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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, 1997
or
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File Number 0-12194
ZITEL CORPORATION
(Exact name of Registrant as specified in its charter)
California 94-2566313
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
47211 Bayside Parkway 94538-6517
Fremont, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 440-9600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes __X__ No _____
The number of shares of the Registrant's Common Stock outstanding as of March
31, 1997 was 15,263,514.
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ZITEL CORPORATION AND SUBSIDIARIES
INDEX
Page
Number
------
PART I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1997 (unaudited) and September 30, 1996 .. 3
Condensed Consolidated Statements of
Operations (unaudited) - Three and Six Months
Ended March 31, 1997 and 1996 ..................... 4
Condensed Consolidated Statements of
Cash Flows (unaudited) - Six Months Ended
March 31, 1997 and 1996 ............................ 5
Notes to Condensed Consolidated
Financial Statements ............................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations ................................ 8
Exhibits to Part I.
Exhibit 11.1 - Computation of Net Income (Loss)
per Common and Common Equivalent Share .............. 12
PART II. Other Information
Item 4. Submission of Matters to a Vote
of Security Holders ............................ 13
Item 6. Exhibits and Reports on Form 8-K ............... 13
Page 2
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ZITEL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($000's)
March 31, September 30,
1997 1996
--------- -------------
UNAUDITED
ASSETS
Current assets:
Cash and cash equivalents $ 7,410 $ 9,216
Short-term investments - 2,382
Accounts receivable, net 3,331 5,542
Inventories 3,532 4,211
Deferred and refundable taxes 3,619 2,224
Other current assets 739 480
------- -------
Total current assets 18,631 24,055
Fixed assets, net 2,556 2,253
Other assets, net 7,242 4,391
------- -------
Total assets $28,429 $30,699
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,334 $ 2,066
Accrued liabilities 1,607 1,544
------- -------
Total current liabilities 2,941 3,610
Shareholders' equity:
Common stock 21,604 20,723
Retained earnings 3,884 6,366
------- -------
Total shareholders' equity 25,488 27,089
------- -------
Total liabilities and
shareholders' equity $28,429 $30,699
======= =======
The accompanying notes are an integral part of these financial statements.
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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,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales $ 1,576 $ 1,747 $ 4,842 $ 4,591
Royalty revenue 1,196 3,713 3,514 8,182
------- ------- ------- -------
Total revenue 2,772 5,460 8,356 12,773
Cost of goods sold 1,737 1,119 4,536 3,039
Research and development
expenses 1,613 1,625 3,235 3,194
Selling, general &
administrative expenses 3,007 1,801 5,498 3,781
------- ------- ------- -------
Operating income (loss) (3,585) 915 (4,913) 2,759
Other income (594) (728) (1,035) (1,513)
------- ------- ------- -------
Income (loss) before
income taxes (2,991) 1,643 (3,878) 4,272
Provision (benefit) for
income taxes (1,077) 659 (1,396) 1,645
------- ------- ------- -------
Net income (loss) $(1,914) $ 984 $(2,482) $ 2,627
======= ======= ======= =======
Net income (loss) per share $ (.13) $ .06 $ (.16) $ .17
======= ======= ======= =======
Number of shares used in
per share calculations 15,234 15,562 15,096 15,504
======= ======= ======= =======
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,
1997 1996
Cash flows provided by (used in) ------- -------
operating activities:
Net income (loss) $(2,482) $ 2,627
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 556 457
Provision for doubtful accounts 99 197
Provision for inventory allowances 766 143
(Increase) decrease in accounts receivable 2,112 (1,642)
Unrealized gains on trading securities 0 (1,297)
Gain on sale of trading securities (777) 0
Proceeds from sale of trading securities 3,159 0
Increase in inventories (87) (1,664)
Decrease (increase) in deferred and
refundable taxes (1,395) 1,594
Increase in other current assets (259) (121)
Decrease in accounts payable (732) (449)
Increase (decrease) in accrued liabilities 63 (63)
------- -------
Net cash provided by (used in)
operating activities 1,023 (218)
------- -------
Cash flows used in investing activities:
Purchase of fixed assets (811) (486)
Reduction (purchase) of other assets (875) 209
Investment in unconsolidated company (2,024) (3,563)
------- -------
Net cash used in investing activities (3,710) (3,840)
------- -------
Cash flows provided by (used in) financing activities:
Issuance of common stock 881 450
Repayments of borrowings 0 (9)
------- -------
Net cash provided by financing activities 881 441
------- -------
Net decrease in cash (1,806) (3,617)
Cash, beginning of period 9,216 11,265
------- -------
Cash, end of period $ 7,410 $ 7,648
======= =======
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, 1997 are not necessarily indicative of
the results expected for the full year.
2. 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.
3. Inventories:
March 31, September 30,
1997 1996
--------- -------------
Raw materials $1,116 $1,515
Work in process 585 738
Finished goods 1,831 1,958
------ ------
$3,532 $4,211
====== ======
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4. Investment in Unconsolidated Company:
In November 1995, Zitel purchased 9.6 million shares of preferred stock and
certain technology rights, to be commercialized, of MatriDigm Corporation, 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. The technology rights include an exclusive license to manufacture and
market certain products using proprietary technology of MatriDigm, subject to a
royalty to the company. Zitel has made additional investments in the company
for preferred stock. As of March 31, 1997, the Company's investments in
MatriDigm amounted to $5.59 million. Zitel also has an option to purchase 500
thousand shares of MatriDigm's common stock from a shareholder of the company at
$.60 per share, exerciseable beginning July 1997.
5. 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 March 31, 1997,
$1.1 million in costs had been capitalized and are included in other long-term
assets. No amortization has been charged as of March 31, 1997.
6. Line of Credit:
The Company has a $3.0 million bank line of credit which expires on January
31, 1998. Interest is at the prime rate (8.25% at March 31, 1997) and is
payable monthly. The Company is required to maintain certain specified
financial ratios and profitable operations on a quarterly basis. The bank has
waived non-compliance with the profitability covenant as of March 31, 1997. As
of March 31, 1997, the Company had no borrowings outstanding under the line of
credit.
7. 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.
8. Income (loss) per share amounts are computed using the weighted average
number of common and common equivalent (dilutive stock options) shares
outstanding during each period presented, when dilutive.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Result of Operations
The Company recorded a net loss of $1,914,000 ($0.13 per share) for the quarter
ended March 31, 1997 compared with net income of $984,000 ($0.06 per share) for
the same quarter of the prior year. Results for the quarter included a tax
benefit of $1,077,000 (36% of income before income taxes) resulting from the
recognition of deferred tax assets in accordance with S.F.A.S. No. 109,
Accounting for Income Taxes, compared to a tax provision of $659,000 (40% of
income before income taxes) for the same quarter a year earlier. Weighted
average shares outstanding for the current quarter were 15,234,000 compared to
15,562,000 for the comparable quarter of the prior year.
For the six-months ended March 31, 1997, the Company recorded a net loss of
$2,482,000 ($0.16 per share) versus net income of $2,627,000 ($0.17 per share)
for the same period a year earlier. Included in the current year is a tax
benefit of $1,396,000 (36% of income before income taxes) compared to a tax
provision of $1,645,000 (38.5% of income before income taxes) for the same
period a year earlier. Year-to-date weighted average shares were 15,096,000
versus 15,504,000 in the prior year.
Total revenue for the quarter ended March 31, 1997 was $2,772,000 versus
$5,460,000 for the comparable quarter of the prior year. The decrease in total
revenue is primarily as a result of lower royalties from IBM. Revenue for the
current quarter included $1,196,000 of royalty revenue from the IBM RAMAC
product versus $3,713,000 in the same quarter of the prior year, a decrease of
$2,517,000. Royalties from IBM continued to be impacted by the transition from
the RAMAC 2 generation storage system to RAMAC 3 and the transition by IBM to
non-royalty-bearing products. The Company does not expect royalty revenue to
increase from its current level and anticipates that it will continue to
decline.
Net sales for the quarter ended March 31, 1997 were $1,576,000 versus $1,747,000
for the same quarter of the prior year. The decrease in net sales is
attributable to a decrease in net sales of the Company's more mature products in
the Unisys market. Net sales of the CASD II/Enterprise products into the open
systems market offset a substantial portion of the decline in net sales of
mature products.
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For the six months ended March 31, 1997, total revenue was $8,356,000 versus
$12,773,000 for the same period of the prior year. Revenue for the six-month
period included royalty revenue of $3,514,000 versus $8,182,000 in the prior
year. Net sales for the six months ended March 31, 1997 increased to $4,842,000
versus $4,591,000 for the same period of the prior year. Management continues
to believe price/performance characteristics should make CASD II/Enterprise 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.
During the fourth quarter of fiscal 1996, the Company entered into a reseller
agreement with MatriDigm Corporation to market MatriDigm's proposed solution for
the Year 2000 problem. Staffing of the Company's newly-established Solution
Services Division is in process. Sales calls are being made and customer code
is being received and code conversion has begun. While management is encouraged
by the progress of MatriDigm's development effort, that effort is continuing.
The Company's ability to generate sales is dependent on the success of
MatriDigm's development effort and there can be no assurance that the Company
would be successful in generating profitable sales of conversion services.
Gross margin as a percent of net sales was a negative 10% for the quarter ended
March 31, 1997 compared to 36% for the same quarter of the prior year. For the
six-month period ended March 31, 1997, gross margin was 6% versus 34% for the
same period of the prior year. The significant decrease in gross margins on net
sales is attributable to an increase 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 March 31, 1997 were 58%
of total revenue compared to 30% in the prior year. For the six-month period,
research and development was 39% of total revenue versus 25% in the prior year.
The increase in percentage in both periods is due to lower revenues in the
current year; actual spending, however, only increased by $12,000 and $41,000,
respectively.
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Selling, general and administrative expenses were 108% of total revenue for the
current quarter versus 33% in the prior year. Actual spending increased
$1,206,000. The increase in spending included increases in salaries and related
costs as a result of an increase in sales, marketing and administration
personnel ($618,000), business promotion ($216,000), and travel and
entertainment ($100,000). For the six-month period, selling, general and
administrative expenses were 66% of total revenue versus 30% in the prior year.
Actual spending increased $1,717,000. The increase in spending included
increases in salaries and related costs as a result of an increase in sales,
marketing and administration personnel ($1,109,000), business promotion
($123,000), and travel and entertainment ($230,000).
Other income was $594,000 for the quarter just ended versus other income of
$728,000 for the comparable quarter of the prior year. The current quarter
includes income in the amount of $479,000 realized from the sale of marketable
securities compared with income of $656,000 related to the recognition of
unrealized gains in the prior year. Interest income for the quarter was
$126,000 versus $89,000 in the prior year. For the six months just ended, other
income was $1,035,000 as compared to $1,513,000 in the prior year. Included in
the current year period are realized gains of $777,000 with respect to
marketable securities compared to unrealized gains of $1,297,000 in the prior
year. Interest income in the current year is $266,000 versus $227,000 in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
During the six-month period ended March 31, 1997, working capital decreased
$4,755,000 and cash flow provided by operating activities was $1,023,000. Cash
flow from operating activities was generated primarily from the disposition of
short-term investments ($2,382,000), a decrease of $2,211,000 in accounts
receivable, a decrease of $679,000 in inventory and depreciation and
amortization of $556,000. This was offset by a net loss of $2,482,000, an
increase of $1,395,000 in deferred and refundable taxes, and a decrease of
$732,000 in accounts payable.
During the current year, $3,710,000 was used in investing activities. The
Company invested an additional $2,000,000 in preferred stock of MatriDigm
Corporation. $811,000 was used to purchase capital equipment and $819,000 was
used in connection with the development and implementation of software purchased
in the last quarter of fiscal 1996.
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Net cash provided by financing activities in the current year was $881,000,
generated from the exercise of employee stock options and from the sale of stock
under the Company's stock purchase plan. The Company has a $3,000,000 bank line
of credit which expires in January 31, 1998. At March 31, 1997, the Company had
no borrowings outstanding on the line of credit.
In order for the Company to maintain its operations on the current basis,
management believes the Company will need to raise additional capital either
from the equity or debt market to augment its current cash on hand, other
existing working capital, cash flows from operations, and the available line of
credit.
____________________________________________________________
Zitel and CASD are registered trademarks of Zitel Corporation.
IBM and RAMAC are registered trademarks of IBM Corporation.
MatriDigm is a registered trademark of MatriDigm Corporation.
All other product names and brand names are trademarks or
registered trademarks of their respective holders.
Page 11
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EXHIBIT 11.1
ZITEL CORPORATION AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON
AND COMMON EQUIVALENT SHARE
(In thousands except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1997 1996 1997 1996
------ ------ ------ ------
Weighted average common
shares outstanding 15,234 14,676 15,096 14,624
Computation of incremental
outstanding shares:
Net effect of dilutive
stock options based on
treasury stock method - 886 - 880
------- ------ ------- ------
15,234 15,562 15,096 15,504
======= ====== ======= ======
Net income (loss) $(1,914) $ 984 $(2,482) $2,627
======= ====== ======= ======
Net income (loss) per share $ (.13) $ .06 $ (.16) $ .17
======= ====== ======= ======
Primary and fully diluted income per share differ by less than one cent in all
periods presented.
NOTE: All share numbers and prices reported herein reflect a 2:1 Common Stock
split effected in the form of a dividend of one share of Common Stock for each
one owned, payable on 11/27/96 to record holders of the Issuer at 11/18/96.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual meeting of shareholders of the Company was held on February 27,
1997. A total of 14,381,929 shares of the Company's Common Stock out of a total
15,164,816 shares outstanding on the record date for the meeting were
represented and voted in person or by proxy.
The Company has a five-person Board of Directors. At the annual meeting,
all five directors were nominated and re-elected to the Board of Directors by a
vote of at least 13,624,259 shares in favor and 757,670 shares withholding
authority to vote.
The shareholders approved the adoption of an amendment to the Company's
Restated Articles of Incorporation, as amended, to increase the Company's
authorized number of shares of Common stock from 20,000,000 shares to
40,000,000. The motion was carried by a vote of 14,043,727 shares voting for,
286,556 dissenting votes and 49,576 abstaining votes.
The shareholders approved the adoption of an amendment to the 1990 Stock
Option Plan, as amended, to provide that the number of shares of Common Stock
reserved for issuance under such Plan be increased by 800,000 shares, from
4,650,000 shares (including shares reserved or granted under the Company's prior
Option Plans) to 5,450,000 shares. The motion was carried by a vote of
5,820,189 shares voting for, 1,327,748 dissenting votes and 99,478 abstaining
votes.
The shareholders did not approve the proposal to change the Company's state
of incorporation from California to Delaware which requires the vote of over 50%
of the total shares outstanding. The holders of 6,756,754 shares or 45% of the
outstanding shares voted for the proposal, the holders of 912,005 shares voted
against the proposal, and the holders of 64,219 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.30 - Sales Representative Agreement, dated as of August 22,
1996 among MatriDigm Corporation and the Company.
Exhibit 27 - Financial Data Schedule
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(b) Reports
No reports on Form 8-K were filed during the quarter for which this
report is filed.
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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 15, 1997 Henry C. Harris
Henry C. Harris
Vice President, Finance &
Administration
(Chief Financial and
Accounting Officer)
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Exhibit 10.30
SALES REPRESENTATIVE AGREEMENT
This SALES REPRESENTATIVE AGREEMENT ("Agreement") is made and entered into
between MatriDigm Corporation, a California corporation having its principal
place of business at 47207 Bayside Parkway, Fremont, California 94538 ("MDC"),
and Zitel Corporation, a California corporation having its principal place of
business at 47211 Bayside Parkway, Fremont, California 94538 ("Representative").
It shall become effective on the date (the "Effective Date") it is executed by
the last person to sign below.
WHEREAS, MDC is developing, and expects in the near future to become engaged in
the business of providing "Year 2000" computer code conversion services,
consisting of the processing, upgrading or supplementing software code in such a
fashion as to enable software programs and records to function subsequent to the
year 1999 (the "Code Conversion Services");
AND WHEREAS, MDC is developing and will utilize for the purpose of performing
its code conversion services certain proprietary technology including trade
secrets, copyrighted or copyrightable software code and/or patentable inventions
or techniques ("MDC Intellectual Property");
AND WHEREAS, Zitel is developing, and expects in the near future to become
engaged in the business of providing "Year 2000" consulting and advisory
services, consisting of the planning, advice, assessment and comprehensive
assistance of its clients in successfully undertaking the modification of their
systems and software to function subsequent to the year 1999 (the "Millennium
Consulting Services");
AND WHEREAS, Zitel desires to market and offer code conversion services to its
clients, and MDC desires to distribute its code conversion services through
Zitel;
NOW THEREFORE, the parties hereby agree as follows:
1. DEFINITIONS
As used in this agreement, the following terms shall have the following
designated meanings:
1.1 Commercial Availability Date: shall mean the date which MDC announces and
can demonstrate that its code conversion services
Exh. 10.30 - Page 1
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are available for application to customer code, that it has adequately defined
and trained Zitel personnel in the specifications and procedures necessary for
Zitel to perform under Section 5.1 and that it has fulfilled its obligations to
provide Engagement Support as set forth in Section 4.4.
1.2 Commissions: shall mean Commissions payable by MDC to Zitel pursuant to
Section 6 of this Agreement.
1.3 Effective Date of Termination: The date upon which a party receives written
notice from the other of its election to terminate the Agreement pursuant to
Section 11.
1.4 House Accounts: The prospective customers listed on EXHIBIT C are House
Accounts to whom MDC reserves the exclusive right to sell MDC Services.
1.5 MDC Services: Services provided by MDC.
1.6 MDC Services Sold BY Zitel: MDC Services will be considered to have been
sold by Zitel, and Zitel shall be entitled to Commissions, if a customer order
is obtained by Zitel for MDC Services.
1.7 MLOC: Millions of lines of code.
1.8 Net Revenues: Net Revenues means the gross revenues received by MDC from
all sales of MDC Services, less adjustments for customer discounts, sales or
other taxes, and separately stated shipping charges.
2. APPOINTMENT OF REPRESENTATIVE
2.1 Nature of Sales Representative Relationship: MDC hereby appoints Zitel as a
non-exclusive sales representative for MDC Services for sales within the United
States. Sales representative activities by Zitel outside of the United States
wherein MDC provides MDC Service must be approved by MDC in advance. Zitel shall
act as an independent contractor and as such its employees are not agents of MDC
and have no authority to bind or commit MDC.
2.2 Nature of exclusive agent to create portable conversion sites: Whereas
MatriDigm Corporation is focused on the year 2000 code conversion at their
designated factory(s), it is acknowledged that certain accounts will not release
code from their premises for conversion. In order to address this segment
Exh. 10.30 - Page 2
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of the market, MatriDigm Corporation appoints Zitel Corporation as its exclusive
agent to create portable on-site conversion centers for these accounts. The
required on-site manpower will be assigned by Zitel or MatriDigm by mutual
consent. The required hardware and other costs pertinent to the center will be
provided by Zitel. MatriDigm will provide the same code as used in their
factory(s), including year 2000 conversion object code, packed binary date
subroutine source, and soft coded rules to enable a successful conversion. Upon
completion of the contact a statement will be prepared indicating revenue less
reimbursement of all direct costs by MatriDigm and for Zitel. The resulting
margin on the account will be split 50-50 between MatriDigm and Zitel. This
assignment of exclusivity for the creation of portable factories, of which Zitel
has right of first refusal or first right to perform, shall not preclude
MatriDigm from establishing on-site conversion center as required by customers.
3. REPRESENTATIVE'S DUTIES
3.1 Zitel Business Unit. Zitel shall create an independent business unit, or
units, which will concentrate on providing Millennium Consulting Services. As a
part of providing its Millennium Consulting Services, Zitel shall introduce,
promote the sale of, solicit and obtain orders (subject to MDC's acceptance) for
MDC Services from customers.
3.3 Promotion of MDC Services. Zitel shall actively promote MDC Services and do
so in a manner sufficient to stimulate demonstrable interest on behalf of
customers and create a general understanding or recognition of Millennium
Consulting Services and/or MDC Services among senior information systems
managers.
3.4 Sales Materials. Zitel shall actively develop and distribute sales
materials which will promote Millennium Consulting Services and MDC Services.
MDC shall have the right to review and approve sales materials developed by
Zitel which promote MDC Services.
3.5 Response to Correspondence. When requested by MDC, Zitel shall use
reasonable commercial efforts to follow up on sales correspondence or
communication between MDC and any customer or prospective customer.
3.6 Sales Outlook. Zitel will provide monthly reports on sales activity and
outlook for input into MDC's planning process
3.7 Rule Updates. Zitel will provide year 2000 rules enhancements Zitel
develops for MatriDigm for inclusion in the
Exh. 10.30 - Page 3
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MatriDigm's year 2000 conversion package. This will be provided at no cost to
MDC.
4. DUTIES OF MDC
4.1 Processing Capability. By December 1, 1996, MDC shall demonstrate an
automatic computer code scanning capability which can identify fields, logic and
data related to dates or calendar functions within computer programs in amount
in excess of 98% accuracy and that it has an automatic computerized fix
capability which will modify the computer programs such that they can function
subsequent to the year 1999 with minimal required manual modifications.
Thereafter, MDC shall maintain performance standards which equal or exceed the
above.
4.2 Production Capacity. Subsequent to the commercial availability date, MDC
shall develop a production capacity sufficient to perform its code conversion
services in an amount greater than the Sales Targets.
4.3 MDC Sales Materials. MDC shall periodically provide Zitel with sales
materials for use by Zitel in marketing MDC Services.
4.4 Engagement Support: By October 1, 1996, MDC shall have created the
capability to provide Zitel "Engagement Support." Engagement Support shall
encompass the ability on MDC's part to offer an individual or individual(s) to
assist Zitel with advice, information, specifications and other materials
necessary for Zitel to effectively develop proposals or quotations to customers
which include MDC Services, and to provide assistance from time to time, at
Zitel's request, in on-site meetings with specific customer prospects and other
sales or production support functions. The purpose of Engagement Support is
additionally to ensure that there is sufficient and effective communication
between the parties and to ensure efficient coordination of relative tasks,
customer service and other administration of this contract. This section does
not apply to portable factory support.
4.5 Portable Factory Support: MDC will provide training to required for Zitel
personnel to deliver MDC year 2000 conversion services in portable factories.
5. DUTIES OF Zitel AND MDC RELATED TO PERFORMANCE OF ORDERS
5.1 Zitel Performance. With respect to the performance of specific customer
orders, Zitel shall be primarily responsible
Exh. 10.30 - Page 4
<PAGE>
for management of the contracts and relationships between MDC and the customers
developed by Zitel. This responsibility includes preparation of the customer for
MDC Services, including the conduct of an inventory of the customer's programs,
applications and files to be processed by MDC, planning and articulating with
the customer the scope of services to be provided, and obtaining from the
customer all necessary information relative to the MDC Services to be performed
for the customer. In connection with each such engagement, Zitel shall ensure
that materials required by MDC from the customer to perform MDC Services, such
as data tapes or other software media, are complete and are in the correct
format required by MDC.
Zitel will also provide the assistance to the customer required to support the
customer's system test and integration of the MDC converted code. Zitel shall
also assist in the resolution of any commercial or technical issues, and to the
extent possible, the informal resolution of disputes and miscommunications which
may arise between MDC and any such customer.
5.2 MDC Performance. MDC shall be responsible for the timely response to Zitel
in support of Zitel's need to quote pricing, scheduling, expected completion
dates and performance standards for MDC Services to prospective customers. MDC
will be responsible for the processing of customer programs, applications and
files pursuant to its stated pricing, scheduling, expected completion dates and
performance standards.
6. COMMISSIONS AND PAYMENT
6.1 Commissions. In consideration for the services performed (under sections 3
and 5.1 ) by Zitel, MDC shall pay Zitel a "Commission" equal to twenty percent
(20%) of the Net Revenues of MDC Services Sold By Zitel to customers:
6.2 Referral Commissions. In the event that circumstances become known in the
attempt to secure a contract with the Customer which indicate that the Customer
would be better served with a direct contract with MDC, representative at its
discretion, will formally transfer the opportunity to MDC. Representative shall
be paid a referral "Commission" equal to five percent (5%) of Net Revenues of
millennium MDC Services Sold By Zitel to Customer.
6.3 Payment of Commissions. Commissions will be earned by Zitel commensurate
with MDC's completion of billable portions of work for specific customer orders.
Commissions will be due and payable to Zitel promptly upon receipt of payment
for such work. In cases
Exh. 10.30 - Page 5
<PAGE>
where Zitel contracts directly with the customer and receives payment for work
MDC performs, payment (net of Commissions) shall be due from Zitel to MDC
promptly upon receipt of funds related to MDC Services.
6.4 House Accounts. Zitel shall receive no Commissions for MDC Services
provided to House Accounts.
6.5 Record-Keeping. Both parties agree to maintain books and records in a
complete and accurate manner related to the processing of orders, performance of
services, billing, collection and other financial activities set forth in this
agreement. Such records shall be maintained for a minimum of two years after the
termination of this Agreement. Both parties shall have the right at any time
during the term of this Agreement, and for two years thereafter, to examine such
books and records of the other as may be deemed necessary or appropriate upon
reasonable advance notice to other party.
6.6 Most Favored Commission Rate. If at any time during the term of this
Agreement, MDC shall enter into any other agreement to appoint a sales
representative or reseller for MDC Services in the United States which provides
a more favorable commission rate for similar volumes of sales of MDC Services
under similar conditions than the Commissions provided hereunder, then beginning
with the effective date of that agreement and until the earlier to occur of the
termination of this Agreement or the termination of that agreement, the
Commissions set forth herein shall automatically and without further action of
the parties be amended to substitute the applicable higher percentage rate.
7. CONFIDENTIALITY
7.1 No Transfer of Ownership. Ownership and all right, title and interest in
any trademarks, trade names, service marks, computer software, computer hardware
or other proprietary items relating to either party's services shall remain
vested solely with that party. Nothing herein shall be construed to transfer any
right or ownership of any of the foregoing to the other party.
7.2 MDC Software. MDC may design, create, invent or write software systems,
programs, processes, routines, algorithms, code and/or concepts (collectively
"Software") for purposes of providing MDC Services, among other potential
purposes. Any Software utilized by MDC in connection with providing MDC Services
will be proprietary to MDC. Zitel acknowledges and agrees that all such Software
is owned by MDC and is a trade
Exh. 10.30 - Page 6
<PAGE>
secret of MDC and/or is protected by United States and/or international
copyright laws, treaty provisions and/or patent law. Zitel therefore agrees, to
the extent any Software comes to be disclosed to or into the possession of
Zitel, to treat the Software like any other confidential information of MDC
and/or copyrighted material. Zitel shall not copy the Software or any written
materials accompanying or concerning the Software or use it for any purpose
other than the performance of its duties pursuant to this Agreement. At MDC's
discretion in the course of or upon the termination of any contract for MDC
Services or this Agreement, MDC shall have the right to recover all copies of
any Software in the possession of the applicable customer or Zitel; and Zitel
shall, at MDC's request, provide MDC with such assistance as shall be reasonably
practicable in efforts to recover the applicable copy or copies of the Software.
7.3 Confidentiality. Each of the parties acknowledges that, in the course of
cooperation in performance of their respective duties under this Agreement, it
may obtain information relating to the other, to the MDC Services and to Zitel's
Millennium Consulting Services which it knows or has reason to know is of a
confidential and/or proprietary nature to the other ("Confidential
Information"). Such Confidential Information may include, but is not limited
to, MDC Intellectual Property, other intellectual property, cost guidelines,
technical and/or strategic development plans, future product releases, trade
secrets, know-how, inventions, techniques, processes, Software, other software,
discount schedules, customer lists, financial information and sales and
marketing plans. Both parties shall at all times, both during the term of this
Agreement and at all times thereafter, keep and hold such Confidential
Information of the other in the strictest confidence, and shall not use such
Confidential Information for any purpose without the prior written consent of
the owner thereof, other than as may be reasonably necessary for the performance
of the respective duties of the parties under this Agreement. Confidential
Information shall not include any items which are or become readily available to
the trade or public through no fault of the party to this Agreement receiving
Confidential Information from the other, which are subsequently lawfully and in
good faith obtained by a party from an independent third party without breach of
this Agreement, or which the recipient can establish were in its possession
prior to the date of disclosure of such information.
8.0 PRICING
8.1 Market Pricing. MDC will establish pricing for MDC Services
Exh. 10.30 - Page 7
<PAGE>
in a manner consistent with the prevailing market price for similar services
offered in the United States. MDC may change its prices from time to time,
depending on market conditions, but will be bound to adhere to specific
quotations it has made to Zitel for which Zitel has quoted or proposed to a
specific customer. In the event that Zitel is able to charge a price for MDC
Services, as set forth in such a proposal or quotation, which is greater than
the price initially quoted by MDC for such customer, then MDC shall receive
twenty-five (25%) of such additional stated charges at the time of customer
payment. Such additional sharing of revenues shall not be applied to other Zitel
products or services offered to such customer, including Millennium Consulting
Services. This does apply to portable factories which are covered in section
2.2.
9.0 MDC FIRST RIGHT OF REFUSAL
9.1 Right of First Refusal. After the Commercial Availability Date, when
offering code conversion services as a part of its Millennium Consulting
Services, Zitel shall use MDC Services to satisfy its code conversion services
unless:
(a) MDC declines to include its services as a part of Zitel's quotation or
proposal to a particular customer, either due to a lack of capacity or for other
business reasons.
(b) MDC declines to offer its services at a price equal or less than that
available to Zitel from an alternative vendor providing similar services, after
notice to MDC of this alternative has been provided and MDC has had a reasonable
opportunity to respond.
(c) MDC declines to offer its services with the same or better performance
standards or completion commitments as offered by an alternative vendor
providing similar services, after notice to MDC of this alternative has been
provided and MDC has had a reasonable opportunity to respond.
(d) MDC does not respond to requests for quotation or proposal for a particular
customer being solicited by Zitel in a reasonable and timely business fashion.
10. WARRANTIES AND LIABILITY
10.1 NO WARRANTIES. NOTHING HEREIN SHALL BE CONSTRUED AS ONE PARTY PROVIDING
THE OTHER A WARRANTY OR CONDITION OF ANY NATURE AS TO ANY SERVICES PROVIDED
HEREUNDER, INCLUDING WITHOUT
Exh. 10.30 - Page 8
<PAGE>
LIMITATIONS THE WARRANTIES OR CONDITIONS OF FITNESS FOR A PARTICULAR PURPOSE OR
MERCHANTABILITY.
10.2 Indemnification. MDC shall defend, hold-harmless and indemnify Zitel from
and against all actions or proceedings brought against Zitel seeking damages
arising out of any actual or alleged infringement by the MDC Services or any
Software or other MDC Intellectual Property used in connection herewith of a
United States patent, copyright or under similar construction of law. Zitel
shall defend, hold harmless and indemnify MDC from and against all actions or
proceedings brought against MDC seeking damages arising out of any actual or
alleged infringement by Zitel Millennium Consulting Services or any Zitel
proprietary software, hardware or other tools used in connection herewith of a
United States patent, copyright or under similar construction of law. The
indemnity obligations of both parties are conditioned upon the indemnified party
providing prompt notification to the indemnifying party of any such claim. The
indemnified party shall provide reasonable cooperation and assistance, at the
indemnifying party's expense, in the defense or settlement of the claim. The
indemnifying party shall have the sole authority to defend and settle the claim.
The indemnified party may retain separate representation at its own cost. Such
indemnification shall not extend to any third party software or hardware which
the indemnifying party incorporates into its product at the request of the
indemnified party.
10.3 Commissions. MDC shall be liable to Zitel for the payment of all
Commissions under this Agreement.
10.4 Liability To Customers. Liability with respect to performance for a
specific customer order shall be negotiated in good faith between the parties at
the time a particular customer proposal or quotation is placed.
10.5 Confidentiality. Both parties shall be liable to each other for compliance
with and performance of their obligations associated with Section 7,
Confidentiality.
1O.6 NO LIABILITY. EXCEPT AS SPECIFICALLY SET FORTH IN THIS SECTION 10, NEITHER
PARTY SHALL BE LIABLE TO THE OTHER FOR ANY FAILURE TO PERFORM ITS OBLIGATIONS
HEREUNDER AND THE SOLE REMEDY OF EITHER PARTY FOR ANY BREACH OR NON-PERFORMANCE
OF THE OTHER HEREUNDER SHALL BE TO TERMINATE THIS AGREEMENT. AS SUCH, UNDER NO
CIRCUMSTANCES OR THEORY OF LIABILITY WHATSOEVER SHALL EITHER MDC OR
REPRESENTATIVE HAVE ANY OBLIGATION OR LIABILITY TO THE OTHER, OR TO ANY
CUSTOMERS OR PERSONNEL, AGENTS, PRINCIPALS, DEALERS OR
Exh. 10.30 - Page 9
<PAGE>
REPRESENTATIVES OF THE OTHER, FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, LOST PROFITS OR OTHER COMPENSATION OR RECOVERY ASSOCIATED WITH MDC's OR
ZITEL's SERVICES, EVEN IF SUCH PARTY HAS BEEN ADVISED GENERALLY OR SPECIFICALLY
OF THE POSSIBILITY OF SUCH DAMAGES. THIS PROHIBITS, AMONG OTHER THINGS, ANY
RECOVERY FOR LOSS OF SALES, EXPENDITURES, INVESTMENTS OR OTHER COMMITMENTS MADE
IN CONNECTION WITH THE ESTABLISHMENT, DEVELOPMENT OR MAINTENANCE OF THE SELLING
REPRESENTATION CREATED BY THIS AGREEMENT OR IN CONNECTION WITH THE PERFORMANCE
OF OBLIGATIONS HEREUNDER. THE REMEDIES PROVIDED UNDER THIS AGREEMENT ARE
EXCLUSIVE.
11. TERM AND TERMINATION
11.1 Term of Agreement. Unless otherwise extended by mutual consent, this
Agreement is effective for the period beginning the Effective Date and ending on
December 31, 2001, unless terminated earlier pursuant to this Section 11.
11.2 Termination Due To Breach or Default. In the event of a material breach or
default of a party's obligations under this Agreement, the non-breaching party
may give written notice thereof to the breaching party and if the breach or
default continues uncured for a period of thirty (30) days after the notice, the
nonbreaching party may request an immediate face-to-face meeting with the most
senior officer of the breaching party for the purpose of discussing resolution
of the underlying breach or default. If no agreed upon plan to resolve the
underlying issues results from such a meeting, or if the most senior officer of
the breaching party does not agree to and conduct the meeting as soon as is
reasonable and practicable, then the non-breaching party may immediately
terminate this agreement upon written notice to the other of such an election to
terminate.
11.4 Termination Due To Discontinuance of Operations. Either party may
immediately terminate this Agreement by giving written notice to the other in
the event that the other:
(a) Ceases to exist as a business entity, or otherwise terminates or
substantially discontinues its daily business operations.
(b) Is liquidated or dissolved.
11.5 Continuing Obligations. Termination of this Agreement shall not relieve
either party of its obligations and rights under Sections 1, 6, 7, 10, 11 and 12
of this Agreement, and shall not
Exh. 10.30 - Page 10
<PAGE>
relieve MDC of its obligations to pay Zitel Commissions related to orders placed
for MDC Services prior to the Effective Date of Termination. Notwithstanding the
foregoing, Zitel shall not receive Override Commissions for Net Revenues
subsequent to the Effective Date of Termination.
11.6 Return of Property: Upon termination of this Agreement, each party agrees
to return the intellectual property, software and property of the other which
may be in its possession, or in the possession of its customers.
12. GENERAL PROVISIONS
12.1 No Waiver. The failure of either party to enforce at any time or for any
period any of the provisions of this Agreement shall not be construed to be a
waiver of those provisions or of the right of that party thereafter to enforce
each and every
provision hereof.
12.2 Notices. All notices which any party to this Agreement may be required or
may wish to give may be given by addressing them to the other party at the
addresses set forth at the beginning of this Agreement (or such other addresses
as may be designated by a given party due to a change in their principal place
of business) by: (a) personal delivery; or (b) sending such notices by
commercial overnight courier with written verification of actual receipt; (c)
sending them by registered or certified mail, (d) or, for purposes of Section 9,
only, by facsimile with verbal confirmation of receipt. If so mailed or
otherwise delivered, such notices shall be deemed and presumed to have been
given on the earlier of the date of actual receipt or three (3) days after
mailing via an authorized form of delivery.
12.3 Governing Law: This Agreement shall be governed by the laws of the State
of California. The venue for litigation shall be either Santa Clara or Alameda
County, California. The language of the Agreement shall be construed as a whole
according to its fair meaning, and not strictly for or against any of the
parties.
12.4 Resolution of Disputes: Any claim, dispute or controversy arising out of
or in any way relating to this Agreement, or to the enforcement or alleged
infringement, interference or breach of any related right or obligation of the
parties hereto, shall be submitted to binding arbitration conducted under the
auspices of the American Arbitration Association in accordance with the
commercial rules then in effect for that Association. Any arbitrator shall issue
a preliminary decision including findings
Exh. 10.30 - Page 11
<PAGE>
of fact and conclusions upon which the parties can comment for fifteen (15)
days. Thirty (30) days after issuance of such a preliminary decision, the
arbitrator shall render a final decision, also including findings of fact and
conclusions of law. Such final decision shall be final and binding upon the
parties subject to California law on finality of arbitration decisions.
12.5 Injunctive Relief. Notwithstanding Section 12.4, nothing in this Agreement
shall prevent either party from seeking injunctive relief (or any other
provisional remedy) from any court having jurisdiction over the parties and the
subject matter of their dispute.
12.6 Recovery of Litigation Costs. A court or arbitration panel adjudicating or
arbitrating any claim, dispute or controversy arising out of or in any way
relating to this Agreement may award recovery of litigation costs, including
attorney's fees. to the prevailing party in the dispute.
12.7 Authority. Each party represents and warrants to the other that this
Agreement has been duly authorized and approved by all requisite action of its
respective Board of Directors, including approval by a majority of disinterested
directors.
12.8 Headings. The headings and titles of the various sections of this
Agreement are used for convenience of reference only and are not intended to,
and shall not in any way, enlarge or diminish the rights or obligations of the
parties or affect the meaning or construction of this instrument.
12.9 Counterparts. The Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
constitute one and the same Agreement.
12.10 Integrated Agreement. This Agreement constitutes the entire and final
understanding with respect to the subject matter hereof and supersedes and
terminates any and all prior and/or contemporaneous negotiations,
representations, understandings, discussions, offers and/or agreements between
the parties, whether written or verbal, express or implied, relating to the
subject matter hereof. This Agreement is intended by the parties to be a
complete fully integrated expression of their understanding and agreement, and
it may not be altered, amended, modified or otherwise changed in any way except
by written instrument, which specifically identifies the intended alteration,
amendment, modification or other change and clearly expresses the intention to
so change this Agreement, signed by an authorized officer of each party.
Exh. 10.30 - Page 12
<PAGE>
12.11 Binding Effect. This Agreement shall be binding upon and shall inure to
the benefit of the parties, their successors and their assigns.
12.12 Assignability. Except as provided herein, neither party shall assign,
transfer or pledge this Agreement or any part thereof, interest herein,
obligation or right hereunder without obtaining the written consent of the
other. Notwithstanding the foregoing, the consent of either party to an
assignment will not be required in the event that the other sells substantially
all of its assets and operations, or in the event of a merger.
12.13 Severability. If the application of any provision or provisions of this
Agreement to any particular facts or circumstances shall be held to be invalid
or unenforceable by any arbitrator or court of competent jurisdiction, then the
validity and enforceability of that provision or those provisions as applied to
any other particular facts or circumstances, and the validity of other
provisions of this Agreement, shall not in any way be affected or impaired
thereby; and that or those provisions shall be reformed without further action
by the parties in such a manner as shall be necessary to make the provisions
valid and enforceable when applied to the relevant facts and circumstances.
12.14 Force Majeure. The failure of either party to perform a duty pursuant to
this Agreement shall be excused to the extent that strike, fire, flood,
earthquake, explosion, war, unavailability of power, governmental acts or
orders, or other conditions beyond the reasonable control of the affected party
prevents, restricts or interferes with such performance. The party so affected
shall promptly notify the other party of such condition and shall take all
reasonable steps to avoid or remove such condition so as to resume performance
as soon as reasonably practicable.
12.15 Incorporation of Exhibits. The exhibits referred to herein and annexed
hereto are incorporated and made a part of this Agreement.
In order to bind the parties to this Agreement, their duly authorized
representatives have signed below on the dates indicated.
Zitel Corporation, MatriDigm Corporation,
a California Corporation a California Corporation
By: HENRY C. HARRIS By: JAMES T. BRADY
Title: CFO Title: President & CEO
Date: 8/22/96 Date: 8-21-1996
Exh. 10.30 - Page 13
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