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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, 2000
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.
OUTSTANDING AT
CLASS OCTOBER 31, 2000
------------- ----------------
Common Stock,
$0.01 par value 24,421,173
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PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TRICORD SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(In thousands, except per share data) 2000 1999 2000 1999
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
Operating expenses:
Research and development (1) $ 1,671 610 3,703 1,847
Sales and marketing (1) 1,355 336 2,337 1,793
General and administrative (1) 559 364 1,442 1,099
Stock-based compensation 155 357 1,930 1,079
-------------- ------------- ------------ -------------
3,740 1,667 9,412 5,818
-------------- ------------- ------------ -------------
Operating loss (3,740) (1,667) (9,412) (5,818)
-------------- ------------- ------------ -------------
Other income (expense):
Interest, net 352 48 644 164
Other, net 9 (1) 6 23
-------------- ------------- ------------ -------------
361 47 650 187
-------------- ------------- ------------ -------------
Loss from continuing operations (3,379) (1,620) (8,762) (5,631)
-------------- ------------- ------------ -------------
Discontinued operations:
Income (loss) from operations of legacy server business - (246) - 228
Gain (loss) on disposal of legacy server business 16 (207) 100 (207)
-------------- ------------- ------------ -------------
Income (loss) from discontinued operations 16 (453) 100 21
-------------- ------------- ------------ -------------
Net loss $ (3,363) (2,073) (8,662) (5,610)
============== ============== ============ =============
Loss per share from continuing
operations - basic and diluted $ (0.14) (0.08) (0.38) (0.29)
============== ============== ============= =============
Income (loss) per share from discontinued
operations - basic and diluted $ - (0.02) - -
============== ============== ============= =============
Net loss per share - basic and diluted $ (0.14) (0.10) (0.38) (0.29)
============== ============== ============= =============
Weighted average common shares outstanding
- basic and diluted 24,308 19,740 22,830 19,265
============== ============== ============== =============
(1) Excludes non-cash, stock-based compensation expense
as follows:
Research and development $ 107 125 969 385
Sales and marketing 12 125 168 386
General and administrative 36 107 793 308
-------------- ------------- ------------- -------------
$ 155 357 1,930 1,079
============== ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
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TRICORD SYSTEMS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
(In thousands, except per share data) 2000 1999
------------------- -------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,380 3,082
Other current assets 177 73
------------------- -------------------
Total current assets 21,557 3,155
Equipment and improvements, net 1,960 277
------------------- -------------------
Total Assets $ 23,517 3,432
=================== ===================
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable $ 817 98
Accrued payroll, benefits and related taxes 643 306
Other accrued expenses 177 126
------------------- -------------------
Total current liabilities 1,637 530
Stockholders' equity:
Common stock, $0.01 par value; 75,000 shares
authorized, 24,368 and 20,169 shares
issued and outstanding 244 202
Additional paid-in capital 115,671 91,277
Unearned stock compensation (1,469) (4,673)
Accumulated deficit (92,566) (83,904)
------------------- -------------------
Total stockholders' equity 21,880 2,902
------------------- -------------------
Total Liabilities and Stockholders' Equity $ 23,517 3,432
=================== ===================
</TABLE>
See accompanying notes to financial statements.
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TRICORD SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------------------
(In thousands) 2000 1999
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,662) (5,610)
Adjustments to reconcile net loss to net
cash used in operating activities:
Stock compensation 1,930 1,542
Depreciation and amortization 275 174
Loss on sale of legacy server business - 207
Provision for losses on accounts receivable - (22)
Other 45 (133)
Changes in operating assets and liabilities:
Accounts receivable - 160
Inventories - 333
Other current assets (104) 24
Accounts payable 719 (182)
Accrued payroll, benefits and related taxes 337 (20)
Deferred revenue - (395)
Other accrued expenses 51 (131)
-------------------- --------------------
Net cash used in operating activities (5,409) (4,053)
-------------------- --------------------
Cash flows from investing activities:
Capital expenditures (1,958) (253)
-------------------- --------------------
Net cash used in investing activities (1,958) (253)
-------------------- --------------------
Cash flows from financing activities:
Proceeds from private placement 24,378 2,100
Stock option and warrant transactions 1,287 79
-------------------- --------------------
Net cash provided by financing activities 25,665 2,179
-------------------- --------------------
Net increase (decrease) in cash and cash equivalents 18,298 (2,127)
Cash and cash equivalents at beginning of period 3,082 6,215
-------------------- --------------------
Cash and cash equivalents at end of period $ 21,380 4,088
==================== ====================
</TABLE>
See accompanying notes to financial statements.
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TRICORD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
($ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
The accompanying unaudited interim 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 presentation of
the financial position at September 30, 2000, and of results of operations and
cash flows for the interim periods ended September 30, 2000 and 1999. The
results of operations of the server segment of the business are reported as
discontinued operations for all periods presented (see Note 2). Tricord Systems,
Inc. (the "Company") now operates as a single segment. The financial statements
include the accounts of the Company. The Company liquidated its remaining
subsidiary in the United Kingdom during the third quarter of 2000. The unaudited
financial statements should be read in conjunction with the Company's audited
financial statements for the year ended December 31, 1999, which were included
in the Company's 1999 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, 2000 are
not necessarily indicative of the results to be expected for the full year or
any future periods.
2. RECLASSIFICATIONS
Prior stock-based compensation expenses have been reclassified to conform to the
2000 statements of operations presentation. These reclassifications did not
impact previously reported operating loss, loss from continuing operations, net
loss or stockholders' equity.
3. SALE OF ASSETS AND DISCONTINUED OPERATIONS
In August 1999, the Company sold all remaining assets related to the server line
of business (sometimes referred to as the "legacy business"). The Company has
reported results of operations of the legacy business as discontinued operations
for all periods presented. Revenues from the legacy server business included in
discontinued operations for the three months and nine months ended September 30,
1999 were $291 and $1,256, respectively.
Terms of the asset sale require the buyer to pay the Company up to $200 of
additional cash consideration based upon levels of revenues generated from the
legacy business through December 31, 2000. For the three months and nine months
ended September 30, 2000, the Company received $16 and $100, respectively, of
such additional consideration, which has been reported as a gain on disposal of
legacy server business.
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4. SUPPLEMENTAL CASH FLOW INFORMATION
During the third quarter and the nine months ended September 30, 2000, expenses
for outside directors meeting fees of $5 and $45, respectively, were settled
through the issuance of 345 and 5,825 shares of common stock of the Company,
respectively.
5. INCOME (LOSS) PER SHARE
Loss per share from continuing operations is computed by dividing loss from
continuing operations by the weighted average number of common shares
outstanding during each period. Income (loss) per share from discontinued
operations is computed by dividing income (loss) from discontinued operations by
the weighted average number of common shares outstanding during each period. 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 loss per share from continuing
operations and net loss per share as their impact is antidilutive. Loss per
share from continuing operations, income (loss) per share from discontinued
operations and net loss per share do not reflect common stock options and
warrants ultimately exercisable for the purchase of approximately 10,300,000
shares for the three and nine month periods ended September 30, 2000 and
approximately 8,700,000 shares for the three and nine month periods ended
September 30, 1999.
6. COMPREHENSIVE INCOME (LOSS)
The Company has no significant comprehensive income (loss) items other than net
loss.
7. EQUITY TRANSACTION
In April 2000, the Company sold 3,250,000 shares of common stock at a price of
$8.00 per share to certain private investors. These shares and other shares
issued in other private placements were registered for resale in the public
markets pursuant to a Registration Statement under Form S-3, which was declared
effective by the Securities and Exchange Commission on August 10, 2000.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company designs, develops and markets server appliances that enable critical
business services ranging from data storage and content management to eCommerce.
Based on distributed file system technology, these intelligent, single-purpose
devices feature seamless aggregation with ease of management. Currently, the
Company is completing the development of its initial server appliance for
network-attached storage. Before 1997, the Company focused its efforts on
designing, manufacturing and selling enterprise servers that were used to
support computer programs that were used with Microsoft Windows NT(R), Novell(R)
NetWare(R) and Unix. In 1997, the Company changed its strategy to focus on
developing software based on its distributed file system technology for use in
managing data storage. In August 1999, the Company sold the last of its assets
that were used in developing and manufacturing enterprise servers, and the
Company is now focused exclusively on developing software technology for server
appliances and other products based on that technology. Because these products
are currently under development, the Company has not yet generated any revenues
from the sale of these products.
See "Certain Important Factors" at the end of this section for a discussion of
risks and uncertainties related to forward looking statements.
RESULTS OF OPERATIONS
Research and Development
Research and development expenses increased to $1,671,000 and $3,703,000,
respectively, for the third quarter and nine months ended September 30, 2000,
from $610,000 and $1,847,000, respectively, for the third quarter and nine
months ended September 30, 1999, primarily due to the Company's continuing
efforts to complete development of its initial network-attached storage server
appliance. The Company anticipates that research and development costs will
continue to rise during the remainder of 2000 compared to 1999 levels, due to
continuing development efforts related to its distributed file system technology
and future products to be developed based on that technology, including its
initial network-attached storage server appliance.
Sales and Marketing
Sales and marketing expenses increased to $1,355,000 and $2,337,000,
respectively, for the third quarter and nine months ended September 30, 2000,
from $336,000 and $1,793,000 for the third quarter and nine months ended
September 30, 1999, primarily
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due to increased marketing costs related to hiring new team members and costs
associated with the development of the sales and marketing infrastructure. The
Company currently anticipates that sales and marketing expenses will continue to
increase significantly during the remainder of 2000 compared to 1999 levels, due
to the Company's plans to develop and market server appliance products.
General and Administrative
General and administrative expenses increased to $559,000 and $1,442,000,
respectively, for the third quarter and nine months ended September 30, 2000
from $364,000 and $1,099,000 for the third quarter and nine months ended
September 30, 1999, primarily due to increased costs related to hiring new team
members and costs associated with expanding the Company's general and
administrative infrastructure. The Company currently anticipates that general
and administrative expenses for 2000 will continue to be greater than 1999
levels due to the factors described elsewhere in this document and the related
expansion of the Company's infrastructure.
Stock-Based Compensation
Stock-based compensation decreased to $155,000 for the third quarter ended
September 30, 2000 from $357,000 for the third quarter ended September 30, 1999,
primarily due to a decrease in the amount charged for the amortization of
unearned stock compensation related to options granted in December 1998.
Stock-based compensation increased to $1,930,000 for the nine months ended
September 30, 2000 from $1,079,000 for the nine months ended September 30, 1999,
primarily due to an increase in the amount charged for amortization of unearned
stock compensation related to options which were granted to non-employee
contractors. This increase is a function of the increase in the Company's stock
price used in the calculation of the fair value of the options for the nine
months ended September 30, 2000. These amounts do not affect the net
stockholders' equity of the Company. These non-cash expenses increased expenses,
loss from continuing operations and net loss per share for the periods reported.
LIQUIDITY AND CAPITAL RESOURCES
The aggregate net increase in cash and cash equivalents during the first nine
months of 2000 was $18,298,000, due primarily to $24,378,000 received from the
net proceeds of a private placement in April 2000, partially offset by net cash
used of $5,409,000 from operating activities and capital expenditures of
$1,958,000. Cash used from operating activities was due primarily to the net
loss of $8,662,000 for the first nine months of 2000 partially offset by
$1,930,000 of non-cash stock compensation expense. Cash provided by financing
activities reflects $1,287,000 received from the exercise of stock options and
warrants during the nine months ended September 30, 2000. The Company used
$1,958,000 of cash in investing activities for the acquisition of equipment and
other capital expenditures in the first nine months of 2000. These capital
expenditures were made to acquire equipment and expand facilities to support the
expanding infrastructure of the Company. The Company believes that capital
expenditures will continue to
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increase during the remainder of 2000 due to the Company's plans to continue to
build the Company's infrastructure to support the development and marketing of
products in the server appliance category.
As of September 30, 2000, the Company had $21,380,000 in cash and cash
equivalents. Although the Company believes that its cash and cash equivalents
are sufficient for its operations for at least the next twelve months, the
Company expects to seek additional financing within the next twelve months to
fund expanded operations and support the execution of its current business
strategy. However, there can be no assurance that the Company will be able to
raise such financing when required, or on terms acceptable to the Company.
CERTAIN IMPORTANT FACTORS
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of federal and state securities laws. For this purpose, any
statements contained in this Quarterly Report that are not statements of
historical fact are deemed to be forward-looking statements. Without limiting
the foregoing, words such as "may," "will," "should," "expects," "anticipates,"
"estimates," "believes," or "plans," or comparable terminology, are intended to
indicate forward looking statements. These statements by their nature are based
on current expectations and assumptions and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward looking statements, including the following risks:
o Since selling the remaining assets associated with its enterprise
server line of business in August of 1999, the Company has not
generated any revenues from the sale of products. The Company
anticipates that all of its revenues for the foreseeable future will
come from server appliance and other products based on its distributed
file system technology. However, because these products are still
under development, the Company is currently not selling any products.
The Company cannot be sure if or when the development of its server
appliance products will be completed, nor can the Company be sure that
anyone will buy such products once they are ready for sale. Therefore,
the Company cannot provide any assurance that it will generate any
revenues from sales of products in the future.
o The Company's operating costs are increasing, but the Company is not
currently selling any products and therefore its operating losses will
continue to grow. The Company has incurred significant operating net
losses during the last three years, and even if the Company begins
selling the products it is developing, the Company cannot provide any
assurance that such sales will be sufficiently profitable and
therefore the Company may remain unprofitable in the future.
o For the foreseeable future, the Company expects its revenues, if any,
to come from the sales and support of server appliance products, which
the Company is still developing. Accordingly, the Company's business
and future operating
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results depend on its ability to be able to complete the development
and testing of these products and to do so on a timely basis. The
Company cannot be sure that it will be able to successfully complete
the development of its server appliance products or when the
development and testing of the server appliance products will be
complete. If the Company fails to successfully complete the
development of its server appliance products, the Company will not
have any products to sell. Further, even if the Company is able to
successfully complete the development of its server appliance
products, the Company cannot be assured that there will be any demand
in the marketplace for its products. The Company's core technology, a
distributed file system, is a new technology, and therefore it is
difficult to ascertain how much, if any, demand there will be for such
products.
o The market for server appliance and storage products currently is
characterized by rapid technological change and evolving industry
standards and is expected to be highly competitive with respect to
timing of product innovation. The introduction of products embodying
new technology and the emergence of new industry standards can render
products, either existing or under development, obsolete and
unmarketable. The Company's success is dependent in part upon its
ability to anticipate changes in technology and industry standards and
to successfully develop and introduce new and technologically-enhanced
products on a timely basis. If the Company is unable for technological
or other reasons to develop products in a timely manner in response to
changes in the industry, or if products or product enhancements that
the Company develops do not achieve market acceptance, the Company's
business will be materially and adversely affected.
o The Company will need to develop a brand identity and credibility for
its products and technology and the failure to do so could limit
wide-scale acceptance by the industry. Also, the Company's sales
lead-time may be longer than most server appliance and storage
products due to the general market reluctance to accept new entrants
and due to the sensitivity of the data on today's storage devices.
o The Company will need to raise additional capital to fund future
operations and any failure to do so when needed or on satisfactory
terms could cause the Company to downsize its operations, prevent it
from pursuing its growth strategy, or otherwise cause the Company
financial harm.
o The Company believes that protecting its proprietary technology is
important to its success and competitive positioning. The Company has
been granted one U.S. patent in the core distributed file system
technology and currently has additional United States patent
applications pending with respect to its distributed file system
technology to protect its intellectual property rights. There can be
no assurance, however, that any of these patent applications will
result in issued patents or that any such patents, if issued, will be
held to be valid or will otherwise be of value to the Company. The
Company also relies on a combination of trade secret and other
intellectual property law, nondisclosure agreements and other
protective measures to establish and protect its proprietary rights in
its intellectual property. The Company cannot be certain that the
steps it
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takes to protect its intellectual property will adequately protect
such proprietary rights, that others will not independently develop or
otherwise acquire equivalent or superior technology or that the
Company can maintain any of its technology as trade secrets. The
Company also cannot be certain that the use of server appliance
products with open source software will not subject the Company to
claims that its software should be available to the public. In
addition, the laws of some of the countries in which server appliance
products may be sold may not protect the Company's systems and
intellectual property to the same extent as the United States or at
all. The Company's failure to protect its intellectual property rights
could have a material adverse effect on its business, results of
operations and financial condition.
o The Company's future success depends, in significant part, upon
retaining the continued service and performance of its senior
management, team members, consultants and other key personnel as well
as its continued ability to recruit qualified personnel. Losing the
services of any member of the Company's management team could impair
its ability to effectively manage the Company and to carry out its
business plan. In addition, competition for skilled technical
employees in the industry in which the Company operates is intense. If
the Company cannot attract and retain sufficient qualified technical
employees, it may be unable to effectively develop and deliver
competitive products to the market.
o The Company will need to maintain compliance with Nasdaq listing
requirements.
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ITEM 3:
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
FINANCIAL INSTRUMENTS
The Company invests excess funds not required for current operations in cash
equivalents, primarily money market funds or commercial paper. As of September
30, 2000, cash equivalents had an average maturity of less than three months.
Market risk was estimated as the potential decrease in interest income resulting
from a hypothetical one percent decrease in interest rates for the cash
equivalents, which would result in an annual interest income decrease of
approximately $164,000.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial data schedule
(b) Reports on Form 8-K
On October 25, 2000, the Company furnished a report on Form 8-K under Item
9, Regulation FD Disclosure, related to a press release announcing its
financial results for the third quarter and nine months ended September 30,
2000, and a press release announcing upcoming conference venues, plans for
product announcement and release.
On November 9, 2000, the Company furnished a report on Form 8-K under Item
9, Regulation FD Disclosure, related to a press release announcing that
President and COO Joan Wrabetz has been named Chief Executive Officer,
succeeding co-CEOs John Mitchum and Rod Canion and reporting that Yuval
Almog was elected to serve as Chairman of the Board.
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SIGNATURE
Pursuant to the requirements 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/ Joan M. Wrabetz
-------------------------------------
Joan M. Wrabetz
Chief Executive Officer
By: /s/ Steven E. Opdahl
-------------------------------------
Steven E. Opdahl,
Chief Financial Officer and
(Principal Financial Officer and
Principal Accounting Officer)
Date: November 13, 2000
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INDEX TO EXHIBITS
Exhibit Page
Number Number
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27.1 Financial data schedule 15
14
