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 June 30, 1995
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 June 30,
1995 was 7,229,098.
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1995 (unaudited) and September 30, 1994 .. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Nine Months
Ended June 30, 1995 and 1994 ..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Nine Months Ended
June 30, 1995 and 1994 ............................ 5
Notes to Condensed Consolidated
Financial Statements .............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations .............................. 8
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income (Loss)
per Common and Common Equivalent Share ............. 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K .............. 12
Page 2
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000's)
June 30, September 30,
1995 1994
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 8,494 $ 1,010
Accounts receivable, net ........................ 6,244 3,785
Inventories ..................................... 2,749 4,988
Deferred and refundable taxes ................... 4,085 244
Other current assets ............................ 1,006 836
-------- --------
Total current assets .......................... 22,578 10,863
Fixed assets, net ................................. 965 1,616
Other assets, net ................................. 1,469 1,199
-------- --------
Total assets .................................... $ 25,012 $ 13,678
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ............... $ 29 $ 77
Accounts payable ................................ 1,202 2,023
Accrued liabilities ............................. 1,336 1,561
-------- --------
Total current liabilities ..................... 2,567 3,661
Long-term debt .................................... 3 13
-------- --------
Total liabilities ............................... 2,570 3,674
Shareholders' equity:
Common stock .................................... 19,716 15,489
Retained earnings (deficit) ..................... 2,726 (5,485)
-------- --------
Total shareholders' equity ...................... 22,442 10,004
-------- --------
Total liabilities and
shareholders' equity .......................... $ 25,012 $ 13,678
======== ========
The accompanying notes are an integral part of these financial statements.
Page 3
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands except per share data)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales ...................... $ 2,791 $ 1,804 $ 6,760 $ 8,197
Royalty revenue ................ 4,209 6,300 12,946 6,300
-------- -------- -------- --------
Total revenue ................ 7,000 8,104 19,706 14,497
Cost of goods sold ............. 2,182 1,733 5,618 7,402
Research and development
expenses ..................... 1,384 2,163 4,376 5,299
Selling, general &
administrative expenses ...... 1,921 1,989 5,495 5,285
-------- -------- -------- --------
Operating income (loss) ...... 1,513 2,219 4,217 (3,489)
Interest expense ............... 5 42 56 306
Interest income ................ (120) (54) (247) (134)
Other (income) expense, net .... 39 34 72 (75)
-------- -------- -------- --------
Income (loss) before
income taxes ............... 1,589 2,197 4,336 (3,586)
Provision (benefit) for
income taxes ................. 595 -- (3,875) --
-------- -------- -------- --------
Net income (loss) ............ $ 994 $ 2,197 $ 8,211 $ (3,586)
======== ======== ======== ========
Net income (loss)
per share .................... $ .13 $ .34 $ 1.09 $ (.57)
======== ======== ======== ========
Number of shares used in per
share calculations ........... 7,677 6,469 7,543 6,301
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
Page 4
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's)
(UNAUDITED)
Nine Months Ended
June 30,
1995 1994
------ -------
Cash flows provided by
operating activities:
Net income (loss) ................................. $ 8,211 $ (3,586)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization ................... 1,110 1,742
Provision for doubtful accounts ................. 349 154
Provision for inventory allowances .............. 297 430
Decrease (increase) in
accounts receivable ........................... (2,808) 1,594
Decrease in inventories ......................... 1,942 2,962
Decrease (increase) in deferred and
refundable taxes .............................. (3,841) 1,420
Decrease (increase) in other current assets (170) 65
(Decrease) increase in accounts payable ......... (821) 195
(Decrease) increase in accrued liabilities ...... (225) 361
Decrease in other liabilities ................... 0 (113)
Royalty proceeds utilized to retire debt ........ 0 (5,000)
-------- --------
Net cash provided by operating activities .......... 4,044 224
-------- --------
Cash flows used in investing activities:
Purchase of fixed assets ........................... (407) (310)
Purchase of other assets ........................... (322) 0
-------- --------
Net cash used in investing activities .............. (729) (310)
-------- --------
Cash flows provided by financing activities:
Issuance of common stock ......................... 4,227 354
Repayments of borrowings ......................... (58) (203)
-------- --------
Net cash provided by financing activities .......... 4,169 151
-------- --------
Net increase in cash ............................... 7,484 65
Cash, beginning of period ........................... 1,010 3,394
-------- --------
Cash, end of period ................................. $ 8,494 $ 3,459
======== ========
The accompanying notes are an integral part of these financial statements.
Page 5
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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 June 30, 1995 are not necessarily indicative of
the results expected for the full year.
2. Inventories:
June 30, September 30,
1995 1994
--------- -------------
Raw materials ........ $ 632 $ 2,074
Work in process ...... 570 751
Finished goods ....... 1,547 2,163
------- -------
$ 2,749 $ 4,988
======= =======
3. Effective November 23, 1994, the Company negotiated a $3 million accounts
receivable line of credit. The line is based on 80% of eligible receivables. The
line of credit is collateralized by accounts receivable, inventory, equipment,
and tangible assets. Interest is at prime plus 3 percentage points
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(12% at June 30, 1995) and is payable monthly. Repayments on the borrowings
against the line are paid back as the Company receives proceeds from customer
accounts. The line of credit expires on September 30, 1995. At June 30, 1995,
the Company had no borrowings against the line.
4. During the first quarter ended December 31, 1994, the Company issued 450,000
shares of common stock in a private placement. Net proceeds from this
transaction were $2,933,000.
5. Revenue recognition:
Revenue is recognized at the time products are shipped to customers and at
the time services are rendered. Royalty revenue is recognized when earned and
receipt is assured.
6. Income (loss) per share amounts are computed using the weighted average
number of common and common equivalent (dilutive stock options) shares
outstanding during each period presented, when dilutive.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Result of Operations
The Company recorded net income of $994,000 ($0.13 per share) for the quarter
ended June 30, 1995 versus $2,197,000 ($0.34 per share) for the same quarter of
the prior year. For the nine months ended, the Company recorded net income of
$8,211,000 ($1.09 per share) versus a net loss of $3,586,000 ($0.57 per share)
for the same period a year earlier.
Total revenue for the quarter ended June 30, 1995 was $7,000,000 versus
$8,104,000 for the same period a year earlier. Revenue for the current quarter
included $4,209,000 of sales-based royalty revenue versus a one-time advanced
royalty payment of $6,300,000 in the same quarter of the prior year. Net sales
for the quarter ended June 30, 1995 were $2,791,000 versus $1,804,000 for the
same quarter of the prior year. The increase in net sales is attributable to
sales of the Company's OEM (Original Equipment Manufacturer) HIPPI interface
cards. For the nine months ended June 30, 1995, total revenue was $19,706,000
versus $14,497,000 for the same period a year earlier. Revenue for the
nine-month period included sales-based royalty revenue of $12,946,000 versus a
$6,300,000 advanced royalty payment for the same period of the prior year. Net
sales for the nine months ended June 30, 1995 were $6,760,000 versus $8,197,000
for the same quarter a year earlier. Net sales were impacted by the decrease in
average sale prices of the solid state and rotating memory products in the
Unisys end user market by 9% and 60%, respectively, and a decrease in demand for
both the RAMdisk and current CASD product lines. The Company does not expect net
sales of these mature products in the Unisys end user market to increase.
The Company has recently announced a new product line, CASD-II, for the Unisys
market. CASD-II went into customer test at the end of June. Production shipments
to customers are expected to begin in late September 1995. Initial interest in
this new product family has been positive, but there is no assurance that the
new products can be successfully marketed at satisfactory margins.
On May 2, 1995, the Company completed the sale of its OEM HIPPI networking
technology to Essential Communications. Under the agreement, Essential
Communications will build and sell the
Page 8
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network interface cards and pay a royalty to the Company for all such products
sold. During the transition phase, net sales of these products may be generated
by the Company. At the end of the transition phase, however, sales of HIPPI
network interface cards will no longer contribute to the Company's net sales but
royalties may contribute to overall profitability.
On July 31, 1995, the Company signed an agreement in principle to acquire 37.5%
of MatriDigm, a privately-held company currently in formation. MatriDigm is in
the business of addressing the COBOL maintenance and re-engineering market.
Under the proposed investment agreement, the Company will obtain from MatriDigm
an exclusive license to manufacture and sell hardware products incorporating the
proprietary technology. The agreement in principle to acquire 37.5% of MatriDigm
is expected to close in the next 30 to 45 days. This investment is expected to
be approximately $3.5 million, to be funded from current cash on hand.
The Company is also in discussion with several companies regarding licensing or
joint development to exploit certain of the Company's technologies. Though
discussions have been positive, there is no assurance that there will be a
successful conclusion to any of these discussions.
The gross margin for the quarter and nine months ended June 30, 1995 was 22% and
17% of net sales, respectively. This compares to 4% and 10% of net sales for the
same periods a year earlier. The increase in gross margin percentage for the
quarter ended June 30, 1995 is primarily attributable to a change in product
mix. For the nine months ended June 30, 1995, the increase in gross margin
percentage is attributable to a decrease in other cost of sales which do not
vary directly with sales volume.
Research and development expenses for the quarter and nine months ended June 30,
1995 were 20% and 22% of total revenue, respectively. This compares to 27% and
37% of total revenue for the same periods of the prior year. For the quarter
just ended, actual spending decreased $779,000. For the nine-month period,
spending decreased $923,000. The decrease in spending in the two periods is
primarily related to the decrease in development spending as a result of the
completion of a major program. In addition, spending decreased due to lower
salary and related costs in connection with a reduction in personnel.
Selling, general and administrative expenses were 27% of total revenue for the
quarter compared to 25% for the same period of
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the prior year. Actual spending decreased $68,000. The decrease in spending is
primarily related to reduced spending in all areas ($139,000) and lower
depreciation ($82,000) partially offset by an increase in bonus and profit
sharing pool ($153,000). For the nine-month period, selling, general and
administrative expenses were 28% of total revenue compared to 36% for the same
period a year earlier. Actual spending increased $210,000. The increase in
spending is primarily attributable to the increase in bonus and profit sharing
pool ($347,000) partially offset by a decrease in depreciation ($183,000).
For the nine-month period ended June 30, 1995, the Company recorded a tax
provision of 37.5% of income before taxes. This provision was offset with the
recognition of approximately $5.5 million of deferred tax assets in the previous
quarters in accordance with S.F.A.S. No. 109, Accounting for Income Taxes.
Liquidity and Capital Resources
For the nine-month period ended June 30, 1995, working capital increased
$12,809,000 and cash flows provided by operations was $4,044,000. Cash flows
from operating activities were generated primarily from net income of
$8,211,000, a decrease in inventory of $1,942,000 and depreciation and
amortization of $1,110,000. This was offset by an increase in accounts
receivable of $2,808,000, an increase in deferred and refundable taxes of
$3,841,000, and a decrease in accounts payable of $821,000. Cash in the amount
of $729,000 was used to purchase capital equipment and other assets in the
current year. Net cash provided by financing activities in the current year was
$4,169,000. This included the issuance of 450,000 shares of common stock in a
private placement which generated $2,933,000. In addition, the Company entered
into an agreement for a $3,000,000 accounts receivable line of credit. At June
30, 1995, the Company had no borrowings against the line of credit.
Management believes that the Company will meet its cash requirements, including
the MatriDigm investment, from current cash on hand, other existing working
capital, cash flows from operations, and utilization of the line of credit.
-------------------------------------------------------------------------------
Zitel, RAMdisk and CASD are registered trademarks of Zitel Corporation.
Unisys is a registered trademark of Unisys Corporation. All other product names
and brand names are trademarks or registered trademarks of their respective
holders.
Page 10
<PAGE>
EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1995 1994 1995 1994
------ ------ ------ -------
Weighted average common
shares outstanding ............... 7,218 6,335 7,017 6,301
Computation of incremental
outstanding shares:
Net effect of dilutive
stock options based on
treasury stock method ......... 459 134 526 --
------ ------ ------ -------
7,677 6,469 7,543 6,301
====== ====== ====== =======
Net income (loss).................. $ 994 $2,197 $8,211 $(3,586)
====== ====== ====== =======
Net income (loss)
per share ........................ $ .13 $ .34 $ 1.09 $ (.57)
====== ====== ====== =======
Primary and fully diluted income (loss) per share differ by less than one cent
in all periods presented.
Page 11
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
Page 12
<PAGE>
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: August 10, 1995 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
Page 13
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<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
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<ALLOWANCES> 172
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<COMMON> 19,716
0
0
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