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, 1995
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, 1995 was 7,297,187.
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1995 (unaudited) and September 30, 1995 3
Condensed Consolidated Statements of
Operations (unaudited) - Three Months
Ended December 31, 1995 and 1994 .................. 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Three Months Ended
December 31, 1995 and 1994 ......................... 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
per Common and Common Equivalent Share .............. 11
PART II. Other Information
Item 4. Submission of Matters to a Vote of
Security Holders ............................. 12
Item 6. Exhibits and Reports on Form 8-K ............... 12
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000's)
December 31, September 30,
1995 1995
ASSETS
Current assets:
Cash and cash equivalents $ 5,103 $11,265
Accounts receivable, net 7,863 4,200
Inventories 3,563 2,987
Deferred and refundable taxes 3,367 4,348
Other current assets 1,987 418
------- -------
Total current assets 21,883 23,218
Fixed assets, net 1,463 1,419
Other assets, net 3,860 1,569
------- -------
Total assets $27,206 $26,206
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5 $ 13
Accounts payable 1,188 1,725
Accrued liabilities 1,249 1,511
------- -------
Total current liabilities 2,442 3,249
Shareholders' equity:
Common stock 20,080 19,916
Retained earnings 4,684 3,041
------- -------
Total shareholders' equity 24,764 22,957
------- -------
Total liabilities and
shareholders' equity $27,206 $26,206
======= =======
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,
------------------
1995 1994
------ ------
Net sales $ 2,844 $ 2,710
Royalty revenue 4,469 4,145
------- -------
Total revenue 7,313 6,855
Cost of goods sold 1,920 2,213
Research and development expenses 1,569 1,397
Selling, general & administrative expenses 1,980 1,691
------- -------
Operating income 1,844 1,554
Other income (785) (16)
------- -------
Income before income taxes 2,629 1,570
Provision for income taxes 986 94
------- -------
Net income $ 1,643 $ 1,476
======= =======
Net income per share $ .21 $ .21
======= =======
Number of shares used in per share calculations 7,722 7,189
======= =======
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,
1995 1994
Cash flows provided by (used in) ------- -------
operating activities:
Net income $ 1,643 $ 1,476
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 243 385
Provision for doubtful accounts 168 54
Provision for inventory allowances 117 57
Unrealized gains on trading security (641) -
Increase in accounts receivable (3,831) (3,187)
Decrease (increase) in inventories (693) 734
Decrease in deferred and refundable taxes 981 31
Decrease (increase) in other current assets 72 (174)
Decrease in accounts payable (537) (288)
Decrease in accrued liabilities (262) (258)
------- -------
Net cash used in operating activities (2,740) (1,170)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (264) (184)
Purchase of other assets (3,314) (171)
------- -------
Net cash used in investing activities (3,578) (355)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 164 3,509
Proceeds from borrowings 0 1,956
Repayments of borrowings (8) (1,045)
------- -------
Net cash provided by financing activities 156 4,420
------- -------
Net increase (decrease) in cash (6,162) 2,895
Cash and cash equivalents,
beginning of period 11,265 1,010
------- -------
Cash and cash equivalents,
end of period $ 5,103 $ 3,905
======= =======
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 three months ended December 31, 1995 are not necessarily
indicative of the results expected for the full year.
2. Inventories:
December 31, September 30,
1995 1995
------------ -------------
Raw materials $ 670 $ 734
Work in process 976 733
Finished goods 1,917 1,520
------ ------
$3,563 $2,987
====== ======
3. Other current assets:
At the beginning of fiscal 1996, an investment in an unconsolidated company
in the amount of $1,000,000 was revalued due to a public offering by the
investee, which took place in October 1995. This investment, which was
previously classified in other long-term assets, was reclassified to other
current
Page 6
assets. In accordance with S.F.A.S. No. 115, this investment will be revalued to
the current market value at the end of each reporting period and a gain or loss
recognized for such period. For the quarter ended December 31, 1995, unrealized
gains of $641,000 were recognized in other income and included in other current
assets.
4. Other assets:
On November 17, 1995, the Company finalized an agreement to acquire 37.5% of
MatriDigm Corporation, a privately held company. The investment, which consisted
of preferred stock, totaled $3,350,000. Under the agreement, the Company
obtained an exclusive license from MatriDigm to incorporate its technology in
the development of new products. The Company does not expect development of any
new products that incorporate the technology in the current fiscal year.
5. Effective October 1995, the Company negotiated a $3,000,000 revolving
accounts receivable line of credit with a commercial bank. The line is
collateralized by accounts receivable, inventory, equipment and tangible assets.
Interest is at the prime rate (8.5% at December 31, 1995) and is payable
monthly. The line of credit expires on September 30, 1996. At December 31, 1995,
the Company had no borrowings against the line.
6. 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.
7. 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
Result of Operations
The Company recorded net income of $1,643,000 ($0.21 per share) for the first
quarter of fiscal 1996 compared to $1,476,000 ($0.21 per share) for the same
period of the prior year. Results for the quarter ended December 31, 1995
reflected a tax provision of $986,000 (37.5% of income before income taxes)
versus $94,000 (6% of income before income taxes) for the same period a year
earlier and a gain of $641,000 on investments held for resale. Weighted average
shares outstanding in the first quarter of fiscal 1996 were 7,722,000 compared
to 7,189,000 for the first quarter of fiscal 1995.
Total revenue for the quarter ended December 31, 1995 was $7,313,000 versus
total revenue of $6,855,000 for the same period of the prior year. The increase
in total revenue is attributable to increases in both net sales ($134,000) and
royalties ($324,000). The increase in net sales is due to initial shipments of
the Company's second generation of CASD products (CASD-II) which began shipping
in November 1995. Royalty revenue was strong this quarter as the third party
that sells royalty-bearing products began shipping their second generation of
products utilizing the Company's technology. The Company expects that royalty
revenue will remain strong for the near future; however, should the third
party's sales decline or should royalty-bearing products be replaced by
non-royalty-bearing products, the Company's total revenue could be materially
and adversely affected.
In mid-December, the Company announced the general availability of SCP-II for
the open systems market. SCP-II is the open systems version of CASD-II. SCP-II
now connects to Sun, HP, NT, Digital, and Unisys open systems platforms. Though
the Company's announcement was 60 to 90 days behind its internal plan, early
reception of SCP-II has been encouraging. The Company believes the
price/performance characteristics of SCP-II for certain applications should make
it an attractive alternative for vendors and users of open systems platforms.
Commercial success of SCP-II is subject to risks and uncertainties including
unanticipated technical problems, the need to achieve Company credibility in the
open systems market, and introduction of more cost effective competitive
products.
Page 8
Gross margin as a percent of net sales was 32% for the quarter ended December
31, 1995 compared to 18% of net sales for the same period of the prior year. The
improvement in gross margin percentage is primarily attributable to the impact
of lower indirect sales cost in the current year period.
Research and development expenses for the quarter ended December 31, 1995 were
21% of total revenue compared to 20% of total revenue for the same period of the
prior year. Research and development expenses increased $172,000, primarily as a
result of continued expenditures on development of future CASD and software
products.
Selling, general and administrative expenses were 27% of total revenue for the
quarter compared to 25% of total revenue for the same period a year earlier.
Selling, general and administrative expenses increased $289,000.
Other income was $785,000 for the quarter just ended versus other income of
$16,000 for the comparable period of the prior year. For the quarter, other
income included an unrealized gain of $641,000 on an investment held for resale.
Interest income for the quarter was $139,000 versus $96,000 for the same period
a year earlier. The increase in interest income is primarily related to larger
cash balances invested and higher interest rates on cash invested during the
current quarter.
Liquidity and Capital Resources
For the quarter ended December 31, 1995, working capital decreased $528,000 and
cash flows used in operating activities was $2,740,000. The utilization of cash
flows resulted primarily from an increase in accounts receivable of $3,831,000,
an increase in inventory of $693,000, a decrease in accounts payable of $537,000
offset by net income of $1,643,000, and utilization of deferred tax assets of
$981,000. During the quarter, $3,578,000 was used in investing activities. On
November 17, 1995, the Company completed a $3,350,000 investment in MatriDigm
Corporation. The Company acquired 37.5% of MatriDigm and also obtained a license
under MatriDigm's proprietary technology. Net cash provided by financing
activities during the quarter was $156,000. In October 1995, the Company
negotiated a $3,000,000 revolving accounts receivable line of credit which
expires on September 30, 1996. At December 31, 1995, the Company had no
borrowings outstanding on the line of credit.
Page 9
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. SCP is a
trademark of Zitel Corporation. Digital is a trademark of Digital Equipment
Corporation. HP is a registered trademark of Hewlett-Packard Company. MatriDigm
is a trademark of MatriDigm Corporation. Sun Microsystems is a trademark of Sun
Microsystems, Inc. Unisys is a registered trademark of Unisys Corporation. All
other product names and brand names are trademarks or registered trademarks of
their respective holders.
Page 10
EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended
December 31,
------------------
1995 1994
------ ------
Weighted average common shares outstanding 7,286 6,660
Computation of incremental outstanding shares :
Net effect of dilutive stock options
based on treasury stock method 436 529
------ ------
7,722 7,189
====== ======
Net income $1,643 $1,476
====== ======
Net income per share $ .21 $ .21
====== ======
Primary and fully diluted income per share differ by less than one cent in all
periods presented.
Page 11
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 January 25,
1996. A total of 6,964,134 shares of the Company's Common Stock out of a total
7,297,187 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 6,910,678 shares in favor and 53,456 shares instructing or
withholding authority to vote.
The shareholders approved the adoption of the 1995 Non-Employee Directors'
Stock Option Plan including the reservation of 100,000 shares of Common Stock
for issuance thereunder. The results of the vote were 6,505,215 shares voting
for, 267,569 dissenting votes, 57,381 abstaining votes, and 133,969 with no
voting instruction indicated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.28 - Series A Preferred Stock Purchase Agreement
between the Company and MatriDigm Corporation dated November 17, 1995.
(Confidential treatment has been requested for a portion of the exhibit.)
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 13, 1996 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
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