UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 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 March
31, 1996 was 7,364,312.
<PAGE>
ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1996 (unaudited) and September 30, 1995 .. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Six Months
Ended March 31, 1996 and 1995 ..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Six Months Ended
March 31, 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)
March 31, September 30,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 7,648 $11,265
Accounts receivable, net 5,645 4,200
Inventories 4,508 2,987
Deferred and refundable taxes 2,754 4,348
Other current assets 2,838 418
------- -------
Total current assets 23,393 23,218
Fixed assets, net 1,492 1,419
Other assets, net 3,876 1,569
------- -------
Total assets $28,761 $26,206
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4 $ 13
Accounts payable 1,276 1,725
Accrued liabilities 1,447 1,511
------- -------
Total current liabilities 2,727 3,249
Shareholders' equity:
Common stock 20,366 19,916
Retained earnings 5,668 3,041
------- -------
Total shareholders' equity 26,034 22,957
------- -------
Total liabilities and
shareholders' equity $28,761 $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 Six Months Ended
March 31, March 31,
------------------ -----------------
1996 1995 1996 1995
------- ------- ------- -------
Net sales $ 1,747 $ 1,259 $ 4,591 $ 3,969
Royalty revenue 3,713 4,592 8,182 8,737
------- ------- ------- -------
Total revenue 5,460 5,851 12,773 12,706
Cost of goods sold 1,119 1,223 3,039 3,436
Research and development
expenses 1,625 1,595 3,194 2,992
Selling, general &
administrative expenses 1,801 1,883 3,781 3,574
------- ------- ------- -------
Operating income 915 1,150 2,759 2,704
Other income (728) (27) (1,513) (43)
------- ------- ------- -------
Income before income taxes 1,643 1,177 4,272 2,747
Provision for income taxes 659 (4,564) 1,645 (4,470)
------- ------- ------- -------
Net income $ 984 $ 5,741 $ 2,627 $ 7,217
======= ======= ======= =======
Net income per share $ .13 $ .74 $ .34 $ .97
======= ======= ======= =======
Number of shares used in
per share calculations 7,781 7,763 7,752 7,476
======= ======= ======= =======
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)
Six Months Ended
March 31,
1996 1995
Cash flows provided by (used in) ------- -------
operating activities:
Net income $ 2,627 $ 7,217
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 457 789
Provision for doubtful accounts 197 259
Provision for inventory allowances 143 89
Increase in accounts receivable (1,642) (2,254)
Unrealized gains on trading security (1,297) 0
Decrease (increase) in inventories (1,664) 1,227
Decrease (increase) in deferred and
refundable taxes 1,594 (4,438)
Increase in other current assets (121) (136)
Decrease in accounts payable (449) (1,396)
Decrease in accrued liabilities (63) (203)
------- -------
Net cash provided by (used in)
operating activities (218) 1,154
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (486) (282)
Purchase of other assets (3,354) (407)
------- -------
Net cash used in investing activities (3,840) (689)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 450 4,050
Proceeds from borrowings 0 3,658
Repayments of borrowings (9) (3,697)
------- -------
Net cash provided by financing activities 441 4,011
------- -------
Net increase (decrease) in cash (3,617) 4,476
Cash, beginning of period 11,265 1,010
------- -------
Cash, end of period $ 7,648 $ 5,486
======= =======
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 March 31, 1996 are not necessarily indicative of
the results expected for the full year.
2. Inventories:
March 31, September 30,
1996 1995
--------- -------------
Raw materials $1,087 $ 734
Work in process 927 733
Finished goods 2,494 1,520
------ ------
$4,508 $2,987
====== ======
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
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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 and a gain or loss
recognized for such period. For the six months ended March 31, 1996, unrealized
gains of $1,297,000 were recognized in other income and included in other
current assets.
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. MatriDigm, to date, has not announced
a product but is currently concentrating its efforts on developing a product to
attack the "Year 2000 Problem".
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 March 31, 1996) and is payable monthly.
The line of credit expires on September 30, 1996. At March 31, 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 $984,000 ($0.13 per share) for the quarter
ended March 31, 1996 versus net income of $5,741,000 ($0.74 per share) for the
same quarter of the prior year. Results for the quarter included a tax provision
of $659,000 (40% of income before income taxes) versus a tax benefit in the
amount of $4,564,000 for the same quarter of the previous year. The prior year
tax benefit resulted from the recognition of deferred tax assets in accordance
with S.F.A.S. No. 109, Accounting for Income Taxes. Included in the current
quarter is an unrealized gain of $656,000 on an investment held for resale.
Weighted average shares outstanding for the current quarter were 7,781,000
compared to 7,763,000 for the same quarter of the prior year.
For the six-months ended March 31, 1996, the Company recorded net income of
$2,627,000 ($0.34 per share) versus net income of $7,217,000 ($0.97 per share)
for the same period a year earlier. Included in the current year is a tax
provision of $1,645,000 (38.5% of income before income taxes) compared to a tax
benefit in the prior year of $4,470,000. An unrealized gain on an investment
held for resale in the amount of $1,297,000 is included in the current year.
Year-to-date weighted average shares are 7,752,000 versus 7,476,000 in the prior
year.
Total revenue for the quarter ended March 31, 1996 was $5,460,000 versus
$5,851,000 for the same period a year earlier. Revenue for the current quarter
included $3,713,000 in royalty revenue from the IBM RAMAC product versus
$4,592,000 in the same quarter of the prior year. Royalty revenue continues to
be a significant portion of total revenue. 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 March 31, 1996 were $1,747,000 versus $1,259,000
for the same quarter of the prior year. The increase in net sales in the current
quarter is related to the CASD-II product, 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
Page 8
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significant net sales in that market during the second 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.
For the six months ended March 31, 1996, total revenue was $12,773,000 versus
$12,706,000 for the same period of the prior year. Revenue for the six-month
period included royalty revenue of $8,182,000 versus $8,737,000 in the prior
year. Net sales for the six months ended March 31, 1996 increased to $4,591,000
primarily as a result of sales of the newly-released CASD-II products versus
$3,969,000 for the same period of the prior year.
Gross margin as a percent of net sales was 36% for the quarter ended March 31,
1996 compared to a 3% margin for the same period of the previous year. For the
six-month period ended March 31, 1996, gross margin was 34% versus 13% for the
same period of the prior year. Gross margins on net sales in the current year
are higher due to increased margins at standard and lower other cost of sales
items.
Research and development expenses for the quarter ended March 31, 1996 were 30%
of total revenue compared to 27% in the prior year. Actual spending increased
$30,000. For the six-month period, research and development was 25% of total
revenue versus 24% in the prior year. Actual spending increased $202,000.
Selling, general and administrative expenses were 33% of total revenue for the
current quarter versus 32% in the prior year. Actual spending decreased $82,000.
For the six-month period, selling, general and administrative expenses were 30%
of total revenue versus 28% in the prior year. Actual spending increased
$207,000.
Other income was $728,000 for the quarter just ended versus other income of
$27,000 in the same quarter of the prior year. The current quarter includes
income in the amount of $656,000 related to the recognition of an unrealized
gain on an investment held for resale. Interest income for the quarter was
$89,000 versus $85,000 in the prior year. For the six months just ended, other
income was $1,513,000 as compared to $43,000 in the prior year.
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<PAGE>
Included in the current year is $1,297,000 of income related to the unrealized
gain on an investment held for resale. Interest income in the current year is
$227,000 versus $127,000 in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
For the six-month period ended March 31, 1996, working capital increased
$697,000 and cash flows used in operating activities was $218,000. An increase
in accounts receivable of $1,642,000, an increase in gross inventory of
$1,664,000, an increase in unrealized gains on a trading security of $1,297,000,
and a decrease in accounts payable of $449,000 contributed to the cash used in
operating activities. Net income of $2,627,000 and a decrease in deferred and
refundable taxes of $1,594,000 partially offset these items. Cash in the amount
of $486,000 was used to purchase capital equipment and other assets increased
$3,354,000 in the current year. Net cash provided by financing activities
consisted of the issuance of common stock in the amount of $450,000. The Company
has a $3,000,000 line of credit which expires on September 30, 1996. At March
31, 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 regisered trademarks of IBM Corporation.
Unisys is a registered trademark of Unisys Corporation.
All other product names and brand names are trademarks or
registered trademarks of their respective holders.
Page 10
<PAGE>
EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1996 1995 1996 1995
------ ------ ------ ------
Weighted average common
shares outstanding 7,338 7,173 7,312 6,916
Computation of incremental
outstanding shares:
Net effect of dilutive
stock options based on
treasury stock method 443 590 440 560
------ ------ ------ ------
7,781 7,763 7,752 7,476
====== ====== ====== ======
Net income $ 984 $5,741 $2,627 $7,217
====== ====== ====== ======
Net income per share $ .13 $ .74 $ .34 $ .97
====== ====== ====== ======
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: May 10, 1996 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
Page 13
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,648
<SECURITIES> 2,297
<RECEIVABLES> 2,063
<ALLOWANCES> 87
<INVENTORY> 4,508
<CURRENT-ASSETS> 23,393
<PP&E> 11,272
<DEPRECIATION> (9,780)
<TOTAL-ASSETS> 28,761
<CURRENT-LIABILITIES> 2,727
<BONDS> 0
<COMMON> 20,366
0
0
<OTHER-SE> 5,668
<TOTAL-LIABILITY-AND-EQUITY> 28,761
<SALES> 1,747
<TOTAL-REVENUES> 5,460
<CGS> 1,119
<TOTAL-COSTS> 3,426
<OTHER-EXPENSES> (728)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,643
<INCOME-TAX> 659
<INCOME-CONTINUING> 984
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<CHANGES> 0
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