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 March 31, 1997
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 March
31, 1997 was 15,263,514.
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 (unaudited) and September 30, 1996 .. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Six Months
Ended March 31, 1997 and 1996 ..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Six Months Ended
March 31, 1997 and 1996 ............................ 5
Notes to Condensed Consolidated
Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations ................................ 8
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income (Loss)
per Common and Common Equivalent Share .............. 12
PART II. Other Information
Item 4. Submission of Matters to a Vote
of Security Holders ............................ 13
Item 6. Exhibits and Reports on Form 8-K ............... 13
Page 2
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
March 31, September 30,
1997 1996
--------- -------------
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 7,410 $ 9,216
Short-term investments - 2,382
Accounts receivable, net 3,331 5,542
Inventories 3,532 4,211
Deferred and refundable taxes 3,619 2,224
Other current assets 739 480
------- -------
Total current assets 18,631 24,055
Fixed assets, net 2,556 2,253
Other assets, net 7,242 4,391
------- -------
Total assets $28,429 $30,699
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,334 $ 2,066
Accrued liabilities 1,607 1,544
------- -------
Total current liabilities 2,941 3,610
Shareholders' equity:
Common stock 21,604 20,723
Retained earnings 3,884 6,366
------- -------
Total shareholders' equity 25,488 27,089
------- -------
Total liabilities and
shareholders' equity $28,429 $30,699
======= =======
The accompanying notes are an integral part of these financial statements.
Page 3
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales $ 1,576 $ 1,747 $ 4,842 $ 4,591
Royalty revenue 1,196 3,713 3,514 8,182
------- ------- ------- -------
Total revenue 2,772 5,460 8,356 12,773
Cost of goods sold 1,737 1,119 4,536 3,039
Research and development
expenses 1,613 1,625 3,235 3,194
Selling, general &
administrative expenses 3,007 1,801 5,498 3,781
------- ------- ------- -------
Operating income (loss) (3,585) 915 (4,913) 2,759
Other income (594) (728) (1,035) (1,513)
------- ------- ------- -------
Income (loss) before
income taxes (2,991) 1,643 (3,878) 4,272
Provision (benefit) for
income taxes (1,077) 659 (1,396) 1,645
------- ------- ------- -------
Net income (loss) $(1,914) $ 984 $(2,482) $ 2,627
======= ======= ======= =======
Net income (loss) per share $ (.13) $ .06 $ (.16) $ .17
======= ======= ======= =======
Number of shares used in
per share calculations 15,234 15,562 15,096 15,504
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
Page 4
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's) (UNAUDITED)
Six Months Ended
March 31,
1997 1996
Cash flows provided by (used in) ------- -------
operating activities:
Net income (loss) $(2,482) $ 2,627
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 556 457
Provision for doubtful accounts 99 197
Provision for inventory allowances 766 143
(Increase) decrease in accounts receivable 2,112 (1,642)
Unrealized gains on trading securities 0 (1,297)
Gain on sale of trading securities (777) 0
Proceeds from sale of trading securities 3,159 0
Increase in inventories (87) (1,664)
Decrease (increase) in deferred and
refundable taxes (1,395) 1,594
Increase in other current assets (259) (121)
Decrease in accounts payable (732) (449)
Increase (decrease) in accrued liabilities 63 (63)
------- -------
Net cash provided by (used in)
operating activities 1,023 (218)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (811) (486)
Reduction (purchase) of other assets (875) 209
Investment in unconsolidated company (2,024) (3,563)
------- -------
Net cash used in investing activities (3,710) (3,840)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 881 450
Repayments of borrowings 0 (9)
------- -------
Net cash provided by financing activities 881 441
------- -------
Net decrease in cash (1,806) (3,617)
Cash, beginning of period 9,216 11,265
------- -------
Cash, end of period $ 7,410 $ 7,648
======= =======
The accompanying notes are an integral part of these financial statements.
Page 5
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 period ended March 31, 1997 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. Inventories:
March 31, September 30,
1997 1996
--------- -------------
Raw materials $1,116 $1,515
Work in process 585 738
Finished goods 1,831 1,958
------ ------
$3,532 $4,211
====== ======
Page 6
4. 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. Zitel has made additional investments in the company
for preferred stock. As of March 31, 1997, the Company's investments in
MatriDigm amounted to $5.59 million. 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.
5. 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 March 31, 1997,
$1.1 million in costs had been capitalized and are included in other long-term
assets. No amortization has been charged as of March 31, 1997.
6. 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 March 31, 1997) 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 March 31, 1997. As
of March 31, 1997, the Company had no borrowings outstanding under the line of
credit.
7. 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.
8. Income (loss) 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.
Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Result of Operations
The Company recorded a net loss of $1,914,000 ($0.13 per share) for the quarter
ended March 31, 1997 compared with net income of $984,000 ($0.06 per share) for
the same quarter of the prior year. Results for the quarter included a tax
benefit of $1,077,000 (36% of income before income taxes) 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 $659,000 (40% of
income before income taxes) for the same quarter a year earlier. Weighted
average shares outstanding for the current quarter were 15,234,000 compared to
15,562,000 for the comparable quarter of the prior year.
For the six-months ended March 31, 1997, the Company recorded a net loss of
$2,482,000 ($0.16 per share) versus net income of $2,627,000 ($0.17 per share)
for the same period a year earlier. Included in the current year is a tax
benefit of $1,396,000 (36% of income before income taxes) compared to a tax
provision of $1,645,000 (38.5% of income before income taxes) for the same
period a year earlier. Year-to-date weighted average shares were 15,096,000
versus 15,504,000 in the prior year.
Total revenue for the quarter ended March 31, 1997 was $2,772,000 versus
$5,460,000 for the comparable quarter of the prior year. The decrease in total
revenue is primarily as a result of lower royalties from IBM. Revenue for the
current quarter included $1,196,000 of royalty revenue from the IBM RAMAC
product versus $3,713,000 in the same quarter of the prior year, a decrease of
$2,517,000. Royalties from IBM continued to be impacted by the transition from
the RAMAC 2 generation storage system to RAMAC 3 and the transition by IBM to
non-royalty-bearing products. The Company does not expect royalty revenue to
increase from its current level and anticipates that it will continue to
decline.
Net sales for the quarter ended March 31, 1997 were $1,576,000 versus $1,747,000
for the same quarter of the prior year. The decrease in net sales is
attributable to a decrease in net sales of the Company's more mature products in
the Unisys market. Net sales of the CASD II/Enterprise products into the open
systems market offset a substantial portion of the decline in net sales of
mature products.
Page 8
For the six months ended March 31, 1997, total revenue was $8,356,000 versus
$12,773,000 for the same period of the prior year. Revenue for the six-month
period included royalty revenue of $3,514,000 versus $8,182,000 in the prior
year. Net sales for the six months ended March 31, 1997 increased to $4,842,000
versus $4,591,000 for the same period of the prior year. Management continues
to believe price/performance characteristics should make CASD II/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.
During the fourth quarter of fiscal 1996, the Company entered into a reseller
agreement with MatriDigm Corporation to market MatriDigm's proposed solution for
the Year 2000 problem. Staffing of the Company's newly-established Solution
Services Division is in process. Sales calls are being made and customer code
is being received and code conversion has begun. 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.
Gross margin as a percent of net sales was a negative 10% for the quarter ended
March 31, 1997 compared to 36% for the same quarter of the prior year. For the
six-month period ended March 31, 1997, gross margin was 6% versus 34% for the
same period of the prior year. The significant decrease in gross margins on net
sales is attributable to an increase in other cost of sales which do not vary
directly with sales volume. 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 March 31, 1997 were 58%
of total revenue compared to 30% in the prior year. For the six-month period,
research and development was 39% of total revenue versus 25% in the prior year.
The increase in percentage in both periods is due to lower revenues in the
current year; actual spending, however, only increased by $12,000 and $41,000,
respectively.
Page 9
Selling, general and administrative expenses were 108% of total revenue for the
current quarter versus 33% in the prior year. Actual spending increased
$1,206,000. The increase in spending included increases in salaries and related
costs as a result of an increase in sales, marketing and administration
personnel ($618,000), business promotion ($216,000), and travel and
entertainment ($100,000). For the six-month period, selling, general and
administrative expenses were 66% of total revenue versus 30% in the prior year.
Actual spending increased $1,717,000. The increase in spending included
increases in salaries and related costs as a result of an increase in sales,
marketing and administration personnel ($1,109,000), business promotion
($123,000), and travel and entertainment ($230,000).
Other income was $594,000 for the quarter just ended versus other income of
$728,000 for the comparable quarter of the prior year. The current quarter
includes income in the amount of $479,000 realized from the sale of marketable
securities compared with income of $656,000 related to the recognition of
unrealized gains in the prior year. Interest income for the quarter was
$126,000 versus $89,000 in the prior year. For the six months just ended, other
income was $1,035,000 as compared to $1,513,000 in the prior year. Included in
the current year period are realized gains of $777,000 with respect to
marketable securities compared to unrealized gains of $1,297,000 in the prior
year. Interest income in the current year is $266,000 versus $227,000 in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended March 31, 1997, working capital decreased
$4,755,000 and cash flow provided by operating activities was $1,023,000. Cash
flow from operating activities was generated primarily from the disposition of
short-term investments ($2,382,000), a decrease of $2,211,000 in accounts
receivable, a decrease of $679,000 in inventory and depreciation and
amortization of $556,000. This was offset by a net loss of $2,482,000, an
increase of $1,395,000 in deferred and refundable taxes, and a decrease of
$732,000 in accounts payable.
During the current year, $3,710,000 was used in investing activities. The
Company invested an additional $2,000,000 in preferred stock of MatriDigm
Corporation. $811,000 was used to purchase capital equipment and $819,000 was
used in connection with the development and implementation of software purchased
in the last quarter of fiscal 1996.
Page 10
Net cash provided by financing activities in the current year was $881,000,
generated from the exercise of employee stock options and from the sale of stock
under the Company's stock purchase plan. The Company has a $3,000,000 bank line
of credit which expires in January 31, 1998. At March 31, 1997, the Company had
no borrowings outstanding on the line of credit.
In order for the Company to maintain its operations on the current basis,
management believes the Company will need to raise additional capital either
from the equity or debt market to augment its current cash on hand, other
existing working capital, cash flows from operations, and the available line of
credit.
____________________________________________________________
Zitel and CASD are registered trademarks of Zitel Corporation.
IBM and RAMAC are registered trademarks of IBM Corporation.
MatriDigm is a registered 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 Six Months Ended
March 31, March 31,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
Weighted average common
shares outstanding 15,234 14,676 15,096 14,624
Computation of incremental
outstanding shares:
Net effect of dilutive
stock options based on
treasury stock method - 886 - 880
------- ------ ------- ------
15,234 15,562 15,096 15,504
======= ====== ======= ======
Net income (loss) $(1,914) $ 984 $(2,482) $2,627
======= ====== ======= ======
Net income (loss) per share $ (.13) $ .06 $ (.16) $ .17
======= ====== ======= ======
Primary and fully diluted income per share differ by less than one cent in all
periods presented.
NOTE: All share numbers and prices reported herein reflect a 2:1 Common Stock
split effected in the form of a dividend of one share of Common Stock for each
one owned, payable on 11/27/96 to record holders of the Issuer at 11/18/96.
Page 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders of the Company was held on February 27,
1997. A total of 14,381,929 shares of the Company's Common Stock out of a total
15,164,816 shares outstanding on the record date for the meeting were
represented and voted in person or by proxy.
The Company has a five-person Board of Directors. At the annual meeting,
all five directors were nominated and re-elected to the Board of Directors by a
vote of at least 13,624,259 shares in favor and 757,670 shares withholding
authority to vote.
The shareholders approved the adoption of an amendment to the Company's
Restated Articles of Incorporation, as amended, to increase the Company's
authorized number of shares of Common stock from 20,000,000 shares to
40,000,000. The motion was carried by a vote of 14,043,727 shares voting for,
286,556 dissenting votes and 49,576 abstaining votes.
The shareholders approved the adoption of an amendment to the 1990 Stock
Option Plan, as amended, to provide that the number of shares of Common Stock
reserved for issuance under such Plan be increased by 800,000 shares, from
4,650,000 shares (including shares reserved or granted under the Company's prior
Option Plans) to 5,450,000 shares. The motion was carried by a vote of
5,820,189 shares voting for, 1,327,748 dissenting votes and 99,478 abstaining
votes.
The shareholders did not approve the proposal to change the Company's state
of incorporation from California to Delaware which requires the vote of over 50%
of the total shares outstanding. The holders of 6,756,754 shares or 45% of the
outstanding shares voted for the proposal, the holders of 912,005 shares voted
against the proposal, and the holders of 64,219 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.30 - Sales Representative Agreement, dated as of August 22,
1996 among MatriDigm Corporation and the Company.
Exhibit 27 - Financial Data Schedule
Page 13
(b) Reports
No reports on Form 8-K were filed during the quarter for which this
report is filed.
Page 14
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: May 15, 1997 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
Page 15