-----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, HvsGpCeS8CK1ScZ2/avRIooW8ptcxIRjxtNIlMGXFw1doIrY8501VFFNJyw3Bwh8 OAMhIutQkHK7RVFNG+Doow== 0001047469-98-004989.txt : 19980217 0001047469-98-004989.hdr.sgml : 19980217 ACCESSION NUMBER: 0001047469-98-004989 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980212 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: 98532775 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 December 31, 1997 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 0-12194 ZITEL CORPORATION (Exact name of Registrant as specified in its charter) California 94-2566313 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 47211 Bayside Parkway 94538-6517 Fremont, California (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (510) 440-9600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares of the Registrant's Common Stock outstanding as of December 31, 1997 was 15,883,256. ZITEL CORPORATION AND SUBSIDIARIES INDEX Page Number PART I. Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets December 31, 1997 (unaudited) and September 30, 1997 .. 3 Condensed Consolidated Statements of Operations (unaudited) - Three Months Ended December 31, 1997 and 1996 ..................... 4 Condensed Consolidated Statements of Cash Flows (unaudited) - Three Months Ended December 31, 1997 and 1996 ............................ 5 Notes to Condensed Consolidated Financial Statements .................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 11 PART II. Other Information Item 4. Submission of Matters to a Vote of Security Holders ............................. 14 Item 6. Exhibits and Reports on Form 8-K .................. 14 Page 2 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($000's)
(UNAUDITED) December 31, September 30, 1997 1997 ASSETS Current assets: Cash and cash equivalents $ 7,124 $ 4,224 Short-term investments 0 9,596 Accounts receivable, net 8,391 6,547 Inventories 2,258 3,050 Deferred and refundable taxes 3,536 3,540 Other current assets 1,005 993 ------- ------- Total current assets 22,314 27,950 Fixed assets, net 3,629 3,700 Other assets, net 19,337 17,644 ------- ------- Total assets $45,280 $49,294 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,079 $ 4,768 Accrued liabilities 5,032 4,419 ------- ------- Total current liabilities 9,111 9,187 Convertible subordinated debt 22,768 24,161 Shareholders' equity: Common stock 29,032 27,081 Accumulated deficit (15,631) (11,135) ------- ------- Total shareholders' equity 13,401 15,946 ------- ------- Total liabilities and shareholders' equity $45,280 $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 December 31, ------------------ 1997 1996 ------ ------ Net sales $ 7,363 $ 3,266 Royalty revenue 583 2,318 ------- ------- Total revenue 7,946 5,584 Cost of goods sold 3,456 2,798 Research and development expenses 1,988 1,621 Selling, general & administrative expenses 6,678 2,493 ------- ------- Operating loss (4,176) (1,328) Other (income) expense 320 (442) ------- ------- Loss before income taxes (4,496) (886) Benefit for income taxes 0 (319) ------- ------- Net loss $(4,496) $ (567) ======= ======= Basic and diluted loss per share $ (.29) $ (.04) ======= ======= Number of shares used in basic and diluted loss per share calculations 15,704 14,953 ======= =======
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) Three Months Ended December 31, 1997 1996 -------- ------- Cash flows used in operating activities: Net loss $(4,496) $ (567) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of discount on subordinated debt 222 - Depreciation and amortization 743 273 Provision for doubtful accounts 51 46 Provision for inventory allowances 120 455 Unrealized gains on marketable securities - (298) Deferred and refundable income taxes - (298) Change in operating assets and liabilities: Decrease (increase) in accounts receivable (1,895) 253 Decrease in inventories 672 129 Decrease (increase) in other current assets (8) 13 Decrease in accounts payable (689) (119) Increase (decrease) in accrued liabilities 647 (72) -------- ------- Net cash used in operating activities (4,633) (185) -------- ------- Cash flows provided by (used in) investing activities: Acquisition of fixed assets (370) (375) Investment in unconsolidated company (1,473) (1,025) Maturities of investments 9,596 - Purchase of other assets (744) (416) -------- ------- Net cash provided by (used in) investing activities 7,009 (1,816) -------- -------
Page 5 ZITEL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) ($000's)
(UNAUDITED) Three Months Ended December 31, 1997 1996 ------- ------- Cash flows provided by financing activities: Issuance of common stock $ 524 $ 611 ------- ------- Net cash provided by financing activities 524 611 ------- ------- Net increase (decrease) in cash 2,900 (1,390) Cash and cash equivalents, beginning of year 4,224 9,216 ------- ------- Cash and cash equivalents, end of period $ 7,124 $ 7,826 ======= ======= Supplemental non-cash investing and financing activities: Conversion of subordinated debt and accrued interest $ 1,427 - ======= =======
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 December 31, 1997 are not necessarily indicative of the results expected for the full year. 2. Recent Accounting Pronouncements: In June 1997, the FASB issued SFAS No, 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The impact of adopting SFAS No. 130, which is effective for the Company in 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 in fiscal year 1999 and the impact of adoption has not been determined. Page 7 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. The effect of the new SOP 97-2 has yet to be determined.
3. Inventories: December 31, September 30, 1997 1997 ------------ ------------- Raw materials $ 867 $ 953 Work in process 374 576 Finished goods 1,017 1,521 ------ ------ $2,258 $3,050 ====== ======
4. Investment in Unconsolidated Company: During the quarter ended December 31, 1997, Zitel invested an additional $1.5 million in MatriDigm in exchange for a convertible promissory note. The note is convertible into common stock with a conversion rate based on future performance of MatriDigm. As of December 31, 1997, the Company's investment in MatriDigm amounted to $7.35 million, consisting of 10.6 million shares of preferred stock, 500 thousand shares of common stock and the promissory note. 5. Line of Credit: The Company's $3.0 million secured bank line of credit expired on January 31, 1998. The Company is in the process of completing an agreement pursuant to the commitment offer letter, which was executed on February 5, 1998, for a $3.0 million secured line of credit. 6. 5% Convertible Subordinated Debentures: The current quarter includes a charge to interest expense in the amount of $222 thousand related to the amortization of the discount on the 5% convertible subordinated debentures. During December 1997, approximately $1.4 million was converted into 129 thousand shares of common stock at a price of $9.9563 per share. Page 8 7. 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):
Quarters Ended December 31, ----------------- l997 1996 ------- ------- (unaudited) Numerator - Basic and Diluted EPS Net loss $(4,496) $ (567) ======= ======= Denominator - Basic EPS Common stock outstanding 15,704 14,953 Common equivalent stock - - ------- ------- 15,704 14,953 ------- ------- Basic loss per share $ (.29) $ (.04) ======= ======= Denominator - Diluted EPS Denominator - Basic EPS 15,704 14,953 Effect of Dilutive Securities: Common stock options - - Convertible preferred stock - - ------- ------- 15,704 14,953 ------- ------- Diluted loss per share $ (.29) $ (.04) ======= =======
Page 9 Options to purchase 750 thousand shares were not included in the computation of diluted EPS because of the anti-dilutive effect of including these shares in the calculation. In addition, had the subordinated debt been converted, it would have resulted in approximately 2.6 million shares, but these shares were not included in the computation due to their anti-dilutive effect. Subsequent to December 31, 1997, approximately $2.2 million of the subordinated debt were converted into approximately 243 thousand common shares. If the transaction would have occurred before the end of the period, the inclusion of those shares would not have had a significant impact. Page 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Result of Operations The Company recorded a net loss of $4,496,000 ($0.29 per share) for the first quarter of fiscal 1998, ended December 31, 1997, compared with a net loss of $567,000 ($0.04 per share) for the same quarter of the prior year. Total revenue for the current quarter was $7,946,000, an increase of 42% over total revenue of $5,584,000 for the same period a year earlier. The increase in total revenue was due to an increase in net sales partially offset by a decrease in royalty revenue. Net sales for the current quarter were $7,363,000 versus $3,266,000 for the same quarter of the prior year, an increase of $4,097,000. The increase in net sales is directly attributable to the net sales generated by the software companies acquired June 30, 1997. Royalty revenue for the quarter just ended was $583,000 compared with $2,318,000 for the same quarter of the prior year. Gross margin for the quarter ended December 31, 1997 was 53% of net sales compared to 14% of net sales for the same quarter of the prior year. The improvement in gross margin percentage is primarily attributable to product mix as a result of net sales generated by the recently acquired software companies. In addition, gross margin of net sales of the storage products, as a percent of net sales, also improved as a result of lower material costs and a slight decrease in other cost of sales which do not vary directly with sales volume. The Company does not believe that the gross margins reported for the current quarter just ended are necessarily indicative of the gross margins to be expected. Gross margins may be affected by several factors, including the mix of products sold, the price of products sold, price competition, increases in material costs and changes in other cost of sales which do not vary directly with sales volume. Research and development expenses for the quarter ended December 31, 1997 were 25% of total revenue compared to 29% for the same period of the prior year. Actual spending increased $367,000, primarily attributable to the added research and development by the recently acquired software companies. Research and development expense in the storage division decreased by approximately $250,000. Page 11 Selling, general and administrative (SG&A) expenses for the quarter ended December 31, 1997 were 84% of total revenue versus 45% for the same period a year earlier. Actual spending increased $4,185,000. The increase is primarily attributable to the added SG&A expenses of the recently acquired software companies of approximately $2,500,000, an increase in SG&A of the Company's solution services division of approximately $500,000, an increase in salaries and related costs as a result of an increase in SG&A personnel of approximately $300,000 and an accrual for the reduction in force described below, of approximately $300,000. While management was pleased with the growth in revenue from year to year, revenue did not grow fast enough to support the levels of spending. Management has restructured the storage and software divisions of the Company, resulting in a reduction in work force. Payroll costs were reduced by approximately 16% and further savings in ancillary expenses are anticipated. Other expense was $320,000 for the quarter just ended versus other income of $442,000 in the same quarter of the prior year. For the current quarter, other expense included $495,000 interest expense related to the convertible subordinated debt, partially offset by interest income of $168,000. For the comparable quarter of the prior year, other income included an unrealized gain of $298,000 on an investment held for resale and interest income of $140,000. Liquidity and Capital Resources For the quarter ended December 31, 1997, working capital decreased $5,560,000 and cash flows used in operating activities totaled $4,633,000. The utilization of cash in operating activities resulted primarily from the net loss of $4,496,000 and an increase in gross accounts receivable of $1,895,000 partially offset by changes in other components of operating assets and liabilities. During the quarter, net cash provided by investing activities was $7,009,000; $9,596,000 was generated from the maturity of a short-term investment. The Company invested an additional $1,473,000 in an unconsolidated company, purchased other assets in the amount of $744,000 and capital equipment in the amount of $370,000. Net cash provided by financing activities was $524,000 from the exercise of employee stock options and from the sale of stock under the Company's employee stock purchase plan. Page 12 The Company's $3.0 million secured bank line of credit expired on January 31, 1998. The Company is in the process of completing an agreement pursuant to the commitment offer letter, executed on February 5, 1998, for a $3.0 million secured bank line of credit Management believes that the Company will be able to meet its cash requirements for the remainder of the fiscal year from cash on hand, other working capital, and cash flow from operations augmented by a bank line of credit. 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 and CASD are registered trademarks of Zitel Corporation. All other product names and brand names are trademarks or registered trademarks of their respective holders. Page 13 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders An annual meeting of shareholders of the Company was held on January 29, 1998. A total of 15,472,852 shares of the Company's Common Stock out of a total 15,749,251 shares outstanding on the record date for the meeting were represented and voted in person or by proxy. The Company has a five-person Board of Directors. At the annual meeting, all five directors were nominated and re-elected to the Board of Directors by a vote of at least 14,908,161 shares in favor and 564,691 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 750,000 shares, from 5,450,000 shares (including shares reserved or granted under the Company's prior Option Plans) to 6,200,000 shares. The motion was carried by a vote of 14,224,626 shares voting for, 1,128,252 dissenting votes and 119,974 abstaining votes. 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 14 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: February 12, 1998 Larry B. Schlenoff Larry B. Schlenoff Vice President, Finance & Administration (Chief Financial Officer and Secretary) Page 15 EX-27 2 EXHIBIT 27
5 1,000 12-MOS SEP-30-1998 OCT-01-1997 DEC-31-1997 7,124 0 8,391 175 2,258 22,314 13,756 10,127 45,280 9,111 0 0 0 29,032 (15,631) 45,280 7,363 7,946 3,456 8,666 (175) 0 495 (4,496) 0 (4,496) 0 0 0 (4,496) (0.29) (0.29)
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