## QuickLinks

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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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, 1999

|/ / | 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

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TRICORD SYSTEMS, INC.(Exact name of Registrant as specified in its charter)

|Delaware                                                       |  | 41-1590621                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
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)

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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.

|Class                         |  | Outstanding at October 31, 1999
|----------------------------- |  | -------------------------------
|Common Stock, $0.01 par value |  | 19,996,329                     

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## 

PART 1. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

TRICORD SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

|                                                                |  | Three Months Ended September 30, |        | Nine Months Ended September 30, |       
|--------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- | ------
|
|Operating expenses:                                             |  |                                  |        |                                 |       
|Research and development                                        |  |                                  | 735    |                                 | 561   
|Sales and marketing                                             |  |                                  | 461    |                                 | 77    
|General and administrative                                      |  |                                  | 471    |                                 | 231   
|                                                                |  |                                  |        |                                 |       
|                                                                |  |                                  | 1,667  |                                 | 869   
|                                                                |  |                                  |        |                                 |       
|Operating loss                                                  |  |                                  | (1,667 | )                               | (869  
|                                                                |  |                                  |        |                                 |       
|Other income (expense):                                         |  |                                  |        |                                 |       
|Interest, net                                                   |  |                                  | 48     |                                 | 48    
|Other, net                                                      |  |                                  | (1     | )                               | 132   
|                                                                |  |                                  |        |                                 |       
|                                                                |  |                                  | 47     |                                 | 180   
|                                                                |  |                                  |        |                                 |       
|Loss from continuing operations                                 |  | $                                | (1,620 | )                               | (689  
|                                                                |  |                                  |        |                                 |       
|Discontinued operations:                                        |  |                                  |        |                                 |       
|Income (loss) from operations of legacy server business         |  |                                  | (246   | )                               | 455   
|Loss on disposal of legacy server business                      |  |                                  | (207   | )                               |      
|                                                                |  |                                  |        |                                 |       
|Income (loss) from discontinued operations                      |  |                                  | (453   | )                               | 455   
|                                                                |  |                                  |        |                                 |       
|Net loss                                                        |  | $                                | (2,073 | )                               | (234  
|                                                                |  |                                  |        |                                 |       
|Net loss per share from continuing operationsbasic and diluted |  | $                                | (0.08  | )                               | (0.05 
|                                                                |  |                                  |        |                                 |       
|Net loss per sharebasic and diluted                            |  | $                                | (0.11  | )                               | (0.02 
|                                                                |  |                                  |        |                                 |       
|Weighted average common shares outstanding
basic and diluted   |  |                                  | 19,740 |                                 | 14,494
|                                                                |  |                                  |        |                                 |       

See
accompanying notes to consolidated financial statements.



TRICORD SYSTEMS, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS

|(In thousands, except per share data)                                                                               |  | September 30, 1999 |         | December 31, 1998 |        
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ----------------- | -------
|
|Current assets:                                                                                                     |  |                    |         |                   |        
|Cash and cash equivalents                                                                                           |  | $                  | 4,088   |                   | 6,215  
|Accounts receivable, net                                                                                            |  |                    | 24      |                   | 162    
|Inventories, net                                                                                                    |  |                    | 0       |                   | 637    
|Other current assets                                                                                                |  |                    | 61      |                   | 96     
|                                                                                                                    |  |                    |         |                   |        
|Total current assets                                                                                                |  |                    | 4,173   |                   | 7,110  
|Equipment and improvements, net                                                                                     |  |                    | 302     |                   | 243    
|                                                                                                                    |  |                    |         |                   |        
|Total Assets                                                                                                        |  | $                  | 4,475   |                   | 7,353  
|                                                                                                                    |  |                    |         |                   |        
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                | 
|Current liabilities:                                                                                                |  |                    |         |                   |        
|Accounts payable                                                                                                    |  | $                  | 85      |                   | 398    
|Accrued payroll, benefits and related taxes                                                                         |  |                    | 249     |                   | 344    
|Deferred revenue                                                                                                    |  |                    |        |                   | 525    
|Other accrued expenses                                                                                              |  |                    | 113     |                   | 244    
|                                                                                                                    |  |                    |         |                   |        
|Total current liabilities                                                                                           |  |                    | 447     |                   | 1,511  
|Stockholders' equity:                                                                                               |  |                    |         |                   |        
|Common stock, $0.01 par value; 75,000 and 27,000 shares authorized, 19,974 and 18,961 shares issued and outstanding |  |                    | 200     |                   | 190    
|Additional paid-in capital                                                                                          |  |                    | 90,114  |                   | 87,483 
|Unearned stock compensation                                                                                         |  |                    | (4,409  | )                 | (5,564 
|Accumulated deficit                                                                                                 |  |                    | (81,877 | )                 | (76,267
|                                                                                                                    |  |                    |         |                   |        
|Total stockholders' equity                                                                                          |  |                    | 4,028   |                   | 5,842  
|                                                                                                                    |  |                    |         |                   |        
|Total Liabilities and Stockholders' Equity                                                                          |  | $                  | 4,475   |                   | 7,353  
|                                                                                                                    |  |                    |         |                   |        

See
accompanying notes to consolidated financial statements.



TRICORD SYSTEMS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

|                                                                            |  | Nine Months Ended September 30, |       
|--------------------------------------------------------------------------- |  | ------------------------------- | ------
|
|Cash flows from operating activities:                                       |  |                                 |       
|Net loss                                                                    |  | $                               | (5,610
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |       
|Stock compensation expense                                                  |  |                                 | 1,542 
|Depreciation and amortization                                               |  |                                 | 174   
|Provision for losses on inventories                                         |  |                                 |      
|Loss on sale of assets                                                      |  |                                 | 207   
|Recoveries on accounts receivable                                           |  |                                 | (22   
|Other                                                                       |  |                                 | (133  
|Changes in operating assets and liabilities:                                |  |                                 |       
|Accounts receivable                                                         |  |                                 | 160   
|Inventories                                                                 |  |                                 | 333   
|Other current assets                                                        |  |                                 | 24    
|Accounts payable                                                            |  |                                 | (182  
|Accrued payroll, benefits and related taxes                                 |  |                                 | (20   
|Deferred revenue                                                            |  |                                 | (395  
|Other accrued expenses                                                      |  |                                 | (131  
|                                                                            |  |                                 |       
|Net cash used in operating activities                                       |  |                                 | (4,053
|                                                                            |  |                                 |       
|Cash flows from investing activities:                                       |  |                                 |       
|Capital expenditures                                                        |  |                                 | (253  
|                                                                            |  |                                 |       
|Net cash used in investing activities                                       |  |                                 | (253  
|                                                                            |  |                                 |       
|Cash flows from financing activities:                                       |  |                                 |       
|Stock option transactions                                                   |  |                                 | 79    
|Proceeds from private placement                                             |  |                                 | 2,100 
|                                                                            |  |                                 |       
|Net cash provided by financing activities                                   |  |                                 | 2,179 
|                                                                            |  |                                 |       
|Net decrease in cash and cash equivalents                                   |  |                                 | (2,127
|Cash and cash equivalents at beginning of period                            |  |                                 | 6,215 
|                                                                            |  |                                 |       
|Cash and cash equivalents at end of period                                  |  | $                               | 4,088 
|                                                                            |  |                                 |       

See
accompanying notes to consolidated financial statements.



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 presentation of the consolidated financial position at September 30, 1999, and of consolidated results of
operations and cash flows for the interim periods ended September 30, 1999 and 1998. 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 unaudited consolidated financial statements should be read in conjunction
with the Company's audited consolidated financial statements for the year ended December 31, 1998, which were incorporated by reference in the Company's 1998 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 September 30, 1999 are not necessarily indicative of the results to be expected for the full year or any future periods.

2. Sale of Assets and Discontinued Operations

On August 27, 1999, the Company sold all assets related to the server line of business (sometimes referred to as the "legacy" business), except for existing
trade accounts receivable, to EFC Systems, Inc. ("EFC") in exchange for the assumption of all liabilities of the legacy business, except for any legacy business Year 2000 issue which the Company
believes is not material. The sale of the legacy business resulted in a loss of $207, which was recorded during the third quarter of 1999. Pursuant to terms of the sale agreement, the Company may
receive up to $200 of cash payments from EFC, contingent upon the level of sales of Tricord server-related products and services from the date of sale through December 31, 2000 to EFC Systems,
Inc. ("EFC").

The
Company has reported results of operations of the legacy server business as discontinued operations for all periods presented. Revenues from the legacy server business included in
discontinued operations were as follows.

|         |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|-------- |  | -------------------------------- | --- | -------------------------------
|
|Revenues |  | $                                | 291 |                                
|         |  |                                  |     |                                

3. Balance Sheet and Supplemental Cash Flow Information

Balance Sheet Information:

|                                   |  | September 30, 1999 |    | December 31, 1998 |       
|---------------------------------- |  | ------------------ | -- | ----------------- | ------
|
|Accounts receivable, net:          |  |                    |    |                   |       
|Accounts receivable                |  | $                  | 25 |                   | 841   
|Allowance for doubtful accounts    |  |                    | (1 | )                 | (679  
|                                   |  |                    |    |                   |       
|                                   |  | $                  | 24 |                   | 162   
|                                   |  |                    |    |                   |       
|Inventories, net:                  |  |                    |    |                   |       
|Spare parts and expansion products |  | $                  |   |                   | 3,946 
|Inventory reserves                 |  |                    |   |                   | (3,309
|                                   |  |                    |    |                   |       
|                                   |  | $                  |   |                   | 637   
|                                   |  |                    |    |                   |       

Supplemental Cash Flow Information:

During
the third quarter of 1999, expenses for outside directors meeting fees of $15 were settled through the issuance of 4,852 shares of common stock of the Company. During the
second quarter of 1999, expenses for outside directors meeting fees of $14 were settled through the issuance of 5,748 shares of common stock of the Company. During the first quarter of 1999, $75 of
accrued payroll obligations, $15 of expenses for outside directors meeting fees and $79 of expenses for consulting fees were settled through the issuance of 70,499 shares of common stock of the
Company.

4. Net Loss Per Share from Continuing Operations and Net Loss Per Share

Net loss per share from continuing operations is computed by dividing net loss from continuing 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 each period. Potentially dilutive common shares are
excluded from the calculation of net loss per share from continuing operations and net loss per share as their impact is antidilutive. Net loss per share from continuing operations and net loss per
share do not include common stock options and warrants ultimately exercisable for the purchase of approximately 8,700,000 shares as of September 30, 1999.

5. Comprehensive Income (Loss)

The Company has no significant comprehensive income (loss) items other than net loss.

6. Equity Transaction

In July 1999, the Company sold 840,000 shares of the Company's common stock at a price of $2.50 per share to certain private investors. Such shares have
not been registered by the Company and are subject to certain resale restrictions.

## 

ITEM 2:      MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

General

Throughout 1998 and the first nine months of 1999, the Company continued to focus its development efforts exclusively on storage system management software,
the strategy it defined in 1997. The storage system management software 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 were generated by TSMS through September 30, 1999, and the Company may not receive revenues from TSMS-based products during
the remainder of 1999.

The
Company had historically engaged in the business of designing, manufacturing, marketing and supporting high-performance enterprise servers for use in mission critical
applications, principally running on Microsoft Windows NT® and Novell® NetWare®.

On
August 27, 1999, the Company sold all assets related to the server line of business (sometimes referred to as the "legacy business"), except for trade accounts receivable,
to EFC Systems, Inc. ("EFC") in exchange for the assumption of all liabilities of the legacy business, except for any legacy business Year 2000 issue which the Company believes is not material. The
sale of the legacy business resulted in a loss of $207,000, which was recorded during the third quarter of 1999. Pursuant to terms of the sale agreement, the Company may receive up to $200,000 of cash
payments from EFC, contingent upon the level of the sales of Tricord server-related products and services from the date of sale through December 31, 2000.

The
Company has reported results of operations from the legacy business as discontinued operations for all periods presented.

In
July 1999, the Company effected a workforce reduction to streamline its operations. The reduction resulted in the severance of eleven employees primarily engaged in
performing legacy business activities. The costs of the workforce reduction, which included severance payments and stock compensation charges totaling $339,000, have been included in the third quarter
loss from discontinued operations. The Company expects this workforce reduction to have favorable effects on the costs of the Company in the fourth quarter of 1999.

See
"Certain Important Factors" at the end of this section for a discussion of forward looking statements.

Results of Operations

Research and Development

Research and development expenses were $735,000 and $2,232,000, respectively, for the third quarter and nine months ended September 30, 1999, compared
to $561,000 and $1,916,000, respectively, for the third quarter and nine months ended September 30, 1998, primarily due to continuing efforts to complete development of TSMS. These increases
include $125,000 and $385,000, respectively, for the
third quarter and first nine months of 1999 in non-cash stock compensation expense related to certain options granted and restricted stock issued in 1998. The Company anticipates that research and
development costs will rise during 1999 compared to 1998 levels due to continuing TSMS development efforts.

Sales and Marketing

Sales and marketing expenses increased to $461,000 and $2,179,000, respectively, for the third quarter and nine months ended September 30, 1999 from
$77,000 and $623,000, respectively, for the third quarter and first nine months of 1998, primarily due to increases in personnel costs related to headcount additions and expenses related to marketing
research and analysis for TSMS. These increases include $125,000 and $386,000, respectively, for the third quarter and first nine months of 1999 in non-cash stock compensation expense related to
certain options granted and restricted stock issued in 1998. The Company currently anticipates that sales and marketing expenses will remain significantly higher during the remainder of 1999 compared
to 1998 levels.

General and Administrative

General and administrative expenses increased to $471,000 and $1,407,000, respectively, for the third quarter and nine months ended September 30, 1999
from $231,000 and $816,000, respectively, for the third quarter and first nine months of 1998, primarily due to an increase in personnel costs related to the December 1998 addition of the
Company's Vice President and General Counsel and an increase in professional fees. These increased costs include non-cash compensation expense of $107,000 and $308,000, respectively, related to
certain options granted and restricted stock issued in 1998. The Company currently anticipates that general and administrative expenses for 1999 will be greater than 1998 levels due to the factors
described herein.

Liquidity and Capital Resources

The aggregate net decrease in cash and cash equivalents during the first nine months of 1999 was $2,127,000, including $4,053,000 of cash used in operating
activities due primarily to the net loss for the first nine months of 1999 (adjusted by $1,542,000 of non-cash stock compensation expense) and capital expenditures of $253,000, principally to acquire
equipment for research and development efforts, partially offset by cash provided by the proceeds from private placement of $2,100,000 and stock option transactions of $79,000. The Company may
purchase additional 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, 1999, the Company had $4,088,000 in cash and cash equivalents. The Company believes that it will be able to manage its cash resources to continue operations
for at least the next twelve months. However, should the Company incur additional increases in research and development costs and sales and marketing costs within the next twelve months, the Company
may need to adjust its operating plans.

The
Company will need to raise additional capital in order to complete development of TSMS. The Company may seek such additional capital through the sale of debt or equity securities.
In addition, the Company continues to look for 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.

Year 2000

The Company previously initiated a project to prepare its computer systems for the Year 2000. This project encompasses information technology ("IT") systems,
non-IT systems, Company products and third party products and systems.

The
Company has reviewed its main IT system and to date has concluded that a Year 2000 problem does not exist in that system. However, the Company has other smaller supporting
business systems which it is continuing to review. In the event that the Company determines that its smaller supporting business systems will not transition properly at the end of 1999, the Company
will transition these systems to its main business system in order to reduce the risk of any business disruption.

The
Company has completed an evaluation of its telephone, gas and electric systems and its building systems and determined that a Year 2000 problem does not exist in those systems.
The Company has other non-IT systems which it is continuing to review for Year 2000 readiness. The Company will take remedial action as necessary.

As
discussed above, the Company sold the net assets related to its legacy business to EFC in August 1999. The Company remains responsible for any legacy business Year 2000
issues. The Company has reviewed its software related to its legacy business and has completed a fix for the Year 2000 issue. The Company has made this fix available to its customers on its web
site as has EFC on its web site. The Company has contacted as many of its legacy business customers as practicable.

The
Company has not yet released any TSMS-based products, but it intends to review and correct any Year 2000 issues, if necessary, prior to release to market of these products.

Substantially
all of the Company's Year 2000 efforts have been made using internal personnel, and, the costs associated with the Year 2000 assessment and corrections have not been,
and currently are not anticipated to be, material to the Company. All such costs to date have been expensed as incurred.

Based
on its efforts to date, management believes the Year 2000 issue will not have a significant impact on operations. If additional modifications and conversions are necessary,
however, and cannot be completed on a timely basis, the Year 2000 issue could have an adverse effect on the Company's operations. At this time, the Company believes that it is unnecessary to adopt a
contingency plan covering the possibility that additional modifications and conversions will be needed, but, as part of the overall project, the Company will continue to assess the need for such a
contingency plan, and will continue to analyze its computer systems to determine if additional modifications and conversions will be needed.

Certain Important Factors

This Quarterly Report on Form 10-Q contains certain forward looking statements within the meaning of the Private Securities Reform Act of 1995. 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:



## 

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, 1999, 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 $40,000.

## 

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K





## 

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:                              
| |  | By:                              
| |  | Date: November 2, 1999           



## 

INDEX TO EXHIBITS

|Exhibit Number |  |                         |  | Page Number
|-------------- |  | ----------------------- |  | -----------
|27.1           |  | Financial data schedule |  | 16         



## QuickLinks

PART 1. FINANCIAL INFORMATIONITEM 1: FINANCIAL STATEMENTS

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

SIGNATURE

INDEX TO EXHIBITS