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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2800 NORTHWEST BOULEVARD, PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 557-9005
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
OUTSTANDING AT
CLASS MARCH 31, 1996
----- --------------
Common Stock,
$.01 par value 13,320,739
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PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
------------------------------
(in thousands, except per share data) 1996 1995
----------- -----------
Revenues $18,450 16,168
Cost of goods sold 12,608 11,861
----------- -----------
Gross margin 5,842 4,307
----------- -----------
Operating expenses:
Research and development 1,974 1,825
Sales and marketing 4,890 5,226
General and administrative 999 1,034
----------- -----------
7,863 8,085
----------- -----------
Operating loss (2,021) (3,778)
----------- -----------
Other income (expense):
Interest income 128 147
Interest expense - (2)
Other, net (30) 379
----------- -----------
98 524
----------- -----------
Loss before provision for income taxes (1,923) (3,254)
Provision for income taxes - -
----------- -----------
Net loss $ (1,923) (3,254)
----------- -----------
----------- -----------
Net loss per share $ (0.14) (0.25)
----------- -----------
----------- -----------
Average common and common equivalent
shares outstanding 13,275 13,016
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
1
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TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
(in thousands, except per share data) 1996 1995
---------- -------------
(unaudited)
Current assets:
Cash and cash equivalents $ 9,658 11,456
Short-term investments 1,000 1,000
Accounts receivable 10,527 9,679
Inventories 7,904 8,531
Other current assets 1,084 767
--------- ---------
Total current assets 30,173 31,433
Equipment and improvements, net 7,624 8,054
Other assets 738 680
--------- ---------
Total Assets $38,535 40,167
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,780 6,126
Accrued payroll, benefits and related taxes 1,440 1,486
Deferred revenue 1,111 1,203
Other accrued expenses 2,742 2,598
--------- ---------
Total current liabilities 11,073 11,413
Commitments and contingencies
Stockholders' equity:
Common stock ,$.01 par value; 27,000
shares authorized, 13,321 and 13,273
shares issued and outstanding 133 133
Additional paid-in capital 76,989 76,830
Cumulative translation adjustments 284 (188)
Accumulated deficit (49,944) (48,021)
--------- ---------
Total stockholders' equity 27,462 28,754
--------- ---------
Total Liabilities and Stockholders'
Equity $38,535 40,167
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
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TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
----------------------------
(In thousands) 1996 1995
--------- -------
Cash flows from operating activities:
Net loss $ (1,923) (3,254)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,182 1,319
Loss on disposal of equipment - 230
Provision for losses on accounts receivable 60 224
Provision for losses on inventories 83 1,200
Other (1) 27
Changes in operating assets and liabilities:
Accounts receivable (983) 5,539
Inventories 493 (5,532)
Other current assets (335) (308)
Accounts payable 41 (440)
Accrued payroll, benefits and related taxes 111 (29)
Other accrued expenses 18 456
--------- ---------
Net cash used in operating activities (1,254) (568)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments (1,000) -
Proceeds from maturities of short-term
investments 1,000 -
Capital expenditures (748) (249)
Increase in other assets (110) (72)
--------- ---------
Net cash used in investing activities (858) (321)
--------- ---------
Cash flows from financing activities:
Principal payments on capital lease
obligations - (17)
Stock option transactions 3 75
--------- ---------
Net cash provided by financing activities 3 58
--------- ---------
Effect of exchange rate changes on cash 311 384
Net decrease in cash and cash equivalents (1,798) (447)
Cash and cash equivalents at beginning of period 11,456 13,241
--------- ---------
Cash and cash equivalents at end of period $ 9,658 12,794
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
3
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TRICORD SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated statements of operations, balance
sheets and statements of cash flows reflect all adjustments of a normal
recurring nature which are, in the opinion of management, necessary for a
fair statement of the consolidated financial position at March 31, 1996, and
of consolidated results of operations and cash flows for the interim periods
ended March 31, 1996 and 1995. The unaudited consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended December 31, 1995, which
were incorporated by reference in its Form 10-K Annual Report. The year-end
balance sheet data is derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
The results of operations for the interim period ended March 31, 1996 are
not necessarily indicative of the results to be expected for the full year.
2. BALANCE SHEET INFORMATION
March 31, 1996 December 31, 1995
-------------- -----------------
(unaudited)
Inventories:
Raw materials $2,266 2,263
Work-in-process 3,107 3,604
Finished goods 2,304 2,435
Evaluation and on-loan items 70 90
Spare parts 157 139
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$7,904 8,531
------ ------
------ ------
3. LEGAL PROCEEDINGS
The Company has received an order from the U.S. District Court in Minnesota
with respect to class action complaints filed against the Company and certain
of its directors and officers. The complaints were filed in July 1994
following the Company's announcement that second quarter 1994 results would be
below analysts' expectations. The order establishes a class action period of
April 20, 1994 to July 1, 1994, in contrast to a requested class period by
the plaintiffs of October 20, 1993 to July 1, 1994. The order also dismisses
three of the individual defendants from one of the two liability counts of
the complaint. Subsequent to the order, the plaintiffs dismissed two of
those individual defendants from the second liability count. The case is
continuing, but the Company believes that the lawsuit is without merit and
will continue to defend it vigorously.
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4. MAJOR CUSTOMERS
Three customers accounted for a significant portion of the Company's revenues
in the first quarter of 1996. Revenues from Memorex Telex Corporation and
Toshiba Corporation were 27.8% and 21.7%, respectively, of the Company's
revenues for the first quarter of 1996 compared to 18.6% and 9.6%,
respectively, for the first quarter of 1995. Revenues from Connect Computer
Company, a value added reseller, were 11.5% of revenues in the first quarter of
1996 compared to 2.2% in the first quarter of 1995.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company designs, manufactures, markets and supports high-performance
enterprise servers for use in mission-critical on-line transaction
processing, on-line analytical processing, media and file/print applications
running on industry standard network operating systems, principally Novell
NetWare and Microsoft Windows NT. The Company's products are characterized
by an open system design with emphasis on system management, fault tolerance,
high performance and scalability.
Historically, the Company's production methodology was to build to inventory
and many of the Company's customers ordered on an as-needed basis, often at
the end of a quarter. As a result, backlog at the beginning of a quarter
historically did not represent a significant percentage of the Company's
actual revenues for that quarter. Quarterly revenues and operating results,
therefore, have historically depended on the volume and timing of orders
received during the quarter, which are difficult to forecast and which limit
the Company's ability to plan production and inventory levels. In addition,
because a substantial portion of the Company's net revenues in each quarter
have historically resulted from orders received and shipments made during the
last few weeks of that quarter, if orders or shipments anticipated for the
last few weeks of any quarter do not occur or are delayed, expenditure levels
could be disproportionately high, and the Company's operating results for
that quarter would be adversely affected. Accordingly, the absence of
significant backlog and the concentration of orders and shipments at the end
of the quarter lead to fluctuations in operating results.
In the second quarter of 1995, the Company changed its production methodology
from build to inventory to build to order, and it is not yet clear how this
change in production methodology will impact these historical trends.
The Company's backlog of open orders received and accepted but not
yet shipped was $5,460,000 at March 31, 1996 compared to $210,000 at March
31, 1995. Operating results may also fluctuate based upon other factors,
such as delays in the introduction of new products or enhancements, seasonal
fluctuations in business activity, delays in delivery of components by the
Company's suppliers, acceptance of enterprise servers in various markets
around the world, product announcements by the Company or its competitors,
changes in pricing policies by the Company, its competitors or its suppliers,
and the gross margin impact to the Company of changes in the distribution mix
between sales to value added resellers (""VARs'') and system integrators,
original equipment manufacturers (""OEMs'') and international distributors.
During the first quarter of 1996, the Company disposed of an additional
$533,000 of excess and obsolete inventory related to the second quarter 1995
charge of $14,488,000.
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The Company also paid an additional $50,000 for noncancellable purchase
orders for the DS1700 and DS2700 inventory and has been able to negotiate
extensions of a significant portion of the noncancellable purchase orders.
As of March 31, 1996, the Company has approximately $9,100,000 of inventory
reserves, which it believes adequately provides for excess and obsolete
inventory.
RESULTS OF OPERATIONS
The following table sets forth the percentage increase (decrease) and the
percentage of revenues represented by certain line items in the Consolidated
Statements of Operations for the periods indicated:
Percentage
Increase (Decrease) Percentage of Revenue
1995 to 1996 ---------------------
-------------- Three Months
Three Ended March 31,
Months ---------------------
-------------- 1996 1995
---------------------
14 % Revenues......................... 100 % 100 %
6 Cost of goods sold............... 68 73
------ ----- -----
36 Gross margin..................... 32 27
Operating expenses:
8 Research and development....... 11 11
(6) Sales and marketing............ 27 32
(3) General and administrative..... 5 7
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(3) Total operating expenses..... 43 50
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(46) Operating loss................. (11) (23)
(82) Other income (expense), net...... 1 3
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(41) Loss before taxes.............. (10) (20)
Provision for income taxes....... - -
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(41)% Net loss....................... (10)% (20)%
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REVENUES
The Company derives revenues primarily from the sale of enterprise servers
and associated software products, disk drives, memory, expansion products,
and warranty service contracts. Revenues for the first quarter ended March
31, 1996 were $18,450,000 compared to $16,168,000 for the first quarter ended
March 31, 1995. The increase in product revenues related primarily to higher
revenues from the high-end enterprise server product line. The increase in
revenues with respect to channels of distribution occurred primarily in the
OEM channel with sales to Memorex Telex Corporation (""Memorex Telex'') and
Toshiba Corporation (""Toshiba''). Also, included in first quarter 1996
revenues is $500,000 relating to the sale of system management software to
Toshiba. Memorex Telex accounted for 27.8% of the Company's revenues in the
first quarter of 1996 compared to 18.6% in the first quarter of 1995. Sales
to Toshiba were 21.7% of
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revenues in the first quarter of 1996 compared to 9.6% in the first quarter
of 1995. Sales to Connect Computer Company, a value added reseller, were
11.5% of revenues in the first quarter of 1996 compared to 2.2% in the first
quarter of 1995. The Company anticipates that sales to Toshiba of the
Company's low-end DS product line will decrease in the future as Toshiba
develops their own low-end servers.
GROSS MARGIN
Gross margin, as a percent of revenues, increased to 32% in the first quarter
of 1996 compared to 27% in the first quarter of 1995. The increase in gross
margin was primarily due to the fact that during the first quarter of 1995,
gross margins were negatively impacted by approximately 7% as the Company
increased its obsolescence reserve by $1,200,000 with respect to the
Company's older product lines; and, during the first quarter of 1996, gross
margins were favorably impacted by approximately 2% due to the Company's sale
of system management software to Toshiba. This gross margin percent increase
was partially offset by decreased product margins primarily due to increased
sales during the first quarter of 1996 to Memorex Telex and Toshiba, which
tend to be lower margin revenues.
RESEARCH AND DEVELOPMENT
Expenses for research and development consist primarily of compensation and
related benefit costs and depreciation on capital equipment used in the
research and development process. Research and development expenses increased
8% to $1,974,000 for the first quarter of 1996 from $1,825,000 for the first
quarter of 1995. As a percentage of revenues, research and development
expenses remained the same at 11% in the first quarter of both periods.
SALES AND MARKETING
Sales and marketing expenses include compensation and benefits, sales
commissions, travel, trade shows, marketing materials and programs and
facility costs associated with worldwide sales offices. Sales and marketing
expenses decreased 6% to $4,890,000 for the first quarter of 1996 from
$5,226,000 for the same period in 1995. Sales and marketing expenses
decreased as a percentage of revenues from 32% in the first quarter of 1995
to 27% in the first quarter of 1996, primarily due to increased revenues over
which sales and marketing costs could be allocated.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 3% to $999,000 for the first
quarter of 1996 from $1,034,000 for the first quarter of 1995. General and
administrative expenses
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decreased as a percentage of revenues from 7% in the first quarter of 1995 to
5% in the first quarter of 1996.
OTHER INCOME (EXPENSE), NET
Other income was $98,000 for the first quarter of 1996 and $524,000 for the
first quarter of 1995. The decrease in other income from the first quarter
of 1995 is primarily due to a reduction in foreign currency gains related to
transactions with the Company's Japanese subsidiary. There can be no
assurance that the Company will continue to experience foreign currency
gains. A weakening of the yen against the dollar could result in a foreign
currency loss and could adversely affect the financial results of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $1,254,000 during the first three
months of 1996, due primarily to the net loss for the first quarter of 1996
partially offset by cash generated from improved accounts receivable
management and increased inventory turns. As of March 31, 1996 and December
31, 1995, accounts receivable were $10,527,000 and $9,679,000, respectively.
The average days sales outstanding at March 31, 1996 and December 31, 1995
were 39 and 47 days, respectively. As of March 31, 1996 and December 31,
1995, inventories were $7,904,000 and $8,531,000, respectively. The Company
turned inventory on an annualized basis approximately 6.1 times in the first
quarter of 1996 compared to approximately 4.7 times in the fourth quarter of
1995.
Cash used in investing activities was $858,000 in the first quarter of 1996,
primarily due to capital expenditures as described below. Cash provided by
financing activities was $3,000, primarily due to the proceeds from issuance
of common stock due to employee stock options exercised. The effect of
exchange rate changes on cash was $311,000.
Capital expenditures were approximately $748,000 and $249,000 in the first
quarters of 1996 and 1995, respectively. These expenditures were primarily
related to capitalization of internally-developed equipment for production,
testing and demonstration purposes and purchase of production equipment. The
Company currently plans purchases of capital equipment of approximately
$1,400,000 during the last three quarters of 1996, which will either be
purchased or internally-developed equipment, and will be used for research
and development, demonstration purposes and test equipment. Actual capital
expenditures could materially differ from those expressed in the preceding
forward-looking statement, as actual capital expenditures are dependent on many
factors, including: the ability of the Company to achieve its planned growth to
generate the cash necessary to fund capital expenditures and the continued use
of current capital assets without the need of replacement due to obsolescence,
destruction or technology changes. The Company has no material commitments for
the purchase of capital equipment.
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As of March 31, 1996, the Company had approximately $10,658,000 in cash and
investments. The Company currently anticipates that its existing cash and
investments will be sufficient to satisfy the Company's cash requirements for
at least twelve months. Actual cash requirements could differ materially
from those expressed in the preceding forward-looking statement, as actual
cash requirements are dependent on many factors, including: the ability of
the Company to achieve its planned operating results and, if additional funds
may be needed, the ability of the Company to secure additional funds with
acceptable terms.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31, 1996.
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SIGNATURE
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.
TRICORD SYSTEMS, INC.
(REGISTRANT)
By: /s/ Gregory T. Barnum
----------------------
Gregory T. Barnum, Vice President
of Finance & Administration
(Principal Financial Officer)
By: /s/ Marvin E. Dee
-----------------
Marvin E. Dee, V.P. of Finance &
Treasurer
(Principal Accounting Officer)
Date: May 15, 1996
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INDEX TO EXHIBITS
Exhibit Page
Number Number
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27.1 Financial data schedule 14
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1 AND 2 OF THE COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1996,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 9,658
<SECURITIES> 1,000
<RECEIVABLES> 12,156
<ALLOWANCES> (1,629)
<INVENTORY> 7,904
<CURRENT-ASSETS> 30,173
<PP&E> 16,621
<DEPRECIATION> (8,997)
<TOTAL-ASSETS> 38,535
<CURRENT-LIABILITIES> 11,073
<BONDS> 0
0
0
<COMMON> 133
<OTHER-SE> 27,329
<TOTAL-LIABILITY-AND-EQUITY> 38,535
<SALES> 18,450
<TOTAL-REVENUES> 18,450
<CGS> 12,608
<TOTAL-COSTS> 12,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,923)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,923)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,923)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
