-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCgaoPi5niXpXN4Gt9/Si1fLULEMTDAiIR2Z+npP+t2L5Th56IVKRLYoNMvZXC33 l7QTuqf5RCjgoU3m/tknmA== 0000912057-97-027751.txt : 19970815 0000912057-97-027751.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027751 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZITEL CORP CENTRAL INDEX KEY: 0000731647 STANDARD INDUSTRIAL CLASSIFICATION: PATENT OWNERS & LESSORS [6794] IRS NUMBER: 942566313 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-12194 FILM NUMBER: 97660230 BUSINESS ADDRESS: STREET 1: 47211 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538-6517 BUSINESS PHONE: 5104409600 MAIL ADDRESS: STREET 1: 47211 BAYSIDE PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 10-Q 1 FORM 10-Q 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 June 30, 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 June 30, 1997 was 15,360,032. ZITEL CORPORATION AND SUBSIDIARIES INDEX Page Number PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets June 30, 1997 (unaudited) and September 30, 1996 .. 3 Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended June 30, 1997 and 1996 ..................... 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended June 30, 1997 and 1996 ............................ 5 Notes to Condensed Consolidated Financial Statements .............................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................. 10 Exhibits to Part I. Exhibit 11.1 - Computation of Net Income (Loss) per Common and Common Equivalent Share ............. 14 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K .............. 15 Page 2 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000's) (UNAUDITED) (AUDITED) June 30, September 30, 1997 1996 ASSETS Current assets: Cash and cash equivalents $17,342 $ 9,216 Short-term investments 0 2,382 Accounts receivable, net 7,037 5,542 Inventories 3,382 4,211 Deferred and refundable taxes 6,969 2,224 Other current assets 672 480 ------- ------- Total current assets 35,402 24,055 Fixed assets, net 3,437 2,253 Other assets, net 13,773 4,391 ------- ------- Total assets $52,612 $30,699 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,066 $ 2,066 Accrued liabilities 3,308 1,544 ------- ------- Total current liabilities 7,374 3,610 Long-term debt 26,204 0 Shareholders' equity: Common stock 23,123 20,723 Retained earnings (deficit) (4,089) 6,366 ------- ------- Total shareholders' equity 19,034 27,089 ------- ------- Total liabilities and shareholders' equity $52,612 $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 Nine Months Ended June 30, June 30, ------------------ ----------------- 1997 1996 1997 1996 ------ ------ ------ ------ Net sales $ 2,215 $ 1,911 $ 7,057 $ 6,501 Royalty revenue 1,137 3,733 4,651 11,916 ------- ------- -------- ------- Total revenue 3,352 5,644 11,708 18,417 Cost of goods sold 1,707 1,780 6,243 4,819 Research and development expenses 1,671 1,639 4,906 4,832 Selling, general & administrative expenses 3,291 1,974 8,789 5,756 Purchased R&D 6,600 - 6,600 - ------- ------- -------- ------- Operating income (loss) (9,917) 251 (14,830) 3,010 Other (income) expense 1,163 (1,612) 128 (3,125) ------- ------- -------- ------- Income (loss) before income taxes (11,080) 1,863 (14,958) 6,135 Provision (benefit) for income taxes (3,107) 717 (4,503) 2,362 ------- ------- -------- ------- Net income (loss) $(7,973) $ 1,146 $(10,455) $ 3,773 ======= ======= ======== ======= Net income (loss) per share$ (.52) $ .07 $ (.69) $ .24 ======= ======= ======== ======= Number of shares used in per share calculations 15,280 15,782 15,157 15,596 ======= ======= ======== ======= 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) Nine Months Ended June 30, 1997 1996 -------- ------- Cash flows provided by (used in) operating activities: Net income (loss) $(10,455) $ 3,773 Adjustments to reconcile net income(loss) to net cash provided by (used in) operating activities: Purchased R&D 6,600 - Discount amortization on subordinated debenture 1,204 - Depreciation and amortization 923 688 Provision for doubtful accounts 147 260 Provision for inventory allowances 360 360 Unrealized gains on marketable securities 0 (1,215) Realized gains on sale of marketable securities (777) (1,569) Increase in accounts receivable (1,642) (4,101) Decrease (increase) in inventories 469 (1,269) Decrease (increase) in deferred and refundable taxes (4,745) 2,313 Increase in other current assets (192) (144) Increase (decrease) in accounts payable 2,000 (532) Increase in accrued liabilities 1,764 31 -------- ------- Net cash used in operating activities (4,344) (1,405) -------- ------- Cash flows used in investing activities: Purchase of fixed assets (1,980) (1,186) Purchase of other assets (618) (212) Investment in unconsolidated company (2,024) (3,563) Proceeds from sale of marketable securities 3,159 2,110 Effect of business combination (11,062) - -------- ------- Net cash used in investing activities (12,525) (2,851) -------- ------- Page 5 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's) (UNAUDITED) Nine Months Ended June 30, 1997 1996 ------- ------- Cash flows provided by (used in) financing activities: Issuance of common stock 1,200 856 Payments of long-term debt 0 (13) Issuance of subordinated debenture 23,795 - ------- ------- Net cash provided by financing activities 24,995 843 ------- ------- Net increase (decrease) in cash 8,126 (3,413) Cash, beginning of period 9,216 11,265 ------- ------- Cash, end of period $17,342 $ 7,852 ======= ======= Supplemental non-cash investing and financing activities: Issuance of common stock in business combination $ 1,200 ======= Professional costs incurred in placement of subordinated debenture $ 1,205 ======= The accompanying notes are an integral part of these financial statements. Page 6 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 June 30, 1997 are not necessarily indicative of the results expected for the full year. 2. Business Combinations: On June 30, 1997, the Company acquired Datametrics Systems Corporation, Palmer & Webb Systems Limited, and Palmer & Webb Systems B.V. The purchase price consisted of a cash payment of $11,062,000, the issuance of shares of the Company's common stock valued at $1,200,000 and transaction costs of approximately $500,000. The acquisition will be accounted for under the purchase method of accounting. Accordingly, the total purchase price of $12,762,000 was allocated to the net assets acquired based upon their estimated fair values. In addition, $6,600,000 of the purchase price was allocated to purchased in-process research and development that has not reached technological feasibility and that has no alternative future use. The following table is a summary of pro-forma financial information with respect to the combined companies as described above, disclosing pro-forma results of operations for the nine-month period ended June 30, 1997 and June 30, 1996, as though the entities had been combined at the beginning of each period. The pro-forma results do not reflect any non-recurring charges which resulted directly from the transaction, such as the $6.6 million write-off of purchased research and development. Nine months Nine months ended June 30, 1997 ended June 30, 1996 Revenue $22,005 $28,942 Net income (loss) $(6,578) $ 2,885 EPS $ (0.43) $ 0.18 3. Recent Accounting Pronouncements: The FASB issued SFAS No. 128, Earnings Per Share, in February 1997 effective for periods ending after December 15, 1997. SFAS No. 128 was issued to simplify the computation of Earnings Per Share (EPS) and to make the U.S. standard more compatible with the EPS standards of other countries. Prior period EPS will be restated after the effective date of this statement. The Page 7 adoption of SFAS No. 128 should have no effect on earnings per share as the Company does not have a complex capital structure. In June 1997, the FASB issued SFAS No, 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 1998, has not been determined. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires publicly-held companies to report financial and other information about key revenue-producing segments of the entity for which such information is available and is utilized by the chief operations decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998 and the impact of adoption has not been determined. 4. Inventories: June 30, September 30, 1997 1996 --------- ------------- Raw materials $1,104 $1,515 Work in process 587 738 Finished goods 1,691 1,958 ------ ------ $3,382 $4,211 ====== ====== Page 8 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. Zitel has made additional investments in the company for preferred stock. As of June 30, 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. 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 June 30, 1997, $1.1 million in costs had been capitalized and are included in other long-term assets and $55 thousand has been amortized. 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 (8.50% at June 30, 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 June 30, 1997. As of June 30, 1997, the Company had no borrowings outstanding under the line of credit. 8. 5% Convertible Subordinated Debentures: On May 22, 1997, the Company issued $25,000,000 principal amount of 5% Convertible Subordinated Debentures (the "Debentures") which are due November 22, 1999. The Debentures accrue interest at the rate of 5% per annum and principal and accrued interest are convertible into Common Stock of the Company at a price equal to 90% of the average of the closing bid prices for the Common Stock on the five consecutive trading days preceding the date of conversion, but in no event greater than $26.975 per share. The Debentures are not convertible until the earlier of (a) 90 days following the date of issue or (b) the effective date of a corporate reorganization to which the Company is a party, and any Debentures outstanding on the November 22, 1999 automatically will be converted into Common Stock. The Debentures restrict distributions and repurchases of capital stock. Reference is made to the Company's Current Report on Form 8-K dated May 22, 1997 for additional information about the Debentures. The current quarter includes a charge to interest expense in the amount of $1,204,000 related to the amortization of the discount on the 5% convertible subordinated debentures. The total discount on the subordinated debenture is $2,778,000 and the remaining $1,574,000 will be expensed in the fourth quarter ending September 30, 1997. 9. 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. 10. 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 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Result of Operations The Company recorded a net loss of $7,973,000 ($0.52 per share) for the quarter ended June 30, 1997 compared with net income of $1,146,000 ($0.07 per share) for the same quarter of the prior year. Results for the quarter included a one-time after-tax charge of $4,744,000 for the write-off of in-process research and development in connection with the acquisition of Datametrics Systems Corporation, Palmer & Webb Systems Limited and Palmer & Webb Systems B.V. during the quarter. The current quarter results also includes a charge to interest expense in the amount of $1,204,000 related to the amortization of the discount on the 5% convertible subordinated debentures issued by the Company in May 1997. The total discount on the subordinated debenture is $2,778,000 and the remaining $1,574,000 will be expensed in the fourth quarter ending September 30, 1997. This expense has no impact on the Company's cash flow. For the nine months ended June 30, 1997, the Company recorded a net loss of $10,455,000 ($0.69 per share) versus net income of $3,773,000 ($0.24 per share) for the same period a year earlier. Year to date gains in the amount of $777,000 have been realized on an investment that was sold. In fiscal 1996, gains (both realized and unrealized) recognized on an investment that was held for resale amounted to $2,784,000. Total revenue for the quarter ended June 30, 1997 was $3,352,000 versus $5,644,000 for the same period a year earlier. The decrease in total revenue is primarily attributable to a decrease of $2,596,000 in royalty revenue, partially offset by an increase in net sales of $304,000. For the nine months ended June 30, 1997, total revenue was $11,708,000 versus $18,417,000. The decrease in total revenue is primarily attributable to a decrease of $7,265,000 in royalty revenue, partially offset by an Page 10 increase in net sales of $556,000. The Company believes that IBM is transitioning to a device which does not require royalty payments to the Company, and that as a result royalties will continue to decline. The Company must generate substantial additional net sales of its storage products in order to restore gross margins on those products, must generate profitable net sales from its recently acquired software businesses and must generate revenue from its newly-formed solutions services division in order to remain a viable operating entity. The Company has continued with its restructuring of the sales and marketing infrastructure of its storage division. With the majority of the changes in place, coupled with product enhancements offering 9GB drives and a Solid State Disk feature in the CASD II/Enterprise storage solution, management is cautiously optimistic that net sales of storage products will increase significantly; however, there can be no assurance that net sales will increase. Gross margin for the quarter and nine months ended June 30, 1997 was 23% and 12% of net sales, respectively. This compares to 7% and 26% of net sales for the same periods a year earlier. The increase in gross margin for the quarter ended June 30, 1997 is primarily attributable to reduced material costs and increased sales of CASD storage products. For the nine-month period ended June 30, 1997, the decrease in gross margin percentage is primarily 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 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. Research and development expenses for the quarter ended June 30, 1997 were 50% of total revenue compared to 29% in the prior year. For the nine-month period, research and development was 42% of total revenue versus 26% in the prior year. The increase in percentage in both periods is due to lower revenues in the current year; actual spending, however, remained relatively flat year to year. Selling, general and administrative expenses for the quarter ended June 30, 1997 were 98% of total revenue versus 35% in the prior year. Actual spending increased $1,317,000. For the nine-month period, selling, general and administrative expenses were 75% of total revenue versus 31% in the prior year. Actual spending increased $3,033,000. The increases in spending are Page 11 primarily attributable to increases in salaries and related costs in connection with additions in sales, marketing and administration personnel, increase in business promotion, and an increase in travel and entertainment. Other expense was $1,163,000 for the quarter just ended versus other income of $1,612,000 in the same quarter of the prior year. Included in the current quarter is a charge to interest expense in the amount of $1,204,000 related to the amortization of the discount on the 5% convertible subordinated debenture issued by the Company in May 1997. Interest income for the quarter was $250,000 versus $114,000 in the prior year. For the nine months just ended, other expense was $128,000 versus other income of $3,125,000. Included in other income for the current year is $777,000 of realized gains from the sale of marketable securities compared with $2,784,000 of realized and unrealized gains recognized in the prior year. Interest income for the current year is $516,000 versus $342,000 in the prior year. Liquidity and Capital Resources For the nine-month period ended June 30, 1997, working capital increased $7,583,000 and cash flows used in operating activities was $4,344,000. The utilization of cash in operating activities resulted primarily from net loss of $10,455,000, an increase in gross accounts receivable of $1,642,000 and an increase in deferred and refundable income taxes of $4,745,000. This was offset by an increase in accounts payable of $2,000,000, an increase in accrued liabilities of $1,764,000 and adjustments to net loss for depreciation of $923,000, write-off of purchased research and development of $6,600,000, and discount amortization of $1,204,000. During the current year, $12,525,000 was used in investing activities. On June 30, 1997, the Company purchased the assets and certain liabilities of three software companies for $11,062,000 in cash and common stock of the Company valued at $1,200,000. During the current year, the Company also invested an additional $2,000,000 in preferred stock of MatriDigm Corporation. In addition, $1,980,000 was used to purchase capital equipment. Proceeds in the amount of $3,159,000 were generated from the sale of marketable securities during the current year. Net cash provided by financing activities in the current year was $24,995,000; $23,795,000 was raised from the issuance of 5% Page 12 convertible subordinated debentures and $1,200,000 was 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 on January 31, 1998. At June 30, 1997, 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, existing working capital, cash flows from operations, and the available line of credit. ======================================================= This report contains forward-looking statements which are subject to uncertainties, including those contained in the Company's current report on Form 8-K filed July 14, 1997. _____________________________________________________________ Zitel and CASD are registered trademarks of Zitel Corporation. All other product names and brand names are trademarks or registered trademarks of their respective holders. Page 13 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 Nine Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- ------ -------- ------ Weighted average common shares outstanding 15,280 14,796 15,157 14,682 Computation of incremental outstanding shares: Net effect of dilutive stock options based on treasury stock method - 986 - 914 ------- ------ -------- ------ 15,280 15,782 15,157 15,596 ======= ====== ======== ====== Net income $(7,973) $1,146 $(10,455) $3,773 ======= ====== ======== ====== Net income per share $ (.52) $ .07 $ (.69) $ .24 ======= ====== ======== ====== Primary and fully diluted income per share differ by less than one cent in all periods presented. Page 14 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K During the period from April 1, 1997 through June 30, 1997, the Company filed the following current report on Form 8-K: Date of Report Item(s) Reported: May 22, 1997 - Placement of 5% Convertible Subordinated Debentures; Risk Factors. Page 15 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: August 14, 1997 Larry B. Schlenoff Larry B. Schlenoff Vice President, Finance (Chief Financial and Accounting Officer) Page 16 EX-27 2 EXHIBIT 27
5 1,000 3-MOS SEP-30-1997 APR-01-1997 JUN-30-1997 17,342 0 8,064 1,027 3,382 35,402 12,895 9,458 52,612 7,374 26,204 0 0 23,123 (4,089) 52,612 2,215 3,352 1,707 11,562 (234) 0 1,397 (11,080) (3,107) (7,973) 0 0 0 (7,973) (.52) (.52)
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