UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1996
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway 94538-6517
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
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 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 _____
The number of shares of the Registrant's Common Stock outstanding as of December
31, 1996 was 15,166,691.
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1996 (unaudited) and September 30, 1996 . 3
Condensed Consolidated Statements of
Operations (unaudited) - Three Months
Ended December 31, 1996 and 1995 .................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Three Months Ended
December 31, 1996 and 1995 ........................... 5
Notes to Condensed Consolidated
Financial Statements ................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations .................................. 9
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income (Loss)
per Common and Common Equivalent Share ................ 12
PART II. Other Information
Item 5. Other Information ................................ 13
Item 6. Exhibits and Reports on Form 8-K ................. 14
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
December 31, September 30,
1996 1996
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 7,826 $ 9,216
Short-term investments 2,680 2,382
Accounts receivable, net 5,243 5,542
Inventories 3,627 4,211
Deferred and refundable taxes 2,522 2,224
Other current assets 467 480
------- -------
Total current assets 22,365 24,055
Fixed assets, net 2,379 2,253
Other assets, net 5,808 4,391
------- -------
Total assets $30,552 $30,699
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,947 $ 2,066
Accrued liabilities 1,472 1,544
------- -------
Total current liabilities 3,419 3,610
Shareholders' equity:
Common stock 21,334 20,723
Retained earnings 5,799 6,366
------- -------
Total shareholders' equity 27,133 27,089
------- -------
Total liabilities and
shareholders' equity $30,552 $30,699
======= =======
The accompanying notes are an integral part of these financial statements.
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended
December 31,
------------------
1996 1995
------ ------
Net sales $ 3,266 $ 2,844
Royalty revenue 2,318 4,469
------- -------
Total revenue 5,584 7,313
Cost of goods sold 2,798 1,920
Research and development expenses 1,621 1,569
Selling, general & administrative expenses 2,493 1,980
------- -------
Operating income (loss) (1,328) 1,844
Other income (442) (785)
------- -------
Income (loss) before income taxes (886) 2,629
Provision (benefit) for income taxes (319) 986
------- -------
Net income (loss) $ (567) $ 1,643
======= =======
Net income (loss) per share $ (.04) $ .11
======= =======
Number of shares used in per share calculations 14,953 15,444
======= =======
The accompanying notes are an integral part of these financial statements.
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's) (UNAUDITED)
Three Months Ended
December 31,
1996 1995
Cash flows provided by (used in) ------- -------
operating activities:
Net income (loss) $ (567) $ 1,643
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 273 243
Provision for doubtful accounts 46 168
Provision for inventory allowances 455 117
Unrealized gains on trading security (298) (641)
Decrease (increase) in accounts receivable 253 (3,831)
Decrease (increase) in inventories 129 (693)
Decrease (increase) in deferred and
refundable taxes (298) 981
Decrease in other current assets 13 72
Decrease in accounts payable (119) (537)
Decrease in accrued liabilities (72) (262)
------- -------
Net cash used in operating activities (185) (2,740)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (375) (264)
Reduction (purchase) of other assets (416) 43
Investment in unconsolidated company (1,025) (3,357)
------- -------
Net cash used in investing activities (1,816) (3,578)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 611 164
Repayments of borrowings 0 (8)
------- -------
Net cash provided by financing activities 611 156
------- -------
Net increase (decrease) in cash (1,390) (6,162)
Cash and cash equivalents,
beginning of period 9,216 11,265
------- -------
Cash and cash equivalents,
end of period $ 7,826 $ 5,103
======= =======
The accompanying notes are an integral part of these financial statements.
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ZITEL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Amounts in thousands except per share data)
1. The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission and should be read in conjunction
with the audited financial statements of the Company. Certain information
and footnote disclosures, normally included in financial statements prepared
in accordance with generally accepted accounting principles, have been
condensed or omitted although the Company believes the disclosures which are
made are adequate to make the information presented not misleading. Further,
the condensed consolidated financial statements reflect, in the opinion of
management, all adjustments necessary to present fairly the financial
position and results of operations as of and for the periods indicated. The
results of operations for the three months ended December 31, 1996 are not
necessarily indicative of the results expected for the full year.
2. Fair Value of Financial Instruments:
Carrying value amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable
and other accrued liabilities approximate fair value due to their short
maturities.
3. Marketable Securities:
At December 31, 1996, the Company's marketable securities consisted entirely
of common shares of one company and were classified as trading securities.
The cost of the marketable securities was $341 thousand and the fair market
value of the securities on December 31, 1996 was $2,680 thousand. The
increase in the difference between the cost of those securities and their
fair market value based on quoted market prices on September 30, 1996 and
December 31, 1996 is included in other income.
Page 6
4. Inventories:
December 31, September 30,
1996 1996
------------ -------------
Raw materials $1,170 $1,515
Work in process 1,105 738
Finished goods 1,352 1,958
------ ------
$3,627 $4,211
====== ======
5. Investment in Unconsolidated Company:
In November 1995, Zitel purchased 9.6 million shares of preferred stock and
certain technology rights, to be commercialized, of MatriDigm Corporation, a
company in the development stage, in exchange for $3.35 million in cash, $66
thousand in equipment and $150 thousand in future rent and administrative
services. The technology rights include an exclusive license to manufacture
and market certain products using proprietary technology of MatriDigm,
subject to a royalty to the company. In November 1996, Zitel invested an
additional $1.0 million for preferred stock. Zitel also has an option to
purchase 500 thousand shares of MatriDigm's common stock from a shareholder
of the company at $.60 per share, exerciseable beginning July 1997.
6. Deferred Software Implementation Costs:
The Company capitalizes substantially all costs related to the purchase of
software and its implementation which includes purchased software, consulting
fees and the use of certain specified Company resources. As of December 31,
1996, $616 thousand in costs had been capitalized and are included in other
long-term assets. No amortization has been charged as of December 31, 1996.
7. Line of Credit:
The Company has a $3.0 million bank line of credit which expires on January
31, 1998. Interest is at the prime rate (8.25% at December 31, 1996) and is
payable monthly. The Company is required to maintain certain specified
financial ratios and profitable operations on a quarterly basis. The bank
has waived non-compliance with the profitability covenant as of
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December 31, 1996. As of December 31, 1996, the Company had no borrowings
outstanding under the line of credit.
8. Revenue recognition:
Revenue is recognized at the time products are shipped to customers and at
the time services are rendered. Royalty revenue is recognized when earned
and receipt is assured.
9. Income per share amounts are computed using the weighted average number
of common and common equivalent (dilutive stock options) shares outstanding
during each period presented, when dilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company recorded a net loss of $567,000 ($0.04 per share) for the quarter
ended December 31, 1996 compared with net income of $1,643,000 ($0.11 per
share) for the same quarter of the prior year. Included in the current year
is a tax benefit of $319,000 resulting from the recognition of deferred tax
assets in accordance with S.F.A.S. No. 109, Accounting for Income Taxes,
compared to a tax provision of $986,000 (37.5% of income before income
taxes). Weighted average shares outstanding in the first quarter of fiscal
1997 were 14,953,000 compared to 15,444,000 for the first quarter of fiscal
1996.
Total revenue for the quarter ended December 31, 1996 was $5,584,000 versus
$7,313,000 for the same period a year earlier. Revenue for the quarter just
ended included $2,278,000 in royalty revenue from the IBM RAMAC product
versus $4,469,000 in the same quarter of the prior year, a decrease of
$2,191,000. Royalties from IBM were impacted by the transition from the RAMAC
2 generation storage system to RAMAC 3. The new RAMAC 3 contains nine
gigabyte drives versus the previous generation's four gigabyte drives. With
this increased storage capacity, the Company does not expect royalties to
return to historical levels. In addition, should IBM's sales of
royalty-bearing products decline further or should royalty-bearing products
be replaced by non-royalty bearing products, the Company's total revenue
could be materially and adversely affected.
Net sales for the quarter ended December 31, 1996 were $3,266,000 versus
$2,844,000 for the same quarter of the prior year, an increase of $422,000.
The increase in net sales is attributable to an increase in net sales of
CASD/Enterprise, partially offset by a decrease in net sales of other
products. During the quarter, net sales of CASD products increased 36%
compared to net sales of CASD products for the same period a year earlier,
and 89% from net sales of CASD products from the fourth quarter of fiscal
1996. Management continues to believe price/performance characteristics
should make CASD/Enterprise an attractive alternative for vendors and users
of open systems platforms. However, commercial success remains subject to
risks and uncertainties, including unanticipated technical problems, the
continuing need to achieve Company credibility in the open systems market,
and the potential introduction of more cost-effective competitive products.
Page 9
Gross margin for the quarter ended December 31, 1996 was 14% of net sales
compared to 32% for the same period a year earlier. The decrease in gross
margin percentage is primarily attributable to reduced average selling
prices. The Company does not believe that the gross margins reported for the
current quarter just ended are necessarily indicative of the gross margins to
be expected in the event net sales should increase significantly; there can
be no assurance that net sales will increase significantly.
Research and development expenses for the quarter ended December 31, 1996
were 29% of total revenue compared to 21% for the same period of the prior
year. Actual spending increased $52,000.
Selling, general and administrative expenses were 45% of total revenue for
the quarter ended December 31, 1996 compared to 27% for the same period of
the prior year. Actual spending increased $513,000. The increase is
primarily attributable to higher salary and related costs associated with an
increase in sales and marketing personnel, an increase in travel and
entertainment, partially offset by a reduction in business promotion.
Other income was $442,000 for the quarter just ended versus other income of
$785,000 for the comparable period of the prior year. For the quarter, other
income included an unrealized gain of $298,000 on an investment held for
resale compared with an unrealized gain of $641,000 on the same investment in
the prior year. Interest income for the quarter was $140,000 versus $139,000
for the same period a year earlier.
Liquidity and Capital Resources
For the quarter ended December 31, 1996, working capital decreased $1,499,000
and cash flows used in operating activities was $185,000. The utilization of
cash in operating activities resulted primarily from net loss of $567,000, an
increase in marketable securities of $298,000, an increase in deferred and
refundable taxes of $298,000 and a decrease in accounts payable of $119,000.
This was offset by a decrease in accounts receivable of $299,000, a decrease
in inventory of $584,000 and depreciation and amortization of $273,000.
During the quarter, $1,816,000 was used in investing activities. In November
of 1996, the Company invested an additional $1,000,000 in preferred stock of
MatriDigm Corporation. $375,000 was used to purchase capital equipment and
$378,000 was used in
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connection with the development and implementation of a software purchased
during the last quarter of fiscal 1996.
Net cash provided by financing activities in the current quarter was
$611,000, generated from the exercise of employee stock options and from the
sale of stock under the Company's employee stock purchase plan. The Company
has a $3,000,000 bank line of credit which expires in January 31, 1998. At
December 31, 1996, the Company had no borrowings outstanding on the line of
credit.
Management believes that the Company will meet its cash requirements from
current cash on hand, other existing working capital, cash flows from
operations, and the utilization of the line of credit.
____________________________________________________________
Zitel and CASD are registered trademarks of Zitel Corporation. IBM and RAMAC
are registered trademarks of IBM Corporation. MatriDigm is a trademark of
MatriDigm Corporation. All other product names and brand names are trademarks
or registered trademarks of their respective holders.
Page 11
EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended
December 31,
------------------
1996 1995
------ ------
Weighted average common shares outstanding 14,953 14,572
Computation of incremental
outstanding shares:
Net effect of dilutive stock options
based on treasury stock method 0 872
------ ------
14,953 15,444
====== ======
Net income (loss) $ (567) $1,643
====== ======
Net income (loss) per share $ (.04) $ .11
====== ======
Primary and fully diluted income (loss) per share differ by less than one cent
in all periods presented.
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PART II. OTHER INFORMATION
Item 5. Other Information
(a) Marketable Securities. As of February 12, 1997, the Company
had sold all of the marketable securities held at December 31, 1996, and
realized net proceeds of $3,159,401.
(b) MatriDigm Corporation.
Reference is made to the disclosure concerning MatriDigm
Corporation in the Company's report on Form 10-K for the fiscal year ended
September 30, 1996, under the caption, "Business - MatriDigm Corporation".
On February 10, 1997, MatriDigm announced commercial availability of the
first release of its automated Year 2000 Solution. The Company, as an
authorized reseller of MatriDigm's Year 2000 compliance services, has been
allocated its first time slot in the MatriDigm factory and expects to use the
allocated time for conversion of a customer's code. While management is
encouraged by the progress of MatriDigm's development effort, that effort is
continuing. The Company's ability to generate sales is dependent on the
success of MatriDigm's development effort and there can be no assurance that
the Company would be successful in generating profitable sales of conversion
services.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.29 - Preferred Stock Purchase and Put Option
Agreement, dated as of December 2, 1996 among MatriDigm Corporation, BRC
Holdings, Inc., and the Company.
Page 13
Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZITEL CORPORATION
Date: February 12, 1997 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
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