-----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, Md6TU8RSHQP23q6TqxjulTsVk5HRH7aKmN0A8gbDL4+xwMQaBy/WA7odH0NZceOw 0BCn1RIRFUE7s4IXn8h7WQ== 0000929624-98-001696.txt : 19981022 0000929624-98-001696.hdr.sgml : 19981022 ACCESSION NUMBER: 0000929624-98-001696 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19981021 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-K/A SEC ACT: SEC FILE NUMBER: 000-12194 FILM NUMBER: 98728577 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-K/A 1 FORM 10-K/A FOR THE PERIOD SEPT. 30, 1997 ================================================================================ FORM 10-K/A-1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File No. 0-12194 ZITEL CORPORATION (Exact name of Registrant as specified in its charter) CALIFORNIA 94-2566313 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 47211 BAYSIDE PARKWAY, FREMONT, CALIFORNIA 94538-6517 (Address of principal executive offices) (Zip Code) (510) 440-9600 (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE (Title of Class) Indicate by check mark whether the Registrant (1) has filed 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 aggregate market value of the Registrant's Common Stock held by nonaffiliates on November 28, 1997 (based upon the closing sale price of stock on such date) was $172,724,861. As of November 28, 1997, 15,749,251 of the Registrant's Common Stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Company's 1997 Notice of Annual Meeting of Shareholders and Proxy Statement are incorporated by reference into Part III hereof. ================================================================================ This Amendment is filed to amend Item 8 to reflect certain subsequent events. Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Balance Sheets (In thousands)
September 30, 1997 1996 Assets Current assets: Cash and cash equivalents $ 4,224 $ 9,216 Marketable securities - 2,382 Short-term investments 9,596 - Accounts receivable, less allowance for doubtful accounts of $175 in 1997 and $88 in 1996 6,547 5,542 Inventories 3,050 4,211 Deferred and refundable taxes 3,540 2,224 Other current assets 993 480 -------- ------- Total current assets 27,950 24,055 Fixed assets-net 3,700 2,253 Intangible assets-net 5,846 - Other assets-net 11,798 4,391 -------- ------- Total assets $ 49,294 $30,699 ======== ======= Liabilities And Shareholders' Equity Current liabilities: Accounts payable $ 4,768 $ 2,066 Accrued liabilities 4,419 1,544 -------- ------- Total current liabilities 9,187 3,610 Convertible subordinated debenture 24,161 - Commitments (See note) Shareholders' equity: Preferred stock, no par value; 1,000 shares authorized, none issued Common stock, no par value; 40,000 shares authorized: Issued and outstanding; 15,603 shares and 14,820 shares at September 30, 1997 and 1996, respectively 27,081 20,723 Retained earnings (deficit) (11,135) 6,366 -------- ------- Total shareholders' equity 15,946 27,089 -------- ------- Total liabilities and shareholders' equity $ 49,294 $30,699 ======== =======
The accompanying notes are an integral part of these consolidated financial statements. 1 Consolidated Statements of Operations (In thousands except per share data)
Year Ended September 30, 1997 1996 1995 Net sales $ 12,626 $ 8,593 $ 8,293 Royalty revenue 5,340 14,473 15,421 -------- ------- ------- Total revenue 17,966 23,066 23,714 Costs and expenses: Cost of goods sold 9,301 6,630 6,807 Research and development 7,504 6,551 5,754 Selling, general and administrative 14,468 8,002 6,944 Acquisition of in-process research & development 6,600 - - -------- ------- ------- Operating income (loss) (19,907) 1,883 4,209 Interest income (746) (482) (399) Interest expense 3,532 25 156 Other income and expense (689) (4,188) (19) -------- ------- ------- Income (loss) before income taxes (22,004) 6,528 4,471 Provision (benefit) for income taxes (4,503) 2,479 (4,055) -------- ------- ------- Net income (loss) $(17,501) $ 4,049 $ 8,526 ======== ======= ======= Net income (loss) per share $(1.15) $.26 $.56 ======== ======= ======= Number of shares used in per share calculation 15,222 15,626 15,166 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 2 Consolidated Statements of Shareholders' Equity (In thousands except per share data)
Common Common Retained Total Stock Stock Earnings Shareholders' Shares Amount (Deficit) Equity Balances at September 30, 1994 12,970 $15,489 $ (5,485) $ 10,004 Issuance of common stock: Stock options exercised ($0.34-$4.57 per share) 544 1,262 - 1,262 Employee stock purchase plan ($1.07 and $3.83 per share) 134 230 - 230 Private placement 900 2,922 - 2,922 Stock warrants 4 13 - 13 Net income - - 8,526 8,526 ------ ------- -------- -------- Balances at September 30, 1995 14,552 19,916 3,041 22,957 Issuance of common stock: Stock options exercised ($0.82-$7.94 per share) 310 686 - 686 Employee stock purchase plan ($4.15 and $5.10 per share) 66 303 - 303 Stock repurchase (130) (182) (724) (906) Stock warrants 22 - - - Net income - - 4,049 4,049 ------ ------- -------- -------- Balances at September 30, 1996 14,820 20,723 6,366 27,089 Issuance of common stock: Stock options exercised ($0.81 - $9.50 per share) 498 1,104 - 1,104 Employee stock purchase plan ($7.87 and $16.58 per share) 35 390 - 390 Stock warrants 15 - - - Common stock issued for acquisition 61 1,200 - 1,200 Conversion of subordinated debt 174 3,664 - 3,664 Net loss - - (17,501) (17,501) ------ ------- -------- -------- Balances at September 30, 1997 15,603 $27,081 $(11,135) $ 15,946 ====== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 3 Consolidated Statements of Cash Flows (In thousands)
Year Ended September 30, 1997 1996 1995 Cash flows provided by (used in) operating activities: Net income (loss) $(17,501) $ 4,049 $ 8,526 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Acquisition of in-process research & development expenses 6,600 - - Discount amortization on subordinated debt 2,778 - - Depreciation and amortization 1,404 935 1,384 Loss on disposal of fixed assets - 15 111 Provision for doubtful accounts 284 185 114 Provision for inventory allowances 480 480 176 Unrealized gains on marketable securities - (2,041) - Realized gains on marketable securities (777) (2,136) - Deferred and refundable income taxes (4,743) 2,124 (4,104) Change in operating assets and liabilities: Increase in accounts receivable (1,289) (1,527) (529) Decrease (increase) in inventories 681 (1,770) 1,825 Decrease (increase) in other current assets (513) (62) 418 Increase (decrease) in accounts payable 2,702 341 (298) Increase (decrease) in accrued liabilities 2,875 33 (50) -------- ------- ------- Net cash provided by (used in) operating activities (7,019) 626 7,573 -------- ------- ------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets (2,650) (1,676) (1,222) Investment in unconsolidated company (2,024) (3,497) - Purchase of short-term investments (9,596) - - Proceeds from sale of marketable securities 3,159 2,795 - Purchase of other assets (1,089) (367) (446) Purchase of companies net of cash acquired (11,062) - - -------- ------- ------- Net cash used in investing activities (23,262) (2,745) (1,668) -------- ------- ------- Cash flows provided by (used in) financing activities: Issuance of common stock 1,494 989 4,427 Repurchase of common stock - (906) - Proceeds from borrowings - - 3,646 Repayments of borrowings - (13) (3,723) Issuance of subordinated debenture 23,795 - - -------- ------- ------- Net cash provided by financing activities 25,289 70 4,350 -------- ------- ------- Net increase (decrease) in cash (4,992) (2,049) 10,255 Cash and cash equivalents, beginning of year 9,216 11,265 1,010 -------- ------- ------- Cash and cash equivalents, end of year $ 4,224 $ 9,216 $11,265 ======== ======= ======= Supplemental cash flow information: Interest paid - - $ 57 Income taxes paid $ 265 $ 82 $ 136 Supplemental non-cash investing and financing activities: Issuance of common stock in business combination $ 1,200 - - Capitalized financing costs $ 1,038 - - Conversion of subordinated debt and accrued interest $ 3,664 - - Conversion of note receivable to investment in unconsolidated company $ 300 - -
The accompanying notes are an integral part of these consolidated financial statements. 4 Notes to Consolidated Financial Statements (In thousands except per share data) Summary of Significant Accounting Policies: Zitel Corporation (the "Company") is an Information Technology Company that specializes in advanced memory algorithms, systems optimization, and modeling and search technology. The Company employs these core competencies in three related lines of business: multi-platform and multi-system performance measurement and modeling software used to optimize performance in mission- critical environments; high-performance, enterprise-wide storage systems for mission-critical applications that include relational database, batch and on- line transactions; and, Year 2000 services and consulting including project management, planning, analysis, code conversion and testing using the MatriDigm technology and other tools. Zitel conducts its business within one industry segment. The following is a summary of Zitel's significant accounting policies: Principles of Consolidation: The consolidated financial statements include the accounts of Zitel Corporation and its wholly-owned subsidiaries. Zitel's preferred stock interest in an unconsolidated company is accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash Equivalents: For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. 5 Marketable Securities: At September 30, 1996, the Company's marketable securities consisted entirely of common shares of one company and were classified as trading securities. Those securities were sold in January 1997. The gain on the sale of such securities is included in other income. Short-Term Investments: At September 30, 1997, the Company's short-term investments, which were classified as available-for-sale securities, consisted entirely of 120-day high- grade commercial paper with a maturity date of October 2, 1997. The Company's short-term investments are carried at cost, which approximates fair value. Inventories: Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Fixed Assets: Fixed assets, other than leasehold improvements, are depreciated on a straight- line basis over their estimated useful lives (2-7 years). Leasehold improvements are amortized over the lesser of their useful life or remaining term of the related lease. When assets are disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gains and losses are included in the results of operations. Deferred Software Implementation Costs: The Company capitalizes substantially all costs related to the purchase of internal-use software and its implementation which includes the cost of purchased software, consulting fees and the use of certain specified Company resources. As of September 30, 1997 and 1996, $1,092 thousand and $238 thousand, respectively, in costs have been capitalized and are included in other long-term assets. Amortization in the amount of $111 thousand has been charged during fiscal year 1997. No amortization had been charged in fiscal year 1996. Revenue Recognition: Revenue is recognized at the time products are shipped to 6 customers and at the time services are rendered. Royalty revenue is recognized when earned and receipt is assured. Software revenue is recognized in accordance with the American Institute of Certified Public Accountants Statement of Position (SOP) 91-1, "Software Revenue Recognition". The effect of the new SOP 97-2, "Software Revenue Recognition", issued on October 27, 1997, has yet to be determined. Research and Development Expenditures: Research and development expenditures are charged to operations as incurred. Software Development Costs: Statement of Financial Accounting Standards (SFAS) No. 86 provides for the capitalization of certain software development costs after technological feasibility of the software is attained. Software development costs capitalized in fiscal year 1997 were $189 thousand. No amortization has been charged as of September 30, 1997. Foreign Currency Translation: The U.S. dollar is considered to be the functional currency for the Company's foreign operations. Accordingly, non-monetary assets and liabilities have been translated into U.S. dollars at a historical rate; monetary assets and liabilities have been translated into U.S. dollars using the exchange rate at the balance sheet date; and revenues and expenses have been generally translated into U.S. dollars at the weighted average exchange rate during the period. Foreign currency transaction gains and losses, as well as the effects of remeasurement (which have not been material in the aggregate), are included in the accompanying statements of operations. Intangible Assets: Intangible assets include goodwill and purchased technology, recorded in connection with the acquisition of the three software companies, which are being amortized on a straight-line basis over seven and five years, respectively. The Company periodically assesses the recoverability of intangible assets by determining whether the amortization of the asset balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. The amount of 7 impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset to a net realizable value. Income Taxes: The Company accounts for income taxes under the liability method. Deferred tax assets and liabilities are determined based on the difference between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Recent Accounting Pronouncements: The Financial Accounting Standards Board (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 effect of the adoption of SFAS No. 128 has yet to be determined. 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 beginning in fiscal year 1999, 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 beginning in fiscal year 1999 and the impact of adoption has not been determined. 8 Net Income (Loss) Per Share: Net income (loss) per share amounts are computed by dividing the net income (loss) by the weighted average number of common shares and common equivalent shares (when dilutive) outstanding during each year presented using the treasury stock method. Concentrations of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash, marketable securities and trade receivables. The Company places its cash investments and marketable securities with high credit quality financial institutions and limits the amount of exposure to any one financial institution. Concentrations of credit risk with respect to trade receivables are limited due to the diversity of the Company's customers, both geographically and within different industry segments. Fair Value of Financial Instruments: Carrying value amounts of certain of the Company's financial instruments, including cash and cash equivalents, marketable securities, short-term investments, accounts receivable, accounts payable, subordinated debentures, and other accrued liabilities approximate fair value due to their short maturities.
September 30, 1997 1996 Inventories: Raw materials $ 953 $ 1,515 Work in progress 576 738 Finished goods 1,521 1,958 ------- ------- $ 3,050 $ 4,211 ======= ======= Fixed Assets: Manufacturing equipment $ 3,965 $ 3,666 Office furniture and equipment 4,162 2,250 Engineering equipment 4,576 4,334 Leasehold improvements 683 666 ------- ------- 13,386 10,916 Less accumulated depreciation and amortization (9,686) (8,663) ------- ------- $ 3,700 $ 2,253 ======= =======
9 Depreciation expense was $1,316 thousand, $827 thousand and $1,281 thousand for the fiscal years ended September 30, 1997, 1996 and 1995, respectively.
September 30, 1997 1996 Other Assets: Investment in unconsolidated companies $5,879 $3,563 Deferred software implementation costs 1,092 238 Deferred taxes, net 3,177 - Capitalized financing costs on subordinated debt 1,038 - Other 947 1,014 ------- ------ 12,133 4,815 Less accumulated amortization (335) (424) ------- ------ $11,798 $4,391 ======= ======
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 $11.1 million, the issuance of shares of the Company's common stock valued at $1.2 million and transaction costs of approximately $500 thousand. The acquisition has been accounted for under the purchase method of accounting. Accordingly, the total purchase price of $12.8 million was allocated to the net assets acquired based upon their estimated fair values. In addition, $6.6 million 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 operating results of the acquired companies from July 1, 1997 through September 30, 1997, are included in the consolidated results of operations. 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 fiscal years ended September 30, 1997 and 1996, as though the entities had been combined as of October 1, 1997 and 1996. 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. 10
Year ended September 30, 1997 1996 Revenue $ 28,263 $36,095 Net income (loss) $(13,624) $ 2,929 Net income (loss) per share $ (0.90) $ 0.19
Investment in Unconsolidated Companies: At September 30, 1996, Zitel had a $2.4 million investment in a company, classified as a trading marketable security, which was accounted for under the cost method. During fiscal year 1997, the Company liquidated its investment in the company. In November 1995, Zitel purchased 9.6 million shares of preferred stock of 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 the company, subject to a royalty to the company. In July 1996, Zitel entered into an agreement to resell services of the company on a commission basis. The agreement also provides Zitel the exclusive right to create portable, on-site centers for the performance of services offered by the company for certain accounts in certain circumstances. During fiscal year 1997, the Company purchased an additional one million shares of preferred stock of the company in exchange for $2.0 million in cash. The Company also exercised an option to purchase 500 thousand shares of the company's common stock from a shareholder of the company for $300 thousand. Refer to "Note Receivable from Related Party" footnote. The following is a summary of financial information with respect to the company, as of September 30, 1997 and 1996:
1997 1996 unaudited Net sales $ 123 $ - Gross profit 38 - Net loss (14,549) (1,873) Current assets 3,816 2,612 Non-current assets 4,009 1,009 Current liabilities 1,504 324
11 Note Receivable from Related Party: The Company held a note receivable from an officer of an unconsolidated company with a principle balance of $300 thousand. At September 30, 1996, the note was included in other long-term assets. During fiscal year 1997, the note was investment is included in other long-term assets.
September 30, 1997 1996 Accrued Liabilities: Accrued payroll and related $1,062 $ 435 Accrued vacation 886 594 Accrued commissions 170 24 Deferred revenue 1,100 - Deferred warranty costs 1,023 - Other accrued liabilities 178 491 ------ ------ $4,419 $1,544 ====== ======
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 September 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 September 30, 1997. As of September 30, 1997, the Company had no borrowings outstanding under the line of credit. Commitments: The Company leases its operating facilities under non-cancelable operating leases that expire at various dates through the year 2005. Rent expense incurred under all operating leases and charged to operations was $789 thousand in 1997, $574 thousand in 1996 and $606 thousand in 1995. Future minimum obligations under all facility leases at September 30, 1997 aggregate approximately $9.0 million, payable as follows: 12
Fiscal Year 1998 $1,407 1999 1,481 2000 1,495 2001 1,512 2002 1,549 Thereafter 1,519
Convertible Subordinated Debentures: On May 22, 1997, the Company issued $25 million 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 November 22, 1999 automatically will be converted into Common Stock. The Debentures restrict distributions and repurchases of capital stock. The current year Consolidated Statement of Operations includes a charge to interest expense in the amount of $2,778 thousand related to the amortization of the total discount on the 5% Convertible Subordinated Debentures. During September 1997, approximately $3.3 million was converted to 174 thousand shares of common stock at prices ranging from $20.28 to $22.74 per share. CAPITAL STOCK: - ------------- Preferred Stock: In October 1983, the Company authorized one million shares of preferred stock. The Board of Directors has the authority to establish all rights and terms with respect to the preferred stock without future vote or action by the shareholders. Private Placement: In November 1994, the Company issued 900 thousand shares of 13 common stock in a private placement. Net proceeds from this transaction were $2.9 million. Common stock purchase warrants totaling approximately 45 thousand were issued as a part of this transaction. The warrants have been fully exercised. Stock Option Plans: At September 30, 1997, the Company had reserved 5.5 million common shares for issuance under its 1990 Stock Option, 1982 Incentive Option and 1984 Supplemental Stock Option Plans. Under the Company's stock option plans, options become exercisable at dates and in amounts as specified by the Compensation Committee of the Board of Directors and expire two to ten years from the date of grant. Options may be granted to employees at prices not less than fair market value at the date of grant. At September 30, 1997, there were 34 thousand shares reserved for future grants. At September 30, 1996, there were no shares reserved for future grant. Activity in the Company's option plans during fiscal years 1995, 1996 and 1997 is summarized as follows:
Weighted Number Average Options of Price Price Total Shares Per Share Per Share Amount Balances, September 30, 1994 1,996 $ 1.92 $ .34-$ 9.50 $ 3,819 Granted 544 $ 5.99 $ 3.94-$ 9.50 3,263 Cancelled (136) $ 3.39 $ 1.44-$ 7.94 (462) Exercised (544) $ 2.28 $ .34-$ 4.56 (1,243) ----- ------------- ------- Balances, September 30, 1995 1,860 $ 2.89 $ .34-$ 9.50 5,377 Granted 260 $ 7.10 $ 4.82-$ 9.88 1,851 Cancelled (40) $ 4.69 $ 1.19-$ 7.94 (190) Exercised (310) $ 2.13 $ .82-$ 7.94 (660) ----- ------------- ------- Balances, September 30, 1996 1,770 $ 3.60 $ .34-$ 9.88 6,378 Granted 1,008 $23.47 $13.63-$44.38 23,662 Cancelled (291) $28.75 $ 1.06-$44.38 (8,372) Exercised (477) $ 2.05 $ .81-$ 9.50 (978) ----- ------------- ------- Balances, September 30, 1997 2,010 $10.29 $ .34-$44.38 $20,690 ===== ====== ============= =======
At September 30, 1997 and 1996, respectively, options for 867 thousand and 1,044 thousand shares were exercisable at prices ranging from $0.34 to $17.44. 14 1995 Non-Employee Directors' Stock Option Plan: In April 1995, the Board of Directors approved the adoption of a Directors' plan which provides for automatic, non-discretionary grants of options to purchase an aggregate of 200 thousand shares of common stock. Options in the amount of 30 thousand, 24 thousand, and 24 thousand were granted in fiscal years 1995, 1996 and 1997, respectively, at prices ranging from $5.88 to $33.00 per share. Options totaling 21 thousand shares were exercised during fiscal 1997 with prices ranging from $5.88 to $6.22. 122 thousand shares are available for future grant. At September 30, 1997, 38 thousand shares were exercisable at prices ranging from $5.88 to $33.00. At September 30, 1996, 25 thousand shares were exercisable at prices ranging from $5.88 to $6.22. Preferred Share Purchase Rights Plan: In June 1996, the Company adopted a Preferred Share Purchase Rights Plan whereby shareholders will receive one right to purchase one one-hundredth of a share of a new series of preferred stock ("Rights") for each outstanding share of the Company's common stock held at the date of record, July 1, 1996. The Rights do not become exercisable or transferable apart from the common stock until a person or group (a) acquires beneficial ownership of 15% or more of the Company's common stock or (b) announces a tender or exchange offer, the consummation of which would result in ownership by a person or group of 15% or more of the Company's common stock. The Rights will be distributed as a non- taxable dividend and will expire in ten years from the date of declaration of the dividend. The exercise price is $69.50 per 1/100 of a share of preferred stock. Stock Purchase Plan: In April 1984, the Board of Directors approved the adoption of an Employee Stock Purchase Plan under which 400 thousand shares of common stock were reserved for issuance to eligible employees. In January 1988, January 1990, January 1992, and January 1995, the shareholders approved amendments to increase the shares reserved for the Plan by 300 thousand shares, 400 thousand shares, 400 thousand shares, and 500 thousand shares, respectively. Employees who do not own 5% or more of the outstanding shares are eligible to participate through payroll deductions, which may not exceed 10% of an employee's compensation. At the end of each offering period, shares are 15 purchased by the participants at 85% of the lower of the fair market value at the beginning or the end of the offering period. The 15% discount is treated as equivalent to the cost of issuing stock for financial reporting purposes. 35 thousand and 66 thousand shares were issued under the Plan during fiscal years 1997 and 1996, respectively. Since inception of the Plan, approximately 1,635 thousand shares have been issued. Pro Forma Stock-Based Compensation: As of September 30, 1997, options outstanding were as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ----------------------------------------------------- --------------------- Weighted Range Average Weighted Weighted of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price - --------------- ----------- ----------- -------- ----------- -------- $ 0.34 - $ 1.31 206 0.58 $ 1.22 206 $ 1.22 $ 1.38 - $ 2.00 115 3.75 $ 1.67 112 $ 1.67 $ 2.06 - $ 2.06 204 2.83 $ 2.06 204 $ 2.06 $ 2.31 $ 5.63 344 7.38 $ 4.73 185 $ 4.55 $ 5.69 - $ 7.94 276 7.73 $ 6.50 119 $ 6.51 $ 8.19 - $17.44 317 8.91 $14.24 78 $11.42 $19.13 - $19.63 230 9.40 $19.36 - - $20.13 - $22.50 300 9.56 $21.35 - - $23.25 - $24.50 49 9.84 $23.90 - - $33.00 - $33.00 26 9.41 $33.00 12 $33.00 ----- ---- ------ --- ------ $ 0.34 - $33.00 2,067 6.91 $10.29 916 $ 3.82
The Company has elected to continue to follow the provisions of Accounting Principles Board (APB) No. 25, "Accounting for Stock Issued to Employees", for financial reporting purposes and has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for the Company's stock option plans or employee stock purchase plan. Had compensation cost for the Company's stock option plans and employee stock purchase plan been determined based on the fair value at the grant date for awards in fiscal years 1997 and 1996 consistent with the provisions of SFAS No. 123, the Company's net income (loss) and net income (loss) per share for fiscal years 1997 and 1996 would have been modified to the pro forma amounts indicated below (in thousands, except per share amounts): 16
Year ended September 30, 1997 1996 Net income (loss) applicable to common stockholders - as reported $(17,501) $4,049 ======== ====== Net income (loss) applicable to common stockholders - pro forma $(22,138) $3,637 ======== ====== Net income (loss) per share - as reported $ (1.15) $ .26 ======== ====== Net income (loss) per share - pro forma $ (1.45) $ .23 ======== ======
The above pro forma disclosures are not necessarily representative of the effects on reported net income or loss for future years. The aggregate fair value and weighted average fair value of each option granted in fiscal years 1997 and 1996 were $13.4 million and $1.2 million, and $12.99 and $4.23, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes Option Pricing Model with the following weighted average assumptions for fiscal years 1997 and 1996: Expected volatility 76% - 91% Risk-free interest rate 5.07% - 6.22% Expected life .88 - 5.12 years Expected dividend yield 0.0% The Company has also estimated the fair value for the purchase rights under the employee stock purchase plan using the Black-Scholes Model, with the following assumptions for fiscal years 1997 and 1996: Expected volatility 65% - 136% Risk-free interest rate 5.51% - 5.63% Expected life .50 years Expected dividend yield 0.0% Savings and Investment Plan: The Company has a Savings and Investment Plan, qualified under sections 401(k) and 401(a) of the Internal Revenue Code, that enables participating U.S. employees to prepare for retirement. The Plan allows eligible employees to defer up to 15%, but no greater than $9.5 thousand per year, of their earnings on a pre-tax basis through contributions to the Plan. The Plan provides for employer contributions at the discretion of the Board of 17 Directors; however, no such contributions were made in fiscal 1997, 1996, or 1995. Income Taxes: The provision (benefit) for income taxes for the years ended September 30, 1997, 1996 and 1995 is as follows:
1997 1996 1995 Current expense: Federal $ - $ 77 $ 125 State - 23 - Foreign - - 7 ------- ------- ------- - 100 132 Deferred tax expense (benefit): Federal (3,989) 2,091 (3,735) State (514) 288 (452) ------- ------- ------- $(4,503) $ 2,479 $(4,055) ======= ======= =======
The Company's effective tax rate for the years ended September 30, 1997 and 1996 differs from the U.S. federal statutory income tax rate as follows:
1997 1996 Federal income tax at statutory rate (34.0)% 34.0% State taxes, net of federal benefit (4.1) 6.1 Tax credits (2.3) (2.7) Non-deductible interest expense 5.1 - Other, net 3.6 .6 Change in valuation allowance 11.2 - ------ ---- (20.5)% 38.0% ====== ====
The following table shows the major components of the deferred tax asset as of September 30, 1997 and 1996: 18
1997 1996 Deferred tax assets and liabilities: Current: Accounts receivable, inventory and other reserves $ 1,109 $ 694 Accrued liabilities 330 286 Net operating losses 3,975 373 Tax credit carryforwards 2,391 1,015 Appreciation of marketable securities - (819) Other 981 259 ------- ------- Total before valuation allowance 8,786 1,808 Valuation allowance (2,475) - ------- ------- Net deferred tax asset $ 6,311 $ 1,808 ======= =======
At September 30, 1997, the Company has federal and state net operating loss (NOL) carryforwards of $10.5 million and $5.2 million, respectively, to reduce future taxable income. The Company has federal and state general business credit carryforwards of $1.9 million and $.5 million, respectively, to reduce future taxable income. These carryforwards expire in 1998 through 2012 if not utilized. In addition, the Company has $6.2 million of NOLs related to stock option exercises, the benefit of which will be credited to equity when utilized. Due to the uncertainty surrounding the realization of the NOL and credit carryforwards in future tax returns, a valuation allowance has been established to reduce the deferred tax assets to the amount expected to be realized. The valuation allowance increased by $2.5 million during the year ended September 30, 1997. Research and Development Contract: During fiscal year 1992, the Company entered into a joint development contract to develop a product with a third party. The Company received funding from the third party based on completion milestones. In addition, upon completion of the project, the Company has and will receive a royalty based on sales by the third party of the product developed. Royalties totaling approximately $5.3 million, $14.5 million and $15.4 million were received from the third party in fiscal years 1997, 1996 and 1995, respectively. 19 Foreign Operations: The Company's foreign operations are those of its European branches and subsidiaries. All of their sales are made to unaffiliated European customers. The following table summarizes the Company's European operations:
1997 1996 1995 Net sales $ 4,530 $2,924 $1,566 Operating income (loss) (1,080) 585 (124) Total assets 6,693 1,368 386
Export Sales: Export sales from domestic operations were $2.2 million, $1.4 million and $1.5 million in 1997, 1996 and 1995, respectively. Major Customers: Sales to one customer amounted to 14.6% and 14.3% of net sales in 1997 and 1995, respectively. Sales to two customers amounted to 13% and 11.8% of net sales in 1996. Subsequent Events (Unaudited): Convertible Subordinated Debentures On June 16, 1998, the Company issued $10,000,000 principal amount of 3% Convertible Subordinated Debentures (the Debentures) which are due June 15, 1999, and five-year common stock purchase warrants for 150,000 shares of the Company's common stock. The Debentures include a 10% discount of $1,111,000, which was charged to interest expense in the third quarter of fiscal 1998. The Debentures accrue interest at the rate of 3% per annum and principal and accrued interest are convertible into common stock of the Company at a price of $3.92625 per share. The Warrants were valued at $4.08 per share and will be amortized over the life of the Debentures. Any Debentures outstanding on June 15, 1999, will be automatically converted into common stock. The Debentures restrict distributions and repurchases of capital stock. Definitive Merger Agreement On October 5, 1998, the Company signed a definitive agreement to acquire the remaining 68.7% of MatriDigm Corporation (MatriDigm) not currently owned in a tax-free exchange of stock, which will be accounted for as a purchase combination. The MatriDigm shareholders will receive approximately 0.65 share, of a newly created company, for each MatriDigm share they currently own. The merger is subject to the approval of the shareholders' of the Company and MatriDigm and regulatory approval. Under the definitive agreement, the Company committed to fund the working capital needs of MatriDigm from October 5, 1998 through the date of the closing of the merger, which is expected to be in early calendar year 1999. Net cash used in operations during fiscal 1997 and through the nine months ended June 30, 1998 was $7,019 and $9,635, respectively. Management is seeking to increase revenues while controlling costs to meet the combined working capital needs. If the Company is unable to generate sufficient cash flow from operations, it will need to raise additional debt or equity. There can be no assurance that management will be able to execute their plans or raise additional debt or equity funding. 20 Report of Independent Accountants To the Shareholders and Board of Directors Zitel Corporation We have audited the accompanying consolidated balance sheets of Zitel Corporation and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zitel Corporation and subsidiaries as of September 30, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. Net cash used in operating activities by the Company during fiscal year 1997 and through the nine months ended June 30, 1998 was $7,019,000 and $9,635,000, respectively. As discussed in the Subsequent Events Note, the Company is committed to acquire the remaining 68.7% of MatriDigm Corporation (MatriDigm) not currently owned. The Company has committed to fund the working capital needs of MatriDigm through the closing of the merger. Management is seeking to increase revenues while controlling costs to meet the combined working capital needs. If the Company is unable to generate sufficient cash flows from operations, it will need to raise additional debt or equity. There can be no assurance that management will be able to execute their plans or raise additional debt or equity funding. PricewaterhouseCoopers LLP San Jose, California October 28, 1997, except for the Subsequent Events Note for which the date is October 19, 1998 21 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ZITEL CORPORATION /s/ Jack H. King ------------------------------------ By: Jack H. King President and Director Chief Executive Officer October 21, 1998 22 Exhibit Number Description - ------- ----------- 23.1 Consent of Independent Accountants. EX-23.1 2 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Zitel Corporation on Form S-8 (File No.'s 33-92522 and 33-47697) and Form S-3 (File No. 33-359131) of our report, which includes an explanatory paragraph, for an emphasis of a matter, regarding the Company's operating activities and liquidity, dated October 28, 1997, except for the subsequent events note, for which the date is October 19, 1998, on our audit of the consolidated financial statements of Zitel Corporation as of September 30, 1997 and 1996 and for the years ended September 30, 1997, 1996 and 1995, which report is included in this Annual Report on Form 10-K/A. /s/ PricewaterhouseCoopers PricewaterhouseCoopers LLP San Jose, California October 20, 1998 -----END PRIVACY-ENHANCED MESSAGE-----