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, 1996
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,
1996 was 7,436,803
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1996 (unaudited) and September 30, 1995 ............. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Nine Months
Ended June 30, 1996 and 1995 ................................ 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Nine Months Ended
June 30, 1996 and 1995 ....................................... 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
per Common and Common Equivalent Share ........................ 11
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K ......................... 12
Page 2
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
($000's)
June 30, September 30,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 7,852 $11,265
Accounts receivable, net 8,041 4,200
Inventories 3,896 2,987
Deferred and refundable taxes 2,035 4,348
Other current assets 2,236 418
------- -------
Total current assets 24,060 23,218
Fixed assets, net 1,986 1,419
Other assets, net 4,275 1,569
------- -------
Total assets $30,321 $26,206
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 13
Accounts payable 1,193 1,725
Accrued liabilities 1,542 1,511
------- -------
Total current liabilities 2,735 3,249
Shareholders' equity:
Common stock 20,772 19,916
Retained earnings 6,814 3,041
------- -------
Total shareholders' equity 27,586 22,957
------- -------
Total liabilities and
shareholders' equity $30,321 $26,206
======= =======
The accompanying notes are an integral part of these financial statements.
Page 3
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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,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
Net sales $ 1,911 $ 2,791 $ 6,501 $ 6,760
Royalty revenue 3,733 4,209 11,916 12,946
------- ------- ------- -------
Total revenue 5,644 7,000 18,417 19,706
Cost of goods sold 1,780 2,182 4,819 5,618
Research and development
expenses 1,639 1,384 4,832 4,376
Selling, general &
administrative expenses 1,974 1,921 5,756 5,495
------- ------- ------- -------
Operating income 251 1,513 3,010 4,217
Other income (1,612) (76) (3,125) (119)
------- ------- ------- -------
Income before
income taxes 1,863 1,589 6,135 4,336
Provision (benefit) for
income taxes 717 595 2,362 (3,875)
------- ------- ------- -------
Net income $ 1,146 $ 994 $ 3,773 $ 8,211
======= ======= ======= =======
Net income per share $ .15 $ .13 $ .48 $ 1.09
======= ======= ======= =======
Number of shares used in per
share calculations 7,891 7,677 7,798 7,543
======= ======= ======= =======
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,
1996 1995
Cash flows provided by (used in) ------ ------
operating activities:
Net income $ 3,773 $ 8,211
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 688 1,110
Provision for doubtful accounts 260 349
Provision for inventory allowances 360 297
Unrealized gains on trading security (1,215) -
Gain on sale of trading security (1,569) -
Increase in accounts receivable (1,991) (2,808)
Decrease (increase) in inventories (1,269) 1,942
Decrease (increase) in deferred and
refundable taxes 2,313 (3,841)
Increase in other current assets (144) (170)
Decrease in accounts payable (532) (821)
(Decrease) increase in accrued liabilities 31 (225)
------- -------
Net cash provided by operating activities 705 4,044
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (1,186) (407)
Purchase of other assets (3,775) (322)
------- -------
Net cash used in investing activities (4,961) (729)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 856 4,227
Payments of long-term debt (13) (58)
------- -------
Net cash provided by financing activities 843 4,169
------- -------
Net increase (decrease) in cash (3,413) 7,484
Cash, beginning of period 11,265 1,010
------- -------
Cash, end of period $ 7,852 $ 8,494
======= =======
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, 1996 are not necessarily indicative of
the results expected for the full year.
2. Inventories:
June 30, September 30,
1996 1995
--------- -------------
Raw materials $ 832 $ 734
Work in process 903 733
Finished goods 2,161 1,520
------ ------
$3,896 $2,987
====== ======
Page 6
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3. Other current assets:
At the beginning of fiscal 1996, an investment in an unconsolidated company
in the amount of $1,000,000 was revalued due to a public offering by the
investee, which took place in October 1995. This investment, which was
previously classified in other long-term assets, was reclassified to other
current assets. In accordance with S.F.A.S. No. 115, this investment will be
revalued to the current market value at the end of each reporting period. A
portion of this investment was sold in June 1996. Gains in the amount of
$1,569,000 have been realized on this sale and are included in other income.
Cumulative unrealized gains recognized in other income through June 30, 1996 on
the remaining portion of the investment amounts to $1,215,000.
4. Other assets:
On November 17, 1995, the Company finalized an agreement to acquire 37.5% of
MatriDigm Corporation, a privately held company. The investment, which consisted
of preferred stock, totaled $3,350,000. Under the agreement, the Company
obtained an exclusive license from MatriDigm to incorporate its technology in
the development of new products. The Company is not currently developing any new
products that incorporate the technology.
5. Effective October 1995, the Company negotiated a $3,000,000 revolving
accounts receivable line of credit with a commercial bank. The line is
collateralized by accounts receivable, inventory, equipment and tangible assets.
Interest is at the prime rate (8.25% at June 30, 1996) and is payable monthly.
The line of credit expires on September 30, 1996. At June 30, 1996, the Company
had no borrowings against the line.
6. 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.
7. Income 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 $1,146,000 ($0.15 per share) for the quarter
ended June 30, 1996 versus net income of $994,000 ($0.13 per share) for the same
quarter of the prior year. Results for the quarter included a gain of $1,487,000
on an investment held for resale. Weighted average shares outstanding in the
third quarter of fiscal 1996 were 7,891,000 compared to 7,677,000 for the third
quarter of fiscal 1995.
For the nine months ended June 30, 1996, the Company recorded net income of
$3,773,000 ($0.48 per share) versus net income of $8,211,000 ($1.09 per share)
for the same period a year earlier. Year to date, gains in the amount of
$2,784,000 ($1,569,000 and $1,215,000, realized and unrealized, respectively)
have been recognized on the investment held for resale. Included in the current
year is a tax provision of $2,362,000 (38.5% of income before income taxes)
compared to a tax benefit in the prior year of $3,875,000 resulting from the
recognition of deferred tax assets in accordance with S.F.A.S. No. 109,
Accounting for Income Taxes. Weighted average shares outstanding in the first
nine months of fiscal 1996 were 7,798,000 compared to 7,543,000 for the first
nine months of fiscal 1995.
Total revenue for the quarter ended June 30, 1996 was $5,644,000 versus
$7,000,000 for the same period a year earlier. Revenue for the current quarter
included $3,733,000 in royalty revenue from the IBM RAMAC product versus
$4,209,000 in the same quarter of the prior year. For the nine months ended June
30, 1996, total revenue was $18,417,000 versus $19,706,000 for the same period
of the prior year. Year-to-date royalty revenues amounted to $11,916,000 during
the current year compared to $12,946,000 for the same period a year earlier. The
Company expects that royalty revenue will remain strong for the near future;
however, should the third party's sales decline or should royalty-bearing
products be replaced by non-royalty-bearing products, the Company's total
revenue could be materially and adversely affected.
Net sales for the quarter ended June 30, 1996 were $1,911,000 versus $2,791,000
for the same quarter of the prior year. Net sales for the nine-month period
ended June 30, 1996 were $6,501,000 compared to $6,760,000 for the same period a
year
Page 8
<PAGE>
earlier. Net sales during the current quarter decreased as a result of the
discontinuance of sales of the Company's OEM HiPPI interface card products,
partially offset by a slight increase in net sales of CASD-II products, which
began shipping earlier in the fiscal year. In December 1995, the Company
announced general availability of SCP-II for the open systems market. The
Company did not realize significant net sales in that market during the third
quarter but management continues to believe the price/performance
characteristics for certain applications should make SCP-II an attractive
alternative for vendors and users of open systems platforms. However, commercial
success remains subject to risks and uncertainties, including unanticipated
technical problems, the continuing need to achieve Company credibility in the
open systems market, and the potential introduction of more cost-effective
competitive products.
Gross margin for the quarter and nine months ended June 30, 1996 was 7% and 26%
of net sales, respectively. This compares to 22% and 17% of net sales for the
same periods a year earlier. The decrease in gross margin percentage for the
quarter ended June 30, 1996 is primarily attributable to a change in product mix
and to the amortization of materials-related standards changes. For the nine
month period ended June 30, 1996, the increase in gross margin percentage is
attributable to increased sales of higher margin CASD-II products and a decrease
in other cost of sales which do not vary directly with sales volume. The Company
does not believe that the gross margins reported for the current quarter just
ended are necessarily indicative of the gross margins to be expected in the
event net sales should increase significantly; there can be no assurance that
net sales will increase significantly.
Research and development expenses for the quarter ended June 30, 1996 were 29%
of total revenue compared to 20% for the same period a year earlier. Actual
spending increased $255,000. For the nine-month period, research and development
was 26% of total revenue versus 22% in the prior year. Actual spending increased
$456,000. The increase in spending in the two periods is primarily related to
the increase in development spending and an increase in personnel.
Selling, general and administrative expenses were 35% of total revenue for the
current quarter versus 27% in the prior year. Actual spending increased $53,000.
For the nine-month period, selling, general and administrative expenses were 31%
of total revenue versus 28% in the prior year. Actual spending increased
$261,000.
Page 9
<PAGE>
Other income was $1,612,000 for the quarter just ended versus other income of
$76,000 in the same quarter of the prior year. Included in the current quarter
is a gain of $1,487,000 on an investment held for resale. Interest income for
the quarter was $114,000 versus $120,000 in the prior year. For the nine months
just ended, other income was $3,125,000 as compared to $119,000 in the prior
year. Included in other income for the current year is $2,784,000 ($1,569,000
realized and $1,215,000 unrealized) of income recognized related to an
investment held for resale. Interest income in the current year is $342,000
versus $247,000 in the prior year.
Liquidity and Capital Resources
For the nine-month period ended June 30, 1996, working capital increased
$1,356,000 and cash flows provided by operating activities were $705,000. Cash
flows from operating activities were generated primarily from net income of
$3,773,000, a decrease in deferred and refundable taxes of $2,313,000 and
depreciation and amortization of $688,000. This was offset by an increase in
gains on a trading security of $2,784,000, an increase in accounts receivable of
$1,991,000, an increase in inventory of $1,269,000, and a decrease in accounts
payable of $532,000. Cash in the amount of $1,186,000 was used to purchase
capital equipment and other assets increased $3,775,000 in the current year. Net
cash provided by financing activities consisted of the issuance of common stock
in the amount of $856,000. The Company has a $3,000,000 line of credit which
expires on September 30, 1996. At June 30, 1996, the Company had no borrowings
outstanding on the line of credit.
Management believes that the Company will meet its cash requirements from
current cash on hand, existing working capital, cash flows from operations, and
the utilization of the line of credit.
- -------------------------------------------------------------
Zitel and CASD are registered trademarks of Zitel Corporation. SCP is a
trademark of Zitel Corporation. IBM and RAMAC are registered trademarks of IBM
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 PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1996 1995 1996 1995
------ ------ ------ ------
Weighted average common
shares outstanding 7,398 7,218 7,341 7,017
Computation of incremental
outstanding shares:
Net effect of dilutive
stock options based on
treasury stock method 493 459 457 526
------ ------ ------ ------
7,891 7,677 7,798 7,543
====== ====== ====== ======
Net income $1,146 $ 994 $3,773 $8,211
====== ====== ====== ======
Net income per share $ .15 $ .13 $ .48 $ 1.09
====== ====== ====== ======
Primary and fully diluted income 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
Exhibit 27 - Financial Data Schedule
(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 12, 1996 Jack H. King
Jack H. King
President &
Chief Executive Officer
Page 13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,852
<SECURITIES> 1,674
<RECEIVABLES> 2,106
<ALLOWANCES> 87
<INVENTORY> 3,896
<CURRENT-ASSETS> 24,060
<PP&E> 11,965
<DEPRECIATION> (9,979)
<TOTAL-ASSETS> 30,321
<CURRENT-LIABILITIES> 2,735
<BONDS> 0
<COMMON> 20,772
0
0
<OTHER-SE> 6,814
<TOTAL-LIABILITY-AND-EQUITY> 30,321
<SALES> 1,911
<TOTAL-REVENUES> 5,644
<CGS> 1,780
<TOTAL-COSTS> 3,613
<OTHER-EXPENSES> (1,612)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,863
<INCOME-TAX> 717
<INCOME-CONTINUING> 1,146
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,146
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
