-----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, A5u3YjFHVzfBbBicTtd9nBoat04sTWp2eEa9kbx1VxXLpcneAiLdb5XadycfCZXz i59+qEIDJgIn5ahudnnGuQ== 0001047469-99-019035.txt : 19990511 0001047469-99-019035.hdr.sgml : 19990511 ACCESSION NUMBER: 0001047469-99-019035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990510 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: 99615570 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, 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, 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 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, 1999 was 21,911,553. ZITEL CORPORATION AND SUBSIDIARIES INDEX
Page Number PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets March 31, 1999 (unaudited) and September 30, 1998 ..... 3 Condensed Consolidated Statements of Operations (unaudited) - Three and Six Months Ended March 31, 1999 and 1998 ........................ 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Six Months Ended March 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 .................................. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk ................................. 19 PART II. Other Information Item 1. Legal Proceedings ................................. 20 Item 2. Changes in Securities ............................. 20 Item 3. Defaults Upon Senior Securities ................... 20 Item 4. Submission of Matters to a Vote of Security Holders .................................. 20 Item 5. Other Information ................................. 21 Item 6. Exhibits and Reports on Form 8-K .................. 31
Page 2 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000's)
March 31, September 30, 1999 1998 (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 6,254 $ 6,589 Accounts receivable, net 4,202 3,579 Refundable taxes 213 208 Other current assets 1,528 749 ------- ------- Total current assets 12,197 11,125 Fixed assets, net 1,027 1,311 Other assets, net 5,352 5,634 ------- ------- Total assets $18,576 $18,070 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,299 $ 3,585 Accrued liabilities 1,449 1,527 Deferred revenue 2,835 2,139 ------- ------- Total current liabilities 6,583 7,251 Convertible subordinated debenture 4,892 4,585 ------- ------- Total liabilities 11,475 11,836 Shareholders' equity: Common stock 66,280 60,574 Accumulated deficit (59,179) (54,340) ------- ------- Total shareholders' equity 7,101 6,234 ------- ------- Total liabilities and shareholders' equity $18,576 $18,070 ======= =======
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, ------------------ ----------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net sales $ 4,239 $ 4,183 $10,139 $11,546 Royalty revenue - 210 - 792 ------- ------- ------- ------- Total revenue 4,239 4,393 10,139 12,338 Cost and expenses: Cost of goods sold 1,451 2,339 3,673 5,795 Research and development expenses 653 1,963 1,268 3,951 Selling, general & administrative expenses 3,663 5,182 7,550 11,860 Loss from unconsolidated company - - 1,512 - ------- ------- ------- ------- Operating loss (1,528) (5,091) (3,864) (9,268) Other expense 535 399 975 719 ------- ------- ------- ------- Net loss $(2,063) $(5,490) $ (4,839) $(9,987) ======= ======= ======= ======= Basic and diluted net loss per share $ (.09) $ (.33) $ (.22) $ (.62) ======= ======= ======= ======= Shares used in basic and diluted per share calculation 21,908 16,646 21,643 16,175 ======= ======= ======= =======
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, 1999 1998 -------- -------- Cash flows provided by (used in) operating activities: Net loss $(4,839) $(9,987) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Loss from unconsolidated company 1,512 - Discount on subordinated debenture 555 - Interest accrued on convertible subordinated debenture 347 - Amortization of capitalized financing costs 308 482 Depreciation and amortization 1,040 1,530 Provision for doubtful accounts (33) 102 Provision for inventory allowances - 160 Change in operating assets and liabilities: Increase (decrease) in accounts receivable (590) 1,393 Refundable income taxes (5) (6) Decrease in inventories - 975 Increase in other current assets (779) (188) Decrease in accounts payable (1,286) (1,971) Decrease in accrued liabilities (78) (721) Deferred revenue 696 989 ------- ------- Net cash used in operating activities (3,152) (7,242) ------- ------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets (109) (477) Investment in unconsolidated company (1,512) (1,495) Proceeds from sale of short-term investments - 9,596 Capitalized software development costs (219) (233) Purchased technology (250) - Decrease in (purchase of) other assets 15 (629) ------- ------- Net cash provided by (used in) investing activities (2,075) 6,762 ------- -------
Page 5 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's)
(UNAUDITED) Six Months Ended March 31, 1999 1998 -------- ------- Cash flows provided by financing activities: Issuance of common stock $ 110 $ 671 Issuance of subordinated debentures 4,782 - ------- ------- Net cash provided by financing activities 4,892 671 ------- ------- Net increase (decrease) in cash (335) 191 Cash and cash equivalents, beginning of year 6,589 4,224 ------- ------- Cash and cash equivalents, end of period $ 6,254 $ 4,415 ======= ======= Supplemental non-cash investing and financing activities: Capitalized financing costs $ 218 $ - ======= ======= Common stock purchase warrants $ 128 $ - ======= ======= Conversion of subordinated debentures and accrued interest $ 4,912 $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, 1999 are not necessarily indicative of the results expected for the full year. 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 Company adopted SFAS No. 130 at the beginning of fiscal year 1999. There was no difference between the Company's net loss and its total comprehensive loss for the three and six months ended March 31, 1999 and 1998. 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 Page 7 financial statements would be provided. The Company is evaluating the impact SFAS No. 131 will have on its disclosure requirements for the fiscal year 1999 annual financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for the Company in fiscal year 2000 and will not require retroactive restatement of prior period financial statements. The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements, but the Company believes there will not be a significant impact. 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, as amended by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2", effective January 1, 1998, establishes the standard for the appropriate recognition of software revenue. The Company has adopted SOP 97-2, as amended, effective October 1, 1998 and it has been determined that there was no material impact to the adoption. In December 1998, The Accounting Standards Executive Committee (AcSEC) released 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 means of the "residual method" when (1) there is vendor-specific objective evidence (VSOE) of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. Page 8 The provisions of SOP 98-9 that extend the deferral of certain passages of SOP 97-2 became effective December 15, 1998. All other provisions of SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. The Company is evaluating the requirements of SOP 98-9 and the effects, if any, on the Company's current revenue recognition policies. AICPA SOP 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use", issued on March 4,1998, is effective for the Company in fiscal year 1999. There has not been a significant impact upon adoption. 3. Other Assets: Other assets consist of the following:
March 31, September 30, 1999 1998 ------------ ------------- Goodwill $2,754 $2,768 Purchased technology 2,588 2,588 Other assets 2,269 1,890 Less accumulated amortization (2,259) (1,612) ------ ------ $5,352 $5,634 ====== ======
4. Investment in Unconsolidated Company: The following is a summary of financial information with respect to MatriDigm for the three and six months ended March 31, 1999 and 1998, respectively:
Three months ended Six months ended March 31, March 31, 1999 1998 1999 1998 ------ ------ ------ ------ Net sales $ 762 $ 987 $1,607 $1,890 Gross profit 351 13 567 261 Loss before one-time merger costs 1,802 3,795 4,562 7,425 Net loss 1,802 3,795 5,262 7,425
5. 3% Convertible Subordinated Debentures dated June 16, 1998: For the six months ended March 31, 1999, approximately $4.9 million was converted into 1.25 million shares of common stock at an average price of $3.92625 per share. As of November 1998, the debentures had been fully converted. Page 9 6. 3% Convertible Subordinated Debentures dated February 3, 1999: On February 3, 1999, the Company issued $5 million principal amount of 3% Convertible Subordinated Debentures (the "Debentures") which automatically converts on February 1, 2000, and five-year common stock purchase warrants to acquire 75,000 shares of the Company's common stock. 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 $2.25. The current quarter includes a charge to interest expense in the amount of $78 thousand and $555 thousand, respectively, related to the amortization of the debt issuance costs on the 3% convertible subordinated debentures and the expense of the discount. As of March 31, 1999, there have been no conversions of the debentures. 7. Common Stock: Common stock activity for the period from September 30, 1998 through March 31, 1999 is as follows:
Common Stock Common Stock Shares Amount ------------ ------------ Balance at September 30, 1998 20,601 $60,574 Conversion of subordinated debentures 1,251 4,912 Exercise of stock options 60 110 Common stock warrants and discount on subordinated debentures - 684 ------ ------- Balance at March 31, 1999 21,912 $66,280 ====== =======
8. Income Taxes: The benefit for income taxes was fully offset by a valuation allowance due to the uncertainty surrounding the realization of the favorable tax attributes. 9. Earnings Per Share (EPS): The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share", effective December 31, 1997. SFAS No. 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 Page 10 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 No. 128. In accordance with the disclosure requirements of SFAS No. 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, ------------------ ---------------- l999 1998 1999 1998 ------- ------- ------- ------- (unaudited) (unaudited) Numerator - Basic and Diluted EPS Net loss $(2,063) $(5,490) $(4,839) $(9,987) ======= ======= ======= ======= Denominator - Basic EPS Common stock outstanding 21,908 16,646 21,643 16,175 Common equivalent stock - - - - ------- ------- ------- ------- 21,908 16,646 21,643 16,175 ------- ------- ------- ------- Basic loss per share $ (.09) $ (.33) $ (.22) $ (.62) ======= ======= ======= ======= Denominator - Diluted EPS Denominator - Basic EPS 21,908 16,646 21,643 16,175 Effect of Dilutive Securities: Common stock options - - - - Convertible preferred stock - - - - ------- ------- ------- ------- 21,908 16,646 21,643 16,175 ------- ------- ------- ------- Diluted loss per share $ (.09) $ (.33) $ (.22) $ (.62) ======= ======= ======= =======
For the quarter and six-month period ended March 31, 1999, options to purchase 92 thousand and 108 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, 1998, options to purchase 738 thousand and Page 11 744 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. In addition, had the subordinated debt been converted, it would have resulted in approximately 2,222 thousand for the three and six months ended March 31, 1999. These shares were not included in the computation due to their anti-dilutive effect. Page 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Result of Operations The Company recorded a net loss of $2,063,000 ($0.09 per share) for the quarter ended March 31, 1999 compared with a net loss of $5,490,000 ($0.33 per share) for the same quarter of the prior year. Included in the current quarter are costs related to the convertible subordinated debentures of $633,000. Weighted average shares outstanding for the current quarter were 21,908,000 compared to 16,646,000 for the same quarter of the prior year. For the six months ended March 31, 1999, the net loss was $4,839,000 ($0.22 per share) compared with a net loss of $9,987,000 ($0.62 per share) for the same period a year earlier. Year-to-date weighted average shares were 21,643,000 versus 16,175,000 in the prior year. Total revenue for the current quarter was $4,239,000 versus total revenue of $4,393,000 for the same quarter of the prior year, a decrease of $154,000. The prior year included revenue of $1,608,000 related to the storage business unit, which was disposed of in the third quarter of fiscal year 1998, and royalties in the amount of $210,000, which terminated in April 1998. Revenue from the Datametrics business unit was $3,951,000 in the current quarter, an increase of 54% from the same quarter of the prior year. For the six months ended March 31, 1999, total revenue was $10,139,000 versus total revenue of $12,338,000 for the same period of the prior year, a decrease of $2,199,000. Included in the prior year was revenue and royalties related to the storage business unit of $4,795,000 and $792,000, respectively. Revenue from the Datametrics business unit was $9,372,000 for the six months just ended, an increase of 39% from the same period in the prior year. Gross margin as a percent of net sales was 66% for the quarter ended March 31,1999 compared to 44% for the same quarter of the prior year. For the six-month period ended March 31, 1999, gross margin was 64% versus 50% 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. Future gross margins may be affected by several factors including the mix of products sold, the price of products sold, and price competition. Page 13 Research and development expenses for the quarter ended March 31, 1999, were 15% of total revenue compared with 45% for the same quarter of the prior year. Actual spending decreased $1,310,000. For the six-month period just ended, research and development expenses were 13% of total revenue compared with 32% for the same period of the prior year. Actual spending decreased $2,683,000. The decrease in spending during both periods is the result of the sale of the storage business unit in July 1998. Selling, general and administrative (SG&A) expenses were 86% of total revenue for the current quarter versus 118% for the same quarter of the prior year. Actual spending decreased $1,519,000. For the six-month period just ended, SG&A expenses were 74% of total revenue compared with 96% for the same period a year earlier. Actual spending decreased $4,310,000. The decrease in spending in both periods is the result of the sale of the storage business unit in the prior year. During the six months ended March 31, 1999, the Company charged $1,512,000 to expense as a loss from unconsolidated company. Because of the uncertainties in MatriDigm's future and its ability to generate sufficient operating cash flows, the Company reserved 100% of the funds advanced to MatriDigm during the six-month period. Other expense was $535,000 for the quarter just ended versus $399,000 in the same quarter of the prior year. For the current quarter, other expense included $633,000 expense related to the 3% convertible subordinated debentures, partially offset by interest income of $155,000. For the comparable quarter of the prior year, other expense included interest related to the 5% convertible subordinated debentures of $482,000, which was partially offset by interest income of $126,000. Liquidity and Capital Resources During the six-month period ended March 31, 1999, working capital increased $1,740,000 and cash flow utilized by operating activities was $3,152,000. The utilization of cash in operating activities resulted primarily from the net loss of $4,839,000, an increase in accounts receivable of $590,000, an increase in other current assets of $779,000, and a decrease in accounts payable of $1,286,000. This was partially offset by the loss from unconsolidated company of $1,512,000, depreciation and amortization of $1,040,000, an increase in deferred revenue of $696,000, and the discount on subordinated debentures of $555,000. Page 14 During the current year, net cash utilized by investing activities was $2,075,000. The Company invested an additional $1,512,000 in an unconsolidated company, purchased technology in the amount of $250,000 and capitalized software development costs in the amount of $219,000. Net cash provided by financing activities was $4,892,000, which included $4,782,000 (net) from the issuance of convertible subordinated debentures and $110,000 from the exercise of employee stock options. Management believes that the Company will be able to meet its cash requirement needs for the next twelve months from cash on hand, other working capital, and cash flow from operations. 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 Company adopted SFAS No. 130 at the beginning of fiscal year 1999. There was no difference between the Company's net loss and its total comprehensive loss for the three and six months ended March 31, 1999 and 1998. 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. The Company is evaluating the impact SFAS No. 131 will have on its disclosure requirements for the fiscal year 1999 annual financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards requiring that Page 15 every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for the Company in fiscal year 2000 and will not require retroactive restatement of prior period financial statements. The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements, but the Company believes there will not be a significant impact. 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, as amended by SOP 98-4, "Deferral of the Effective Date of Certain Provisions of SOP 97-2", effective January 1, 1998, establishes the standard for the appropriate recognition of software revenue. The Company has adopted SOP 97-2, as amended, effective October 1, 1998 and it has been determined that there was no material impact to the adoption. In December 1998, The Accounting Standards Executive Committee (AcSEC) released 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 means of the "residual method" when (1) there is vendor-specific objective evidence (VSOE) of the fair values of all the undelivered elements that are not accounted for by means of long-term contract accounting, (2) VSOE of fair value does not exist for one or more of the delivered elements, and (3) all revenue recognition criteria of SOP 97-2 (other than the requirement for VSOE of the fair value of each delivered element) are satisfied. The provisions of SOP 98-9 that extend the referral of certain passages of SOP 97-2 became effective December 15, 1998. All other provisions of SOP 98-9 will be effective for transactions that are entered into in fiscal years beginning after March 15, 1999. Retroactive application is prohibited. The Company is evaluating the requirements of SOP 98-9 and the effects, if any, on the Company's current revenue recognition policies. Page 16 AICPA SOP 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use", issued on March 4,1998, is effective for the Company in fiscal year 1999. There has not been a significant impact upon adoption. Impact of the Year 2000 Issue The costs of the planned Year 2000 modifications and the dates by which the Company expects to complete its plans are based on Management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors. Specific factors that might cause differences between the estimates and actual results include, but are not limited to, the availability and cost of personnel trained in these areas, the ability to locate and correct all relevant computer codes, changes in consulting fees and costs to remediate or replace hardware and software as well as non-incremental costs resulting from redeployment of internal resources, timely responses to and corrections by third parties such as significant customers and suppliers, and similar uncertainties. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The issue arises if date-sensitive software recognizes a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's information technology systems consist primarily of hardware and software purchased from outside parties. The vendor for the Company's enterprise-wide software has informed the Company that the version of its software that the Company is currently utilizing is Year 2000 compliant and the Company is currently testing to ensure that this is the case. This testing phase is expected to be complete by mid-1999. The Company is in the process of addressing the Year 2000 compliance of other software and hardware. The Company is utilizing a seven step process in addressing compliance of these other systems: (1) awareness; (2) inventory of all systems and documentation; (3) assessment to identify any areas of noncompliance; (4) remediation/renovation of any noncompliant systems; (5) verification of compliance through testing and/or vendor certification; (6) implementation of any necessary changes Page 17 revealed during verifications; and (7) monitoring of the results of implementation. The Company is in the process of identifying areas of non-compliance. The Company expects to have completed the entire process for its non-enterprise software and hardware by the end of third quarter 1999. The Company has begun the process of identifying and making inquiries of its significant suppliers and large public and private sector customers to determine the extent to which the Company is vulnerable to those third parties' failure to solve their own Year 2000 issues. The Company expects that the process of making inquiries to these significant suppliers and customers will be ongoing through the end of 1999. However, there can be no guarantee that the systems of other companies or public agencies with which the Company does business will be timely converted, or that failure to convert by another company or public agency would not have a material adverse effect on the Company. The Company's most likely worst case Year 2000 scenario would be an interruption in work or cash flow resulting from unanticipated problems encountered with the information systems of the Company, or of any of the significant third parties with whom the company does business. The Company believes that the risk of significant business interruption due to unanticipated problems with its own systems is low based on the progress of the Year 2000 project to date. If unforeseen internal disruptions occur, the Company believes that its existing disaster recovery program, which includes the manual processing of certain key transactions, would significantly mitigate the impact. The Company's highest risk relates to significant suppliers or customers failing to remediate their Year 2000 issues in a timely manner. Relating to its suppliers, the Company has identified and will continue to identify alternative suppliers. The Company's suppliers are generally locally or regionally based, which tends to lessen the Company's exposure from the lack of readiness of any single supplier. The risk relating to the Company's customers relates primarily to any delay in receipt of payment due to a customer's unresolved Year 2000 issue. The Company's existing financial resources will help to mitigate such an impact and the Company will continue to assess this risk as it receives communications about the Year 2000 status of its customers. The Company estimates that costs to address the Year 2000 issue will total approximately $275,000, including costs already incurred. These estimated costs include consulting fees and costs to remediate or replace hardware and software as well as Page 18 non-incremental costs resulting from redeployment of internal resources. To date, an insignificant amount has been incurred and expensed related to the Year 2000 issue. The Company's Year 2000 costs will be funded from its operating cash flows. 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 March 31, 1999. A review of the Company's other financial instruments and risk exposures at that date revealed that the Company had exposure to interest rate risk. At March 31, 1999, the Company performed sensitivity analyses to assess the potential effect of this risk and concluded that near-term changes in interest rates should not materially adversely affect the Company's financial position, results of operations or cash flow. ============================================================= 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. All other product names and brand names are trademarks or registered trademarks of their respective holders. Page 19 PART II. OTHER INFORMATION Item 1. Legal Proceedings On December 14, 1998, the Company commenced a suit against VLSI Technology, Inc. in the Superior Court of the State of California in and for the County of Santa Clara. The complaint alleges that the defendant promised to design and develop certain application specific integrated circuits (ASICs) critical to the Company's planned third-generation data storage system product (CASD-III), that VLSI failed to design or develop the promised ASICs, and that the Company was forced to abandon the CASD-III project and dispose of its Intelligent Storage Systems business unit. The suit seeks damages with respect to CASD-III development costs and loss of profits. Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders of the Company was held on March 11, 1999. A total of 19,390,869 shares of the Company's Common Stock out of a total 21,907,553 shares outstanding on the record date for the meeting were represented and voted in person or by proxy. The Company has a six-person Board of Directors. At the annual meeting, all six directors were nominated and re-elected to the Board of Directors by a vote of at least 18,333,595 shares in favor and at least 555,774 shares withholding authority to vote. The shareholders approved the adoption of an amendment to the 1990 Stock Option Plan, as amended, to provide that the number of shares of Common Stock reserved for issuance under such Plan be increased by 500,000 shares, from 6,200,000 shares (including shares reserved or granted under the Company's prior Option Plans) to 6,700,000 shares. The motion was carried by a vote of 17,996,907 shares voting for, 1,210,135 dissenting votes and 183,827 abstaining votes. The shareholders approved the adoption of an amendment to the Page 20 1995 Non-Employee Directors' Stock Option Plan, as amended, to provide that the number of shares of Common Stock reserved for issuance under such Plan be increased by 200,000 shares, from 200,000 shares (including shares reserved or granted under the Company's prior Option Plans) to 400,000 shares. The motion was carried by a vote of 17,919,562 shares voting for, 1,283,075 dissenting votes and 188,232 abstaining votes. Item 5. Other Information Risk Factors Recent Levels of Net Sales Have Been Insufficient In recent years, Zitel has not generated net sales sufficient to produce an operating profit and has relied on a stream of royalty payments under an agreement with IBM Corporation and significant financings to support its activities. In April 1998, Zitel and IBM entered into an agreement whereby IBM stopped paying royalties to the Company in exchange for a lump sum payment amounting to $740,000. Zitel sustained substantial operating losses and net losses in fiscal 1997 and 1998 and in the first half of fiscal 1999. Zitel 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 half of fiscal year 1999, the Company reported a net loss of $4,839,000. During the Company's 1998 fiscal year, the Company has reported a total net loss of $43,205,000. The Company reported a total net loss of $17,501,000 in fiscal 1997 and total net income of $4,049,000 in fiscal 1996. While the Company has taken a number of steps to attempt to return to profitability, there is no assurance that it will be successful. A significant portion of the recent losses were caused by the operations of the Company's former storage systems business unit; in July 1998, the Company sold that business unit. The Company is in the process of attempting to sublease its Fremont, California, headquarters and move to substantially smaller and less costly premises. The Company is taking other actions to reduce its costs in an effort to bring costs into line with anticipated revenues. There Page 21 can be no assurance that the Company will be successful in this effort and remain a viable operating entity. Nasdaq Listing Criteria The Company's common stock is quoted on the Nasdaq National Market, which requires the Company to meet the National Market maintenance criteria. If the Company fails to meet the criteria and is not able to raise sufficient equity or otherwise take action to meet such requirements, the Company may be delisted from the National Market and the quotation of the Company's stock could be included on the Nasdaq SmallCap Market or in the non-Nasdaq over-the-counter market. As a result of any such delisting, an investor may find it more difficult to trade in shares of the Company's Common Stock. Change of Nature of Business From its organization in 1979 until the acquisition of the Datametrics businesses in June 1997, substantially all of the Company's net sales were generated from the design, manufacture and sale of electronic data storage systems. In June 1997, the Company acquired the business of Datametrics Systems Corporation and certain related businesses which were engaged in the development, marketing and sales of software products. In fiscal 1997, the Company commenced offering Year 2000 conversion services; the first remediation revenue from the Year 2000 business unit was recorded in the third quarter of 1998. With the sale of the Company's storage business unit, substantially all of its operations are in businesses in which it has limited experience. Accordingly, the Company must quickly develop increased management skills necessary to survive and realize net income in these new businesses. There is no assurance that it will be successful in developing these skills or realizing net income in the future. 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; Page 22 - 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. Investment in MatriDigm Corporation At September 30, 1998, the Company had invested approximately $7,400,000 to acquire approximately 31% interest in MatriDigm, a private company organized to provide COBOL software maintenance and re-engineering services for users of IBM mainframe computer systems. In addition, the Company has demand notes in the amount of $2,000,000 and has guaranteed a bank guarantee of $1,000,000. At September 30, 1998, the Company has written off its investment and fully reserved the demand notes and the bank guarantee. In the quarter ended December 31, 1998, the Company advanced an additional $1,500,000 and has fully reserved the additional advance. In October 1998, the Company entered into an agreement to acquire the balance of MatriDigm, which agreement has since been terminated. The Company paid $250,000 on January 21, 1999 for a non-exclusive, royalty-bearing license for the MatriDigm technology. The Company has continued to explore possible Page 23 transactions to acquire the balance of MatriDigm but there is no assurance that such a transaction will be consummated. The initial focus of MatriDigm has been development of technology to automate the conversion of legacy software code which could not recognize or utilize dates after the year 1999 (the "Year 2000 Problem") into code which is able to recognize and utilize dates into the next century. MatriDigm has devoted substantially all of its engineering resources to development of such technology. In May 1997, MatriDigm announced the commercial availability of its MAP2000 windowing process for programs written in ANSI COBOL 85. MatriDigm has subsequently extended the capability of MAP2000 to cover COBOL ANSI 68 and 74, with support for CICS and IMS/DC transactions and VSAM, IMS/DB SQL and DB2 databases and file systems. MatriDigm's MARC2000, introduced June 1998, is a tool which provides independent verification and validation (IV&V) to confirm the accuracy and completeness of COBOL Year 2000 code conversions. It provides extensive reports identifying faulty and potentially faulty code and helps the customer to record the activities needed to demonstrate due diligence in auditing COBOL Year 2000 renovation projects. MatriDigm intends to continue to refine its current toolset and to extend its toolset. Substantially all software programs written assume that the first two digits of any date are "19" and cannot recognize or utilize dates commencing with the year 2000. Estimates of the cost and available market for conversion of existing code to eliminate this problem are substantial and vary widely. The alternative solutions available to a company with a Year 2000 Problem include migration to new programs, elimination of code with a Year 2000 Problem, use of internal resources to convert existing code, or procurement of conversion services from outside providers such as the Company and MatriDigm. A large number of companies, many of which have substantially greater resources than MatriDigm, are offering conversion services or are developing systems to provide such services, and competition is intense among the providers of such services. However, the demand for Year 2000 conversion services has emerged at a slower pace than originally anticipated and there is no assurance that it can successfully market its automated toolset, develop extensions for other computer languages or generate substantial revenue and profits. MatriDigm's customers have begun to recognize the value of their product and services and request that they have continued use of the products and services. These quality assurance, management change control and Page 24 audit trail capabilities are the basis for MatriDigm's markets following the year 2000. While larger and more sophisticated users are requesting this capability now, there is no assurance that a significant enough volume of business will emerge in the future to sustain the company. During the course of development, the Company has made additional investments in MatriDigm and continues to make additional investments. To the extent other investors are unable or unwilling to continue to make investments in MatriDigm, the Company may be required to make a disproportionate share of such investments. These investments could have a material adverse effect on the Company's business results of operations and financial condition. Zitel Stock Price Has Been Volatile The price of Zitel's Common Stock has been subject to extreme volatility during fiscal 1997 and 1998, as the closing bid price has ranged between a low of 10 7/8 and a high of 61 1/4 and a low of 2 7/32 and a high of 23 5/8, respectively. In the first half of fiscal 1999, such price ranged between a low of 2 1/16 and a high of 6 29/64. Zitel believes that one of the reasons for this volatility is rumored progress of and rumored problems in the product development program and marketing efforts of MatriDigm. 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 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. The market for Year 2000 conversion services is highly competitive, with services being provided by a number of international, national, regional and local firms, many of which have existing relationships and contractual arrangements with customers. Many of these competitors have substantially greater financial, technical and marketing resources than the Company. The ability of the Company to compete in the IBM COBOL segment of this market will depend primarily on the ability of MatriDigm to Page 25 achieve market acceptance of its automated solution and as yet there can be no assurance that MatriDigm will be successful in this effort. In addition, the Company must achieve general credibility as a provider of Year 2000 conversion services by generating substantial net sales. 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. The extent to which the solution services business unit must Page 26 provide warranty protection to its customers in order to be competitive remains uncertain. To the extent that future warranty obligations shift risks to the Company that are in excess of the warranty protection provided to the Company by MatriDigm and other toolset providers, a successful 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 Company to redesign its products or require the Company to enter into royalty or Page 27 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. The Company's solution services business unit relies primarily on proprietary technology developed and owned by MatriDigm and the prospects for the business unit are dependent on the ability of MatriDigm to maintain and expand a toolset which provides a relative advantage over competing Year 2000 conversion service providers for IBM COBOL. In the event that the MatriDigm toolset does not achieve significant market acceptance, the business of the solution services business unit would be materially and adversely affected. 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 and The Netherlands, 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 or in The Netherlands. Page 28 Dependence on Key Personnel The Company's future performance depends in significant part 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 also depends on its continuing ability to attract and 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 technical and management personnel in the future. The future success of the Company's solution services business unit in particular will depend to a significant extent on its ability to attract, train, motivate and retain highly skilled software development professionals, particularly project managers, software engineers and other senior technical personnel. The Company believes that in the United States and elsewhere there is a shortage of, and significant competition for, software development professionals with the advanced technological skills necessary to perform the services offered by the solution services business unit. The increasing recognition of the scope and significance of the Year 2000 problem has materially increased the competition for personnel with appropriate skills and salary requirements have increased as availability of such personnel has declined precipitously. The Company's ability to maintain and 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 solution services business unit to manage and complete its existing projects and to bid for or obtain new projects. 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 a stockholder Page 29 might consider to be in that stockholder's best interests, 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 as 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") have 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 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 a person or group of 15% or more of such outstanding Common Shares. The Rights have certain anti-takeover effects, as they would cause substantial dilution to a person or group 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 Page 30 that a person or group 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 During the period from January 1, 1999 through March 31, 1999, the Company filed the following current report on Form 8-K: Date of Report - Item(s) Reported: February 3, 1999 - Placement of 3% Convertible Subordinated Debentures Page 31 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 10, 1999 /s/ Henry C. Harris Henry C. Harris Chief Financial Officer Page 32 EX-27 2 EXHIBIT 27
5 0000731647 ZITEL CORPORATION 1000 3-MOS SEP-30-1999 JAN-01-1999 MAR-31-1999 6,254 0 5,493 (1,291) 0 1,741 3,639 (2,612) 18,576 6,583 0 0 0 66,280 (59,179) 18,576 4,239 4,239 1,451 4,316 (98) 0 633 (2,063) 0 (2,063) 0 0 0 (2,063) (.09) (.09)
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