<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 29, 1997
OR
[ ] Transition Report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934.
For the transition period from____________to____________.
Commission File Number 0-20084
NETFRAME SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 77-0081278
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1545 Barber Lane, Milpitas, CA 95035
------------------------------------
(Address of principal executive offices and zip code)
(408) 474-1000
--------------
(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 of 15(d) of the Securities Exchange
Act of 1934 during the proceeding 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_____
As of May 5, 1997 there were 13,978,445 shares of the registrant's common stock
outstanding.
This quarterly report on Form 10-Q contains 16 pages of which this is page
number 1.
<PAGE> 2
NETFRAME SYSTEMS INCORPORATED
FORM 10-Q
MARCH 29, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Statements of Operations -
Three months ended March 29, 1997
and March 30, 1996 3
Consolidated Balance Sheets -
March 29, 1997 and December 28, 1996 4
Consolidated Statements of Cash Flows -
Three months ended March 29, 1997 and
March 30, 1996 5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURE PAGE 16
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
NetFRAME Systems Incorporated
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------
March 29, March 30,
1997 1996
-------- --------
<S> <C> <C>
Net revenue $ 13,636 $ 20,069
Cost of revenue 12,240 10,920
-------- --------
Gross profit 1,396 9,149
Operating expenses:
Research and development 4,064 3,658
Selling, general & administrative 8,440 8,592
-------- --------
Total operating expenses 12,504 12,250
-------- --------
Operating loss (11,108) (3,101)
Interest and other income, net 8 337
-------- --------
Loss before income taxes (11,100) (2,764)
Benefit for income taxes -- --
-------- --------
Net loss $(11,100) $ (2,764)
======== ========
Net loss per share $ (0.80) $ (0.20)
======== ========
Number of shares used in computing
per share amounts 13,926 13,629
======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
NetFRAME Systems Incorporated
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS
Mar. 29 Dec. 28
1997 1996
-------- --------
Current assets: (unaudited)
<S> <C>
Cash and cash equivalents $ 6,395 $ 14,011
Accounts receivable, net 11,135 14,203
Inventories 6,929 9,741
Other current assets 781 782
-------- --------
Total current assets 25,240 38,737
Property and equipment, net 8,825 9,930
Other assets, net 1,666 1,642
-------- --------
$ 35,731 $ 50,309
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,369 $ 9,236
Accrued compensation and benefits 3,470 4,552
Accrued warranty 1,747 1,721
Deferred revenue 1,990 2,037
Other accrued liabilities 1,095 965
-------- --------
Total current liabilities 14,671 18,511
Commitments and contingencies
Stockholders' equity:
Common stock 14 14
Additional paid-in-capital 73,519 73,156
Accumulated deficit (52,473) (41,372)
-------- --------
Total stockholders' equity 21,060 31,798
-------- --------
$ 35,731 $ 50,309
======== ========
</TABLE>
See accompanying notes.
4
<PAGE> 5
NetFRAME Systems Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
March 29, 1997 March 30, 1996
-------------- --------------
<S> <C> <C>
Cash flows required for operating activities:
Net loss ($11,100) ($ 2,764)
Items not requiring the current use of cash:
Loss on disposal of capital assets 60 35
Depreciation and amortization 1,703 1,387
Changes in items affecting operations:
Accounts receivable 3,068 (194)
Inventories 2,028 (97)
Other current assets 1 591
Accounts payable (2,867) (1,549)
Accrued liabilities (973) (145)
-------- --------
Cash required for operating activites (8,080) (2,736)
Cash flows from investing activities:
Acquisitions of property and equipment 109 (1,396)
Other assets (8) (142)
Purchase of available-for-sale securities - (17,500)
Maturities of available-for-sale securities - 22,000
-------- --------
Cash generated from investing activities 101 2,962
Cash flows from financing activities:
Issuance of common stock, net 363 63
-------- --------
Cash generated from financing activities 363 63
Net increase (decrease) in cash and cash equivalents (7,616) 289
Cash and cash equivalents at the beginning of the period 14,011 18,340
-------- --------
Cash and cash equivalents at the end of the period $ 6,395 $ 18,629
======== ========
Supplemental disclosures:
Other noncash charges:
Capitalization of assets through inventory transfers $ 366 $ 600
Reclassification of inventory to other assets $ 418 $ 929
Cash paid during the period for:
Interest $ 75 --
Income taxes $ 20 --
</TABLE>
See accompanying notes
5
<PAGE> 6
NETFRAME SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q but do not
include all of the information and footnotes required by generally accepted
accounting principles for complete consolidated financial statements and
should, therefore, be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the fiscal year
ended December 31, 1996 included in the Annual Report on Form 10-K. The
accompanying statements include all normal recurring adjustments which the
Company believes necessary for a fair presentation of the statements. The
interim operating results are not necessarily indicative of the results for
the full year.
2. BASIS OF PRESENTATION
The consolidated financial statements of NetFRAME Systems Incorporated (the
Company) for the quarter ended March 29, 1997, have been prepared on a
going concern basis. The Company had approximately $6.4 million of cash
and cash equivalents at March 29, 1997, and had recently entered into an
asset based revolving credit facility to provide additional capital. (See
Footnote 8.) However, the net loss of $11.1 million and the resulting $8.1
million of cash used in the first quarter of 1997 to fund operations
coupled with continuing competitive industry conditions indicates that
management must take certain actions to continue operations with existing
capital resources. These actions include: timely introduction of products
currently under development; expanding distribution channels to increase
revenue; and outsourcing certain business operations and further
streamlining the Company's infrastructure to reduce product and operating
costs. Specifically, the Company is negotiating with third party
distributors, resellers and service providers with substantially greater
resources to market, distribute and service its products. In addition, the
Company is negotiating to consolidate certain corporate facilities and has
taken measures to reduce its workforce. In the event the Company is unable
to generate sufficient cash from operations or obtain necessary financing
from other sources, management will be required, and is prepared, to
sharply curtail certain of its existing business operations.
6
<PAGE> 7
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 29, 1997 Dec. 31, 1996
-------------- --------------
<S> <C> <C>
Raw materials $2,007 $2,729
Work in process 493 2,673
Finished goods 4,429 4,339
------ ------
$6,929 $9,741
====== ======
</TABLE>
4. CONTINGENCIES
In the ordinary course of business, various lawsuits and claims are filed
against the Company. While the outcome of these matters is currently not
determinable, management believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position,
results of operations or cash flows.
5. PROVISION (BENEFIT) FOR INCOME TAXES
The Company provides for income tax expense (or benefit) during interim
reporting periods based upon an estimate of the annual effective tax rate.
The rate of tax (benefit) is less than the federal statutory rate of 35%
due to the limitations controlling the timing for realization of net
operating losses and tax credits (which may carryforward to partially
offset future income taxes) established by the Statement of Financial
Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes".
6. NET LOSS PER SHARE
Net loss per share is based upon the weighted average number of outstanding
shares of common stock.
7
<PAGE> 8
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 (FAS 128), "Earnings Per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The
Company's common stock equivalent share for the three months ended March
31, 1997 and 1996 were antidilutive and accordingly, there is expected to
be no impact on primary income per share. The Company has not yet
determined what the impact of FAS 128 will be on the calculation of fully
diluted earnings per share.
7. CREDIT FACILITY
In March 1997, the Company obtained an asset based revolving credit
facility with the CIT Group/Business Credit, Inc., Los Angeles, CA, to
finance eligible accounts receivable and production inventory up to a
maximum of $15.0 million, subject to certain net worth and other financial
covenants. The asset based revolving credit facility, which expires March
26, 2000, also includes interest in an amount equal to prime plus one-half
percent (0.50%). As of March 29, 1997, no amounts were outstanding and the
Company's available borrowing base under this credit facility was
approximately $6.0 million.
8
<PAGE> 9
NETFRAME SYSTEMS INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This section contains certain trend analysis and forward-looking statements.
Actual results may differ materially from the results described in such trend
analysis and forward looking statements. Factors that might cause such a
difference include, but are not limited to, those discussed in "Business
Factors".
RESULTS OF OPERATIONS
NET REVENUE AND GROSS MARGIN:
<TABLE>
<CAPTION>
Three months ended
---------------------------
(in thousands) March 29, March 30,
1997 1996
------- -------
<S> <C> <C>
Net Revenue $13,636 $20,069
Domestic Sales $11,699 $18,372
Percent of net revenue 86% 92%
Export Sales $ 1,937 $ 1,697
Percent of net revenue 14% 8%
Gross Margin 10% 46%
</TABLE>
Net revenue decreased 32% for the first quarter of 1997 when compared to the
same period in the prior year, primarily due to lower than expected unit
volumes, particularly on the older NF8500 product, aggressive competitive
pricing actions taken by the Company and the lack of availability of NetFRAME's
newly announced NF9000 products.
The Company believes that the potential for revenue growth in 1997 is dependent
upon continuing development and timely introduction of new products; acceptance
of its next-generation NF9000 products and expansion of its current
distribution channels. Any delay in the development process, difficulties
encountered in introducing new products, failure of the new products to compete
successfully with alternatives offered by other vendors or delays in the
expansion of its distribution channels could adversely affect the Company's
business, financial condition or results of operation. There can be no
assurance that the Company's expansion of its distribution channels will result
in increased unit sales or revenues or that continuing price competition will
not continue to
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<PAGE> 10
have an adverse effect on the Company's business, results of operation or
financial condition. In addition, the Company anticipates that some of the
factors which negatively impacted operating results for the first three months
of 1997 may continue to have an adverse impact on the Company's operating
results for the remainder of fiscal 1997.
Export net revenue increased as a percentage of total net revenue for the first
quarter of 1997 when compared to the same period in the prior year. The
increase was primarily due to increased product shipments to certain Asia
Pacific customers. In fiscal 1996 and the first quarter of 1997, the Company
reduced its international sales headcount and experienced shipment delays
pending secured financing from certain international customers. Because
of these factors, there can be no assurance that the Company will be able to
increase international revenues in the near future.
The Company recognizes revenue upon shipment of product and records allowances
for estimated uncollectible accounts and sales returns. For the first three
months of 1997, when compared to the corresponding period of 1996, the Company
experienced a higher rate of sales returns. While the Company had recorded and
continues to record allowances for estimated sales returns and uncollectible
accounts, there can be no assurance that such estimates regarding allowances
will be adequate.
Gross margins were 10% for the first quarter of 1997 as compared to 46% for the
same period one year ago. Gross margins decreased primarily due to lower net
revenue, continued pricing competition and additional costs related to its
product transition. The Company believes that its provisions for potential
excess and obsolete inventory related to its NF8500 product lines should be
adequate for its product transition to the NF9000. However, there can be no
assurance that gross margins will not be negatively impacted in future periods
if there is a decline in anticipated unit sales and net revenues of its next
generation of products as well as continuing price competition.
OPERATING EXPENSES:
<TABLE>
<CAPTION>
Three months ended
--------------------------
(in thousands) March 29, March 30,
1997 1996
------- -------
<S> <C> <C>
Research & development $ 4,064 $ 3,658
Percent of net revenue 30% 18%
Selling, general & administrative $ 8,440 $ 8,592
Percent of net revenue 62% 43%
Total Operating Expenses $12,504 $12,250
Percent of net revenue 92% 61%
</TABLE>
10
<PAGE> 11
Research and development expense increased 11% for the first quarter of 1997
when compared to the same quarter one year ago. The expenses for 1997
increased primarily due to consulting and product prototype expenses. The
Company expects that research and development expenses will not increase
significantly for the remainder of fiscal 1997 although these expenses can vary
from period to period primarily due to variable spending on product prototypes.
The Company operates in a rapidly changing and highly competitive marketplace
and, as a result, believes it is critical to continue its investment in
research and development activities in order to maintain its competitive
position. There can be no assurance that any research or development efforts
will be successfully completed or that future products will be available on a
timely basis or achieve market acceptance.
Selling, general and administrative expenses decreased 2% for the first quarter
of 1997 when compared to the same period in 1996. The decrease in expenses in
the first quarter of 1997 was primarily due to lower commission expense related
to lower net revenues, and lower salaries and headcount related expenses,
offset by an increase in allowances for uncollectible accounts, as well as
costs related to a reduction in force. In addition, the Company is continuing
to invest in advertising and channel-development strategies as it continues its
transition to its new product platform.
INTEREST AND OTHER INCOME, NET:
Interest and other income, net decreased for the first quarter of 1997 compared
to the same quarter one year ago due primarily to lower interest income earned
in 1997 due to lower cash balances. In addition, the Company incurred
financing fees in the first quarter of 1997, associated with the asset based
revolving credit facility it obtained in March 1997.
PROVISION (BENEFIT) FOR INCOME TAX:
The Company recorded no provision for income taxes for the quarters ended March
29, 1997 and March 30, 1996. The Company provides for income taxes (benefits)
during interim reporting periods based upon an estimated annual effective tax
rate, applied to income (loss) before income taxes.
BUSINESS FACTORS:
In the past, the Company has experienced fluctuations in its operating results
and believes it will continue to experience fluctuations. The Company
generally fills orders shortly after receipt from customers and, therefore,
backlog at the beginning of a fiscal period represents only a small percentage
of the product sales anticipated in that period. Further, a substantial
portion of the Company's net revenue in each quarter generally results from
orders received during the last few weeks of that quarter. The absence of
11
<PAGE> 12
significant backlog and the concentration of sales at the end of the quarter
impairs the Company's ability to forecast and to control expense, production
and inventory levels, which are controlled based on expected revenue. If
anticipated shipments in any quarter do not occur or are delayed, expenditure
levels could be disproportionately high, and the Company's operating results
for that quarter would be materially adversely affected.
Although first customer shipment of the NF9000 occurred in the fourth quarter
of 1996, and sales of the NF9000 are expected to represent a majority of net
revenue in 1997, cumulative sales to date have been limited due to the short
period of time since the introduction of the NF9000, the continuing effort in
the first quarter of 1997 to sell the older NF8500 product line, and the
transition of the VARs to selling the newer NF9000 product. The Company does
not expect to achieve significant revenue growth unless the anticipated impact
of the product transition is realized. Even though the Company is optimistic
about the prospects of its new products, unless the NF9000 products are sold in
sufficient volume, including products expected to be developed and released in
1997, the Company does not anticipate returning to profitability. Management
has developed a program to liquidate inventory of the older products and
believes that the Company has appropriately valued the inventory.
In addition, the Company's operating results may fluctuate as a result of a
number of other factors, including variation in the size and timing of
individual transactions, the mix of products sold, variation in the mix of
sales by distribution channel, mix in international and domestic sales, end
users' capital spending cycles, changes in pricing policies by the Company, its
competitors or its suppliers, the availability and cost of key components,
European and Pacific Rim market seasonality and the timing of introduction and
the market acceptance of new and enhanced versions of the Company's products.
The Company's primary means of distribution is through VARs, systems
integrators and distributors. The Company's business, financial conditions,
and operating results could be adversely affected in the event that the
generally weak financial condition of its VARs and system integrators worsens
to the point that it affects their ability to sell or pay for the Company's
products. The Company recently segregated the number of VARs with which it
does business between those authorized to resell and support all of the
Company's products and those limited to the resell and support of the Company's
products prior to the NF9000. Management is actively working to collect
outstanding balances and believes no additional reserves are necessary. The
Company is continuing its evaluation of its distribution channels. Any changes
could result in fluctuations in net revenue, gross margins, and/or operating
expenses. The Company cannot at this time determine the ultimate effect of
these or other future distribution channel modification efforts on the
Company's future operating results.
In the first quarter of 1997, the majority of the products sold by the Company
utilized operating systems provided by Novell and Microsoft. Any problems in
the use of these operating systems by end users could adversely affect the
Company's sales.
12
<PAGE> 13
The Company's products include certain components that are currently available
only from single sources or limited sources. Any availability limitations,
interruptions in supplies, or price increases relative to these components
could materially adversely affect the Company's business, financial condition,
and operating results.
Because of the variety and uncertainty of various factors affecting the
Company's operating results, and the fact that the Company participates in a
highly dynamic industry, there may be significant volatility in the Company's
common stock price.
LIQUIDITY AND CAPITAL RESOURCES
During the first three months of 1997, the Company used $8.1 million of cash in
operating activities which consisted primarily of a net loss of $11.1 million,
a decrease in accounts payable of $2.9 million and a decrease in accrued
liabilities of $1.0 million, offset by a decrease in accounts receivable of
$3.1 million, a decrease in inventory of $2.0 million and depreciation and
amortization expense of $1.7 million.
The Company used cash of $100,000 in the first quarter of 1997 for the purchase
of capital equipment for internal purposes. The Company currently plans
purchases of capital equipment of approximately $1.9 million for the remainder
of 1997, which will either be purchased or internally-developed equipment, and
will be used for research and development, demonstration purposes and test
equipment. Actual capital expenditures could materially differ from those
expressed in the preceding forward-looking statement, as actual capital
expenditures are dependent on many factors, including, the ability of the
Company to achieve its planned revenues and collections to generate the cash
necessary to fund capital expenditures and the continued use of current capital
assets without the need of replacement due to obsolescence, destruction or
technology changes. The Company has no material commitments for the purchase
of capital equipment.
At March 29, 1997, the Company had cash and cash equivalents of approximately
$6.4 million, a decrease from $14.0 million at December 31, 1996. In March
1997, the Company obtained an asset based revolving credit facility with the
CIT Group/Business Credit, Inc., Los Angeles, CA, to finance eligible accounts
receivable and production inventory up to a maximum of $15.0 million, subject
to certain net worth and other financial covenants. The asset based revolving
credit facility, which expires March 26,2000, also includes interest in an
amount equal to prime plus one-half percent (0.50%). As of March 29, 1997, no
amounts were outstanding and the Company's available borrowing base under this
credit facility was approximately $6.0 million.
Management recognizes the need to take certain actions if remaining cash
balances and potential available borrowings under the revolving credit facility
are to adequate to satisfy the Company's cash requirement for the next twelve
(12) months. These actions
13
<PAGE> 14
include: timely introduction of products currently under development;
expanding distribution channels to increase revenue; and outsourcing certain
business operations and further streamlining the Company's infrastructure to
reduce product and operating costs. Specifically, the Company is negotiating
with third party distributors, resellers and service providers with
substantially greater resources to market distribute and support its products.
In addition, the Company is negotiating to consolidate certain corporate
facilities and has taken measures to reduce its workforce. In the event the
Company is unable to generate sufficient cash from operations or obtain
necessary financing from other sources, management will be required, and is
prepared, to sharply curtail certain of its existing business operations.
Actual cash requirements could differ materially from those expressed in the
preceding forward-looking statements, as actual cash requirements are dependent
on many factors, including the ability of the Company to achieve its planned
operating results.
14
<PAGE> 15
PART II. OTHER INFORMATION
--------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
None
b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 29,
1997.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NetFRAME Systems Incorporated
Registrant
Date May 8, 1997 /s/ Robert L. Puette
------------------------------------
Robert L. Puette
President and Chief Executive Officer
(Principal Executive Officer)
Date May 8, 1997 /s/ Dan McCammon
------------------------------------
Dan McCammon
Vice President, Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE> 17
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-START> DEC-29-1996
<PERIOD-END> MAR-29-1997
<CASH> 6,395
<SECURITIES> 0
<RECEIVABLES> 12,996
<ALLOWANCES> 1,861
<INVENTORY> 6,929
<CURRENT-ASSETS> 25,240
<PP&E> 30,231
<DEPRECIATION> 21,406
<TOTAL-ASSETS> 35,731
<CURRENT-LIABILITIES> 14,671
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 21,060
<TOTAL-LIABILITY-AND-EQUITY> 35,731
<SALES> 13,636
<TOTAL-REVENUES> 13,636
<CGS> 12,240
<TOTAL-COSTS> 12,240
<OTHER-EXPENSES> 12,504
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (8)
<INCOME-PRETAX> (11,100)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,100)
<EPS-PRIMARY> (0.80)
<EPS-DILUTED> (0.80)
</TABLE>
