FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2566313
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway, Fremont, California 94538-6517
(Address of principal executive offices) (Zip Code)
(510) 440-9600
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No _____.
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on November 30, 1996 (based upon the closing sale price of stock
on such date) was $339,257,112.00. As of November 30, 1996, 14,906,678 of the
Registrant's Common Stock were outstanding.
Documents Incorporated by Reference:
Portions of the Company's 1996 Notice of Annual Meeting of Shareholders and
Proxy Statement are incorporated by reference into Part III hereof.
<PAGE>
PART I
Item 1: BUSINESS
Business
Zitel Corporation ("Zitel" or the "Company") specializes in the design,
manufacture and marketing of high-performance, mission-critical storage
subsystems for enterprise-wide applications which include relational database,
batch and on-line transaction processing. Its primary products include CASD
(Cached Actuator Storage Device) subsystems for Unisys A and V mainframes, and
CASD-II/Enterprise, CASD technology architected for UNIX, NT and NETWARE based
open systems. The Company also develops and markets single-system and
multi-system performance measurement and modeling software used on a variety of
UNIX and proprietary platforms to measure the performance of complex
client/server environments. These products are marketed worldwide through a
variety of channels including systems integrators, value-added resellers and
distributors, sales representatives, Original Equipment Manufacturers (OEMs),
and directly to end users. Additionally, the Company is a reseller of Year 2000
compliance services. The Company conducts its business within one industry
segment.
Zitel was organized in 1979 to provide semiconductor memory systems to OEM
customers. The Company's first end user product was the solid state RAMdisk sold
to users of Unisys Corporation mainframe computer systems. The Company then
introduced its line of rotating memory systems incorporating its CASD
technology, enhanced with caching solid state memory and proprietary algorithms,
also for Unisys computer systems. In 1995, the Company announced the
availability of the CASD products for the open systems and relational database
markets. In late fiscal 1995, the second generation of CASD (CASD-II) was
announced for general availability into the Unisys market. CASD-II for the open
systems and relational database markets were announced in December 1995. The
Company also sells Value Analysis Modeling (VAM)/Capacity Planner and
NetArchitect software products which enables customers to plan their future
information technology systems by balancing service levels required to support
business applications with the costs of building and maintaining those systems.
In 1996, the Company became a reseller of MatriDigm Corporation's Year 2000
compliance services. The Company operates with little backlog. Most of its
orders are shipped in the quarter received.
In 1992, the Company entered into a joint development agreement
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with International Business Machines (IBM) Corporation. In September and October
of 1994, IBM announced general availability of RAMAC products, which incorporate
Zitel technology, and upon which the Company is receiving royalties based on
RAMAC products sold. In October 1995 and September 1996, IBM announced the
general availability of RAMAC 2 and RAMAC 3, respectively, its second and third
generation of RAMAC, which continue to include Zitel technology and upon which
Zitel will receive royalties. Royalties from RAMAC products constituted 38%, 65%
and 63% of total revenue in fiscal 1994, 1995 and 1996, respectively. In the
event that IBM should replace its current RAMAC products with products that do
not incorporate the Company's technology or if sales of royalty bearing products
were to produce significantly lower royalty payments and the Company were to be
unable to generate profitable revenue from other sources, the Company could be
unable to continue operations as currently conducted.
The Company has historically, during certain quarters, made material sales to a
single customer which have had significant impact on net sales and on operating
margins. Operating margins can also fluctuate from quarter to quarter due to
product mix and other cost of sales, which do not vary directly with sales
volume. As a result of these and other factors, the Company has experienced
fluctuations in its quarterly operating results in the past and anticipates such
fluctuations in the future.
Research and Development and New Products
During fiscal 1996, the Company invested in a number of development programs
including the enhancement of CASD-II, the current generation of rotating memory
systems incorporating its CASD technology; other CASD programs for future
generations of CASD; and the development of NetArchitect, a software package for
client/server network design and simulation. Expenditures for research and
development activities were approximately $6,551,000, $5,754,000 and $7,071,000
in fiscal 1996, 1995 and 1994, respectively.
The computer industry, in general, and the markets for the Company's products,
in particular, are subject to extreme price competition, rapid technological
change and evolving standards, resulting in relatively short product life cycles
and continuous erosion of average selling prices. As a result, the Company must
continually enhance its existing products and develop and introduce new products
in an effort to maintain and increase net sales. The Company has experienced
delays in completing the
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development of new products and may well encounter difficulties that could delay
the products currently under development. There can be no assurance that the
Company will be successful in its enhancement and development efforts or in
achieving market acceptance of products developed.
Products
The Company offers a family of rotating memory systems utilizing the CASD
technology for use with Unisys A and V mainframe computers and with most UNIX,
NT, Open VMS and NETWARE server platforms. The Company also offers a family of
software planning tools that help Information Technology managers architect and
evaluate client/server environments.
CASD-II, the second generation of the Company's CASD products, was introduced in
September, 1995. CASD products integrate a high-capacity solid state cache with
multiple rotating disk drives and utilize interactive caching algorithms.
Modules utilizing the technology are available with cache sizes ranging from 64
to 512 megabytes and with one to four disk drives with capacities from 4.3 to
17.2 gigabytes, depending on the market the products are sold into. These
modules can be sold on an individual module basis or are available in cabinet
configurations ranging from one to six modules and up to 103 gigabytes per
cabinet. Pricing for a single module ranges from approximately $16,500 to
$27,900. Subsystems incorporating CASD technology are available in prices from
$74,000 to $175,400, depending on the number of modules utilized, the amount of
cache utilized, optional equipment, and other factors.
Performance and Modeling, Inc., Zitel's wholly-owned subsidiary, designed and
developed the Value Analysis Modeling (VAM) family of system planning tools,
VAM/Capacity Planner and NetArchitect. VAM/Capacity Planner is a Windows-based
system modeling tool that reduces analyses and planning costs by enabling
companies to correctly identify current system utilization and undertake
sophisticated "what-if?" analyses of modifications in system deployment or
design. VAM/Capacity Planner's embedded expertise allows easy examination of the
effects of various configuration changes and determines the best equipment
enhancements. VAM/Capacity Planner measures and simulates performance of IBM
MVS, Digital VMS, Unisys proprietary, and a wide variety of open systems
platforms. This software tool aids system administrators to anticipate, track
and correct system performance bottlenecks and I/O problems.
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NetArchitect is a network modeling tool that has an intuitive, easy-to-use,
Windows-based Graphical User Interface. This package is designed for the Network
Administrator who has the responsibility of designing and installing a new
network, or maintaining and expanding existing structures. As network
requirements become increasingly more complex, computer-aided tools will be
mandatory to sort through and evaluate the many issues and possibilities prior
to the investment and installation of significant amounts of capital equipment.
With these capabilities in mind, NetArchitect also has practical applications as
a pre-sales tool for systems integrators, VARs, and other channels selling or
consulting on network management. NetArchitect runs under Windows 3.X, Windows
95 and Windows NT.
MatriDigm Corporation
In November 1995, Zitel invested $3,350,000 in cash, $66,000 in equipment and
$150,000 in future rent and administrative services in exchange for preferred
stock and certain technology rights of a newly-formed company, MatriDigm
Corporation ("MatriDigm"), which represented 37.5% of the capital stock of
MatriDigm on a fully-converted basis. MatriDigm was formed to provide COBOL
maintenance and re-engineering services. As of December 15, 1996, Zitel
beneficially owned approximately 33% of the outstanding capital stock on a
fully-converted basis. Zitel's percentage ownership will change as MatriDigm
raises additional capital and as options under MatriDigm's stock option plan
vest and are exercised.
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 resources to development of such technology and has
stated that it expects to announce general availability of its conversion
services early in 1997.
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 in the hundreds of billions of dollars. 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 expected to be intense among the providers of
such services.
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MatriDigm believes that the software systems it is developing will have
substantial advantages over the currently available systems. However, as with
all development projects, there are risks that the software in development will
not be successfully developed, will take longer to develop than MatriDigm
currently expects, will not have the functionality currently planned or will
have "bugs" or other problems rendering the commercial provision of conversion
services more difficult or impossible. MatriDigm has stated that it expects to
announce general availability of its conversion services in January 1997, but
general availability may differ materially from that expectation.
In August 1996, Zitel was authorized to become a reseller of MatriDigm's year
2000 compliance services on a commission basis. Zitel has established a new
division to market those services and is in the process of staffing, training
and performing preliminary marketing efforts. The reseller agreement also
provides Zitel the exclusive right to create portable, on-site centers for the
performance of services offered by the Company for certain accounts in certain
circumstances. The Company's ability to generate sales and revenues is dependent
on the success of MatriDigm's development effort and there is no assurance that
the Company will be successful in generating profitable sales of conversion
services.
Marketing and Customers
Zitel offers its products through system integrators, value-added resellers and
distributors, OEMs, and directly to end users. Zitel's direct sales and service
staff consists of employees who operate from Arizona, California, Florida,
Kansas, Massachusetts, New Jersey, New York, Pennsylvania, Tennessee, Virginia,
and Europe.
In fiscal 1996, Proven Technology and Banamex accounted for 13.0% and 11.8% of
net sales, respectively. In fiscal 1995, Lockheed Martin Missiles and Space
Company accounted for 14.3% of net sales. In fiscal 1994, Unisys Mexico
accounted for 14.5% of net sales
During fiscal 1996, Zitel sold to approximately 113 customers, both domestically
and internationally. Foreign and export sales were approximately $4.3 million in
fiscal 1996, up from approximately $3.1 million in fiscal 1995.
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Zitel does not maintain a field service organization. Typically, customers
contract with a third party to maintain products. The end-user organization is
staffed with experienced technical support personnel to make or assist in the
initial installations; assist the service organization with problem resolution
and field upgrades; assist customers in determining whether or not Zitel
products can improve system reliability, performance and cost effectiveness; and
in helping customers determine how best to deploy Zitel products in their system
to achieve the maximum benefit.
Competition
During fiscal 1996, the Company generated a majority of its net sales in the
Unisys end user market. Unisys Corporation offers alternative products by which
a computer user can achieve enhanced performance. Zitel products compete against
these alternatives in providing the customer with the best performance solution.
Zitel also competes with other independent manufacturers of devices in the
Unisys market and several system integrators. During fiscal 1996, competition
remained at a high level and average sales prices continued to decline.
Depending on the other markets served, the Company may compete with the computer
manufacturer and/or third party companies.
Patents
Management believes that technical expertise, responsiveness to user
requirements and implementation of technological advances are mandatory factors
in Zitel's markets. Zitel applied for additional patent protection on certain
elements of its CASD products, VAM software products and other products in the
development stage. During the year, the Company received one patent on one of
its other products, bringing the total patents currently held to five. There can
be no assurance that any of the other patents applied for will be issued or, if
issued, provide any meaningful protection.
Manufacturing and Suppliers
Zitel manufactures a large percentage of its hardware products from standard
component parts and subassemblies purchased from others. Certain of these parts,
including printed circuit boards and subassemblies, are produced from Zitel's
design and to its specifications. Use of such standard items simplifies the
manufacturing process, reduces the number of items carried in
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inventory and permits Zitel to expand its product line while minimizing the
expense of designing and developing new assemblies.
The Company utilizes various subcontractors to assemble and solder printed
circuit boards using material purchased by the Company or to produce surface
mount ASICs to Zitel's workmanship standards. Completed assemblies are then
inspected by Zitel's receiving inspection department and submitted to its
manufacturing test operation. This test operation provides board-level and
system-level testing under stressed operating conditions.
The Company's hardware products use a large number of components that are
generally available from several sources and the Company believes that the loss
of one or more of its suppliers will not have a material effect on operations.
Employees
At the end of fiscal 1996, the Company employed 105 persons on a full time
basis, 36 in research and development, 16 in manufacturing, 29 in sales and
marketing, and 24 in general management and administration.
The Company believes that its further success will depend, in part, on its
ability to attract and retain qualified employees, who are in great demand. None
of Zitel's employees are represented by a labor union and the Company believes
that its employee relations are good.
Item 2: PROPERTIES
Zitel leases its primary manufacturing and office facility under a noncancelable
operating lease, which expires in March 1998, with an average annual rent of
approximately $502,000 per annum.
Item 3: LEGAL PROCEEDINGS
None.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matters to a vote of security holders during the
fourth quarter of the fiscal year ended September 30, 1996.
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Executive Officers of the Registrant
Set forth below is information regarding executive officers of the Company who
are not directors.
Name Age Position
Richard F. Harapat 61 Vice President, International Sales
Henry C. Harris 48 Vice President, Finance and
Administration; Chief Financial
Officer; Chief Accounting Officer;
Secretary
Jesse I. Stamness 50 Vice President, Engineering
Frank J. Vukmanic 50 Vice President, Domestic Sales
Richard F. Harapat joined Zitel as Director of International Sales in March of
1986. In October of 1987, he was promoted to Vice President of End User Sales
and, in mid-1992, to Vice President of International Sales. Prior to joining
Zitel, he spent over 30 years in the computer industry in the sales management
area, 15 of which were with Burroughs Corporation.
Henry C. Harris, CPA, joined Zitel as Vice President of Finance and
Administration, Chief Financial Officer and Chief Accounting Officer in December
1986. He has served as Secretary of the Company since November 1987. Prior to
joining Zitel, he was employed by Dynamic Disk, Inc. as Vice President of
Finance and Administration and Chief Financial Officer from October 1983 until
November 1986. Prior to Dynamic Disk, he spent over 10 years in financial
management and public accounting positions.
Jesse I. Stamness joined Zitel in May 1991. He has over 26 years of development
experience in data storage and storage controller products for various markets
including IBM and Unisys. Mr. Stamness has been granted many patents in disk
storage controller and caching technology and currently has several patents
pending on technology recently released. He has held senior engineering
management positions at Unisys Corporation, Memorex Corporation and Burroughs
Corporation.
Frank J. Vukmanic joined Zitel in June 1994 as Vice President of Marketing,
which he relinquished in February 1996 to become Vice President of Domestic
Sales. Prior to joining Zitel, Mr. Vukmanic was CEO of Edgetech International, a
consulting firm, from October 1993 until joining Zitel. From June 1989 to
September 1993, Mr. Vukmanic was Sr. Vice President of Amperif Corporation
responsible for worldwide sales, marketing, customer
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support, and customer engineering for mass storage products. For 19 years prior
to joining Amperif, Mr. Vukmanic held various sales and marketing management
positions with Unisys Corporation. His experience includes over 25 years in
sales, marketing, product management, customer service and support management,
and program management.
Zitel, CASD and RAMdisk are registered trademarks of Zitel Corporation.
NetArchitect and VAM are trademarks of Zitel Corporation. Digital is a trademark
of Digital Equipment Corporation. IBM, MVS and RAMAC are registered trademarks
of IBM Corporation. MatriDigm is a trademark of MatriDigm Corporation. Windows
NT is a trademark of Microsoft Corporation. Unisys is a registered trademark of
Unisys Corporation. Unisys A and V are trademarks of Unisys Corporation. UNIX is
a registered trademark of UNIX Systems Laboratories, Inc., in the United States
and other countries. All other product names are trademarks or registered
trademarks of their respective holders.
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PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Zitel Corporation's common stock is traded in the over-the-counter market and is
listed on the Nasdaq National Market System under the symbol ZITL.
The following table shows the quarterly high and low closing prices in the
Nasdaq National Market System after giving effect to the two-for-one stock split
on November 27, 1996:
FISCAL 1996 1995
------------------- -------------------
High Low High Low
-------- -------- -------- --------
First Quarter 6 3/8 4 11/16 6 13/16 3 15/16
Second Quarter 6 15/16 5 1/16 10 3/8 5 13/16
Third Quarter 10 6 1/16 6 1/2 4 1/16
Fourth Quarter 10 1/8 5 1/8 6 13/16 4 5/8
As of September 30, 1996, the Registrant had approximately 251 shareholders of
record of its Common Stock.
The Company has paid no cash dividends on its common stock and does not plan to
pay cash dividends to its shareholders in the foreseeable future.
Item 6: SELECTED FINANCIAL DATA
Five-Year Financial Summary
(In thousands except per share data)
1996 1995 1994 1993 1992
Total Revenue $23,066 $23,714 $17,452 $21,780 $47,771
Net income (loss) 4,049 8,526 (6,961) (8,277) 783
Net income (loss) per share .26 .56 (.55) (.67) .06
Number of shares used in
per share calculation 15,626 15,166 12,654 12,358 13,110
At year end:
Working capital 20,445 19,969 7,202 15,668 18,374
Total assets 30,699 26,206 13,678 24,230 32,442
Long-term liabilities - - 13 4,355 305
Shareholders' equity 27,089 22,957 10,004 16,203 23,802
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Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the five-year
summary of selected financial data and the Company's consolidated financial
statements and notes thereto.
Business
Zitel Corporation (the "Company") specializes in the design, manufacture and
marketing of high-performance, mission-critical storage subsystems for
relational database, batch and on-line transaction processing. The Company also
develops and markets single-system and multi-system performance management and
modeling software used on a variety of UNIX and proprietary platforms to manage
the performance of client/server environments. These products are marketed
worldwide through a wide variety of channels including systems integrators,
value-added resellers and distributors, OEMs, and directly to end users. The
Company has recently been appointed as an authorized reseller of the Year 2000
services by an affiliated company. It has not completed development of its Year
2000 services and no revenue has been generated from this activity.
1996 vs. 1995
Total revenue for 1996 was $23,066,000 compared with revenue of $23,714,000 in
the prior year, a decrease of 3%. The decrease in total revenue is attributable
to a decrease in royalty revenue based upon the sale of products incorporating
the Company's technology by a third party from $15,421,000 to $14,473,000. The
third party has recently commenced shipping a third generation product
incorporating the Company's technology and management is not yet in a position
to express a view on the level of future royalty revenue.
Net sales were approximately level year to year with increases in sales of CASD
products into the Unisys Corporation computer systems market offsetting the
absence of sales of products discontinued or sold in fiscal 1995. Net sales into
the open system market were not a material portion of the Company's sales until
the fourth quarter of the year. While management has been encouraged by the
initial reception of these products, the Company's ability to sell these
products in quantities and at prices resulting in profitable operations is yet
to be established.
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Cost of goods sold as a percentage of net sales decreased to 77% in 1996 from
82% of net sales in the prior year. The improvement in cost of goods sold was
attributable to lower material and production costs of the newly introduced
CASD-II. The average sales price per megabyte of product sales declined by
nearly 50% during the year.
Research and development expenses were 28% of total revenue versus 24% of total
revenue in the prior year. Spending increased $797,000, primarily attributable
to enhancements of existing products and the development of new products. The
increase was primarily related to increased salary and related costs, consulting
costs and costs associated with chip development.
Selling, general and administrative expenses were 35% of total revenue versus
29% of total revenue in the prior year. Actual spending increased $1,058,000.
The increase is primarily attributable to an increase in bad debt expense of
$367,000 resulting from a bad debt reversal in the prior year and increases in
expenses in a wide variety of expense categories.
Included in interest and other income is a gain on trading securities of
$4,177,000 of which $2,136,000 has been realized. Also included is interest
income in fiscal 1996 of $482,000 versus $399,000 in 1995. The increase is
primarily related to higher cash balances invested in fiscal 1996 versus 1995.
In 1996, the Company recorded a tax provision of 38% of income before income
taxes. In 1995, the Company recorded a tax provision of 33.2% of income before
income taxes, which was offset by the utilization of net operating losses and
the recognition of deferred tax assets in accordance with SFAS No. 109,
"Accounting for Income Taxes," totaling $5,500,000.
On November 27, 1996, the Company's common stock was split two-for-one in the
form of a stock dividend to shareholders of record on November 18, 1996. All
applicable share and per-share data in these financial statements have been
restated to give effect to the stock split.
1995 vs. 1994
Total revenue for 1995 was $23,714,000 compared with revenues of $17,452,000 in
the prior year, an increase of 36%. The increase in revenue was attributable to
an increase of $8,743,000 in
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royalties, partially offset by a decrease of $2,481,000 in net sales. Fiscal
1995 represented the first full year that royalties based on a third party's
sales of products incorporating the Company's technology were received.
In 1994, royalties represented a one-time non-refundable prepayment of
$6,378,000 from this third party and $300,000 from product sales in the fourth
quarter of the fiscal year.
The decrease in net sales continued to impact operational profitability
excluding royalty revenue. The decrease in net sales was primarily attributable
to competitive factors in the data storage market which have made the Company's
original generation of CASD products a less cost effective solution for
end-users of Unisys Corporation computer systems. A new generation of CASD
products for the Unisys market was announced for general availability in early
October 1995.
Cost of goods sold as a percentage of net sales decreased to 82% during 1995
from 90% of net sales in the prior year. The improvement in gross margin is
primarily attributable to a decrease in other cost of sales which do not vary
directly with sales volume.
Research and development expenses were 24% of total revenue versus 41% of total
revenue in the prior year. Spending decreased $1,317,000, primarily attributable
to decreased development spending as a result of the completion of a major
development program, and lower salary and related costs in connection with a
reduction in personnel.
Selling, general and administrative expenses were 29% of total revenue versus
43% of total revenue in the prior year. Actual spending decreased $586,000. The
decrease was primarily attributable to the reversal of a bad debt reserve for an
expected collection of a receivable ($350,000).
Interest expense in fiscal 1995 was $57,000 versus $310,000 in the prior year.
The decrease was primarily attributable to lower levels of debt in fiscal 1995
versus 1994. Interest income in fiscal 1995 was $399,000 versus $174,000 in
1994. The increase is primarily related to higher cash balances invested in
fiscal 1995 versus 1994.
In 1995, the Company recorded a tax provision of 33.2% of income before income
taxes. This provision was offset by the
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utilization of net operating losses and the recognition of deferred tax assets
in accordance with SFAS No. 109, "Accounting for Income Taxes," totaling
$5,500,000.
Liquidity and Capital Resources
The Company's principal sources of working capital are product sales and royalty
revenue. Working capital increased $476,000 during fiscal 1996 and cash flows
provided by operations were $626,000. Cash flows from operating activities were
generated primarily from net income of $4,049,000, a decrease in deferred and
refundable taxes of $2,124,000, an increase in accounts payable of $341,000 and
depreciation and amortization of $935,000. This was offset by an increase in
marketable securities of $2,382,000, an increase in accounts receivable of
$1,342,000 and an increase in inventory of $1,224,000.
Net cash used in investing activities was $2,745,000. $1,676,000 was used to
purchase capital equipment in the current year and $3,497,000 was utilized to
invest in a private company. This was offset by the proceeds of $2,795,000 from
the sale of a trading security.
Net cash provided by financing activities in the current year was $70,000.
$989,000 was generated from the exercise of employee stock options and from the
sale of stock under the Company's employee stock purchase plan. This was offset
by the repurchase of 130,000 shares of the Company's common stock for $906,000.
The Company had a $3,000,000 line of credit during the year that was extended to
November 30, 1996. The Company did not utilize the line of credit during the
year.
Management believes that the Company will meet its cash requirements from
current cash on hand, other existing working capital, cash flows from
operations, and the utilization of the line of credit.
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Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
(In thousands)
September 30,
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 9,216 $ 11,265
Marketable securities 2,382 -
Accounts receivable, less allowance for doubtful
accounts of $88 in 1996 and in 1995 5,542 4,200
Inventories 4,211 2,987
Deferred and refundable taxes 2,224 4,348
Other current assets 480 418
-------- --------
Total current assets 24,055 23,218
Fixed assets-net 2,253 1,419
Other assets-net 4,391 1,569
-------- --------
Total assets $ 30,699 $ 26,206
======== ========
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 2,066 $ 1,725
Accrued liabilities 1,544 1,524
-------- --------
Total current liabilities 3,610 3,249
Commitments (See note)
Shareholders' equity:
Preferred stock, no par value; 1,000 shares
authorized, none issued
Common stock, no par value; 20,000 shares authorized:
Issued and outstanding; 14,820 shares and 14,552
shares at September 30, 1996 and 1995, respectively 20,723 19,916
Retained earnings 6,366 3,041
-------- --------
Total shareholders' equity 27,089 22,957
-------- --------
Total liabilities and shareholders' equity $ 30,699 $ 26,206
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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Consolidated Statements of Operations
(In thousands except per share data)
Year Ended September 30,
1996 1995 1994
Net sales $ 8,593 $ 8,293 $10,774
Royalty revenue 14,473 15,421 6,678
------- ------- -------
Total revenue 23,066 23,714 17,452
Costs and expenses:
Cost of goods sold 6,630 6,807 9,682
Research and development 6,551 5,754 7,071
Selling, general and administrative 8,002 6,944 7,530
------- ------- -------
Operating income (loss) 1,883 4,209 (6,831)
Interest and other expense 25 156 419
Interest and other income (4,670) (418) (289)
------- ------- -------
Income (loss) before income taxes 6,528 4,471 (6,961)
Provision (benefit) for income taxes 2,479 (4,055) -
------- ------- -------
Net income (loss) $ 4,049 $ 8,526 $(6,961)
======= ======= =======
Net income (loss) per share $ .26 $ .56 $ (.55)
======= ======= =======
Number of shares used in per share calculation 15,626 15,166 12,654
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
Page 17
<PAGE>
<TABLE>
Consolidated Statements of Shareholders' Equity
(In thousands except per share data)
<CAPTION>
Common Common Retained Total
Stock Stock Earnings Shareholders'
Shares Amount (Deficit) Equity
<S> <C> <C> <C> <C>
Balances at September 30, 1993 12,466 $14,727 $ 1,476 $16,203
Issuance of common stock:
Stock options exercised ($0.34-$3.82
per share) 308 504 - 504
Employee stock purchase plan ($1.07 and $1.65
per share) 196 258 - 258
Net loss - - (6,961) (6,961)
------ ------- ------- -------
Balances at September 30, 1994 12,970 15,489 (5,485) 10,004
Issuance of common stock:
Stock options exercised ($0.34-$4.57
per share) 544 1,262 - 1,262
Employee stock purchase plan ($1.07 and $3.83
per share) 134 230 - 230
Private placement 900 2,922 - 2,922
Stock warrants 4 13 - 13
Net income - - 8,526 8,526
------ ------- ------- -------
Balances at September 30, 1995 14,552 19,916 3,041 22,957
Issuance of common stock:
Stock options exercised ($0.82-$7.94
per share) 310 686 - 686
Employee stock purchase plan ($4.15 and $5.10
per share) 66 303 - 303
Stock repurchase (130) (182) (724) (906)
Stock warrants 22 - - -
Net income - - 4,049 4,049
------ ------- ------- -------
Balances at September 30, 1996 14,820 $20,723 $ 6,366 $27,089
====== ======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
Page 18
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
(In thousands)
<CAPTION>
Year Ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 4,049 $ 8,526 $(6,961)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 935 1,384 2,495
Loss on disposal of fixed assets 15 111 212
Provision for doubtful accounts 185 114 237
Provision for inventory allowances 480 176 233
Unrealized gains on marketable securities (2,041) - -
Realized gains on marketable securities (2,136) - -
Deferred and refundable income taxes 2,124 (4,104) 1,412
Decrease (increase) in accounts receivable (1,527) (529) 213
Decrease (increase) in inventories (1,770) 1,825 3,276
Decrease (increase) in other current assets (62) 418 722
Increase (decrease) in accounts payable 341 (298) 755
Increase (decrease) in accrued liabilities 33 (50) 226
Decrease in other long-term liabilities - - (113)
Royalty revenues utilized to retire note payable - - (5,000)
------- ------- -------
Net cash provided by (used in) operating activities 626 7,573 (2,293)
------- ------- -------
Cash flows provided by (used in) investing activities:
Acquisition of fixed assets (1,676) (1,222) (566)
Investment in unconsolidated company (3,497) - -
Sale of trading security 2,795 - -
Purchase of other assets (367) (446) (66)
------- ------- -------
Net cash used in investing activities (2,745) (1,668) (632)
------- ------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 989 4,427 762
Repurchase of common stock (906) - -
Proceeds from borrowings - 3,646 -
Repayments of borrowings (13) (3,723) (221)
------- ------- -------
Net cash provided by financing activities 70 4,350 541
------- ------- -------
Net increase (decrease) in cash (2,049) 10,255 (2,384)
Cash and cash equivalents, beginning of year 11,265 1,010 3,394
------- ------- -------
Cash and cash equivalents, end of year $ 9,216 $11,265 $ 1,010
======= ======= =======
<FN>
The accompanying notes are an integral part of these consolidated financial
statements.
</FN>
</TABLE>
Page 19
<PAGE>
Notes to Consolidated Financial Statements
(In thousands except per share data)
Summary of Significant Accounting Policies:
Zitel Corporation (the "Company") specializes in the design, manufacture and
marketing of high-performance, mission-critical storage subsystems for
relational database, batch and on-line transaction processing. The Company also
develops and markets single-system and multi-system performance management and
modeling software used on a variety of UNIX and proprietary platforms to manage
performance of client/server environments. These products are marketed worldwide
through a wide variety of channels including systems integrators, value-added
resellers and distributors, OEMs, and directly to end users. Additionally, the
Company is a reseller of Year 2000 services. Zitel conducts its business within
one industry segment. The following is a summary of Zitel's significant
accounting policies:
Principles of Consolidation:
The consolidated financial statements include the accounts of Zitel Corporation
and its wholly-owned subsidiaries. Zitel's preferred stock interest in the
unconsolidated company is accounted for under the equity method. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Cash Equivalents:
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Page 20
<PAGE>
Marketable Securities:
At September 30, 1996, the Company's marketable securities consisted entirely of
common shares of one company and were classified as trading securities. The
Company has entered into an agreement whereby it will not sell such shares until
January of 1997, after which time the Company intends to sell the shares,
dependent upon market conditions. The cost of the marketable securities was $341
thousand and the fair market value of the securities on September 30, 1996 was
$2,382 thousand. The difference between the cost of those securities and their
fair market value based on quoted market prices on September 30, 1996, is
included in other income.
Inventories:
Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.
Fixed Assets:
Fixed assets, other than leasehold improvements, are depreciated on a
straight-line basis over their estimated useful lives (2-7 years). Leasehold
improvements are amortized over the lesser of their useful life or remaining
term of the related lease. When assets are disposed of, the cost and related
accumulated depreciation are removed from the accounts and the resulting gains
and losses are included in the results of operations.
Deferred Software Implementation Costs:
The Company capitalizes substantially all costs related to the purchase of
software and its implementation which includes purchased software, consulting
fees and the use of certain specified Company resources. As of September 30,
1996, $238 thousand in costs had been capitalized and are included in other
long-term assets. No amortization has been charged as of September 30, 1996.
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.
Page 21
<PAGE>
Research and Development Expenditures:
Research and development expenditures are charged to operations as incurred.
Foreign Currency Translation:
The U.S. dollar is considered to be the functional currency for the Company's
foreign operations. Accordingly, non-monetary assets and liabilities have been
translated into U.S. dollars at a historical rate; monetary assets and
liabilities have been translated into U.S. dollars using the exchange rate at
the balance sheet date; and revenues and expenses have been generally translated
into U.S. dollars at the weighted average exchange rate during the period.
Foreign currency transaction gains and losses, as well as the effects of
translation (which have not been material in the aggregate), are included in the
accompanying statements of operations.
Income Taxes:
The Company accounts for income taxes under the liability method. Deferred tax
assets and liabilities are determined based on the difference between the
financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
Recent Accounting Pronouncement:
During March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires the Company to review for impairment
long-lived assets, certain identifiable intangibles and goodwill related to
those assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In certain situations, an
impairment loss would be recognized. Statement No. 121 will be effective for the
Company's fiscal year 1997. The Company has studied the implications of the
statement and based on its initial evaluation, does not expect it to have a
material impact on the Company's financial condition or results of operations.
During October 1995, the Financial Accounting Standards Board issued Statement
No. 123 (SFAS No. 123), "Accounting for Stock-
Page 22
<PAGE>
Based Compensation," which establishes a fair value based method of accounting
for stock-based compensation plans. The Company is currently following the
requirements of APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company will adopt SFAS No. 123 in fiscal year 1997 utilizing the disclosure
alternative.
Net Income (Loss) Per Share:
Net income (loss) per share amounts are computed by dividing the net income
(loss) by the weighted average number of common shares and common equivalent
shares (when dilutive) outstanding during each year presented using the treasury
stock method.
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. The Company
places its cash investments with high credit quality financial institutions and
limits the amount of exposure to any one financial institution. Concentrations
of credit risk with respect to trade receivables are limited due to the
diversity of the Company's customers both geographically and within different
industry segments.
Year Ended September 30,
1996 1995 1994
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest $ - $ 57 $310
Income taxes 82 136 19
Fair Value of Financial Instruments:
Carrying value amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
September 30,
1996 1995
Inventories:
Raw materials $ 1,515 $ 734
Work in progress 738 733
Finished goods 1,958 1,520
------- -------
$ 4,211 $ 2,987
======= =======
Page 23
<PAGE>
September 30,
1996 1995
Fixed Assets:
Manufacturing equipment $ 3,666 $ 3,504
Office furniture and equipment 2,250 2,197
Engineering equipment 4,334 4,462
Leasehold improvements 666 638
------- -------
10,916 10,801
Less accumulated depreciation
and amortization (8,663) (9,382)
------- -------
$ 2,253 $ 1,419
======= =======
Other Assets:
Investment in unconsolidated companies $ 3,563 $ 1,000
Other 1,252 885
------- -------
4,815 1,885
Less accumulated amortization (424) (316)
------- -------
$ 4,391 $ 1,569
======= =======
Investment in Unconsolidated Companies:
At September 30, 1995, Zitel had a $1.0 million investment in a company which
was accounted for under the cost method. During fiscal year 1996, the company
completed its initial public offering and Zitel sold a portion of its
investment. The remaining investment is classified as a trading marketable
security at September 30, 1996.
In November 1995, Zitel purchased 9.6 million shares of preferred stock and
certain technology rights, to be commercialized, of a company in the development
stage, in exchange for $3.35 million in cash, $66 thousand in equipment and $150
thousand in future rent and administrative services. As of September 30, 1996,
the company had utilized approximately $147 thousand of such rent and
administrative services. The technology rights include an exclusive license to
manufacture and market certain products using proprietary technology of the
company, subject to a royalty to the company. Zitel also has an option to
purchase 500
Page 24
<PAGE>
thousand shares of the company's common stock from a shareholder of the company
at $.60 per share, exercisable beginning July 1997.
The following is a summary of financial information with respect to the company,
as of September 30, 1996:
Net sales $ -
Gross profit -
Net loss (1,873)
Current assets 2,612
Non-current assets 1,009
Current liabilities 324
In July 1996, Zitel entered into an agreement to resell services of the company
on a commission basis. The agreement also provides Zitel the exclusive right to
create portable, on-site centers for the performance of services offered by the
company for certain accounts in certain circumstances.
Note Receivable From Related Party:
The Company holds a note receivable from an officer of an unconsolidated
company. The note bears interest at 8% per annum and has a principle balance of
$300 thousand. As of September 30, 1996, interest in the amount of $18 thousand
has been prepaid on the note. The note is included in other long-term assets at
September 30, 1996.
September 30,
1996 1995
Accrued Liabilities:
Accrued payroll and related $ 435 $ 637
Accrued vacation 594 526
Accrued commissions 24 24
Other accrued liabilities 491 337
------- -------
$ 1,544 $ 1,524
======= =======
Line of Credit:
The Company has a $3.0 million bank line of credit which expired on September
30, 1996 and was subsequently extended to November 30, 1996. Interest is at the
prime rate (8.25% at September 30, 1996) and is payable monthly. The Company is
required to
Page 25
<PAGE>
maintain certain specified financial ratios and profitable operations on a
quarterly basis. As of September 30, 1996, the Company had no borrowings
outstanding under the line of credit.
Commitments:
The Company leases its primary manufacturing and office facility under a
noncancelable operating lease which expires in March 1998. The Company is
responsible for taxes, maintenance and insurance. Rent expense incurred under
all operating leases and charged to operations was $574 thousand in 1996, $606
thousand in 1995 and $682 thousand in 1994.
Future minimum obligations under the facility lease at September 30, 1996
aggregate approximately $753 thousand, payable as follows:
Fiscal Year
1997 $502
1998 251
Capital Stock:
- -------------
Preferred Stock:
In October 1983, the Company authorized one million shares of preferred stock.
The Board of Directors has the authority to establish all rights and terms with
respect to the preferred stock without future vote or action by the
shareholders.
Private Placement:
In November 1994, the Company issued 900 thousand shares of common stock in a
private placement. Net proceeds from this transaction were $2.9 million. Common
stock purchase warrants totaling approximately 46 thousand were issued as a part
of this transaction. The warrants, which are immediately exercisable at $3.51
per share, expire in December 1999.
Stock Option Plans:
At September 30, 1996, the Company had reserved 4.6 million common shares for
issuance under its 1990 Stock Option, 1982 Incentive Option and 1984
Supplemental Stock Option Plans. Under the Company's stock option plans, options
become exercisable at
Page 26
<PAGE>
dates and in amounts as specified by the Compensation Committee of the Board of
Directors and expire two to ten years from the date of grant. Options may be
granted to employees at prices not less than fair market value at the date of
grant. At September 30, 1996, there were no shares reserved for future grants.
Activity in the Company's option plans during fiscal 1996 is summarized as
follows:
Options Outstanding
Shares Per Share Amount Total
Balances, September 30, 1995 1,860 $ .34-$9.50 $ 5,377
Granted 260 $4.82-$9.88 1,851
Canceled (40) $1.19-$7.94 (190)
Exercised (310) $ .82-$7.94 (660)
----- ----------- -------
Balances, September 30, 1996 1,770 $ .34-$9.88 $ 6,378
===== =======
At September 30, 1996, options for 1,044 thousand shares were exercisable at
prices ranging from $0.34 to $9.88.
Preferred Share Purchase Rights Plan:
In June 1996, the Company adopted a Preferred Share Purchase Rights Plan whereby
shareholders will receive one right to purchase one one-hundredth of a share of
a new series of preferred stock ("Rights") for each outstanding share of the
Company's common stock held at the date of record, July 1, 1996. The Rights do
not become exercisable or transferable apart from the common stock until a
person or group (a) acquires beneficial ownership of 15% or more of the
Company's common stock or (b) announces a tender or exchange offer, the
consummation of which would result in ownership by a person or group of 15% or
more of the Company's common stock. The Rights will be distributed as a
non-taxable dividend and will expire in ten years from the date of declaration
of the dividend. The exercise price is $69.50 per 1/100 of a share of preferred
stock.
Employee Benefit Plans:
- ----------------------
Stock Purchase Plan:
In April 1984, the Board of Directors approved the adoption of an Employee Stock
Purchase Plan under which 400 thousand shares of common stock were reserved for
issuance to eligible employees.
Page 27
<PAGE>
In January 1988, January 1990, January 1992, and January 1995, the shareholders
approved amendments to increase the shares reserved for the Plan by 300 thousand
shares, 400 thousand shares, 400 thousand shares, and 500 thousand shares,
respectively. Employees who do not own 5% or more of the outstanding shares are
eligible to participate through payroll deductions, which may not exceed 10% of
an employee's compensation. At the end of each offering period, shares are
purchased by the participants at 85% of the lower of the fair market value at
the beginning or the end of the offering period. The 15% discount is treated as
equivalent to the cost of issuing stock for financial reporting purposes. 66
thousand shares were issued under the Plan during fiscal 1996. Since inception
of the Plan, approximately 1,600 thousand shares have been issued.
Savings and Investment Plan:
The Company has a Savings and Investment Plan, qualified under sections 401(k)
and 401(a) of the Internal Revenue Code, that enables participating U.S.
employees to prepare for retirement. The Plan allows eligible employees to defer
up to 15%, but no greater than $9.5 thousand per year, of their earnings on a
pre-tax basis through contributions to the Plan. The Plan provides for employer
contributions at the discretion of the Board of Directors; however, no such
contributions were made in fiscal 1996, 1995, or 1994.
Income Taxes:
For the year ended September 30, 1994, there was no provision for income taxes.
The provision (benefit) for income taxes for the years ended September 30, 1996
and 1995 is as follows:
1996 1995
Current expense:
Federal $ 77 $ 125
State 23 -
Foreign - 7
------- -------
100 132
Deferred tax expense (benefit):
Federal 2,091 (3,735)
State 288 (452)
------- -------
$ 2,479 $(4,055)
======= =======
Page 28
<PAGE>
The Company's effective tax rate for the years ended September 30, 1996 and 1995
differs from the U.S. federal statutory income tax rate as follows:
1996 1995
Federal income tax at statutory rate 34.0% 34.0%
State taxes, net of federal benefit 6.1 6.1
Tax credits (2.7) (9.7)
Other, net .6 2.8
Net operating losses utilized - (33.5)
Change in valuation allowance - (90.4)
------- -------
38.0% (90.7%)
======= =======
The following table shows the major components of the deferred tax asset as of
September 30, 1996 and 1995:
Deferred tax assets and liabilities: 1996 1995
Current:
Accounts receivable, inventory and
other reserves $ 694 $ 691
Accrued liabilities 286 264
Net operating losses 373 1,673
Tax credit carryforwards 1,015 1,114
Appreciation of marketable securities (819) -
Other 259 445
------- -------
Net deferred tax asset $ 1,808 $ 4,187
======= =======
At September 30, 1996, the Company has federal and state net operating loss
(NOL) carryforwards of $1.0 million and $.5 million, respectively, to reduce
future taxable income. These carryforwards expire in 1998 through 2009, if not
utilized.
As a result of the acquisition of CHI Systems, Inc. in 1992, CHI Systems
experienced a change of ownership as defined by the Internal Revenue Code.
Consequently, utilization of approximately $500 thousand and $100 thousand of
the Company's federal and state NOL carryforwards, respectively, will be subject
to an annual limitation of approximately $100 thousand available to offset CHI
Systems' separate taxable income. These carryforwards expire in 1998 through
2008, if not utilized.
Page 29
<PAGE>
Research and Development Contract:
During fiscal year 1992, the Company entered into a joint development contract
to develop a product with a third party. The Company received funding from the
third party based on completion milestones. In addition, upon completion of the
project, the Company has and will receive a royalty based on sales by the third
party of the product developed. All expenses incurred by the Company were
charged to research and development expense as incurred. Amounts received from
the third party were recognized as a reduction of research and development
expense on a percentage of completion basis and amounted to $1,101 thousand for
the year ended September 30, 1994. For the year ended September 30, 1994, the
Company incurred expenses of $2,928 thousand related to the contract. Royalties
totaling approximately $14.5 million, $15.4 million and $300 thousand were
received from the third party in fiscal years 1996, 1995 and 1994, respectively.
Foreign Operations:
The Company's foreign operations are those of its European branch and
subsidiary. All of their sales are made to unaffiliated European customers. The
following table summarizes the Company's European operations:
1996 1995 1994
Net sales $2,924 $1,566 $2,138
Operating income (loss) 585 (124) (489)
Total assets 1,368 386 1,176
Export Sales:
Export sales from domestic operations were $1.4 million, $1.5 million and $2.8
million in 1996, 1995 and 1994, respectively.
Major Customers:
Sales to two customers amounted to 13% and 11.8% of net sales in 1996. Sales to
one customer amounted to 14.3% and 14.5% of net sales in 1995 and 1994,
respectively.
Page 30
<PAGE>
Subsequent Events:
On November 27, 1996, the Company's common stock was split two-for-one in the
form of a stock dividend to shareholders of record on November 18, 1996. All
applicable share and per-share data in these financial statements have been
restated to give effect to the stock split.
Page 31
<PAGE>
Report of Independent Accountants
To the Shareholders and Board of Directors
Zitel Corporation
We have audited the accompanying consolidated balance sheets of Zitel
Corporation and subsidiaries as of September 30, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended September 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Zitel
Corporation and subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
San Jose, California
October 24, 1996, except for the note entitled "Subsequent Events" to which the
date is November 18, 1996.
Page 32
<PAGE>
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors under the caption "Election of Directors" of
the Proxy Statement for the Annual Meeting of Shareholders to be held February
27, 1997, is incorporated herein by reference. The information regarding
executive officers under the caption "Executive Officers of the Registrant" is
included herein on pages 9 and 10.
Item 11: EXECUTIVE COMPENSATION
The information under the caption "Executive Compensation of the Proxy Statement
for the Annual Meeting of Shareholders to be held February 27, 1997, is
incorporated herein by reference.
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information under the caption "Security Ownership of Certain Beneficial
Owners and Management" of the Proxy Statement for the Annual Meeting of
Shareholders to be held on February 27, 1997, is incorporated herein by
reference.
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Financial Statements and Schedules
The consolidated financial statements, together with the report
thereon from Coopers & Lybrand, appear in Item 8 in this Form 10-K. Financial
statement schedules not included in this Form 10-K have been omitted because
they are not applicable or the required information is shown in the financial
statements or the notes thereto.
Page 33
<PAGE>
(1) Financial Statements:
Consolidated Balance Sheets (p. 16)
Consolidated Statements of Operations (p. 17)
Consolidated Statements of Shareholders' Equity (p. 18)
Consolidated Statements of Cash Flows (p. 19)
Notes to Consolidated Financial Statements (pgs. 20-31)
Report of Independent Accountants (p. 32)
(2) Financial Statement Schedules:
Report of Independent Accountants (p. 41)
SCHEDULE VIII-Valuation and Qualifying Accounts (p. 42)
(3) Exhibits
Exhibits filed as part of this report are listed below. Certain
exhibits have been previously filed with the Commission and are
incorporated by reference.
Exhibit
Number Description
- ------- -----------
3.1 Restated Articles of Incorporation. (7)
3.2 Bylaws. (2)
10.1 1982 Incentive Stock Option Plan, as amended, and form of Stock Option
Grant. (3)
10.2 1984 Supplemental Stock Option Plan and form of Stock Option Grant. (3)
10.3 1984 Stock Purchase Plan, as amended through November 1987. (7)
10.4 Agreement dated February 27, 1979 among Robert H. Welch, Jack Melchor,
Bernard Wagner, Tony Tadin, John C. Blackie, John J. DePalma, James F.
Riley and the Company, amended as of November 15, 1979. (1)
10.5 Agreement for the Sale and Purchase of Intel Memory Product Lines dated as
of February 2, 1983 between the Company and Intel Corporation, and
amendments dated March 16, 1983, April 22, 1983, June 23, 1983 and October
25, 1983 (portions deleted pursuant to a Confidentiality Order). (1)
Page 34
<PAGE>
10.6 Stock Purchase Agreement dated September 29, 1980 between the Company and
Oxford Venture Fund, Oxford Venture (California) Fund II, and Oxford
Venture Offshore Fund. (1)
10.7 Stock Purchase Agreement dated June 2, 1983 between the Company and Oxford
Venture Fund, Oxford Venture (California) Fund II, and Oxford Venture
Offshore Fund. (1)
10.8 Agreement dated as of October 1, 1983 between the Company and Motorola,
Inc. (portions deleted pursuant to a Confidentiality Order). (1)
10.9 Agreement and Plan of Reorganization among the Company, Zitel Merger
Corporation and Gifford Computers Systems, Inc. (4)
10.10 Agreement for Purchase and Sale of Assets dated as of November 1, 1985
between the Company and React Corporation with Exhibits (portions deleted
pursuant to a Confidentiality Order). (5)
10.11 Agreement for Purchase and Sale of Marketing Rights dated as of June 8,
1986 between the Company and React Corporation (portions deleted pursuant
to a Confidentiality Order). (6)
10.12 Lease agreement dated February 7, 1986 between the Company, John
Arrillaga, Trustee, and Richard T. Peery, Trustee. (7)
10.13 Senior Management Incentive Plan (SMIP) dated November 18, 1987. (8)
10.14 Unisys Cooperative Marketing Agreement dated April 13, 1990 between the
Company and Unisys Corporation and Amendment One effective October 25,
1990. (The Company has applied for confidential treatment of a portion of
this Exhibit.) (9)
10.15 Amendment Two to the Unisys Cooperative Marketing Agreement effective
February 5, 1991. (10)
10.16 Amendment Three to the Unisys Cooperative Marketing Agreement effective
March 31, 1991. (10)
10.17 Amendment Four to the Unisys Cooperative Marketing Agreement effective
June 30, 1991. (10)
Page 35
<PAGE>
10.18 Sublease agreement dated August 11, 1992 between the Company and Credence
Systems Corporation. (11)
10.19 Loan and Security Agreement dated August 2, 1993 between the Company and
IBM Credit Corporation. (12)
10.20 Development Agreement between the Company and IBM Corporation dated
October 14, 1992. (Confidential treatment has been requested for a portion
of the exhibit.) (13)
10.21 Amendment No. 1 dated June 23, 1993 to the Development Agreement between
the Company and IBM Corporation dated October 14, 1992. (Confidential
treatment has been requested for a portion of the exhibit.) (13)
10.22 Amendment No. 2 dated July 26, 1993 to the Development Agreement between
the Company and IBM Corporation dated October 14, 1992. (Confidential
treatment has been requested for a portion of the exhibit.) (13)
10.23 Amendment No. 3 dated November 29, 1993 to the Development Agreement
between the Company and IBM Corporation dated October 14, 1992.
(Confidential treatment has been requested for a portion of the exhibit.)
(13)
10.24 Amendment No. 4 dated April 15, 1994 to the Development Agreement between
the Company and IBM Corporation dated October 14, 1992. (Confidential
treatment has been requested for a portion of the exhibit.) (13)
10.25 Loan and Security Agreement, dated as of September 30, 1994, between the
Company and CoastFed Business Credit Corporation. (14)
10.26 Accounts Collateral Security Agreement, dated as of September 30, 1994,
between the Company and CoastFed Business Credit Corporation. (14)
10.27 Lease Agreement dated February 16, 1995 between the Company and Renco
Investment Company. (15)
10.28 Series A Preferred Stock Purchase Agreement between the Company and
MatriDigm Corporation dated November 17, 1995. (Confidential treatment has
been requested for a portion of the exhibit. The confidential portion has
been omitted and filed separately with the Commission.)(16)
Page 36
<PAGE>
11.1 Statement regarding computation of earnings per share.
22.1 Subsidiaries of the Company.
24.1 Consent of Independent Accountants.
27 Financial Data Schedule.
- ----------
(1) Incorporated by reference to the indicated exhibits to the Company's
Registration Statement on Form S-1 (File No. 2-87445) filed on October 27, 1983.
(2) Incorporated by reference to the indicated exhibits to the Company's
Registration Statement on Form S-8 (File No. 2-90366) filed on April 6, 1984.
(3) Incorporated by reference to the indicated exhibits to the Company's
Registration Statement on Form S-8 (File No. 2-96804) filed on March 29, 1985.
(4) Incorporated by reference to the indicated exhibits to the Company's Current
Report on Form 8-K filed on September 20, 1984.
(5) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 18, 1985.
(6) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed August 14, 1986.
(7) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 17, 1987.
(8) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 21, 1988.
(9) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 20, 1990.
(10) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 20, 1991.
(11) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 18, 1992.
Page 37
<PAGE>
(12) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed August 13, 1993.
(13) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed May 13, 1994.
(14) Incorporated by reference to the indicated exhibits to the Company's Annual
Report on Form 10-K filed December 22, 1994.
(15) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed May 11, 1995.
(16) Incorporated by reference to the indicated exhibits to the Company's
Quarterly Report on Form 10-Q filed February 13, 1996 and Form 10-QA filed on
December 16, 1996.
(b) Reports on Form 8-K
None.
For the purposes of complying with the amendments to the rules governing Form
S-8 under the Securities Act of 1933, the undersigned Registrant hereby
undertakes as follows, which undertaking shall be incorporated by reference into
Registrant's Registration Statements on Form S-8 No.'s 33-40361 and 33-47697
(filed May 3, 1991 and May 6, 1992).
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
Page 38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ZITEL CORPORATION
By: /s/ Jack H. King
------------------------------
Jack H. King
President and Director
Chief Executive Officer
December 20, 1996
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jack H. King and Henry C. Harris, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
herewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Page 39
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Jack H. King President and Director December 20, 1996
Jack H. King (Chief Executive Officer)
Henry C. Harris Vice President - December 20, 1996
Henry C. Harris Finance and Administration,
Secretary (Chief Financial
and Accounting Officer)
Catherine P. Lego Director December 20, 1996
Catherine P. Lego
William R. Lonergan Director December 20, 1996
William R. Lonergan
William M. Regitz Director December 20, 1996
William M. Regitz
Robert H. Welch Director December 20, 1996
Robert H. Welch
Page 40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Zitel Corporation
Fremont, California
Our audit of the consolidated financial statements of Zitel Corporation and
Subsidiaries referred to in our report dated October 24, 1996 appearing in Item
8 in this Annual Report on Form 10-K also included an audit of the financial
statement schedule listed in Item 14a of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
October 24, 1996
Page 41
<PAGE>
SCHEDULE VIII
ZITEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
FISCAL YEARS 1994, 1995 AND 1996
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Charged to
Balance Revenues Write-offs Balance at
Beginning and Costs and End of
Description of Period and Expense Deductions Period
----------- --------- ----------- ---------- ------
1994
- --------------
Allowance for
Doubtful
Accounts $259,000 $ 282,000 $ 45,000 $496,000
Provision for
Obsolete
Inventory $139,000 $ 730,000 $ 318,000 $551,000
1995
- --------------
Allowance for
Doubtful
Accounts $496,000 $(408,000) - $ 88,000
Provision for
Obsolete
Inventory $551,000 $ 278,000 $ 520,000 $309,000
1996
- --------------
Allowance for
Doubtful
Accounts $ 88,000 - - $ 88,000
Provision for
Obsolete
Inventory $309,000 $ 480,000 $ 289,000 $500,000
Page 42
EXHIBIT 11.1
ZITEL CORPORATION
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
Year Ended September 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
Average common shares
outstanding 12,654,000 14,158,000 14,726,000
Computation of incremental
outstanding shares
Net effect of dilutive
stock options based
on treasury stock
method 0 1,008,000 900,000
12,654,000 15,166,000 15,626,000
Net income (loss) $(6,961,000) $8,526,000 $4,049,000
Net income (loss) per share $ (0.55) $ 0.56 $ 0.26
Primary and fully diluted income (loss) per share differ by less than one cent
in all periods.
Page 43
EXHIBIT 22.1
SUBSIDIARIES OF ZITEL CORPORATION
1. Zitel International Corporation
47211 Bayside Parkway
Fremont, CA 94538-6517
2. Zitel SARL
47211 Bayside Parkway
Fremont, CA 94538-6517
3. Zitel Export Corporation
47211 Bayside Parkway
Fremont, CA 94538-6517
4. Performance & Modeling, Inc.
47211 Bayside Parkway
Fremont, CA 94538-6517
5. CHI Systems, Inc.
47211 Bayside Parkway
Fremont, CA 94538-6517
Page 44
EXHIBIT 24.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Zitel Corporation on Form S-8 (File No.'s 33-40361 and 33-47697) of our report
dated October 24, 1996 appearing in Item 8 in this Annual Report on Form 10-K.
We also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 42 of this Form 10-K.
Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
San Jose, California
December 20, 1996
Page 45
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Financial Data Schedule for 10-K
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 9,216
<SECURITIES> 2,382
<RECEIVABLES> 2,204
<ALLOWANCES> 88
<INVENTORY> 4,211
<CURRENT-ASSETS> 24,055
<PP&E> 10,915
<DEPRECIATION> 8,662
<TOTAL-ASSETS> 30,699
<CURRENT-LIABILITIES> 3,610
<BONDS> 0
<COMMON> 20,723
0
0
<OTHER-SE> 6,366
<TOTAL-LIABILITY-AND-EQUITY> 30,699
<SALES> 8,593
<TOTAL-REVENUES> 23,066
<CGS> 6,630
<TOTAL-COSTS> 14,553
<OTHER-EXPENSES> (4,645)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,528
<INCOME-TAX> 2,479
<INCOME-CONTINUING> 4,049
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,049
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
