<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 SEPTEMBER 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
- ----------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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COMMISSION FILE NUMBER 0-21366
TRICORD SYSTEMS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 41-1590621
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(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
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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 SEPTEMBER 30, 1998
----- ------------------
<S> <C>
Common Stock,
$0.01 par value 14,493,826
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(in thousands, except per share data) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product sales $ 632 2,098 2,055 9,282
Service contracts 367 484 1,252 1,484
-------- -------- -------- --------
999 2,582 3,307 10,766
Cost of goods sold:
Product sales 467 1,778 1,709 10,906
Service contracts 79 142 299 420
-------- -------- -------- --------
546 1,920 2,008 11,326
Gross margin 453 662 1,299 (560)
-------- -------- -------- --------
Operating expenses:
Research and development 561 698 1,916 3,309
Sales and marketing 95 530 693 4,022
General and administrative 211 386 699 1,711
Nonrecurring items, net -- -- (195) 864
-------- -------- -------- --------
867 1,614 3,113 9,906
-------- -------- -------- --------
Operating loss (414) (952) (1,814) (10,466)
-------- -------- -------- --------
Other income (expense):
Interest, net 48 42 146 141
Other, net 132 120 187 (177)
-------- -------- -------- --------
180 162 333 (36)
-------- -------- -------- --------
Loss before income taxes (234) (790) (1,481) (10,502)
Provision for income taxes -- 224 -- 224
-------- -------- -------- --------
Net loss $ (234) (1,014) (1,481) (10,726)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per share - basic and diluted $ (0.02) (0.08) (0.10) (0.80)
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares outstanding 14,494 13,460 14,245 13,442
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
TRICORD SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
(in thousands, except per share data) 1998 1997
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(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,335 3,713
Accounts receivable, net 293 681
Inventories, net 767 1,497
Other current assets 66 174
------------- ------------
Total current assets 4,461 6,065
Equipment and improvements, net 303 565
Other assets 11 125
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Total Assets $ 4,775 6,755
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------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 436 708
Accrued payroll, benefits and related taxes 353 509
Deferred revenue 696 946
Other accrued expenses 337 925
------------- ------------
Total current liabilities 1,822 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 78,446 77,606
Cumulative translation adjustments -- 82
Accumulated deficit (75,637) (74,156)
------------- ------------
Total stockholders' equity 2,953 3,667
------------- ------------
Total Liabilities and Stockholders' Equity $ 4,775 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>
NINE MONTHS ENDED SEPT. 30,
---------------------------
(In thousands) 1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,481) $(10,726)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 285 2,361
Provision for losses on inventories (10) 1,175
Loss on termination of facilities lease -- 975
Provision for loss on equipment -- 764
Loss on disposal of equipment 21 346
Provision for losses (recoveries) on accounts receivable (117) (195)
Provision for income taxes -- 224
Other 161 619
Changes in operating assets and liabilities:
Accounts receivable 505 3,302
Inventories 740 1,892
Other current assets 93 649
Accounts payable (272) (1,658)
Accrued payroll, benefits and related taxes (66) (684)
Deferred revenue and other accrued expenses (565) (1,453)
-------- --------
Net cash used in operating activities (706) (2,409)
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Cash flows from investing activities:
Capital expenditures (44) (557)
Change in other assets 12 54
-------- --------
Net cash used in investing activities (32) (503)
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Cash flows from financing activities:
Stock option and employee stock purchase plan transactions 360 31
-------- --------
Net cash provided by financing activities 360 31
-------- --------
Effect of exchange rate changes on cash -- 334
-------- --------
Net decrease in cash and cash equivalents (378) (2,547)
Cash and cash equivalents at beginning of period 3,713 5,711
-------- --------
Cash and cash equivalents at end of period $ 3,335 3,164
-------- --------
-------- --------
</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 September 30,
1998, and of consolidated results of operations and cash flows for the
interim periods ended September 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 September 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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable ......................... $ 995 1,894
Allowance for doubtful accounts ............. (702) (1,213)
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$ 293 681
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Inventories, net:
Spare parts and expansion products .......... $ 4,073 5,638
Finished goods .............................. 1,075 1,877
Inventory reserve ........................... (4,381) (6,018)
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$ 767 1,497
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</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
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3. MAJOR CUSTOMERS
Red River Computer Company accounted for 11.1% of the Company's revenues in
the third quarter of 1998. For the nine months ended September 30, 1998,
revenues from Connect Computer Company were 11.0%.
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 totaling approximately 2,763,000 shares.
5
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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 September 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 September 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 third quarter and nine months ended September 30, 1998 were
$999,000 and $3,307,000, respectively, compared to $2,582,000 and $10,766,000
for the third quarter and nine months ended September 30, 1997. The decreases
in revenues for the third quarter of 1998 compared to the third quarter of
1997 and for the first nine months of 1998 compared to 1997 were 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
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The Company currently anticipates that revenues from the server product line
will decrease significantly as the Company continues to focus its resources
on developing 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
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 45% in the third quarter
of 1998 compared to 26% in the third quarter of 1997 and increased to 39% for
the first nine months of 1998 compared to (5%) for the first nine 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 1997 periods 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 currently anticipates that gross margin dollars for the last
three months of 1998 will be less than the comparable 1997 period. 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 requirements.
RESEARCH AND DEVELOPMENT
Research and development expenses decreased 20% to $561,000 for the third
quarter of 1998 from $698,000 for the third quarter of 1997, and decreased 42%
to $1,916,000 for the first nine months of 1998 from $3,309,000 for the first
nine 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 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 and the ability to hire and train
quality research and development team members and/or outside consultants
7
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as well as retain current research and development team members and outside
consultants.
SALES AND MARKETING
Sales and marketing expenses decreased 82% to $95,000 for the third quarter of
1998 from $530,000 for the third quarter of 1997, and decreased 83% to $693,000
for the first nine months of 1998 from $4,022,000 for the first nine 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, including a favorable adjustment
of $141,000 for the third quarter of 1998 for the reversal of previously accrued
estimated subsidiary closedown expenses.
GENERAL AND ADMINISTRATIVE
General and administrative expenses decreased 45% to $211,000 for the third
quarter of 1998 from $386,000 for the third quarter of 1997, and decreased 59%
to $699,000 for the first nine months of 1998 from $1,711,000 for the first nine
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 nine months ended September 30, 1998
consisted of a $195,000 gain the Company recorded related to the sale by the
former owner of the facility which the Company previously occupied.
Nonrecurring items, net of $864,000 for the nine months ended September 30,
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 income of $1,000,000 for a server-related software
license fee granted to an OEM.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The aggregate net decrease in cash and cash equivalents during the first nine
months of 1998 was $378,000, including $706,000 of cash used in operating
activities due to the net loss for the first nine months of 1998, as adjusted by
depreciation and a reduction of the Company's accounts receivable and
inventories, as well as reductions to accounts payable and deferred revenues and
accrued expenses, offset by $360,000 of cash received from stock option
exercises and employee stock purchase plan activity. 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 three 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 September 30, 1998, the Company had $3,335,000 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 the next twelve months.
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 a material adverse effect on the
Company.
NASDAQ
In September 1998, the Company received notice from the Nasdaq Stock Market that
its shares of common stock are currently not in compliance with the required
minimum closing bid price of $1.00. If the Company reports a closing bid price
of $1.00 or greater for ten consecutive trading days by December 10, 1998, its
securities will be in compliance. In the meantime, the Company's common stock
will continue to be traded on the Nasdaq SmallCap Market. The Company intends to
pursue all procedures available to remain on the Nasdaq SmallCap Market,
including requesting a hearing to stay any possible action in regards to
compliance issues. In the event this is not
9
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successful, the Company's securities will subsequently be available for trade on
the OTC Bulletin Board.
YEAR 2000
The Company believes that it has identified substantially all of the major
computers, software applications, and related equipment used in connection
with its internal operations that must be modified, upgraded, or replaced to
minimize the possibility of a material disruption to its business because of
the Year 2000 issue. The Company has commenced the process of modifying,
upgrading or replacing major systems that have been identified as adversely
affected and expects to complete this process in 1999. The Company currently
estimates that the total cost of completing any required modifications,
upgrades or replacements to these internal systems will not have a material
effect on the Company's business or results of operations. In addition, the
Company does not believe that Year 2000 issues exist with respect to its
material vendors.
The Company has also reviewed its software related to its server line of
business and has completed procedures for customers to use to fix the Year
2000 issue. These procedures are listed on the Company's Web page. However,
the Company also believes that it is not possible to determine with complete
certainty that all Year 2000 issues affecting the server installed systems
have been identified or corrected due to the fact that these systems interact
with other third party software suppliers providing operating systems,
applications and utilities which may or may not be Year 2000 compliant
programs. Nevertheless, due to the fact that revenues from the server line of
business will decrease significantly from historical levels and will consist
primarily of spare parts, memory and disk drives, the Company does not
believe that any Year 2000 issues affecting the server installed base will
have a material impact on the company's business or results of operations.
The Company has not released any TSMS-based products, which have yet to be
fully developed. The Company intends to continuously review and correct any
Year 2000 issues prior to release to market of these products, but does not
anticipate that any such costs will be material.
The Company currently expects to identify and resolve all Year 2000 issues
that could adversely affect its business operations and does not believe that
Year 2000 issues will have a material effect on the Company's business or
results of operations. However, unforeseen problems encountered by the
Company or its customers or vendors could require that the Company incur
additional costs or could otherwise have a material effect on the Company's
business or results of operations. Accordingly, the Company will develop
contingency plans as necessary if it determines that Year 2000 issues will
materially impact its business or results of operations.
10
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company announced that John Mitcham, President and Chief Executive Officer,
had been appointed Chairman by the Board of Directors at their October 9, 1998
meeting. Mr. Mitcham succeeds Yuval Almog, who has served as Chairman since
August 1992. Mr. Almog will remain a Director of the Company.
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 third quarter of 1998.
11
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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: October 27, 1998
12
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Number
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<S> <C> <C>
27.1 Financial data schedule 14
</TABLE>
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 NINE MONTHS ENDED SUPTEMBER 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,335
<SECURITIES> 0
<RECEIVABLES> 995
<ALLOWANCES> (702)
<INVENTORY> 767
<CURRENT-ASSETS> 4,461
<PP&E> 2,313
<DEPRECIATION> (2,010)
<TOTAL-ASSETS> 4,775
<CURRENT-LIABILITIES> 1,822
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 2,809
<TOTAL-LIABILITY-AND-EQUITY> 4,775
<SALES> 3,307
<TOTAL-REVENUES> 3,307
<CGS> 2,008
<TOTAL-COSTS> 2,008
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (117)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,481)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,481)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,481)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
