<PAGE>
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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 MARCH 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2905 NORTHWEST BOULEVARD, SUITE 20, PLYMOUTH, MINNESOTA 55441
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 557-9005
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(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.
<TABLE>
<CAPTION>
OUTSTANDING AT
CLASS APRIL 30, 1998
------ --------------
<S> <C>
COMMON STOCK,
$.01 par value 14,258,924
</TABLE>
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<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(in thousands, except per share data) 1998 1997
---------- --------------
<S> <C> <C>
Revenues:
Product sales $ 806 4,381
Service contracts 509 492
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1,315 4,873
Cost of goods sold:
Product sales $ 685 4,786
Service contracts 117 130
------- -----
802 4,916
Gross margin 513 (43)
------- -----
Operating expenses:
Research and development 711 1,783
Sales and marketing 244 2,394
General and administrative 342 720
------- -----
1,297 4,897
------- -----
Operating loss (784) (4,940)
------- -----
Other income (expense):
Interest, net 52 55
Other, net 40 (264)
------- -----
92 (209)
------- -----
Net loss $ (692) (5,149)
------- -----
------- -----
Net loss per share - basic and diluted $ (0.05) (0.38)
------- -----
------- -----
Average common shares outstanding 13,809 13,407
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------- -----
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
(in thousands, except per share data) 1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,912 3,713
Accounts receivable, net 426 681
Inventories, net 1,247 1,497
Other current assets 124 174
-------- ------
Total current assets 5,709 6,065
Equipment and improvements, net 461 565
Other assets 121 125
-------- ------
Total Assets $ 6,291 6,755
-------- ------
-------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 634 708
Accrued payroll, benefits and related taxes 351 509
Deferred revenue 914 946
Other accrued expenses 760 925
-------- ------
Total current liabilities 2,659 3,088
Stockholders' equity:
Common stock, $.01 par value; 27,000 shares
authorized, 14,228 and 13,460 shares
issued and outstanding 142 135
Additional paid-in capital 78,256 77,606
Cumulative translation adjustments 82 82
Accumulated deficit (74,848) (74,156)
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Total stockholders' equity 3,632 3,667
-------- ------
Total Liabilities and Stockholders'
Equity $ 6,291 6,755
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-------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
(In thousands) 1998 1997
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (692) $(5,149)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 109 1,279
Loss on disposal of equipment - 247
Provision for losses on accounts receivable - 75
Provision for losses on inventories 164 416
Other 63 330
Changes in operating assets and liabilities:
Accounts receivable 255 2,780
Inventories 86 (91)
Other current assets 50 94
Accounts payable (74) (475)
Accrued payroll, benefits and related taxes (68) (476)
Deferred revenues and other accrued expenses (25) (728)
------ -------
Net cash used in operating activities (132) (1,698)
------ -------
Cash flows from investing activities:
Capital expenditures (5) (381)
Change in other assets 4 60
------ -------
Net cash used in investing activities (1) (321)
------ -------
Cash flows from financing activities:
Stock option transactions 332 -
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Net cash provided by financing activities 332 -
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Effect of exchange rate changes on cash - 476
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Net increase (decrease) in cash and cash equivalents 199 (1,543)
Cash and cash equivalents at beginning of period 3,713 5,711
------ -------
Cash and cash equivalents at end of period $3,912 4,168
------ -------
------ -------
</TABLE>
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, which are, in the opinion of management, necessary for a
fair statement of the consolidated financial position at March 31, 1998, and
of consolidated results of operations and cash flows for the interim periods
ended March 31, 1998 and 1997. 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, 1997, which were incorporated by reference in the Company's 1997
Annual Report on Form 10-K. 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 period ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year or any
future quarters.
2. BALANCE SHEET AND SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(unaudited)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 1,510 1,894
Allowance for doubtful accounts (1,084) (1,213)
------- -------
$ 426 681
------- -------
------- -------
Inventories, net:
Spare parts and expansion products $ 5,604 5,638
Finished goods 1,767 1,877
Inventory reserves (6,124) (6,018)
------- -------
$ 1,247 1,497
------- -------
------- -------
</TABLE>
Supplemental Cash Flow information:
During the first quarter of 1998, $90 of accrued payroll obligations and $172
of other accrued expenses were settled through the issuance of 374,003 shares
of common stock of the Company.
4
<PAGE>
3. CHANGE IN BUSINESS FOCUS
A combination of competitive pressures and a vision for a highly distributed
and scalable storage systems architecture led the Company in February 1997 to
redefine its corporate strategy to focus its development efforts exclusively
on storage systems management software. The architecture includes an
entirely new generation of Distributed File System and File-Intelligent I/O
("input/output") technology known as Tricord Storage Management Software
("TSMS").
The Company intends to sell its remaining enterprise server product
inventory, consisting primarily of spare parts and expansion products, as
long as there is sufficient customer demand and materials are available. The
Company will honor its service agreements and enter into new agreements as
long as there is sufficient demand. The Company's product sales during the
first quarter of 1998 have consisted mainly of spare parts, disk drives,
memory and expansion products. The Company expects that its 1998 revenues
will decline significantly from 1997 levels and will continue to consist
mainly of spare parts, disk drives, memory and expansion products as well as
new service contracts. No revenues have been generated by TSMS through March
31, 1998. The Company does not anticipate significant revenues in 1998
from the development of TSMS-based products, which have yet to be fully
developed.
If the Company's operations progress as currently anticipated, of which there
can be no assurance, the Company believes that its existing cash and cash
equivalents will be sufficient to fund its operations for the next twelve
months. The Company is continuing to seek additional capital through OEM or
other strategic investments or alliances.
4. NET LOSS PER SHARE
Net loss per share is computed by dividing net loss by the weighted average
number of common shares outstanding during each period. Potentially dilutive
common shares are excluded from the calculation of net loss per share as
their impact is antidilutive. Net loss per share does not include common
stock options and warrants of approximately 2,890,000, of which the majority
have exercise prices at or slightly above the weighted average market price
for the first quarter.
5
<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-Registered Trademark- and Novell-Registered Trademark- NetWare-Registered
Trademark-. All revenues generated though March 31, 1998 related to the
server line of business.
A combination of competitive pressures and a vision for a highly distributed
and scalable storage systems architecture led the Company in February 1997 to
redefine its corporate strategy to focus its development efforts exclusively
on storage systems management software. The architecture includes an
entirely new generation of Distributed File System and File-Intelligent I/O
("input/output") technology known as Tricord Storage Management Software
("TSMS"). No revenues have been generated by TSMS through March 31, 1998.
The Company does not anticipate significant revenues in 1998 from the
development of TSMS-based products, which have yet to be fully developed.
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.
RESULTS OF OPERATIONS
REVENUES
Revenues for the first quarter ended March 31, 1998 were $1,315,000 compared
to $4,873,000 for the first quarter ended March 31, 1997. The decrease in
revenues for the first quarter of 1998 compared to the first quarter of 1997
is primarily due to the Company's decision, as discussed above, to redefine
its corporate strategy to focus its development efforts exclusively on
storage systems management software.
6
<PAGE>
The Company currently anticipates that revenues will decrease significantly
in 1998 as the Company continues to focus its resources on developing TSMS.
The Company intends to sell its remaining enterprise server product
inventory, consisting primarily of spare parts and expansion products, as
long as there is sufficient customer demand and materials are available. The
Company will honor its service agreements and enter into new service
agreements as long as there is sufficient demand. Actual 1998 revenues could
materially differ from those expressed in the foregoing forward-looking
statements, depending on a number of factors, including whether anticipated
demand in 1998 for the Company's enterprise server products differs from the
Company's expectations and the ability of the Company to purchase components
to satisfy customer demand.
GROSS MARGIN
Gross margin, as a percent of revenues, increased to 39% in the first quarter
of 1998 compared to (1%) in the first quarter of 1997. The increase in gross
margin percent for the first quarter of 1998 compared to 1997 was due
primarily to a higher percentage of manufacturing costs in the first quarter
of 1997 because sales volume was decreasing at a faster rate than costs were
able to be deceased.
The Company anticipates that its inventory purchases for 1998 will consist
mainly of disk drives and memory based on customer demand. The Company
currently anticipates that gross margin dollars for the remainder of 1998
will be more than the comparable 1997 periods. Actual 1998 gross margin
results could materially differ from those expressed in the foregoing
forward-looking statement, depending on a number of factors, including the
achievement of the Company's 1998 anticipated revenue level and the ability
of the Company to purchase disk drives, memory and other components cost
effectively in order to satisfy customer demand.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 60% to $711,000 for the first
quarter of 1998 from $1,783,000 for the first quarter of 1997, primarily due
to a decrease in salary and benefit costs associated with fewer team members.
The Company currently anticipates that research and development costs will be
a key expense during 1998 as the Company focuses on the continued development
of TSMS. The Company anticipates that research and development costs for
1998 will continue to be less than the 1997 level. Actual 1998 research and
development expenses could materially differ from those expressed in the
foregoing forward-looking statements, depending on a number of factors,
including the ability of the Company to achieve its business plan and obtain
and commit the required resources to research and development and the ability
to hire and train quality research and development team members as well as
retain current research and development team members.
7
<PAGE>
SALES AND MARKETING
Sales and marketing expenses decreased 90% to $244,000 for the first quarter
of 1998 from $2,394,000 for the first quarter of 1997, primarily due to the
reduction of commissions related to reduced revenues, lower salaries and
benefits due to fewer team members and the closing of certain of the
Company's domestic sales offices.
The Company currently anticipates that sales and marketing expenses in 1998
will continue to be less than 1997 as revenues are expected to decrease and
the Company continues to focus on the development of TSMS. Actual 1998 sales
and marketing expenses could materially differ from those expressed in the
foregoing forward-looking statement, depending on a number of factors,
including the ability of the Company to complete development of TSMS, achieve
its revenue plan and retain its current sales and marketing team members.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 53% to $342,000 for the first
quarter of 1998 from $720,000 for the first quarter of 1997, primarily due to
a decrease in salary and benefit costs associated with fewer team members.
The Company currently anticipates that general and administrative expenses
for 1998 will continue to be less than 1997 due to the move in August 1997 to
a smaller facility and the support necessary for fewer team members.
OTHER INCOME (EXPENSE)
Other income was $92,000 for the first quarter of 1998 compared to other
expense of $209,000 for the first quarter of 1997. The increase in other
income for the first quarter of 1998 is primarily related to the first
quarter 1997 loss on disposal of certain equipment of the Company due to the
redirection of the Company's efforts to the development of TSMS.
LIQUIDITY AND CAPITAL RESOURCES
The aggregate net increase in cash and cash equivalents during the first
quarter of 1998 was $199,000, including stock options transactions of
$332,000, partially offset by $132,000 of cash used in operating activities
due to the net loss for the first three months of 1998, as adjusted by
depreciation, provision for losses on inventories and a reduction of the
Company's accounts receivable.
The Company currently has no plans for significant purchases of capital
equipment during the last nine months of 1998. The Company may purchase
capital equipment, primarily for research and development, depending on the
timing and specific requirements of a potential OEM or other strategic
investment or alliance. The Company has no material commitments for the
purchase of capital equipment.
8
<PAGE>
As of March 31, 1998, the Company had $3,912,000 in cash and cash
equivalents. If the Company's operations progress as currently anticipated,
of which there can be no assurance, the Company believes that its existing
cash and cash equivalents together with the funds generated from the
continued liquidation of its remaining enterprise server inventory, will be
sufficient to fund its operations for the next twelve months. Actual cash
requirements could materially differ from those expressed in the foregoing
forward-looking statement, depending on a number of factors, including the
ability of the Company to achieve anticipated revenue levels from the
continued sale of the remaining enterprise server inventory and the ability
of the Company to maintain its cost structure in accordance with its
operating plan. The Company will adjust its plans as necessary if it
determines that additional cash will be required during 1998.
The Company is seeking additional capital through OEM or other strategic
investments or alliances. There can be no assurance, however, that
additional capital will be available on acceptable terms or at all, and the
failure to obtain additional capital as needed may have an adverse effect on
the Company.
NASDAQ
In February 1998, the Company received notice from the Nasdaq Stock Market
that the Company was not in compliance with Nasdaq National Market listing
requirements and that the Company could be subject to transfer to the
SmallCap Market or delisting. The Company has successfully resolved the
Nasdaq minimum bid requirement. The Company is currently pursuing the
procedures available under Nasdaq rules to avoid transfer to the SmallCap
Market. The Company's goal is to remain on the Nasdaq National Market,
however, there can be no assurance that the Company will be successful in
remaining on the Nasdaq National Market or ultimately, on the Nasdaq Stock
Market.
9
<PAGE>
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 report was filed on Form 8-K for the first quarter of 1998.
10
<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: May 14, 1998
11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Number
------ ------
<S> <C> <C>
27.1 Financial data schedule 13
</TABLE>
12
<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 THREE MONTHS ENDED MARCH 31,
1998, 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,912
<SECURITIES> 0
<RECEIVABLES> 1,510
<ALLOWANCES> (1,084)
<INVENTORY> 1,247
<CURRENT-ASSETS> 5,709
<PP&E> 2,447
<DEPRECIATION> (1,986)
<TOTAL-ASSETS> 6,291
<CURRENT-LIABILITIES> 2,659
<BONDS> 0
0
0
<COMMON> 142
<OTHER-SE> 3,490
<TOTAL-LIABILITY-AND-EQUITY> 6,291
<SALES> 1,315
<TOTAL-REVENUES> 1,315
<CGS> 802
<TOTAL-COSTS> 802
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (692)
<INCOME-TAX> 0
<INCOME-CONTINUING> (692)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (692)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
