<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 JUNE 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
- --------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to ________
COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
------------------------------- -------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2905 NORTHWEST BOULEVARD, SUITE 20, PLYMOUTH, MINNESOTA 55441
------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(612) 557-9005
----------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 JUNE 30, 1998
----- --------------
<S> <C>
Common Stock,
$0.01 par value 14,493,826
</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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
(in thousands, except per share data) 1998 1997 1998 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 617 2,803 1,423 7,184
Service contracts 376 508 885 1,000
------------ ------------ ------------ ----------
993 3,311 2,308 8,184
Cost of goods sold:
Product sales 596 4,342 1,281 9,128
Service contracts 64 148 181 278
------------ ------------ ------------ ----------
660 4,490 1,462 9,406
Gross margin 333 (1,179) 846 (1,222)
------------ ------------ ------------ ----------
Operating expenses:
Research and development 644 828 1,355 2,611
Sales and marketing 354 1,098 598 3,492
General and administrative 146 605 488 1,325
Nonrecurring items, net (195) 864 (195) 864
------------ ------------ ------------ ----------
949 3,395 2,246 8,292
------------ ------------ ------------ ----------
Operating loss (616) (4,574) (1,400) (9,514)
------------ ------------ ------------ ----------
Other income (expense):
Interest, net 46 44 98 99
Other, net 15 (33) 55 (297)
------------ ------------ ------------ ----------
61 11 153 (198)
------------ ------------ ------------ ----------
Net loss $ (555) (4,563) (1,247) (9,712)
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
Net loss per share - basic and diluted $ (0.04) (0.34) (0.09) (0.72)
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
Average common shares outstanding 14,369 13,460 14,119 13,434
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
(in thousands, except per share data) 1998 1997
----------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,765 3,713
Accounts receivable, net 257 681
Inventories, net 1,084 1,497
Other current assets 101 174
----------- ------------
Total current assets 5,207 6,065
Equipment and improvements, net 386 565
Other assets 16 125
----------- ------------
Total Assets $ 5,609 6,755
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 563 708
Accrued payroll, benefits and related taxes 360 509
Deferred revenue 762 946
Other accrued expenses 728 925
----------- ------------
Total current liabilities 2,413 3,088
Stockholders' equity:
Common stock, $0.01 par value; 27,000 shares authorized,
14,494 and 13,460 shares issued and outstanding 144 135
Additional paid-in capital 78,455 77,606
Cumulative translation adjustments - 82
Accumulated deficit (75,403) (74,156)
----------- ------------
Total stockholders' equity 3,196 3,667
----------- ------------
Total Liabilities and Stockholders' Equity $ 5,609 6,755
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,247) $ (9,712)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 207 2,036
Provision for losses on inventories 123 1,456
Loss on termination of facilities lease - 975
Provision for loss on equipment - 764
Loss on disposal of equipment 9 334
Provision for losses (recoveries) on accounts receivable (97) 150
Other 170 577
Changes in operating assets and liabilities:
Accounts receivable 521 3,564
Inventories 290 1,245
Other current assets 58 268
Accounts payable (145) (1,807)
Accrued payroll, benefits and related taxes (59) (774)
Deferred revenues and other accrued expenses (108) (1,022)
--------- ---------
Net cash used in operating activities (278) (1,946)
--------- ---------
Cash flows from investing activities:
Capital expenditures (37) (412)
Change in other assets 7 60
--------- ---------
Net cash used in investing activities (30) (352)
--------- ---------
Cash flows from financing activities:
Stock option and employee stock purchase plan transactions 360 30
--------- ---------
Net cash provided by financing activities 360 30
--------- ---------
Effect of exchange rate changes on cash - 531
--------- ---------
Net increase (decrease) in cash and cash equivalents 52 (1,737)
Cash and cash equivalents at beginning of period 3,713 5,711
--------- ---------
Cash and cash equivalents at end of period $ 3,765 3,974
--------- ---------
--------- ---------
</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 interim 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 June 30, 1998,
and of consolidated results of operations and cash flows for the interim
periods ended June 30, 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 periods ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year or any
future periods.
2. BALANCE SHEET AND SUPPLEMENTAL CASH FLOW INFORMATION
Balance Sheet Information:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
(unaudited)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable $ 1,079 1,894
Allowance for doubtful accounts (822) (1,213)
-------- --------
$ 257 681
-------- --------
-------- --------
Inventories, net:
Spare parts and expansion products $ 4,778 5,638
Finished goods 1,226 1,877
Inventory reserve (4,920) (6,018)
-------- --------
$ 1,084 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. During the second quarter of 1998, $101 of
other accrued expenses were settled through the issuance of 122,233 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
inventories, consisting primarily of spare parts and expansion products, as
long as there is sufficient customer demand and materials are available. The
Company will honor its service agreements and enter into new agreements as
long as there is sufficient demand. The Company's product sales during the
first half 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 June 30,
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. MAJOR CUSTOMERS
Connect Computer Company ("Connect") accounted for 14.5% of the Company's
revenues in the second quarter of 1998 compared to 3.4% of the Company's
revenues in the second quarter of 1997. For the six months ended June 30,
1998, revenues from Connect were 11.6% compared to 3.2% for the comparable
period last year.
5. 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 totaling approximately 2,921,000 shares.
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 through June 30, 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 June 30, 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 storage products; and competition from other companies in the
Windows NT storage products market.
RESULTS OF OPERATIONS
REVENUES
Revenues for the second quarter and six months ended June 30, 1998 were
$993,000 and $2,308,000, respectively, compared to $3,311,000 and $8,184,000
for the second quarter and six months ended June 30, 1997. The decrease in
revenues for the second quarter of 1998 compared to the second quarter of
1997 and the decrease in revenues for the first six months of 1998 compared
to 1997 was 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 34% in the second
quarter of 1998 compared to (36%) in the second quarter of 1997 and increased
to 37% for the first six months of 1998 compared to (15%) for the first six
months of 1997. The increase in gross margin percent for the 1998 periods
compared to the 1997 periods was due primarily to a higher percentage of
manufacturing costs in the second quarter of 1997 because sales volume was
decreasing at a faster rate than costs were able to be decreased, and the
second quarter 1997 charge of $1,332,000 for the write-down of inventory
based on the Company's announcement that it would not bring its next
generation server to market.
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 last half of 1998
will be less 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 22% to $644,000 for the second
quarter of 1998 from $828,000 for the second quarter of 1997, and decreased
48% to $1,355,000 for the first six months of 1998 from $2,611,000 for the
first six months of 1997, primarily due to a decrease in salary and benefit
costs associated with fewer team members and a decrease in depreciation due
to fewer capital equipment items.
Although 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 1997 levels for the reasons described above. 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
7
<PAGE>
and the ability to hire and train quality research and development team
members and/or outside consultants as well as retain current research and
development team members and outside consultants.
SALES AND MARKETING
Sales and marketing expenses decreased 68% to $354,000 for the second quarter
of 1998 from $1,098,000 for the second quarter of 1997, and decreased 83% to
$598,000 for the first six months of 1998 from $3,492,000 for the first six
months 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 the Company's domestic and foreign sales offices.
The Company currently anticipates that sales and marketing expenses in 1998
will continue to be less than 1997 levels as 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 achieve its revenue plan and retain its current sales and
marketing team members.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 76% to $146,000 for the second
quarter of 1998 from $605,000 for the second quarter of 1997, and decreased
63% to $488,000 for the first six months of 1998 from $1,325,000 for the
first six months of 1997, primarily due to a decrease in salary and benefit
costs associated with fewer team members and also due to certain bad debt
recoveries.
The Company currently anticipates that general and administrative expenses
for 1998 will continue to be less than 1997 levels due to the move in August
1997 to a smaller facility and the support necessary for fewer team members.
NONRECURRING ITEMS, NET
Nonrecurring items, net for the second quarter of 1998 consisted of a credit
of $195,000 for the gain the Company recorded related to the sale of its
former leased headquarters facility. Nonrecurring items, net for the second
quarter of 1997 consisted of: a charge of $975,000 for the net write-off of
leasehold improvements due to the termination of the Company's lease at its
previous headquarters facility; a charge of $764,000 for the write-off of
equipment; a charge of $125,000 for the mutual settlement and release of an
alleged patent infringement; and a credit of $1,000,000 for a server-related
software license fee granted to an OEM.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The aggregate net increase in cash and cash equivalents during the first six
months of 1998 was $52,000, including $360,000 of cash received from stock
option exercises and employee stock purchase plan activity offset by $278,000
of cash used in operating activities due to the net loss for the first six
months of 1998, as adjusted by depreciation, provision for losses on
inventories and a reduction of the Company's accounts receivable and
inventories. Cash used in operating activities also includes $300,000 of
cash received from the sale of the Company's former leased headquarters
facility.
The Company currently has no plans for significant purchases of capital
equipment during the last six 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.
As of June 30, 1998, the Company had $3,765,000 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 inventories, will be sufficient to fund
its operations for the next twelve months. The Company believes its existing
net inventories are recoverable, but the Company will continue to monitor
recoverability based on future sales activity. 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. In July, the Company agreed with the Nasdaq
Stock Market to move to the SmallCap Market effective with the open of
business on July 29, 1998. The Company's goal is to remain on the Nasdaq
SmallCap Market, however, there can be no assurance that the Company will be
successful in remaining on the Nasdaq SmallCap Market.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual stockholders meeting was held on May 15, 1998 during
which the following items were voted on and approved under applicable law:
1. Election of Director
Mr. Yuval Almog was elected as a Class C Director, with 13,399,664
votes cast for Mr. Almog and 288,878 votes withheld.
2. On the proposal to approve the 1998 Stock Incentive Plan, 5,931,189
shares were cast for, 802,465 shares were cast against, 49,081 shares
abstained from voting and there were 6,905,807 broker non-votes.
3. On the proposal to approve the 1998 Non-Employee Director Stock Plan,
5,910,130 shares were cast for, 870,808 shares were cast against, 83,091
shares abstained from voting and there were 6,824,513 broker non-votes.
4. On the proposal to ratify the appointment of Coopers & Lybrand L.L.P.
as independent accountants for the Company and its subsidiaries for the
fiscal year ended December 31, 1998, 13,580,194 shares were cast for,
43,306 shares were cast against and 65,042 shares abstained from voting on
such proposal. As a result of its merger, effective July 1, 1998, Coopers
& Lyband L.L.P. is a part of PricewaterhouseCoopers LLP.
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 second quarter of 1998.
10
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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/ 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: July 27, 1998
11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Number
- --------- ------
<S> <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 six months
ended June 30, 1998, 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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,765
<SECURITIES> 0
<RECEIVABLES> 1,079
<ALLOWANCES> (822)
<INVENTORY> 1,084
<CURRENT-ASSETS> 5,207
<PP&E> 2,318
<DEPRECIATION> (1,932)
<TOTAL-ASSETS> 5,609
<CURRENT-LIABILITIES> 2,413
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 3,052
<TOTAL-LIABILITY-AND-EQUITY> 5,609
<SALES> 2,308
<TOTAL-REVENUES> 2,308
<CGS> 1,462
<TOTAL-COSTS> 1,462
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (97)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,247)
<EPS-PRIMARY> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
