-----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, MJ4AeniSRF8R7CmJZWLvdp14tP8KjhnvVkUVi15aWh1mU2xxnnfwcgcvmMPaNMW5 fGQ/YdKHmKI2iVEuun2b3w== 0000912057-00-005877.txt : 20000214 0000912057-00-005877.hdr.sgml : 20000214 ACCESSION NUMBER: 0000912057-00-005877 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000211 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: SEC FILE NUMBER: 000-12194 FILM NUMBER: 536994 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 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 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, FREMONT, CALIFORNIA 94538-6517 (Address of principal executive (Zip Code) offices)
(510) 440-9600 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 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 January 31, 2000 was 26,244,933. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ZITEL CORPORATION AND SUBSIDIARIES INDEX
PAGE NUMBER -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 1999 (unaudited) and September 30, 1999..................... 3 Condensed Consolidated Statements of Operations (unaudited)--Three Months Ended December 31, 1999 and 1998................................................... 4 Condensed Consolidated Statements of Cash Flows (unaudited)--Three Months Ended December 31, 1999 and 1998................................................... 5 Notes to Condensed Consolidated Financial Statements.... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 11 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................ 12 Item 2. Changes in Securities............................ 12 Item 3. Defaults Upon Senior Securities.................. 12 Item 4. Submission of Matters to a Vote of Security Holders................................................. 12 Item 5. Other Information................................ 12 Item 6. Exhibits and Reports on Form 8-K................. 16
2 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000'S) UNAUDITED
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------ ------------- ASSETS Current assets: Cash and cash equivalents................................. $ 2,364 $ 1,670 Accounts receivable, net.................................. 9,797 3,719 Refundable taxes.......................................... 203 205 Other current assets...................................... 2,596 1,218 -------- -------- Total current assets.................................... 14,960 6,812 Fixed assets, net........................................... 712 738 Other assets, net........................................... 4,112 4,102 -------- -------- Total assets.............................................. $ 19,784 $ 11,652 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 4,273 $ 2,568 Accrued liabilities....................................... 1,561 1,114 Short-term debt........................................... 1,128 -- Deferred revenue.......................................... 7,789 2,073 -------- -------- Total current liabilities............................... 14,751 5,755 Shareholders' equity: Preferred stock........................................... 2,000 2,000 Common stock.............................................. 71,392 71,340 Accumulated deficit....................................... (68,359) (67,443) -------- -------- Total shareholders' equity................................ 5,033 5,897 -------- -------- Total liabilities and shareholders' equity................ $ 19,784 $ 11,652 ======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- Net product sales........................................... $ 3,332 $ 2,940 Services and other.......................................... 2,188 2,960 ------- ------- Net sales................................................... 5,520 5,900 Cost and expenses: Cost of products sold..................................... 221 361 Cost of services and other................................ 1,621 1,861 Research and development expenses......................... 651 615 Selling, general & administrative expenses................ 3,851 3,887 Loss from unconsolidated company.......................... -- 1,512 ------- ------- Operating loss............................................ (824) (2,336) Other expense............................................... 92 440 ------- ------- Net loss.................................................. $ (916) $(2,776) ======= ======= Basic and diluted net loss per share........................ $ (.04) $ (.13) ======= ======= Shares used in basic and diluted per share calculation...... 24,915 21,378 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000'S) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- Cash flows provided by (used in) operating activities: Net loss.................................................. $ (916) $(2,776) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss from unconsolidated company........................ -- 1,512 Discount amortization on subordinated debenture......... -- 273 Interest accrued on convertible subordinated debenture............................................. -- 327 Depreciation and amortization........................... 527 484 Provision for doubtful accounts......................... 52 (80) Change in operating assets and liabilities: Increase in accounts receivable....................... (6,107) (2,792) Refundable income taxes............................... 2 (4) Increase in other current assets...................... (804) (266) Increase in accounts payable.......................... 1,017 276 Increase (decrease) in accrued liabilities............ 417 (189) Deferred revenue...................................... 5,212 1,101 ------- ------- Net cash used in operating activities..................... (600) (2,134) ------- ------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets............................. (81) (49) Investment in unconsolidated company.................... -- (1,512) Capitalized software development costs.................. (370) (100) Decrease in other assets................................ -- 44 Purchase of companies net of cash acquired.............. 565 -- ------- ------- Net cash provided by (used in) investing activities....... 114 (1,617) ======= =======
5 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) ($000'S) (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, ------------------- 1999 1998 -------- -------- Cash flows provided by financing activities: Proceeds from short-term debt........................... $1,128 $ -- Issuance of common stock................................ 52 103 ------ ------- Net cash provided by financing activities................. 1,180 103 ------ ------- Net increase (decrease) in cash........................... 694 (3,648) Cash and cash equivalents, beginning of period.............. 1,670 6,589 ------ ------- Cash and cash equivalents, end of period.................... $2,364 $ 2,941 ====== ======= Supplemental non-cash investing and financing activities: Liability related to business acquisition............... $ 619 $ -- Conversion of subordinated debenture and accrued interest.............................................. -- 4,912 ====== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 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 contained in the Company's annual report on Form 10-K for the fiscal year ended September 30, 1999. 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 December 31, 1999 are not necessarily indicative of the results expected for the full year. 2. RECENT ACCOUNTING PRONOUNCEMENTS: In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 will not have a material effect on the financial position or results of the Company. In December 1998, the Accounting Standards Executive Committee ("AcSEC") released Statement of Position 98-9, or SOP 98-9, "Modification of SOP 97-2, 'Software Revenue Recognition', with Respect to Certain Transactions". SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by each element delivered. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 were effective for transactions that were entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. The Company's adoption of SOP 98-9 did not have a significant impact on current revenue recognition policies. 3. OTHER ASSETS: Other assets consist of the following as of:
DECEMBER 31, SEPTEMBER 30, 1999 1999 ------------- -------------- Goodwill............................................ $ 2,768 $ 2,768 Purchased technology................................ 2,588 2,588 Other assets........................................ 2,037 1,782 Less accumulated amortization....................... (3,281) (3,036) ------- ------- $ 4,112 $ 4,102 ======= =======
7 ZITEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 4. BUSINESS COMBINATIONS: On October 19, 1999, the Company acquired Telemetrics Systems Corporation, a company domiciled in Berne, Switzerland. The purchase price consisted of cash payments totaling $1.2 million in exchange for the net assets of the acquired company. No goodwill was generated by the transaction. The acquisition has been accounted for under the purchase method of accounting; accordingly, the total purchase price of $1.2 million was allocated to the net assets acquired based upon their estimated fair values. The operating results of the acquired company from October 19, 1999 through December 31, 1999, are included in the consolidated results of operations. The wholly-owned subsidiary of the Company is now named Datametrics Systems AG. 5. INCOME TAXES: The benefit for income taxes was fully offset by a valuation allowance due to the uncertainty surrounding the realization of the various favorable tax components. 6. EARNINGS PER SHARE ("EPS"): A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts) for the quarters ended December 31:
1999 1998 -------- -------- Numerator--Basic and Diluted EPS Net loss................................................ $ (916) $(2,776) ======= ======= Denominator--Basic EPS Common stock outstanding................................ 24,915 21,378 Common equivalent stock................................. -- -- ------- ------- 24,915 21,378 ------- ------- Basic loss per share...................................... $ (.04) $ (.13) ======= ======= Denominator--Diluted EPS Denominator--Basic EPS.................................. 24,915 21,378 Effect of Dilutive Securities: Common stock options.................................. -- -- Convertible preferred stock........................... -- -- ------- ------- 24,915 21,378 ------- ------- Diluted loss per share.................................... $ (.04) $ (.13) ======= =======
For the quarters ended December 31, 1999 and 1998, respectively, options to purchase 147 thousand and 124 thousand shares were not included in the computation of diluted EPS because of the anti-dilutive effect of including these shares in the calculation for both periods. 8 ZITEL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA) 7. SEGMENT INFORMATION During each of the quarters presented, the Company had two reportable segments--Datametrics and Year 2000 Services. The Datametrics business segment develops and markets E-business performance management software solutions. The Year 2000 segment provided service to review software code and identify areas within the code where Year 200 problems might occur. As of October, 1999, this segment is no longer in business. The following table presents certain segment financial information (in thousands) for the quarters ended December 31:
DATAMETRICS YEAR 2000 TOTAL ----------- --------- -------- 1999: Revenues from external customers............... $5,128 $ 392 $ 5,520 Segment loss from operations................... 669 (1,493) (824) ------- Consolidated loss from operations.............. $ (824) ======= 1998: Revenues from external customers............... $5,421 $ 479 $ 5,900 Segment loss from operations................... 859 (1,683) (824) Loss from unconsolidated company............... (1,512) ------- Consolidated loss from operations.............. $(2,336) =======
The table below presents net sales (in thousands) by geographic area for the quarters ended December 31:
1999 1998 -------- -------- Net sales: US.......................................................... $2,561 $3,406 Europe...................................................... 2,568 2,016 Other....................................................... 391 478 ------ ------ Total....................................................... $5,520 $5,900 ====== ======
The table below presents long-lived asset information (in thousands) by geographic area for the years ended September 30:
1999 1998 -------- -------- Long-lived assets: US.......................................................... $4,295 $6,243 Europe...................................................... 545 702 ------ ------ Total....................................................... $4,840 $6,945 ====== ======
8. COMPREHENSIVE LOSS: The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income". There were no differences between comprehensive loss and net loss as reported for each of the fiscal years 1997, 1998 and 1999. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The Company recorded a net loss of $916,000 ($0.04 per share) for the first quarter of fiscal 2000, ended December 31, 1999, compared with a net loss of $2,776,000 ($0.13 per share) for the same quarter of the prior year. Net sales for the current quarter was $5,520,000 versus net sales of $5,900,000 for the same period a year earlier. The prior year's quarterly net sales included $561,000 not related to current business. Gross margin for the quarter ended December 31, 1999 was 67% of net sales compared to 62% of net sales for the same quarter of the prior year. The improvement in gross margin percentage is primarily attributable to product mix as a result of increased net sales of software. 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. Gross margins may be affected by several factors, including the mix of products sold, the price of products sold and price competition. Research and development expenses for the quarter ended December 31, 1999 were 12% of net sales compared to 10% for the same period of the prior year. The percentage increase is a result of lower net sales for the quarter as actual spending only increased $36,000. Selling, general and administrative ("SG&A") expenses for the quarter ended December 31, 1999 were 70% of net sales versus 66% for the same period a year earlier. The percentage increase is due to lower net sales; actual spending decreased $36,000 quarter to quarter Other expense was $92,000 for the quarter just ended versus $440,000 in the same quarter of the prior year. For the current quarter, other expense included $30,000 interest expense and $110,000 in translation losses, offset by interest income of $48,000. For the comparable quarter of the prior year, other expense included $494,000 interest expense related to the convertible subordinated debentures, partially offset by interest income of $168,000. LIQUIDITY AND CAPITAL RESOURCES For the quarter ended December 31, 1999, working capital decreased $848,000 and cash flows used by operating activities totaled $600,000. The utilization of cash in operating activities resulted primarily from the net loss of $916,000 and an increase in accounts receivable of $6,107,000, offset by an increase in deferred revenue of approximately $5,212,000 and increases in accounts payable and accrued liabilities of $1,434,000. Net cash provided by investing activities of $114,000 is primarily made up of $565,000 from the acquisition of companies, offset by $370,000 in capitalization of software development costs and the acquisition of fixed assets in the amount of $148,000. Net cash provided by financing activities of $1,180,000 was comprised of a $1,128,000 increase in short-term debt and $52,000 from the sale of stock under the Company's employee stock purchase plan. Management believes that the Company will meet its cash requirements for the next twelve months from cash on hand, other working capital, and cash flow from operations. If the Company is unable to generate sufficient cash flow from operations or should management determine it to be prudent, it may attempt to raise additional debt or equity. There can be no assurance that additional debt or equity financing will be available to the Company on commercially reasonable terms, or at all. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with 10 the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. Management believes that the impact of SAB 101 will not have a material effect on the financial position or results of the Company. In December 1998, the Accounting Standards Executive Committee ("AcSEC") released Statement of Position 98-9, or SOP 98-9, "Modification of SOP 97-2, 'Software Revenue Recognition', with Respect to Certain Transactions". SOP 98-9 amends SOP 97-2 to require that an entity recognize revenue for multiple element arrangements by each element delivered. The provisions of SOP 98-9 that extend the deferral of certain paragraphs of SOP 97-2 became effective December 15, 1998. These paragraphs of SOP 97-2 and SOP 98-9 were effective for transactions that were entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. The Company's adoption of the provisions of SOP 98-9 did not have a significant impact on current revenue recognition policies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company considered the provision of Financial Reporting Release No. 48, "Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments". The Company had no holdings of derivative financial or commodity instruments at December 31, 1999. A review of other financial instruments and risk exposures at that date revealed the Company did not have exposure to interest rate risk. This Report on Form 10-Q contains forward-looking statements which are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act. Readers are cautioned that such forward-looking statements are subject to risks and uncertainties and actual results could differ materially. Certain of these risks and uncertainties are discussed herein under the section "Risk Factors" and elsewhere in this Report as well in the Company's other filings with the Securities and Exchange Commission. Zitel is a registered trademark of Zitel Corporation. Datametrics and ViewPoint are registered trademarks of Datametrics Systems Corporation. VisualRoute, VisualPulse, VisualProfile, VisualAnalyze, VisualPoint, and the E-Business Performance Experts are trademarks of Datametrics Systems Corporation. All other service marks, trademarks and registered trademarks are the property of their respective holders. All other product names and brand names are trademarks or registered trademarks of their respective holders. 11 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company did not submit any matters to a vote of security holders during the first quarter of the fiscal year ended September 30, 2000. ITEM 5. OTHER INFORMATION RISK FACTORS RECENT LEVELS OF NET SALES HAVE BEEN INSUFFICIENT Zitel has not generated net sales sufficient to produce an operating profit in recent years. The Company has relied on significant financings to support its activities. Operations in prior years were also partially funded by a stream of royalty payments under an agreement with IBM. This agreement was terminated in April 1998. Zitel sustained substantial operating losses and net losses in fiscal years 1997 through 1999. The Company must generate substantial additional net sales and gross margins on its products and services and must continue to successfully implement programs to manage cost and expense levels in order to remain a viable operating entity. There is no assurance that Zitel can achieve these objectives. SIGNIFICANT LOSSES For the first quarter of fiscal year 2000, the Company reported a net loss of $916,000. The Company reported a total net loss for fiscal year 1999 of $13,103,000. The Company reported total net losses of $43,205,000 and $17,501,000 for fiscal years 1998 and 1997, respectively. The Company has taken a number of steps to attempt to return to profitability, although there is no assurance that it will be successful. A significant portion of the cumulative losses were caused by the funding of MatriDigm, and operations of the Company's former storage systems business, which was sold in July 1998. MatriDigm filed Chapter 7 bankruptcy in October 1999 so there will be no additional funding. The Company began subleasing a portion of its Fremont, CA headquarters, and is considering a move to substantially smaller and less costly premises. The Company continues to consider options and take actions necessary to bring costs into line with anticipated revenues. There can be no assurance that the Company will be successful in this effort and remain a viable operating entity. 12 FLUCTUATIONS IN QUARTERLY RESULTS Zitel's quarterly operating results have in the past varied and may in the future vary significantly depending on a number of factors, including: - The level of competition, the size, timing, cancellation or rescheduling of significant orders; - Market acceptance of new products and product enhancements; - New product announcements or introductions by Zitel's competitors; - Deferrals of customer orders in anticipation of new products or product enhancements; - Changes in pricing by Zitel or its competitors; - The ability of Zitel to develop, introduce and market new products and product enhancements on a timely basis; - Zitel's success in expanding its sales and marketing programs; - Technological changes in the market for Zitel's products; - Product mix and the mix of sales among Zitel's sales channels; - Levels of expenditures on research and development; - Changes in Zitel's strategy; personnel changes; and, - General economic trends and other factors. Due to all of the foregoing factors, Zitel believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indicator of future performance. It is possible that in some future quarter the Company's operating results may be below the expectations of public market analysts and investors. ZITEL STOCK PRICE HAS BEEN VOLATILE The price of Zitel's Common Stock was subject to extreme volatility during fiscal 1998, as the closing bid price ranged between a low of 2 7/32 and a high of 23 5/8. Zitel feels that one of the reasons for this volatility was rumored progress of and rumored problems in the product development program and marketing efforts of MatriDigm. The price of Zitel's Common Stock during fiscal year 1999 demonstrated significantly less volatility, ranging from the low closing bid price of 1 7/32 to the high closing bid price of 6 15/32. In the first quarter of fiscal year 2000, such price ranged between a low of 21/32 and a high of 6 1/4. COMPETITION The market for system management tools in which the Company's software products business unit competes is intensely competitive. Many of the companies with which the Company competes, such as TeamQuest Corporation, Computer Associates International, Inc., Hewlett-Packard Company, and BMC Software, Inc. have substantially larger installed bases and greater financial resources than the Company. There can be no assurance that the Company's competitors will not develop products comparable or superior to those developed by the Company or adapt more quickly than the Company to new technologies, evolving industry standards, new product introductions, or changing customer requirements. 13 DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE The markets in which the Company operates are characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. The introduction of products embodying new technologies and/or the emergence of new industry standards could render the Company's existing products and services obsolete and unmarketable. The Company's future success will depend upon its ability to develop and to introduce new products and services on a timely basis that keep pace with technological developments and emerging industry standards and address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing products or services that respond to technological changes or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products or services, or that its new products or services will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new products or services in a timely manner in response to changing market conditions or customer requirements, the Company's business, operating results and financial condition will be materially and adversely affected. PRODUCT LIABILITY The Company's agreements with its customers typically contain provisions intended to limit the Company's exposure to potential product liability claims. It is possible that the limitation of liability provisions contained in the Company's agreements may not be effective. Although the Company has not received any product liability claims to date, the sale and support of products by the Company and the incorporation of products from other companies may entail the risk of such claims. A successful product liability claim against the Company could have a material adverse effect on the Company's business, operating results and financial condition. DEPENDENCE ON PROPRIETARY TECHNOLOGY The Company's success depends significantly upon its proprietary technology. The Company currently relies on a combination of patent, copyright and trademark laws, trade secrets, confidentiality agreements and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company has registered its Zitel and Datametrics trademarks and will continue to evaluate the registration of additional trademarks as appropriate. The Company generally enters into confidentiality agreements with its employees and with key vendors and suppliers. The Company currently holds a United States patent on one of its software technologies. There can be no assurance that this patent will provide the Company with any competitive advantages or will not be challenged by third parties, or that the patents of others will not have a material adverse effect on the Company's ability to do business. The Company believes that the rapidly changing technology in the computer industry makes the Company's success depend more on the technical competence and creative skills of its personnel than on patents. There has also been substantial litigation in the computer industry regarding intellectual property rights, and litigation may be necessary to protect the Company's proprietary technology. The Company has not received significant claims that it is infringing third parties' intellectual property rights, but there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products, trademarks or other proprietary rights. The Company expects that companies in its markets will increasingly be subject to infringement claims as the number of products and competitors in the Company's target markets grows. Any such claims or litigation may be time-consuming and costly, cause product shipment delays, require the 14 Company to redesign its products or require the Company to enter into royalty or licensing agreements, any of which could have a material adverse effect on the Company's business, operating results or financial condition. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology, duplicate the Company's products or design around patents issued to the Company or other intellectual property rights of the Company. INTERNATIONAL SALES AND OPERATIONS Sales to customers outside the United States have accounted for significant portions of the Company's net sales, and the Company expects that the acquisition of companies headquartered and operating in the United Kingdom, The Netherlands and Switzerland, respectively, will result in international sales representing an increasingly significant portion of the Company's net sales. International sales pose certain risks not faced by companies that limit themselves to domestic sales. Fluctuations in the value of foreign currencies relative to the U.S. dollar, for example, could make the Company's products less price competitive. If the Company, in the future, denominates any of its sales in foreign currencies, this could result in losses from foreign currency transactions. International sales also could be adversely affected by factors beyond the Company's control, including the imposition of government controls, export license requirements, restrictions on technology exports, changes in tariffs and taxes and general economic and political conditions. The laws of some countries do not protect the Company's intellectual property rights to the same extent as the laws of the United States. The Company does not believe these additional risks are significant in the United Kingdom, The Netherlands or Switzerland. DEPENDENCE ON KEY PERSONNEL The Company's future performance depends significantly upon the continued service of its key technical and senior management personnel. The Company provides incentives such as salary, benefits and option grants (which are typically subject to vesting over four years) to attract and retain qualified employees. The loss of the services of one or more of the Company's officers or other key employees could have a material adverse effect on the Company's business, operating results and financial condition. The Company's future success depends on its continuing ability to retain highly qualified technical and management personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain its key technical and management employees or that it can attract, assimilate and retain other highly qualified key technical and management personnel in the future. The Company believes there is significant competition for the few software development professionals with the advanced technological skills necessary to perform the services offered by the Company's business. The Company's ability to maintain or renew existing relationships and obtain new business depends, in large part, on its ability to hire and retain technical personnel. An inability to hire such additional qualified personnel could impair the ability of the business to manage and complete its existing projects and to bid for and obtain new projects. 15 ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Certificate of Incorporation, as amended and restated, and Bylaws, as amended, California law and the Company's indemnification agreements with certain officers and directors of the Company may be deemed to have an anti-takeover effect. Such provisions may delay, defer or prevent a tender offer or takeover attempt that one or more stockholders consider to be in the best interests of same, including attempts that might result in a premium over the market price for the shares held by stockholders. The Company's Board of Directors may issue additional shares of Common Stock or establish one or more classes or series of Preferred Stock, having the number of shares, designations, relative voting rights, dividend rates, liquidation and other rights, preferences and limitations determined by the Board of Directors without stockholder approval. The Board of Directors of the Company has approved the adoption of a Preferred Share Purchase Rights Plan (the "Rights Plan"). Terms of the Rights Plan provide for a dividend distribution of one preferred share purchase right (a "Right") for each outstanding share of common stock, no par value per share (the "Common Shares"), of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A Junior Participating Preferred Stock, no par value (the "Preferred Stock"), at an exercise price of $69.50 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustment, and a redemption price of $.01 per Right. Each one one-hundredth of a share of Preferred Stock has designations and the powers, preferences and rights, and the qualifications, limitations and restrictions which make its value approximately equal to the value of a Common Share. The Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person, entity or group of affiliated or associated persons (an "Acquiring Person") has acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors prior to such time as any person(s) or entity becomes an Acquiring Person) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by an Acquiring Person of 15% or more of such outstanding Common Shares. The Rights have certain anti-takeover effects, as they would cause substantial dilution to a potential Acquiring Person that attempted to acquire the Company on terms not approved by the Company's Board of Directors. The Rights should not interfere with any merger or other business combination approved by the Board of Directors, since the Rights may be redeemed by the Company at $.01 per Right prior to the earliest of (i) the twentieth day following the time that an Acquiring Person has acquired beneficial ownership of 15% or more of the Common Shares (unless extended for one or more 10 day periods by the Board of Directors), (ii) a change of control, or (iii) the final expiration date of the rights. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 27--Financial Data Schedule (b) Reports on Form 8-K The Registrant filed no reports on Form 8-K during the first quarter ended December 31, 1999. 16 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 /s/ ANNA M. MCCANN ------------------------------------------------ Anna M. McCann Date: February 11, 2000 CHIEF FINANCIAL OFFICER
17 EX-27 2 EXHIBIT 27
5 1,000 3-MOS SEP-30-2000 OCT-01-1999 DEC-31-1999 2,364 0 11,759 (1,962) 0 2,596 3,857 (3,145) 19,784 14,751 0 0 2,000 71,392 (68,359) 19,784 5,520 5,520 1,842 4,502 62 0 30 (916) 0 (916) 0 0 0 (916) (.04) (.04)
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