-----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, K/N+ejwW4GJiJtK4H7YKwQq0oCkAEFkwdLdBKEOXDeaQOE6PezxbI44uR2un9Xgd viHi6EEcl9V0l1UI8AJ4dA== 0001047469-98-019810.txt : 19980514 0001047469-98-019810.hdr.sgml : 19980514 ACCESSION NUMBER: 0001047469-98-019810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980513 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: SEC FILE NUMBER: 000-12194 FILM NUMBER: 98618529 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 March 31, 1998 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-12194 ZITEL CORPORATION (Exact name of Registrant as specified in its charter) California 94-2566313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 47211 Bayside Parkway 94538-6517 Fremont, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (510) 440-9600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock outstanding as of March 31, 1998 was 17,189,446. ZITEL CORPORATION AND SUBSIDIARIES INDEX
Page Number PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1998 (unaudited) and September 30, 1997 ..... 3 Condensed Consolidated Statements of Operations (unaudited) - Three and Six Months Ended March 31, 1998 and 1997 ........................ 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months Ended March 31, 1998 and 1997 ............................... 5 Notes to Condensed Consolidated Financial Statements .................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 12 PART II. Other Information Item 6. Exhibits and Reports on Form 8-K .................. 16
Page 2 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000's)
(UNAUDITED) March 31, September 30, 1998 1997 ASSETS Current assets: Cash and cash equivalents $ 4,415 $ 4,224 Short-term investments -- 9,596 Accounts receivable, net 5,052 6,547 Inventories 1,915 3,050 Deferred and refundable taxes 3,546 3,540 Other current assets 1,181 993 ------- ------- Total current assets 16,109 27,950 Fixed assets, net 3,259 3,700 Intangible assets, net 5,347 5,846 Other assets, net 13,560 11,798 ------- ------- Total assets $38,275 $49,294 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,797 $ 4,768 Accrued liabilities 4,218 4,419 ------- ------- Total current liabilities 7,015 9,187 Convertible subordinated debt 9,317 24,161 Shareholders' equity: Common stock 43,065 27,081 Accumulated deficit (21,122) (11,135) ------- ------- Total shareholders' equity 21,943 15,946 ------- ------- Total liabilities and shareholders' equity $38,275 $49,294 ------- ------- ------- -------
The accompanying notes are an integral part of these financial statements. Page 3 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (In thousands except per share data)
Three Months Ended Six Months Ended March 31, March 31, ------------------ ----------------- 1998 1997 1998 1997 ------- ------- ------- ------- Net sales $ 4,183 $ 1,576 $11,546 $ 4,842 Royalty revenue 210 1,196 792 3,514 ------- ------- ------- ------- Total revenue 4,393 2,772 12,338 8,356 Cost of goods sold 2,339 1,737 5,795 4,536 Research and development expenses 1,963 1,613 3,951 3,235 Selling, general & administrative expenses 5,182 3,007 11,860 5,498 ------- ------- ------- ------- Operating loss (5,091) (3,585) (9,268) (4,913) Other (income) expense 399 (594) 719 (1,035) ------- ------- ------- ------- Loss before income taxes (5,490) (2,991) (9,987) (3,878) Benefit from income taxes -- (1,077) -- (1,396) ------- ------- ------- ------- Net loss $(5,490) $(1,914) $(9,987) $(2,482) ------- ------- ------- ------- ------- ------- ------- ------- Basic and diluted loss per share $ (.33) $ (.13) $ (.62) $ (.16) ------- ------- ------- ------- ------- ------- ------- ------- Number of shares used in basic and diluted loss per share calculations 16,646 15,234 16,175 15,096 ------- ------- ------- ------- ------- ------- ------- -------
The accompanying notes are an integral part of these financial statements. Page 4 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's)
(UNAUDITED) Six Months Ended March 31, 1998 1997 -------- ------- Cash flows provided by (used in) operating activities: Net loss $(9,987) $(2,482) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Amortization of capitalized financing costs 482 -- Depreciation and amortization 1,530 556 Provision for doubtful accounts 102 99 Provision for inventory allowances 160 240 Gain on sale of trading securities 0 (777) Proceeds from sale of trading securities 0 3,159 Change in operating assets and liabilities: Decrease in accounts receivable 1,393 2,112 Decrease in inventories 975 439 Increase in deferred and refundable taxes (6) (1,395) Increase in other current assets (188) (259) Decrease in accounts payable (1,971) (732) Increase in accrued liabilities 268 63 -------- ------- Net cash provided by (used in) operating activities (7,242) 1,023 -------- ------- Cash flows provided by (used in) investing activities: Purchase of fixed assets (477) (811) Purchase of other assets (862) (875) Investment in unconsolidated company (1,495) (2,024) Maturities of investments 9,596 -- -------- ------- Net cash provided by (used in) investing activities 6,762 (3,710) -------- -------
Page 5 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's)
(UNAUDITED) Six Months Ended March 31, 1998 1997 -------- ------- Cash flows provided by financing activities: Issuance of common stock $ 671 $ 881 ------- ------- Net cash provided by financing activities 671 881 ------- ------- Net increase (decrease) in cash 191 (1,806) Cash and cash equivalents, beginning of year 4,224 9,216 ------- ------- Cash and cash equivalents, end of period $ 4,415 $ 7,410 -------- ------- -------- ------- Supplemental non-cash investing and financing activities: Conversion of subordinated debt and accrued interest $15,313 $ -- -------- ------- -------- -------
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 March 31, 1998 are not necessarily indicative of the results expected for the full year. The Company has sustained recurring losses related primarily to lower than anticipated revenues. Management believes that the Company will be able to meet its cash requirements for the quarter ending June 30, 1998 from cash on hand, other working capital, and cash flow from operations augmented by the recently obtained bank line of credit. The Company currently plans to raise additional capital to fund operations until cash flow from operating activities are positive. Management is actively engaged in evaluating alternative sources for capital and believes this effort will be successful. There can be no assurance, however, that the Company would be successful in raising the additional capital. 2. Recent Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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 fiscal year 1999, has not been determined. Page 7 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 fiscal year 1999 and the impact of adoption has not been determined. On October 27, 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition". SOP 97-2 establishes the standard for the appropriate recognition of software revenue, effective for the Company in fiscal year 1999. The effect of the new SOP 97-2 has yet to be determined. 3. Inventories:
March 31, September 30, 1998 1997 ------------ ------------- Raw materials $ 819 $ 953 Work in process 255 576 Finished goods 841 1,521 ------ ------ $1,915 $3,050 ------ ------ ------ ------
4. 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 the 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 impairment, if any, is measured based on projected discounted future operating cash flows and is recognized as a write down of the asset to net realizable value. As of March 31, 1998, intangible assets consist of the following: Page 8
March 31, September 30, 1998 1997 Goodwill $3,252 $3,242 Purchased technology 2,862 2,862 Less accumulated amortization (767) (258) ------ ------ $5,347 $5,846 ------ ------ ------ ------
5. Deferred Software Implementation Costs: The Company capitalizes substantially all costs related to the purchase of software and its implementation which includes purchased software, consulting fees and the use of certain specified Company resources, and are being amortized on a straight-line basis over the estimated life of the computer software, which is five years. As of March 31, 1998, $1.1 million in costs had been capitalized and are included in other long-term assets. Amortization in the amount of $113 thousand has been charged during the six-month period in fiscal 1998. Amortization of $111 thousand had been charged in fiscal year 1997. 6. Investment in Unconsolidated Company: During the quarter ended December 31, 1997, Zitel invested an additional $1.5 million in MatriDigm Corporation in exchange for a convertible promissory note. The note is convertible into 1,050 thousand shares of common stock. As of March 31, 1998, the Company's investment in MatriDigm Corporation amounted to $7.37 million, consisting of 10.6 million shares of preferred stock, 500 thousand shares of common stock and the convertible promissory note. 7. Line of Credit: In April 1998, the Company obtained a $1.5 million secured bank line of credit. The line of credit expires on June 30, 1998, with a three-month renewal through September 30, 1998, subject to compliance with specified terms. Advances bear interest at the bank's prime rate plus 1%. Under terms of the agreement, the borrowing base is 75% of eligible domestic and foreign insured accounts receivable. Payment of interest is on a monthly basis, with principal limited to the borrowing base and is due upon maturity. In addition, the Company is required to maintain certain specified financial ratios. 8. 5% Convertible Subordinated Debentures: The current quarter includes a charge to interest expense in Page 9 the amount of $482 thousand related to the amortization of the capitalized financing costs on the 5% convertible subordinated debentures. For the six months ended March 31, 1998, approximately $15.3 million was converted into 1.4 million shares of common stock at an average price of $10.936 per share. 9. Earnings Per Share (EPS): The Company has adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), effective December 31, 1997. SFAS 128 requires the presentation of basic and diluted earnings per share. Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the conversion of convertible subordinated debt (using the "if converted" method) and exercise of stock options and warrants for all periods. All prior period earnings per share amounts have been restated to comply with the SFAS 128. In accordance with the disclosure requirements of SFAS 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follow (in thousands, except per share amounts):
Three Months Ended Six Months Ended March 31, March 31, ------------------ ---------------- l998 1997 1998 1997 ------- ------- ------- ------- (unaudited) (unaudited) Numerator - Basic and Diluted EPS Net loss $(5,490) $(1,914) $(9,987) $(2,482) ------- ------- ------- ------- ------- ------- ------- ------- Denominator - Basic EPS Common stock outstanding 16,646 15,234 16,175 15,096 Common equivalent stock -- -- -- -- ------- ------- ------- ------- 16,646 15,234 16,175 15,096 ------- ------- ------- ------- Basic loss per share $ (.33) $ (.13) $ (.62) $ (.16) ------- ------- ------- ------- ------- ------- ------- ------- Page 10 Denominator - Diluted EPS Denominator - Basic EPS 16,646 15,234 16,175 15,096 Effect of Dilutive Securities: Common stock options -- -- -- -- Convertible preferred stock -- -- -- -- ------- ------- ------- ------- 16,646 15,234 16,175 15,096 ------- ------- ------- ------- Diluted loss per share $ (.33) $ (.13) $ (.62) $ (.16) ------- ------- ------- ------- ------- ------- ------- -------
For the quarter and six-month period ended March 31, 1998, options to purchase 738 thousand and 744 thousand shares, respectively, 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. For the quarter and six-month period ended March 31, 1997, options to purchase 1,404 thousand and 1,422 thousand shares, respectively, 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. In addition, had the subordinated debt been converted, it would have resulted in approximately 679 thousand and 1,659 thousand shares for the three and six months ended March 31, 1998, respectively. These shares were not included in the computation due to their anti-dilutive effect. Page 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Result of Operations The Company recorded a net loss of $5,490,000 ($0.33 per share) for the quarter ended March 31, 1998 compared with a net loss of $1,914,000 ($0.13 per share) for the same quarter of the prior year. Included in the quarter results of the previous year was a tax benefit of $1,077,000 (36% of income before income taxes) resulting from the recognition of deferred tax assets in accordance with SFAS No, 109, "Accounting for Income Taxes". Weighted average shares outstanding for the current quarter were 16,646,000 compared to 15,234,000 for the same quarter of the prior year. For the six months ended March 31, 1998, the net loss was $9,987,000 ($0.62 per share) compared with a net loss of $2,482,000 ($0.16 per share) for the same period a year earlier. Included in the prior year results was a tax benefit of $1,396,000. Year-to-date weighted average shares were 16,175,000 versus 15,096,000 in the prior year. Total revenue for the current quarter was $4,393,000 versus total revenue of $2,772,000 for the same quarter of the prior year, an increase of $1,621,000. The increase in revenue is directly attributable to an increase in net sales, partially offset by a decrease in royalty revenue. Net sales for the current quarter were $4,183,000 versus $1,576,000 for the same quarter of the prior year, an increase of $2,607,000. The increase in net sales is directly attributable to the net sales generated by the software companies acquired June 30, 1997. The Company's solution services business unit has not yet generated revenue. Royalty revenue for the quarter just ended was $210,000 compared with $1,196,000 for the same quarter of the prior year. For the six months ended March 31, 1998, total revenue was $12,338,000 versus total revenue of $8,356,000 for the same period of the prior year, an increase of $3,982,000. The increase in revenue is directly attributable to an increase in net sales, partially offset by a decrease in royalty revenue. For the six months just ended, net sales were $11,546,000 versus $4,842,000 for the same period of the prior year, an increase of $6,704,000. The increase in net sales is directly attributable to the net sales generated by the acquired software companies. Royalty revenue for the six-month period was $792,000 compared Page 12 with $3,514,000 for the same period of the prior year. In April 1998, the Company concluded negotiations for receipt of an additional $740,000 covering remaining royalty obligations from the third party utilizing the Company's technology. Gross margin as a percent of net sales was 44% for the quarter ended March 31,1998 compared to a negative 10% for the same quarter of the prior year. For the six-month period ended March 31, 1998, gross margin was 50% versus 6% for the same period of the prior year. The improvement in the gross margin percentage during the current quarter and six-month period is primarily attributable to product mix as a result of net sales generated by the software business unit. In addition, the gross margin of the storage products, as a percent of net sales, also improved during the current quarter and six-month period, as a result of lower material costs and a reduction in other cost of sales which do not vary directly with sales volume. Future gross margins may be affected by several factors including the mix of products sold, the price of products sold, price competition, increases in material costs and changes in other cost of sales which do not vary directly with sales volume. In April 1998, the Company announced the intention to divest the storage business unit. A leading investment banker has been engaged to advise and assist the Company with respect to the execution of the divestiture. The Company is evaluating a number of alternative actions; however, there is no assurance that the divestiture can be completed without incurring significant costs. Research and development expenses for the quarter ended March 31, 1998, were 45% of total revenue compared with 58% for the same quarter of the prior year. Actual spending increased $350,000. For the six-month period just ended, research and development expenses were 32% of total revenue compared with 39% for the same period of the prior year. Actual spending increased $716,000. The increase in spending during both periods is primarily attributable to the added research and development by the acquired software companies ($642,000 and $1,255,000 for the current quarter and six-month period, respectively), partially offset by a reduction in research and development and a reduction in engineering personnel of the storage business unit ($292,000 and $539,000 for the current quarter and six-month period just ended, respectively). Selling, general and administrative (SG&A) expenses were 118% of total revenue for the current quarter versus 108% for the same Page 13 quarter of the prior year. Actual spending increased $2,175,000. The increase in spending is primarily attributable to the added SG&A expenses of the acquired software companies of approximately $1,952,000. For the six-month period just ended, SG&A expenses were 96% of total revenue compared with 66% for the same period a year earlier. Actual spending increased $6,362,000. The increase in spending is primarily attributable to the added SG&A expenses of the acquired software companies of approximately $4,476,000, an increase in SG&A of the solution services business unit of approximately $769,000, an increase in salaries and related costs as a result of an increase in SG&A personnel of approximately $200,000, an increase in professional services of approximately $370,000, and an increase in depreciation and amortization of approximately $250,000. Other expense was $399,000 for the quarter just ended versus other income of $594,000 in the same quarter of the prior year. For the current quarter, other expense included $482,000 interest expense related to the convertible subordinated debt, partially offset by interest income of $126,000. For the comparable quarter of the prior year, other income included $479,000 in realized gains from the sale of marketable securities and interest income of $126,000. Liquidity and Capital Resources During the six-month period ended March 31, 1998, working capital decreased $9,669,000 and cash flow utilized by operating activities was $7,242,000. The utilization of cash in operating activities resulted primarily from the net loss of $9,987,000 and a decrease in accounts payable of $1,971,000. This was partially offset by a decrease in gross accounts receivable of $1,393,000, a decrease in gross inventory of $975,000, an increase in accrued liabilities of $268,000, and depreciation and amortization of $2,012,000. During the current year, net cash provided by investing activities was $6,762,000; $9,596,000 generated from the maturity of a short-term investment. The Company invested an additional $1,495,000 in an unconsolidated company, purchased other assets in the amount of $862,000 and capital equipment in the amount of $477,000. Net cash provided by financing activities was $671,000 from the exercise of employee stock options and from the purchase of stock under the Company's employee stock purchase plan. Page 14 In April 1998, the Company concluded negotiations for receipt of an additional $740,000 covering remaining royalty obligations from the third party utilizing the Company's technology. Additionally, the Company executed a $1.5 million secured bank line of credit. Management believes that the Company will be able to meet its cash requirements for the quarter ending June 30, 1998 from cash on hand, other working capital, and cash flow from operations augmented by the recently obtained bank line of credit. The Company currently plans to raise additional capital to fund operations until cash flow from operating activities are positive. Management is actively engaged in evaluating alternative sources for capital and believes this effort will be successful. There can be no assurance, however, that the Company would be successful in raising the additional capital. Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". In October 1997, the AICPA issued SOP 97-2, "Software Revenue Recognition". Readers are referred to the "Recent Accounting Pronouncements" section of the Notes to the Condensed Consolidated Financial Statements for further discussion. - -------------------------------------------------- - -------------------------------------------------- This report contains forward-looking statements which are subject to uncertainties, including those contained in the Company's annual report on Form 10-K for the fiscal year ended September 30, 1997. - ------------------------------------------------------------- Zitel is a registered trademark of Zitel Corporation. All other product names and brand names are trademarks or registered trademarks of their respective holders. Page 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 27 - Financial Data Schedule (b) Reports No reports on Form 8-K were filed during the quarter for which this report is filed. Page 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 Date: May 13, 1998 Larry B. Schlenoff Larry B. Schlenoff Vice President, Finance & Administration (Chief Financial Officer and Secretary) Page 17 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 OTHER SEP-30-1998 JAN-01-1998 MAR-31-1998 4,415 0 5,052 175 1,915 16,109 13,863 10,604 38,275 7,015 0 0 0 43,065 (21,122) 38,275 4,183 4,393 2,339 7,145 (114) 0 513 (5,490) 0 (5,490) 0 0 0 (5,490) (0.33) (0.33)
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