
299,000 shares of common stock which were granted to non-employee contractors.
The Company records related compensation expenses based upon the fair value of
the options
[TRICORD SYSTEMS, INC. LOGO]
25
<PAGE> 23
during the period the contractors provide services. Such fair values are
measured using the Black-Scholes option pricing model. Compensation expense
related to these options was $351, $90 and $7 during 1999, 1998 and 1997,
respectively. As of December 31, 1999, the Company has recorded $639 unearned
compensation related to 165,000 unvested 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 the
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 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 options to purchase common stock
at the fair market value on the date of grant. Such grants generally become
exercisable over periods of up to three years and expire within five years.
The following summarizes stock option activity during each of the three years in
the period ended December 31, 1999:
<TABLE>
<CAPTION>
Shares 1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Granted 521,000 3,976,000 3,717,261
Exercised (249,253) (934,541) -
Canceled (326,937) (585,465) (4,021,907)
-------- --------- ----------
December 31:
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
26
<PAGE> 24
<TABLE>
<S> <C> <C> <C>
Options outstanding 5,508,804 5,563,994 3,108,000
========= ========= =========
Options exercisable 1,824,235 676,798 182,375
========= ======= =======
Weighted average exercise
price per share 1999 1998 1997
- --------------------------------------------------------------------------------
Granted $ 2.68 0.64 0.86
Exercised 0.79 0.87 -
Canceled 1.58 3.01 3.41
December 31:
Options outstanding 0.92 0.78 1.41
Options exercisable 0.88 1.47 9.99
</TABLE>
Stock options outstanding at December 31, 1999 had a range of exercise prices of
$0.50 to $6.25 and an average contractual useful life of 3.1 years.
Approximately 99% of the options outstanding had an exercise price of $3.13 or
less, of which approximately 33% of these options are exercisable and have a
weighted average contractual life of 3.1 years.
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 250,000 shares of common stock for issuances under the
Employee Stock Purchase Plan (the "Purchase Plan"). 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 sold
approximately 23,000, 30,000 and 53,000 shares under the Purchase Plan in 1999,
1998 and 1997, respectively.
WARRANTS
The Company issued warrants for the purchase of 3,000,000 shares at $3.50 per
share during 1998 in connection with its sale of common stock as described
above. All of these warrants were outstanding at December 31, 1999.
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>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss
As reported $ (7,637) (2,111) (10,931)
Pro forma (9,896) (4,512) (13,306)
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
27
<PAGE> 25
<TABLE>
<S> <C> <C> <C>
Net loss per common share
As reported $ (0.39) (0.14) (0.81)
Pro forma (0.51) (0.31) (0.99)
</TABLE>
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 the full impact of the 1999 activity is
reflected.
The weighted average grant-date fair value of the options granted in 1999, 1998
and 1997 was $1.99, $0.43 and $0.56 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 at the end of four
years, which is generally the vesting period of the option grants; no dividends
will be paid by the Company during the term of the options granted; cumulative
stock price volatility ranged from approximately 106% to 109%; and the weighted
average risk-free interest rate was 6.50%, 5.01% and 5.92% for 1999, 1998 and
1997, respectively. In addition, average forfeitures were assumed to be 2%, 4%
and 35% for 1999, 1998 and 1997, 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.
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 managed its operations as two business segments, server and
software, until August 1999, when the server business was sold (see Note 1).
9. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
[TRICORD SYSTEMS, INC. LOGO]
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<PAGE> 26
<TABLE>
<S> <C> <C> <C> <C>
1999
Loss from continuing
operations $ (2,160) (1,851) (1,620) (2,076)
Income (loss) from
discontinued operations 322 152 (453) 49
Net loss (1,838) (1,699) (2,073) (2,027)
Loss per share from continuing
operations - basic and diluted (0.12) (0.10) (0.08) (0.10)
Income (loss) per share from
discontinued operations -
basic and diluted 0.02 0.01 (0.02) -
Net loss per share - basic and
diluted (0.10) (0.09) (0.10) (0.10)
1998
Loss from continuing
operations $ (1,188) (1,145) (689) (832)
Income from discontinued
operations 496 590 455 202
Net loss (692) (555) (234) (630)
Loss per share from continuing
operations - basic and diluted (0.09) (0.08) (0.05) (0.05)
Income per share from
discontinued operations -
basic and diluted 0.04 0.04 0.03 0.01
Net loss per share - basic and
diluted (0.05) (0.04) (0.02) (0.04)
</TABLE>
Quarterly calculations of net income or loss per share are made discretely for
each quarter during the fiscal year.
[TRICORD SYSTEMS, INC. LOGO]
29
<PAGE> 27
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
Thursday, May 18, 2000. A formal notice of the meeting, together with proxy
statement and proxy, will be mailed on or about April 14, 2000 to stockholders
of record on April 7, 2000.
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) 551-6402.
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 SmallCap Market (since July 30, 1998) and the Nasdaq National Market
(until July 29, 1998). These prices do not include adjustments for retail
mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
1999 1998
---- ----
High Low High Low
------------ ------------
<S> <C> <C> <C> <C>
First quarter $ 3.88 2.13 1.31 0.56
Second quarter 3.75 1.75 1.19 0.84
Third quarter 4.50 2.75 1.09 0.50
Fourth quarter 7.00 3.50 2.97 0.44
</TABLE>
[TRICORD SYSTEMS, INC. LOGO]
30
<PAGE> 28
On March 24, 2000, the closing price for the Company's common stock was $10.75.
On March 27, 2000, there were approximately 336 shareholders of record of the
Company's common stock. The Company estimates that an additional 6,500
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. LOGO]
31
<PAGE> 29
CORPORATE INFORMATION
DIRECTORS
Yuval Almog - President, CORAL Group, Inc.
Tom R. Dillon - Vice President of Operations, Netflix.com Inc.
Donald L. Lucas - Private Investor
Fred G. Moore - President, Horison, Inc.
John J. Mitcham - Chairman of the Board of Directors;
Co-Chief Executive Officer, Tricord Systems, Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
FINANCE AND AUDIT COMMITTEE
Donald L. Lucas, Chairman
Yuval Almog
Tom R. Dillon
COMPENSATION COMMITTEE
Yuval Almog, Chairman
Donald L. Lucas
EXECUTIVE OFFICERS
Rod Canion - Co-Chief Executive Officer
John J. Mitcham - Co-Chief Executive Officer
Joan M. Wrabetz - President and Chief Operating Officer
Dr. Alexander H. Frey - Senior Vice President and Chief Technical Officer
John F. Gribi - Vice President and Chief Financial Officer
Charles E. Pearsall - Vice President, Engineering
CORPORATE HEADQUARTERS
Plymouth, Minnesota
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
CORPORATE COUNSEL
Oppenheimer Wolff & Donnelly LLP
Palo Alto, California
[TRICORD SYSTEMS, INC. LOGO]
32
<PAGE> 1
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> 1
EXHIBIT 23.1 - CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-65784, 33-76532, 333-04701 and 333-58195)
of Tricord Systems, Inc. of our report dated February 17, 2000 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in the Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated February 17, 2000 relating to the
financial statement schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 17, 2000
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 14 AND 15 OF THE COMPANY'S ANNUAL REPORT FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1999, 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-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,082
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,155
<PP&E> 664
<DEPRECIATION> (387)
<TOTAL-ASSETS> 3,432
<CURRENT-LIABILITIES> 530
<BONDS> 0
0
0
<COMMON> 202
<OTHER-SE> 2,700
<TOTAL-LIABILITY-AND-EQUITY> 2,902
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (22)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,707)
<DISCONTINUED> 70
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,637)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
