<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
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 QUARTERLY PERIOD ENDED JUNE 30, 1997
- ---------- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
--------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 41-1590621
--------------------------------- -----------------------
(State or other jurisdiction 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 JULY 31, 1997
----- ---------------
Common Stock,
$.01 par value 13,459,884
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
(in thousands, except per share data) 1997 1996 1997 1996
-------- ------- ------ ------
<S> <C> <C> <C> <C>
REVENUES $ 3,311 12,012 8,184 30,462
Cost of goods sold 4,490 9,252 9,406 21,860
------- ------ ------ -------
Gross margin (1,179) 2,760 (1,222) 8,602
------- ------ ------ -------
Operating expenses:
Research and development 828 1,790 2,611 3,764
Sales and marketing 1,098 4,952 3,492 9,842
General and administrative 605 1,403 1,325 2,402
Nonrecurring items, net 864 - 864 -
------- ------ ------ -------
3,395 8,145 8,292 16,008
------- ------ ------ -------
Operating loss (4,574) (5,385) (9,514) (7,406)
------- ------ ------ -------
Other income (expense):
Interest income 44 106 99 234
Other, net (33) (79) (297) (109)
------- ------ ------ -------
11 27 (198) 125
------- ------ ------ -------
Net loss $(4,563) (5,358) (9,712) (7,281)
------- ------ ------ -------
------- ------ ------ -------
Net loss per share $ (0.34) (0.40) (0.72) (0.55)
------- ------ ------ -------
------- ------ ------ -------
Average common shares outstanding 13,460 13,359 13,434 13,317
------- ------ ------ -------
------- ------ ------ -------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
(in thousands, except per share data) 1997 1996
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,974 5,711
Accounts receivable, net 922 4,636
Inventories 2,283 4,984
Other current assets 610 572
------------ ------------
Total current assets 7,789 15,903
Equipment and improvements, net 1,079 5,717
Other assets 348 318
------------ ------------
Total Assets $ 9,216 21,938
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,090 2,897
Accrued payroll, benefits and related taxes 501 1,275
Deferred revenue 1,085 1,045
Other accrued expenses 1,484 2,546
------------ ------------
Total current liabilities 4,160 7,763
Stockholders' equity:
Common stock, $.01 par value; 27,000 shares authorized,
13,460 and 13,407 shares issued and outstanding 135 134
Additional paid-in capital 77,583 77,522
Cumulative translation adjustments 275 (256)
Accumulated deficit (72,937) (63,225)
------------ ------------
Total stockholders' equity 5,056 14,175
------------ ------------
Total Liabilities and Stockholders' Equity $ 9,216 21,938
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
----------------------------
(In thousands) 1997 1996
--------- ---------
Cash flows from operating activities:
Net loss $ (9,712) (7,281)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 2,036 2,398
Provision for losses on inventory 1,332 351
Loss on termination of facilities lease 975 -
Provision for losses on equipment 764 -
Loss on disposal of equipment 334 29
Provision for losses on accounts receivable 150 120
Other 577 250
Changes in operating assets and liabilities:
Accounts receivable 3,564 1,604
Inventories 1,245 266
Other current assets 268 (105)
Accounts payable (1,807) (2,031)
Accrued payroll, benefits and related taxes (774) 133
Deferred revenues and other accrued expenses (1,022) 97
--------- ---------
Net cash used in operating activities (1,946) (4,169)
--------- ---------
Cash flows from investing activities:
Purchase of short-term investments - (1,000)
Proceeds from maturities of short-term investments - 1,000
Capital expenditures (412) (1,917)
Change in other assets 60 125
--------- ---------
Net cash used in investing activities (352) (1,792)
--------- ---------
Cash flows from financing activities:
Stock option and employee stock purchase
plan transactions 30 290
--------- ---------
Net cash provided by financing activities 30 290
--------- ---------
Effect of exchange rate changes on cash 531 325
--------- ---------
Net decrease in cash and cash equivalents (1,737) (5,346)
Cash and cash equivalents at beginning of period 5,711 11,456
--------- ---------
Cash and cash equivalents at end of period $ 3,974 6,110
--------- ---------
--------- ---------
See accompanying notes to consolidated financial statements.
3
<PAGE>
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
sheet and statements of cash flows reflect all adjustments of a normal
recurring nature, and also certain nonrecurring items as described in Notes
6, 7, 8, 9 and 12, which are, in the opinion of management, necessary for a
fair statement of the consolidated financial position at June 30, 1997, and
of consolidated results of operations and cash flows for the interim periods
ended June 30, 1997 and 1996. The unaudited consolidated financial
statements should be read in conjunction with Tricord Systems Inc.'s (the
"Company's") audited consolidated financial statements for the year ended
December 31, 1996, which were incorporated by reference in its 1996 Form 10-K
Annual Report. The year-end balance sheet data included herein 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 periods ended June 30, 1997 are not necessarily
indicative of the results to be expected for the full year or any future
quarters.
2. BALANCE SHEET INFORMATION
June 30, December 31,
1997 1996
---------- ------------
(unaudited)
Accounts receivable, net:
Accounts receivable $ 3,815 7,840
Allowance for doubtful accounts (2,893) (2,844)
-------- -------
$ 922 4,636
-------- -------
-------- -------
Inventories:
Raw materials $ 2,660 3,658
Work-in-process 3,005 4,696
Finished goods 2,445 3,194
Evaluation units 6 11
Spare parts 3,193 755
Inventory reserve (9,026) (7,330)
-------- ------
$ 2,283 4,984
-------- ------
-------- ------
4
<PAGE>
3. CHANGE IN BUSINESS FOCUS
In February 1997, the Company announced that its effort to find strategic
alternatives, including the possibility of finding a strategic partner, to
strengthen the Company's probability of success in the server market was not
successful. The Company also announced that it would not bring its next
generation server to market because the costs associated with bringing future
server products through final development to market exceeded the available
resources of the Company. Instead, the Company will focus its resources on
developing and marketing distributed data access and management products for
the Windows NT environment that will incorporate the Company's distributed
file system software technology and related I/O ("input/output") technology.
Specialization in distributed data access and management products represents
a natural evolution for the Company and combines the Company's historical I/O
technology and related expertise with the distributed file system technology
that the Company has been developing since its acquisition of such additional
technology in 1996. This evolution in the Company's strategy necessitated a
reduction in the Company's workforce, affecting approximately 90 employees.
The Company intends to sell its remaining enterprise server inventory
through 1997 as long as there is sufficient customer demand and materials are
available, and to honor its warranty, service and support agreements. The
Company expects that its sales will consist mainly of spares, disk drives,
memory and expansion products.
The Company does not anticipate any significant revenues from the development
of products related to the distributed data access and management products in
1997.
Because of the Company's announcement in February 1997 that it was
discontinuing development of its next generation enterprise server and would
sell its remaining enterprise server inventory only through 1997, the Company
is currently evaluating its cash requirements. If the Company's operations
progress as currently anticipated, of which there can be no assurance, the
Company believes that its existing cash and cash equivalents, together with
funds generated from the continued liquidation of its remaining enterprise
server inventory, will be sufficient to fund its operations for the remainder
of 1997. The Company is seeking additional capital through a number of
different sources, including sales of assets and technology and OEM or other
strategic investments or alliances.
4. MAJOR CUSTOMERS
Toshiba Corporation ("Toshiba") accounted for 19.8% of the Company's revenues
in the second quarter of 1997 compared to 18.2% of the Company's revenues for
the second quarter of 1996. For the six months ended June 30, 1997, revenues
from Toshiba were 8.5% compared to 20.3% for the same period last year.
Revenues from Memorex Telex Corporation ("Memorex Telex") were 1.5% of the
Company's revenues for the second quarter of 1997 compared to 6.8% in the
second quarter of 1996, and 4.3% of the Company's revenues in the first six
months of 1997 compared to 19.5% in the first six months of 1996. Memorex
Telex revenues for the first quarter of 1997 and six months ended June 30,
were primarily from the European subsidiaries of Memorex Telex due to the
fourth quarter 1996 Chapter 11 bankruptcy filing of the Memorex Telex
domestic operations.
5
<PAGE>
5. LEGAL PROCEEDING - SHAREHOLDER LAWSUIT TRIAL
On June 16, 1997, a federal jury in St. Paul, Minnesota absolved the Company
of any liability in a class action lawsuit alleging securities fraud. The
jury found that the Company did not materially misrepresent its revenue
prospects in early 1994.
6. SOFTWARE LICENSE - TOSHIBA CORPORATION
Included in nonrecurring items for the three months and six months ended
June 30, 1997, is a $1,000,000 one-time license fee paid to the Company by
Toshiba for the world-wide, non-exclusive right and license to the Availability
Management System ("AMS") Software.
7. LEASE TERMINATION AGREEMENT
The Company recorded a charge to nonrecurring items of $975,000 in the second
quarter of 1997 upon reaching decisions and completing negotiations with its
landlord regarding the disposition of its headquarters building and related
furniture, leasehold improvements and a sublease. Contrary to prior
estimates, the value implicit in its below-market building lease and sublease
to be realized as a result of these negotiations was less than the carrying
value of leasehold improvements and furniture not recoverable through other
means. The agreement reached with its landlord provides that the Company
will continue to receive sublease rentals, net of related costs, through the
sublease term and would also be paid an additional $300,000 if the landlord
sells the building prior to the end of the sublease in January 2002. The
second quarter 1997 charge is net of the $135,000 present value of net
sublease rentals expected to be received. If, for reasons not presently
foreseeable, the tenant does not honor its sublease commitment and no legal
remedies are available to the Company, an additional charge would be
necessary. Also, netted against the second quarter 1997 nonrecurring item,
and in return for the lease termination and vacating the facility by August
31, 1997, the Company will receive a termination and vacation fee of $200,000
no later than September 15, 1997, and reimbursement of actual out-of-pocket
costs incurred by the Company to move to a new location, including telephone
wiring, relocation of its telephone switch and computer network wiring. The
Company has signed a lease agreement for a new facility to fit its current
operating space requirements and expects to occupy the new space by August
31, 1997. The Company will spend approximately $145,000 in leasehold
improvements costs in its new facility.
8. PROVISION FOR EXCESS AND OBSOLETE INVENTORY
In the second quarter of 1997, the Company took a charge of $1,332,000
related to the write-down of obsolete and excess inventory. The Company
completed an updated forecast of its anticipated usage of current on-hand
inventory. The Company determined that it had more inventory than was
required through the end of 1998 and that the second quarter charge of
$1,332,000 was needed to adjust inventory to its net realizable value.
6
<PAGE>
9. PROVISION FOR LOSSES ON EQUIPMENT
The Company recorded a charge to nonrecurring items of $764,000 in the second
quarter of 1997 for the write-down of the net book value at June 30, 1997 of
certain equipment based on an updated review of the equipment required to
support the operations of the Company.
10. REVOLVING CREDIT FACILITY
In May 1997, the Company received notice that its revolving credit facility
would not be renewed at the August 9, 1997 maturity date, due to default of
the Minimum Tangible Net Worth covenant, product restructuring and the change
in the Company's focus. In June 1997, the Company requested early
termination of the credit facility, which was accepted. A termination fee
included in the credit facility agreement has been waived.
11. LEGAL PROCEEDING - MEMOREX TELEX CORPORATION CHAPTER 11 BANKRUPTCY
In June 1997 the Company filed a response to the complaint filed against the
Company in the U.S. Bankruptcy Court in Delaware regarding certain payments
made to the Company by Memorex Telex within 90 days prior to the October 15,
1996 Chapter 11 bankruptcy filing by Memorex Telex. The complaint alleges
that these payments are avoidable transfers under the Bankruptcy code and
seeks return of approximately $1,300,000 from the Company, together with
interest and attorney's fees and expenses. The Company believes that certain
defenses are available to it with respect to all or some of these amounts,
and has instructed its counsel to defend this action vigorously. If the
Company is required to return all or some of these payments, depending on the
amount and the timing, any such repayments could have a material adverse
effect on the Company's future operations, cash flows and financial
condition. The Company has been notified that a trial regarding this matter
has been scheduled to commence January 5, 1998.
12. MUTUAL SETTLEMENT AND RELEASE AGREEMENT
In June 1997, the Company signed a Mutual Settlement and Release Agreement
with International Business Machines Corporation ("IBM") regarding IBM's
assertion that certain of the Company's server systems and related products
infringe on certain patents owned by IBM. The Company and IBM agreed to
settle this dispute by mutual settlement and release without admission of
liability by either the Company or IBM. The Company agreed to pay IBM
$125,000 for the release granted by IBM, which amount is included in
nonrecurring items for the second quarter of 1997.
7
<PAGE>
13. NEW ACCOUNTING STANDARD
The Company will adopt the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," in the fourth quarter of 1997. The
Company does not believe that the adoption of this new accounting standard
will have a significant impact on earnings (loss) per share as currently
reported compared to earnings (loss) per share after adoption of this
standard.
8
<PAGE>
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The Company historically engaged in the business of designing, manufacturing,
marketing and supporting high-performance enterprise servers for use in
mission critical applications, principally running on Microsoft Windows NT
and Novell NetWare.
In February 1997, the Company announced that its effort to explore strategic
alternatives, including the possibility of finding a strategic partner, to
strengthen the Company's probability of success in the server market was not
successful. The Company also announced that it would therefore not bring its
next generation server to market because the costs associated with bringing
future server products through final development to market exceeded the
available resources of the Company. Instead, the Company is focusing its
resources on developing and marketing distributed data access and management
products for the Windows NT environment that will incorporate the Company's
distributed file system software technology and related I/O ("input/output")
technology. I/O technology is a core competency of the Company and was one
of the key differentiators of its enterprise server product line.
Accordingly, specialization in distributed data access and management
products represents a natural evolution for the Company and combines the
Company's expertise in I/O technology with the distributed file system
technology that the Company has been developing since the Company acquired
such technology in August 1996. This evolution in the Company's strategy
necessitated a reduction in the Company's workforce in February 1997,
affecting approximately 90 employees. The Company intends to sell its
remaining enterprise server inventory through 1997 as long as there is
sufficient customer demand and materials available, and will honor its
warranty, service and support agreements. The Company expects that its sales
will consist mainly of spares, disk drives, memory and expansion products.
In addition to the factors described below, the Company's operating results
could materially differ from those anticipated by the Company based upon the
following factors: the continued growth and acceptance of the Windows NT
operating system and the growth in demand for attached storage; the Company's
ability to develop, test and release its new products for this market on a
timely basis; the ability of the Company to anticipate changes in technology
and industry standards on a timely basis; the Company's ability to generate
adequate cash to fund operations, which in turn will depend on its ability to
sell a sufficient amount of its remaining enterprise server inventory and
control operating expenses; the Company's ability to successfully establish
one or more OEM relationships in order for the Company to introduce and
market its distributed data access and management products; and competition
from other companies in the Windows NT storage products market.
9
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Revenues for the second quarter and six months ended June 30, 1997 were
$3,311,000 and $8,184,000 compared to $12,012,000 and $30,462,000 for the
second quarter and six months ended June 30, 1996. The decreases in product
revenues are due to the Company's announcement, as previously discussed, that
it would not bring its next generation server to market. Decreases in
revenue for the second quarter of 1997 compared to the second quarter of 1996
reflected a $5,400,000 reduction in the ES Series product line; a $2,500,000
reduction in associated add-on products such as disk drives, memory and
expansion products; and an $800,000 reduction in the discontinued DS and
Model Series product lines. Decreases in revenue for the first six months of
1997 compared to the first six months of 1996 reflected a $14,600,000
reduction on the ES Series product line; a $4,900,000 reduction on associated
add-on products; and a $2,800,000 reduction in the discontinued DS and Model
series product lines.
Toshiba Corporation ("Toshiba") accounted for 19.8% of the Company's revenues
in the second quarter of 1997 compared to 18.2% of the Company's revenues for
the second quarter of 1996. Included in the second quarter of 1997 was a
purchase by Toshiba of spare parts and add-on products of approximately
$650,000. The Company does not expect any significant revenues from Toshiba
going forward. For the six months ended June 30, 1997, revenues from Toshiba
were 8.5% compared to 20.3% for the same period last year. Revenues from
Memorex Telex Corporation ("Memorex Telex") were 1.5% of the Company's
revenues for the second quarter of 1997 compared to 6.8% in the second
quarter of 1996, and 4.3% of the Company's revenues in the first six months
of 1997 compared to 19.5% in the first six months of 1996. Memorex Telex
revenues for the first quarter of 1997 and six months ended June 30, were
primarily from the European subsidiaries of Memorex Telex due to the fourth
quarter 1996 Chapter 11 bankruptcy filing of the Memorex Telex domestic
operations.
The Company currently anticipates that revenues will be significantly less in
1997 compared to the corresponding 1996 periods as the Company focuses its
resources on developing its distributed data access and management products
and enterprise server sales are basically limited to the Company's remaining
inventory. The Company intends to sell its remaining enterprise server
inventory through 1997 as long as there is sufficient customer demand and
materials are available. In addition, the Company will sell spares and
expansion products as long as materials are available. The Company does not
anticipate any significant revenues in 1997 from the sale or license of its
distributed data access and management products, which have yet to be fully
developed. Actual 1997 revenues could materially differ from those expressed
in the foregoing forward-looking statements, depending on a number of
factors, including whether anticipated demand in 1997 for the Company's
remaining enterprise server inventory differs from the Company's expectations
and the ability of the Company to purchase components to satisfy customer
demand.
10
<PAGE>
GROSS MARGIN
Gross margin, as a percent of revenues, decreased to a loss of 36% in the
second quarter of 1997 and a loss of 15% for the first six months of 1997
compared to 23% in the second quarter of 1996 and 28% for the first six
months of 1996. The decrease in gross margin for the second quarter and
first six months of 1997 compared to the second quarter and first six months
of 1996 was primarily due to the second quarter 1997 charge of $1,332,000 for
the write-down of inventory based on an updated review by the Company of
forecasted revenues, as well as a significant decrease in the Company's sales
volume, based on the Company's announcement, as discussed above, that it
would not bring its next generation server to market.
Production planning for 1997 has been set at levels which the Company
believes it can attain and recover its remaining enterprise server inventory.
The Company currently anticipates that gross margin will continue to be
significantly less in 1997 compared to the corresponding 1996 periods, both
in dollars and as a percent of revenue, because of the significant decrease
in revenues in 1997 as discussed above. Actual 1997 gross margin results
could materially differ from those expressed in the foregoing forward-looking
statement, depending on a number of factors, including the achievement of the
Company's 1997 anticipated revenue level and the ability of the Company to
purchase quality components in order to satisfy customer demand.
RESEARCH AND DEVELOPMENT
Expenses for research and development consist primarily of compensation and
related benefit costs, project expenses, consulting on development and
depreciation on capital equipment used in the research and development
process. Research and development expenses decreased 54% to $828,000 for the
second quarter of 1997 from $1,790,000 for the second quarter of 1996, and
decreased 31% to $2,611,000 for the first six months of 1997 from $3,764,000
for the first six months of 1996, primarily due to a decrease in salary and
benefit costs associated with fewer team members as a result of the work
force reduction which took effect at the end of the first quarter of 1997.
The Company currently anticipates that research and development
costs will be a critical activity during 1997 as the Company
focuses on the development of distributed data access and
management products. The Company does not, however, anticipate
that research and development costs in 1997 will reach the levels
of the last several years. Actual 1997 research and development
expenses could materially differ from those expressed in the
foregoing forward-looking statements, depending on a number of
factors, including the ability of the Company to achieve its
business plan and obtain and commit the required resources to
research and development and the ability to hire and train
quality research and development team members as well as retain
current research and development team members.
11
<PAGE>
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 78% to $1,098,000 for the second quarter of 1997 from
$4,952,000 for the second quarter of 1996, primarily from lower salaries and
benefits due to fewer team members, the reduction of commissions related to
reduced revenues, the closing of certain of the Company's domestic sales
offices and the ongoing closing and consolidation of the Company's foreign
subsidiaries and sales offices. Sales and marketing expenses decreased 65%
to $3,492,000 for the first six months of 1997 from $9,842,000 for the first
six months of 1996 for the same reasons, except that the effect of the
workforce reduction did not commence until the end of the first quarter of
1997.
The Company currently anticipates that sales and marketing expenses will
continue to be significantly less in 1997 compared to the corresponding 1996
periods as the Company focuses on the development of distributed data access
and management products. Actual 1997 sales and marketing expenses could
materially differ from those expressed in the foregoing forward-looking
statement, depending on a number of factors, including the ability of the
Company to complete development and release commercially its distributed data
access and management products in accordance with its currently anticipated
timetable.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 57% to $605,000 for the second
quarter of 1997 from $1,403,000 for the second quarter of 1996 and decreased
45% to $1,325,000 for the first six months of 1997 from $2,402,000 for the
first six months of 1996, due to lower salaries because of fewer team members
and a decrease due to the second quarter 1996 charge of $400,000 related to
the securities class action lawsuit.
The Company currently anticipates that general and administrative expenses
will continue to be significantly less in 1997 compared to the corresponding
1996 periods due to the workforce reduction and the related support
necessary for fewer team members.
NONRECURRING ITEMS
Nonrecurring items for the second quarter of 1997 are related to
the net write-off of leasehold improvements of $975,000 due to
the termination of the Company's lease of its present
headquarters facility and the pending move to a smaller facility
in August 1997; a $764,000 write-off of equipment related to the
Company's updated review of the equipment required to support the
operations of the Company; and $125,000 for the mutual settlement
and release of an alleged patent infringement without admission
of liability by the Company or IBM, partially offset by a
$1,000,000 one-time license fee for world-wide distribution
rights to the Company's AMS software.
OTHER INCOME (EXPENSE)
Interest income was $44,000 for the second quarter of 1997 and $99,000 for
the first six months of 1997 compared to $106,000 for the second quarter of
1996 and $234,000 for the first six months of 1996 due to lower interest
income on lower cash and cash equivalent investments. Other expense was
$33,000 for the second quarter of 1997 compared to $79,000 for the second
quarter of 1996.
12
<PAGE>
For the first six months of 1997, other expense was $297,000 compared to
$109,000 for the first six months of 1996. The increase in other expense for
the first six months of 1997 compared to 1996 was primarily due a $247,000
first quarter 1997 loss on disposal of certain assets of the Company's
equipment due to the redirection of the Company's efforts to supporting
distributed data access and management product development.
LIQUIDITY AND CAPITAL RESOURCES
The aggregate net decrease in cash and cash equivalents during the first six
months of 1997 was $1,737,000, including $1,946,000 of cash used in operating
activities, due to the net loss for the first six months of 1997, partially
offset by depreciation and other non-cash losses and provisions and a
reduction of the Company's accounts receivable. As of June 30, 1997 and
December 31, 1996, accounts receivable were $922,000 and $4,636,000,
respectively. The average days sales outstanding ("DSO") at June 30, 1997,
excluding Memorex Telex, was 29 days compared to 32 days at December 31,
1996. As of June 30, 1997 and December 31, 1996, inventories were $2,283,000
and $4,984,000, respectively. The Company turned inventory on an annualized
basis approximately 3.8 times, exclusive of the impact on cost of goods sold
of the second quarter charge of $1,332,000 for the write-down of excess and
obsolete inventory, in the first six months of 1997 compared to approximately
5.4 times in 1996.
Net cash used in investing activities was $352,000 in the first six months of
1997, primarily due to capital expenditures of $412,000, partially offset by
a decrease in other assets of $60,000. Capital expenditures were primarily
related to capitalization of internally-developed equipment systems and
upgrades to existing systems for demonstration equipment prior to the
Company's announcement of a change in its business focus, and for the
purchase of computer equipment to support its ongoing operations. The
Company currently plans purchases of capital equipment of approximately
$50,000 during the last six months of 1997, primarily for research and
development. The Company has no material commitments for the purchase of
capital equipment.
As of June 30, 1997, the Company had approximately $3,974,000 in cash and
cash equivalents. Because of the Company's announcement in February 1997 that
it was discontinuing development of its next generation enterprise server and
would sell its remaining enterprise server inventory only through 1997, the
Company is continuing to evaluate its cash requirements. In May 1997, the
Company received notice that its revolving credit facility would not be
renewed at the August 9, 1997 maturity date, due to default of the Minimum
Tangible Net Worth covenant, product restructuring and the change in the
Company's focus. In June 1997, the Company requested early termination of
the credit facility. If the Company's operations progress as currently
anticipated, of which there can be no assurance, the Company believes that
its existing cash and cash equivalents together with the funds generated from
the continued liquidation of its remaining enterprise server inventory, will
be sufficient to fund its operations for the remainder of 1997. Actual cash
requirements could materially differ from those expressed in the foregoing
13
<PAGE>
forward-looking statement, depending on a number of factors, including the
ability of the Company to develop, test and release distributed data access
and management products in accordance with its currently anticipated
timetable, the development of the attached-storage market for Windows NT
computing environments in the manner anticipated by the Company, the ability
of the Company to achieve anticipated revenue levels from the continued sale
of enterprise servers and related components through the end of 1997, and the
ability of the Company to maintain its cost structure in accordance with its
operating plan. In addition, the Company may be required to return all or
some of the payments made by Memorex Telex and, depending on the amount and
timing, any such repayments could have a material adverse effect on the
Company's future operations, cash flows and financial condition.
The Company is seeking additional capital through a number of different
sources, including sales of assets and technology and OEM or other strategic
investments or alliances. There can be no assurance, however, that
additional capital will be available on acceptable terms or at all.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 16, 1997, the Company was unanimously cleared by a federal jury of
any liability in a three-year old class-action suit alleging securities
fraud. The jury found that the Company did not materially misrepresent its
revenue prospects in early 1994.
In June 1997 the Company filed a response to the complaint filed against the
Company in the U.S. Bankruptcy Court in Delaware regarding certain payments
made to the Company by Memorex Telex within 90 days prior to the October 15,
1996 Chapter 11 bankruptcy filing by Memorex Telex. The complaint alleges
that these payments are avoidable transfers under the Bankruptcy code and
seeks return of approximately $1,300,000 from the Company, together with
interest and attorney's fees and expenses. The Company believes that certain
defenses are available to it with respect to all or some of these amounts,
and has instructed its counsel to defend this action vigorously. If the
Company is required to return all or some of these payments, depending on the
amount and the timing, any such repayments could have a material adverse
effect on the Company's future operations, cash flows and financial
condition. The Company has been notified that a trial regarding this matter
has been scheduled to commence January 5, 1998.
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 June 30,1997.
15
<PAGE>
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/ John J. Mitcham
----------------------------------
John J. Mitcham, President
and Chief Executive Officer
(Principal Financial Officer)
By: /s/ Jeff A. Stewart
----------------------------------
Jeff A. Stewart, Vice President
and Controller
(Principal Accounting Officer)
Date: August 14, 1997
16
<PAGE>
INDEX TO EXHIBITS
Exhibit Page
Number Number
- -------- -------
27.1 Financial data schedule 18
17
<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 six months ended June 30, 1997,
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,974
<SECURITIES> 0
<RECEIVABLES> 3,815
<ALLOWANCES> (2,893)
<INVENTORY> 2,283
<CURRENT-ASSETS> 7,789
<PP&E> 7,970
<DEPRECIATION> (6,891)
<TOTAL-ASSETS> 9,216
<CURRENT-LIABILITIES> 4,160
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 4,921
<TOTAL-LIABILITY-AND-EQUITY> 9,216
<SALES> 3,311
<TOTAL-REVENUES> 3,311
<CGS> 4,490
<TOTAL-COSTS> 4,490
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,563)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,563)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
